Unassociated Document
As
filed with the Securities and Exchange Commission on June 17,
2010
Registration
No. 333-______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Teucrium
Commodity Trust
(Registrant)
Delaware
(State
or other jurisdiction of incorporation or organization)
6799
(Primary
Standard Industrial Classification Code Number)
61-1604335
(I.R.S.
Employer Identification No.)
c/o
Teucrium Trading, LLC
232
Hidden Lake Road
Building
A
Brattleboro,
Vermont 05301
Phone:
(802) 257-1617
(Address,
including zip code, and telephone number, including area code, of Registrant’s
principal executive offices)
Sal
Gilbertie
President
Teucrium
Trading, LLC
232
Hidden Lake Road
Building
A
Brattleboro,
Vermont 05301
Phone:
(802) 257-1617
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copy
to:
W.
Thomas Conner, Esq.
Sutherland
Asbill & Brennan LLP
1275
Pennsylvania Avenue, N.W.
Washington,
DC 20004
Approximate
date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration
Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
CALCULATION
OF REGISTRATION FEE
Title of Securities
to be Registered
|
|
Amount
to be
Registered
|
|
|
Proposed
Maximum
Offering Price
Per Share*
|
|
|
Proposed
Maximum
Aggregate
Offering Price*
|
|
|
Amount of
Registration
Fee*
|
|
Common
units of Teucrium Soybean Fund, a series of the Registrant
|
|
|
100,000 |
|
|
$ |
25.00 |
|
|
$ |
2,500,000 |
|
|
$ |
178.25 |
|
*
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(d) under the Securities Act of
1933.
|
The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and the Sponsor and the Trust are not
soliciting an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted.
Preliminary
Prospectus
|
Subject
to Completion June ___, 2010
|
Teucrium
Soybean Fund
[#]
Shares
Teucrium
Soybean Fund (the “Fund”) is a commodity pool that is a series of Teucrium
Commodity Trust (“Trust”), a Delaware statutory trust. The Fund will
issue common units representing fractional undivided beneficial interests in
such Fund, called “Shares.” The Fund intends to continuously offer
creation baskets consisting of 100,000 Shares at their net asset value (“NAV”)
to “Authorized Purchasers” (as defined below) through ALPS Distributors, Inc.,
which is the marketing agent for Shares of the Fund (the “Marketing
Agent”). Authorized Purchasers, in turn, may offer to the public
Shares of any baskets they create. __________________ is expected to
be the initial Authorized Purchaser. Authorized Purchasers will sell
such Shares, which will be listed on the NYSE Arca exchange (“NYSE Arca”), to
the public at per-Share offering prices that are expected to reflect, among
other factors, the trading price of the Shares on the NYSE Arca, the NAV of the
Fund at the time the Authorized Purchaser purchased the Creation Baskets and the
NAV at the time of the offer of the Shares to the public, the supply of and
demand for Shares at the time of sale, and the liquidity of the markets for
soybean interests. The prices of Shares offered by Authorized
Purchasers are expected to fall between the Fund’s NAV and the trading price of
the Shares on the NYSE Arca at the time of sale. The Fund’s Shares
may trade in the secondary market at prices that are lower or higher than their
NAV per Share. Fund Shares will be listed on the NYSE Arca under the
symbol “SOYB.”
The
investment objective of the Fund is to have the daily changes in percentage
terms of the Fund’s NAV per Share reflect the daily changes in percentage terms
of a weighted average of the closing settlement prices for three soybean futures
contracts. The Fund’s sponsor is Teucrium Trading, LLC (the
“Sponsor”).
This is a
best efforts offering; the Marketing Agent is not required to sell any specific
number or dollar amount of Shares, but will use its best efforts to sell
Shares. An Authorized Purchaser is under no obligation to purchase
Shares. This is intended to be a continuous offering that will
terminate on _________, 2012 (two years from the date of this prospectus),
unless suspended or terminated at any earlier time for certain reasons specified
in this prospectus or unless extended as permitted under the rules under the
Securities Act of 1933. See “Prospectus Summary – The Shares”
and “Creation and Redemption of Shares – Rejection of Purchase Orders”
below.
Investing
in the Fund involves significant risks. See “What Are the Risk
Factors Involved with an Investment in the Fund?” beginning on page
[ ]. The Fund is not a mutual fund registered under the
Investment Company Act of 1940 and is not subject to regulation under such
Act.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED IN THIS
PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE
COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS COMMODITY POOL NOR HAS THE COMMISSION PASSED ON THE
ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
This
prospectus is in two parts: a disclosure document and a statement of additional
information. These parts are bound together, and both contain important
information.
|
|
Per share
|
|
|
Per Basket
|
|
Price
of the Shares*
|
|
$ |
25.00 |
|
|
$ |
2,500,000 |
|
* Based
on closing net asset value on [date]. The price may
vary based on net asset value in effect on a particular day.
COMMODITY
FUTURES TRADING COMMISSION
RISK
DISCLOSURE STATEMENT
YOU
SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO
PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE
THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS
GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF
THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN
ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR
PARTICIPATION IN THE POOL.
FURTHER,
COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND
ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT
ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT
CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL
BEGINNING AT PAGE 55 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK
EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE [
].
THIS
BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO
EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE
YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY
THIS DISCLOSURE DOCUMENT, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGE [ ].
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR
OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED
STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY
AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY
AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR
THE POOL MAY BE EFFECTED.
THIS
POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
TEUCRIUM
SOYBEAN FUND
TABLE
OF CONTENTS
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
|
|
iii
|
PROSPECTUS
SUMMARY
|
|
1
|
Principal
Offices of the Fund and the Sponsor
|
|
1
|
Breakeven
Point
|
|
1
|
Overview
of the Fund
|
|
1
|
The
Shares
|
|
6
|
The
Fund’s Investments in Soybean Interests
|
|
7
|
Principal
Investment Risks of an Investment in the Fund
|
|
8
|
Principal
Offices of the Fund and the Sponsor
|
|
10
|
Financial
Condition of the Fund
|
|
10
|
Defined
Terms
|
|
10
|
Breakeven
Analysis
|
|
10
|
The
Offering
|
|
12
|
WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND?
|
|
17
|
Risks
Associated With Investing Directly or Indirectly in
Soybean
|
|
17
|
The
Fund’s Operating Risks
|
|
24
|
Risk
of Leverage and Volatility
|
|
34
|
Over-the-Counter
Contract Risk
|
|
35
|
Risk
of Trading in International Markets
|
|
35
|
Tax
Risk
|
|
36
|
THE
OFFERING
|
|
38
|
The
Fund in General
|
|
38
|
The
Sponsor
|
|
38
|
The
Trustee
|
|
41
|
Operation
of the Fund
|
|
42
|
Futures
Contracts
|
|
47
|
Cleared
Soybean Swaps
|
|
50
|
Over-the-Counter
Derivative
|
|
51
|
Benchmark
Performance
|
|
53
|
The
Soybean Market
|
|
53
|
The
Fund’s Investments in Treasury Securities, Cash and Cash
Equivalents
|
|
53
|
Other
Trading Policies of the Fund
|
|
54
|
The
Service Providers
|
|
55
|
Fees
to be Paid by the Fund
|
|
57
|
Form
of Shares
|
|
57
|
Transfer
of Shares
|
|
58
|
Inter-Series
Limitation on Liability
|
|
58
|
Plan
of Distribution
|
|
59
|
The
Flow of Shares
|
|
61
|
Calculating
NAV
|
|
62
|
Creation
and Redemption of Shares
|
|
63
|
Secondary
Market Transactions
|
|
68
|
Use
of Proceeds
|
|
69
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
70
|
The
Trust Agreement
|
|
73
|
The
Sponsor Has Conflicts of Interest
|
|
78
|
Interests
of Named Experts and Counsel
|
|
79
|
Provisions
of Federal and State Securities Laws
|
|
79
|
Books
and Records
|
|
80
|
Analysis
of Critical Accounting Policies
|
|
80
|
Statements,
Filings, and Reports to Shareholders
|
|
80
|
Fiscal
Year
|
|
81
|
Governing
Law; Consent to Delaware Jurisdiction
|
|
81
|
Legal
Matters
|
|
81
|
Privacy
Policy
|
|
82
|
U.S.
Federal Income Tax Considerations
|
|
82
|
Investment
By ERISA Accounts
|
|
95
|
INFORMATION
YOU SHOULD KNOW
|
|
98
|
WHERE
YOU CAN FIND MORE INFORMATION
|
|
98
|
TEUCRIUM
TRADING, LLC -- INDEX TO FINANCIAL STATEMENTS
|
|
99 |
Until
[date] (25 days
after the date of this prospectus), all dealers effecting transactions in the
offered Shares, whether or not participating in this distribution, may be
required to deliver a prospectus. This requirement is in addition to
the obligations of dealers to deliver a prospectus when acting as underwriters
and with respect to unsold allotments or subscriptions.
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus includes “forward-looking statements” which generally relate to
future events or future performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
the negative of these terms or other comparable terminology. All
statements (other than statements of historical fact) included in this
prospectus that address activities, events or developments that will or may
occur in the future, including such matters as movements in the commodities
markets and indexes that track such movements, the Fund’s operations, the
Sponsor’s plans and references to the Fund’s future success and other similar
matters, are forward-looking statements. These statements are only
predictions. Actual events or results may differ
materially. These statements are based upon certain assumptions and
analyses the Sponsor has made based on its perception of historical trends,
current conditions and expected future developments, as well as other factors
appropriate in the circumstances. Whether or not actual results and
developments will conform to the Sponsor’s expectations and predictions,
however, is subject to a number of risks and uncertainties, including the
special considerations discussed in this prospectus, general economic, market
and business conditions, changes in laws or regulations, including those
concerning taxes, made by governmental authorities or regulatory bodies, and
other world economic and political developments. See “What Are the
Risk Factors Involved with an Investment in the Fund?” Consequently,
all the forward-looking statements made in this prospectus are qualified by
these cautionary statements, and there can be no assurance that actual results
or developments the Sponsor anticipates will be realized or, even if
substantially realized, that they will result in the expected consequences to,
or have the expected effects on, the Fund’s operations or the value of its
Shares.
PROSPECTUS
SUMMARY
This
is only a summary of the prospectus and, while it contains material information
about the Fund and its Shares, it does not contain or summarize all of the
information about the Fund and the Shares contained in this prospectus that is
material and/or which may be important to you. You should read this entire
prospectus, including “What Are the Risk Factors Involved with an Investment in
the Fund?” beginning on page [ ], before making an investment decision about the
Shares. In addition, this prospectus includes a statement of
additional information that follows and is bound together with the primary
disclosure document. Both the primary disclosure document and the
statement of additional information contain important information.
Principal
Offices of the Fund and the Sponsor
The
principal office of the Trust and the Fund is located at 232 Hidden Lake Road,
Building A, Brattleboro, Vermont 05301. The telephone number is (802)
257-1617. The Sponsor’s principal office is also located at 232
Hidden Lake Road, Building A, Brattleboro, Vermont 05301, and its telephone
number is also (802) 257-1617.
Breakeven
Point
The amount of trading income required
for the redemption value of a Share at the end of one year to equal the initial
selling price of the Share, assuming an initial selling price of $25.00, is $0.34 or 1.37% of the
initial selling price. For more information, see “Breakeven Analysis”
below.
Overview
of the Fund
Teucrium
Soybean Fund (the “Fund” or “Us” or “We”), is a commodity pool that will issue
Shares that may be purchased and sold on the NYSE Arca. The Fund is a
series of the Teucrium Commodity Trust (“Trust”), a Delaware statutory trust
organized on September 11, 2009. Currently, the Trust has five
additional series that are separate commodity pools – the Teucrium Corn Fund,
the Teucrium Sugar Fund, the Teucrium Wheat Fund, the Teucrium Natural Gas Fund,
and the Teucrium WTI Crude Oil Fund (together with the Fund, the “Teucrium
Funds”) – although only the Teucrium Corn Fund has commenced operations as of
the date of this prospectus. Additional series of the Trust may be
created in the future. The Trust and the Fund operate pursuant to the
Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the
“Trust Agreement”). The Fund was formed and is managed and controlled
by the Sponsor, Teucrium Trading, LLC. The Sponsor is a limited
liability company formed in Delaware on July 28, 2009 that is registered as a
commodity pool operator (“CPO”) with the Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures Association
(“NFA”). The Sponsor first intends to use this prospectus on or about
_____, 2010, the date of this prospectus.
The
investment objective of the Fund is to have the daily changes in percentage
terms of the Shares’ net asset value (“NAV”) reflect the daily changes in
percentage terms of a weighted average of the closing settlement prices for
three futures contracts for soybeans (“Soybean Futures Contracts”) that are
traded on the Chicago Board of Trade (“CBOT”). Except as described in
the following paragraph, the three Soybean Futures Contracts will be: (1)
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%. (The weighted
average of the three Soybean Futures Contracts is referred to herein as the
“Benchmark,” and the three Soybean Futures Contracts that at any given time make
up the Benchmark are referred to herein as the “Benchmark Component Futures
Contracts.”)
Soybean
Futures Contracts traded on the CBOT expire on a specified day in seven
different months: January, March, May, July, August, September and
November. However, there is generally a less liquid market for the
Soybean Futures Contracts expiring in August (the “August Contract”) and
September (the “September Contract” and, together with the August Contract, the
“Excluded Contracts”), and the Sponsor has determined not to incorporate the
Excluded Contracts into the Benchmark calculation. Accordingly,
during the period when the Excluded Contracts are the second-to-expire and
third-to-expire Soybean Futures Contract, the fourth-to-expire and
fifth-to-expire Soybean Futures Contracts will take the place of the
second-to-expire and third-to-expire Soybean Futures Contracts, respectively, as
Benchmark Component Futures Contracts. Similarly, when the August
Contract is the third-to-expire Soybean Futures Contract, the fifth-to-expire
Soybean Futures Contract will take the place of the August Contract as a
Benchmark Component Futures Contract, and when the September Contract is the
second-to-expire Soybean Futures Contract, the third-to-expire and
fourth-to-expire Soybean Futures Contracts will be Benchmark Component Futures
Contracts.
The
following chart identifies the specific Soybean Futures Contracts that will be
used in the calculation of the Benchmark at any point in a given year, based on
the same 35%/30%/35% weighting methodology described above.
Period
|
|
Benchmark
Component Futures Contracts
|
From
expiration of January Year 0 contract until expiration of March Year 0
contract
|
|
May
Year 0, July Year 0 and November Year 0
|
From
expiration of March Year 0 contract until expiration of May Year 0
contract
|
|
July
Year 0, November Year 0 and November Year 1
|
From
expiration of May Year 0 contract until expiration of July Year 0
contract
|
|
November
Year 0, January Year 1 and November Year 1
|
From
expiration of July Year 0 contract until expiration of August Year 0
contract
|
|
November
Year 0, January Year 1 and November Year 1 (same as immediately
above)
|
From
expiration of August Year 0 contract until expiration of September Year 0
contract
|
|
November
Year 0, January Year 1 and November Year 1 (same as immediately
above)
|
From
expiration of September Year 0 contract until expiration of November Year
0 contract
|
|
January
Year 1, March Year 1 and November Year 1
|
From
expiration of November Year 0 contract until expiration of January Year 1
contract
|
|
March
Year 1, May Year 1 and November Year
1
|
The Fund
seeks to achieve its investment objective by investing under normal market
conditions in Benchmark Component Futures Contracts or, in certain
circumstances, in other Soybean Futures Contracts traded on CBOT or Soybean
Futures Contracts traded on foreign exchanges. In addition, and to a
limited extent, the Fund also may invest in soybean-based swap agreements that
are cleared through the CBOT or its affiliated provider of clearing services
(“Cleared Soybean Swaps”) in furtherance of the Fund's investment
objective. Once position limits in Soybean Futures Contracts are
applicable, the Fund's intention is to invest first in Cleared Soybean Swaps to
the extent practicable under the position limits applicable to Cleared Soybean
Swaps and appropriate in light of the liquidity in the Cleared Soybean Swap
market, and then in contracts and instruments such as cash-settled options on
Soybean Futures Contracts and forward contracts, swaps other than Cleared
Soybean Swaps, and other over-the-counter transactions that are based on the
price of soybean and Soybean Futures Contracts (collectively, “Other Soybean
Interests,” and together with Soybean Futures Contracts and Cleared Soybean
Swaps, “Soybean Interests”). See “The Offering – Futures Contracts”
below. By utilizing certain or all of these investments, the Sponsor
will endeavor to cause the Fund's performance to closely track that of the
Benchmark. The Sponsor expects to manage the Fund’s 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 is also authorized to select
futures commission merchants to execute the Fund’s transactions in Soybean
Futures Contracts.
The Fund
seeks to achieve its investment objective primarily by investing in Soybean
Interests such that daily changes in the Fund’s NAV will be expected to closely
track the changes in the Benchmark. The Fund’s positions in Soybean
Interests will be changed or “rolled” on a regular basis in order to track the
changing nature of the Benchmark. For example, four times a year (on
the date on which a Soybean Futures Contract expires), a particular Soybean
Futures Contract will no longer be a Benchmark Component Futures Contract, and
the Fund’s investments will have to be changed accordingly. In order
that the Fund’s trading does not cause unwanted market movements and to make it
more difficult for third parties to profit by trading based on such expected
market movements, the Fund’s investments typically will not be rolled entirely
on that day, but rather will typically be rolled over a period of several
days.
Consistent
with achieving the Fund’s investment objective of closely tracking the
Benchmark, the Sponsor may for certain reasons cause the Fund to enter into or
hold Soybean Futures Contracts other than the Benchmark Component Futures
Contracts, Cleared Soybean Swaps and/or Other Soybean Interests. For
example, certain Cleared Soybean Swaps have standardized terms similar to, and
are priced by reference to, a corresponding Benchmark Component Futures
Contract. Additionally, Other Soybean Interests that do not have
standardized terms and are not exchange-traded, referred to as
“over-the-counter” Soybean Interests, can generally be structured as the parties
to the Soybean Interest contract desire. Therefore, the Fund might
enter into multiple Cleared Soybean Swaps and/or over-the-counter Soybean
Interests intended to exactly replicate the performance of each of the three
Benchmark Component Futures Contracts, or a single over-the-counter Soybean
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 Soybean Interest, the performance of the Soybean Interest will
necessarily correlate exactly with the performance of the Benchmark or the
applicable Benchmark Component Futures Contract. The Fund’s might
also enter into or hold Soybean Interests other than Benchmark Component Futures
Contracts to facilitate effective trading, consistent with the discussion of the
Fund’s “roll” strategy in the preceding paragraph. In addition, the
Fund might enter into or hold Soybean 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. By utilizing certain or all of the investments
described above, the Sponsor will endeavor to cause the Fund’s performance to
closely track that of the Benchmark.
The Fund
invests in Soybean Interests to the fullest extent possible without being
leveraged or unable to satisfy its expected current or potential margin or
collateral obligations with respect to its investments in Soybean
Interests. After fulfilling such margin and collateral requirements,
the Fund will invest the remainder of its proceeds from the sale of baskets in
obligations of the United States government (“Treasury Securities”) or cash
equivalents, and/or merely hold such assets in cash (generally in
interest-bearing accounts). Therefore, the focus of the Sponsor in
managing the Fund is investing in Soybean Interests and in Treasury Securities,
cash and/or cash equivalents. The Fund will earn interest income from
the Treasury Securities and/or cash equivalents that it purchases and on the
cash it holds through the Fund’s custodian, the Bank of New York Mellon (the
“Custodian”).
The
Sponsor endeavors to place the Fund’s trades in Soybean Interests and otherwise
manage the Fund’s investments so that the Fund’s average daily tracking error
against the Benchmark will be less than 10 percent over any period of 30 trading
days. More specifically, the Sponsor will endeavor to manage the Fund
so that A will be within plus/minus 10 percent of B, where:
|
·
|
A
is the average daily change in the Fund’s NAV for any period of 30
successive valuation days, i.e., any trading day as of which the Fund
calculates its NAV, and
|
|
·
|
B
is the average daily change in the Benchmark over the same
period.
|
The
Sponsor believes that market arbitrage opportunities will cause the Fund’s Share
price on the NYSE Arca to closely track the Fund’s NAV per share. The
Sponsor believes that the net effect of this expected relationship and the
expected relationship described above between the Fund’s NAV and the Benchmark
will be that the changes in the price of the Fund’s Shares on the NYSE Arca will
closely track, in percentage terms, changes in the Benchmark.
The
Sponsor employs a “neutral” investment strategy intended to track the changes in
the Benchmark regardless of whether the Benchmark goes up or goes down. The
Fund’s “neutral” investment strategy is designed to permit investors generally
to purchase and sell the Fund’s Shares for the purpose of investing indirectly
in the soybean market in a cost-effective manner. Such investors may include
participants in the soybean industry and other industries seeking to hedge the
risk of losses in their soybean-related transactions, as well as investors
seeking exposure to the soybean market. Accordingly, depending on the investment
objective of an individual investor, the risks generally associated with
investing in the soybean market and/or the risks involved in hedging may exist.
In addition, an investment in the Fund involves the risks that the changes in
the price of the Fund’s Shares will not accurately track the changes in the
Benchmark, and that changes in the Benchmark will not closely correlate with
changes in the price of soybean on the spot market. Furthermore, as noted above,
the Fund also invests in short-term Treasury Securities, cash and/or cash
equivalents to meet its current or potential margin or collateral requirements
with respect to its investments in Soybean Interests and to invest cash not
required to be used as margin or collateral. The Fund does not expect there to
be any meaningful correlation between the performance of the Fund’s investments
in Treasury Securities/cash/cash equivalents and the changes in the price of
soybean or Soybean Interests. 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 soybean, 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 soybean. The Sponsor does not intend to operate the Fund
in a fashion such that its per share NAV will equal, in dollar terms, the spot
price of a bushel or other unit of soybean or the price of any particular
Soybean Futures Contract.
The Fund
creates and redeems Shares only in blocks called Creation Baskets and Redemption
Baskets, respectively. Only Authorized Purchasers may purchase or
redeem Creation Baskets or Redemption Baskets. An Authorized
Purchaser is under no obligation to create or redeem baskets, and an Authorized
Purchaser is under no obligation to offer to the public Shares of any baskets it
does create. Baskets are generally created when there is a demand for
Shares, including, but not limited to, when the market price per share is at (or
perceived to be at) a premium to the NAV per share. Similarly,
baskets are generally redeemed when the market price per share is at (or
perceived to be at) a discount to the NAV per share. Retail investors
seeking to purchase or sell Shares on any day are expected to effect such
transactions in the secondary market, on the NYSE Arca, at the market price per
share, rather than in connection with the creation or redemption of
baskets.
The Fund
will commence making the investments described in this prospectus as quickly as
practicable (no more than three business days) after the initial Creation Basket
is sold. All proceeds from the sale of subsequent Creation Baskets
will also be invested as quickly as practicable in such
investments. The Fund’s cash and investments are held through the
Fund’s Custodian, in accounts with the Fund’s commodity futures brokers or in
collateral accounts with respect to over-the-counter Soybean
Interests. There is no stated maximum time period for the Fund’s
operations and the Fund will continue until all Shares are redeemed or the Fund
is liquidated pursuant to the terms of the Trust Agreement.
There is
no specified limit on the maximum amount of Creation Baskets that can be sold.
At some point, however, applicable position limits on Soybean Futures Contracts,
Cleared Soybean Swaps or Other Soybean Interests may practically limit the
number of Creation Baskets that will be sold if the Sponsor determines that the
other investment alternatives available to the Fund at that time will not enable
it to meet its stated investment objective.
Shares
may also be purchased and sold by individuals and entities that are not
Authorized Purchasers in smaller increments than Creation Baskets on the NYSE
Arca. However, these transactions are effected at bid and ask prices
established by specialist firm(s). Like any listed security, Shares
of the Fund can be purchased and sold at any time a secondary market is
open.
In
managing the Fund’s assets, the Sponsor does not use a technical trading system
that automatically issues buy and sell orders. Instead, each time one
or more baskets are purchased or redeemed, the Sponsor will purchase or sell
Soybean Interests with an aggregate market value that approximates the amount of
cash received or paid upon the purchase or redemption of the
basket(s).
Note to Secondary Market Investors:
The Shares can be directly purchased from or redeemed by the Fund only in
Creation Baskets or Redemption Baskets, respectively, and only by Authorized
Purchasers. Each Creation Basket and Redemption Basket consists of
100,000 Shares and therefore may require a commitment of several million dollars
(e.g., 100,000 Shares
times an initial Share price of $25.00 equals $2.5
million). Accordingly, investors who do not have such resources or
who are not Authorized Purchasers should be aware that some of the information
contained in this prospectus, including information about purchases and
redemptions of Shares directly with the Fund, is only relevant to Authorized
Purchasers. Shares will be listed and traded on the NYSE Arca under
the ticker symbol “SOYB” and may be purchased and sold as individual
Shares. Individuals interested in purchasing Shares in the secondary
market should contact their broker. Shares purchased or sold through
a broker may be subject to commissions.
Except
when aggregated in Redemption Baskets, Shares are not redeemable securities.
There is no guarantee that Shares will trade at prices that are at or near the
per-Share NAV.
The
Shares
The
Shares are registered as securities under the Securities Act of 1933 (“1933
Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) and do not
provide dividend rights or conversion rights and there will not be sinking
funds. The Shares may only be redeemed when aggregated in Redemption
Baskets as discussed under “Creation and Redemption of Shares” and holders of
Fund shares (“Shareholders”) generally will not have voting rights as discussed
below under “The Trust Agreement – Voting Rights.” Cumulative voting
is neither permitted nor required and there are no preemptive
rights. The Trust Agreement provides that, upon liquidation of the
Fund, its assets will be distributed pro rata to the Shareholders based upon the
number of Shares held. Each Shareholder will receive its share of the
assets in cash or in kind, and the proportion of such share that is received in
cash may vary from Shareholder to Shareholder, as the Sponsor in its sole
discretion may decide.
The
offering of Shares under this prospectus is a continuous offering under Rule 415 of
the 1933 Act and will terminate on _________, 2012 (two years from the date of
this prospectus). The offering may be
extended beyond such date as permitted under the rules under 1933
Act. The offering will terminate before such date or before the end
of any extension period if all of the registered Shares have been
sold. However, the Sponsor expects to cause the Trust to file one or
more additional registration statements as necessary to permit additional Shares
to be registered and offered on an uninterrupted basis. This offering
may also be suspended or terminated at any time for certain specified reasons,
including if and when suitable investments for the Fund are not available or
practicable. See “Creation and Redemption of Shares – Rejection of
Purchase Orders” below. As discussed above, the minimum purchase
requirement for Authorized Purchasers is a Creation Basket, which consists of
100,000 Shares. Under the plan of distribution, the Fund does not require a
minimum purchase amount for investors who purchase Shares from Authorized
Purchasers. There are no arrangements to place funds in an escrow,
trust, or similar account.
The
Fund’s Investments in Soybean Interests
A brief
description of the principal types of Soybean Interests in which the Fund may
invest is set forth below.
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·
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A
futures contract is an exchange-traded contract traded with standard terms
that calls for the delivery of a specified quantity of a commodity at a
specified price, on a specified date and at a specified
location.
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·
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A
swap agreement is a bilateral contract to exchange a periodic stream of
payments determined by reference to a notional amount, with payment
typically made between the parties on a net basis. For
instance, in the case of soybean swap, the Fund may be obligated to pay a
fixed price per bushel of soybeans and be entitled to receive an amount
per bushel equal to the current value of an index of soybean prices, the
price of a specified Soybean Futures Contract, or the average price of a
group of Soybean Futures Contracts such as the Benchmark. The
Fund expects to invest primarily in Cleared Soybean Swaps, rather than
over-the-counter soybean swaps.
|
The Fund
may also invest to a lesser extent in the following types of Soybean
Interests:
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·
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Swap
agreements other than Cleared Soybean Swaps (i.e., over-the-counter
soybean swaps).
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·
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A
forward contract is an over-the-counter bilateral contract for the
purchase of sale of a specified quantity of a commodity at a specified
price, on a specified date and at a specified
location.
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·
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An
option on a futures contract, forward contract or a commodity on the spot
market gives the buyer of the option the right, but not the obligation, to
buy or sell a futures contract, forward contract or commodity, as
applicable, at a specified price on or before a specified
date. Options on futures contracts, like the future contracts
to which they relate, are standardized contracts traded on an exchange,
while options on forward contracts and commodities generally are
individually negotiated, over-the-counter, bilateral
contracts.
|
Unlike
exchange-traded contracts, over-the-counter contracts expose the Fund to the
credit risk of the other party to the contract. (As discussed below,
exchange-traded contracts may expose the Fund to the risk of the clearing
broker’s and/or the exchange clearing house(s)’ bankruptcy.) The
Sponsor does not currently intend to purchase and sell soybeans in the “spot
market” for the Fund. Spot market transactions are cash transactions
in which the buyer and seller agree to the immediate purchase and sale of a
commodity, usually with a two-day settlement period. In addition, the
Sponsor does not currently intend that the Fund will enter into or hold spot
month Soybean Futures Contracts, except that spot month contracts that were
formerly second-to-expire contracts may be held for a brief period until they
can be disposed of in accordance with the Fund’s roll strategy.
A more
detailed description of Soybean Interests and other aspects of the soybean and
Soybean Interest markets can be found later in this prospectus.
As
noted, the Fund invests in Soybean Futures Contracts, including those traded on
the CBOT, and in Cleared Soybean Swaps cleared through CBOT
affiliates. The Fund expressly disclaims any association with the
CBOT or endorsement of the Fund by such exchanges and acknowledges that “CBOT”
and “Chicago Board of Trade” are registered trademarks of such
exchanges.
Principal
Investment Risks of an Investment in the Fund
An
investment in the Fund involves a degree of risk. Some of the risks you may face
are summarized below. A more extensive discussion of these risks appears
beginning on page [ ].
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·
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Unlike
mutual funds, commodity pools and other investment pools that manage their
investments so as to realize income and gains for distribution to their
investors, the Fund generally will not distribute dividends to
Shareholders. You should not invest in the Fund if you will
need cash distributions from the Fund to pay taxes on your share of income
and gains of the Fund, if any, or for other
purposes.
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·
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Investors
may choose to use the Fund as a means of investing indirectly in soybeans,
and there are risks involved in such investments. The risks and
hazards that are inherent in soybean production may cause the price of
soybean to fluctuate widely. Global price movements for soybean
are influenced by, among other things: weather conditions, crop failure,
production decisions, governmental policies, changing demand, the soybean
harvest cycle, and various economic and monetary
events. Soybean production is also subject to domestic and
foreign regulations that
materially affect operations.
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·
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To
the extent that investors use the Fund as a means of investing indirectly
in soybeans, there is the risk that the changes in the price of the Fund’s
Shares on the NYSE Arca will not closely track the changes in spot price
of soybeans. This could happen if the price of Shares traded on
the NYSE Arca does not correlate closely with the Fund’s NAV; the changes
in the Fund’s NAV do not correlate closely with changes in the Benchmark;
or the changes in the Benchmark do not correlate closely with changes in
the cash or spot price of soybeans. This is a risk because if
these correlations are not sufficiently close, then investors may not be
able to use the Fund as a cost-effective way to invest indirectly in
soybeans or as a hedge against the risk of loss in soybean-related
transactions.
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·
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The
Sponsor has limited experience operating commodity
pools. Although the Sponsor currently sponsors six commodity
pools (the Teucrium Funds), only the Teucrium Corn Fund, which commenced
operations on June 8, 2010, has commenced operations as of the date of
this prospectus. Prior to June 8, 2010, the Sponsor had never
operated a commodity pool.
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·
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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
Trust.
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·
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The
price relationship between the near month Soybean Futures Contract to
expire and the Benchmark Component Futures Contracts will vary and may
impact both the Fund’s total return over time and the degree to which such
total return tracks the total return of soybean price
indices. In cases in which the near month contract’s price is
lower than later-expiring contracts’ prices (a situation known as
“contango” in the futures markets), then absent the impact of the overall
movement in soybean prices the value of the Benchmark Component Futures
Contracts would tend to decline as they approach expiration. In
cases in which the near month contract’s price is higher than
later-expiring contracts’ prices (a situation known as “backwardation” in
the futures markets), then absent the impact of the overall movement in
soybean prices the value of the Benchmark Component Futures Contracts
would tend to rise as they approach
expiration.
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·
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Investors,
including those who directly participate in the soybean market, may choose
to use the Fund as a vehicle to hedge against the risk of loss and there
are risks involved in hedging activities. While hedging can
provide protection against an adverse movement in market prices, it can
also preclude a hedger’s opportunity to benefit from a favorable market
movement.
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·
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The
structure and operation of the Fund may involve conflicts of
interest. For example, a conflict may arise because the Sponsor
and its principals and affiliates may trade for themselves. In
addition, the Sponsor has sole current authority to manage the investments
and operations, and the interests of the Sponsor may conflict with the
Shareholders’ best interests.
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·
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You
will have no rights to participate in the management of the Fund and will
have to rely on the duties and judgment of the Sponsor to manage the
Fund.
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·
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The
Fund pays fees and expenses that are incurred regardless of whether it is
profitable.
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·
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The
Fund seeks to have the changes in its Shares’ NAV in percentage terms
track changes in the Benchmark in percentage terms, rather than profit
from speculative trading of Soybean Interests. The Sponsor therefore
endeavors to manage the Fund so that the Fund’s assets are, unlike those
of many other commodity pools, not leveraged (i.e., so that the
aggregate value of the Fund’s unrealized losses from its investments in
Soybean Interests at any time will not exceed the value of the Fund’s
assets). There is no assurance that the Sponsor will successfully
implement this investment strategy. If the Sponsor permits the Fund to
become leveraged, you could lose all or substantially all of your
investment if the Fund’s trading positions suddenly turn unprofitable.
These movements in price may be the result of factors outside of the
Sponsor’s control and may not be anticipated by the
Sponsor.
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·
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The
Fund may invest in Other Soybean Interests. To the extent that
these Other Soybean Interests are contracts individually negotiated
between their parties, they may not be as liquid as Soybean Futures
Contracts and will expose the Fund to credit risk that its counterparty
may not be able to satisfy its obligations to the
Fund.
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·
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The
Fund invests primarily in Soybean Interests that are traded or sold in the
United States. However, a portion of the Fund’s trades may take
place in markets and on 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. In some of these non-U.S. markets, the
performance on a contract is the responsibility of the counterparty and is
not backed by an exchange or clearing corporation and therefore exposes
the Fund to credit risk. Trading in non-U.S. markets also
leaves the Fund susceptible to fluctuations in the value of the local
currency against the U.S. dollar.
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For
additional risks, see “What Are the Risk Factors Involved with an Investment in
the Fund?”
Principal
Offices of the Fund and the Sponsor
The
principal office of the Trust and the Fund is located at 232 Hidden Lake Road,
Building A, Brattleboro, Vermont 05301. The telephone number is (802)
257-1617. The Sponsor’s principal office is also located at 232
Hidden Lake Road, Building A, Brattleboro, Vermont 05301.
Financial
Condition of the Fund
The
Fund’s NAV is determined as of the earlier of the close of the New York Stock
Exchange or 4:00 p.m. New York time on each day that the NYSE Arca is open for
trading.
Defined
Terms
For a
glossary of defined terms, see Appendix A.
Breakeven
Analysis
The
breakeven analysis below indicates the approximate dollar returns and percentage
returns required for the redemption value of a hypothetical $25.00 initial
investment in a single Share to equal the amount invested twelve months after
the investment was made. This breakeven analysis refers to the
redemption of baskets by Authorized Purchasers and is not related to any gains
an individual investor would have to achieve in order to break even. The
breakeven analysis is an approximation only.
Assumed
initial selling price per Share
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$ |
25.00 |
|
Sponsor’s
Fee (1.00%)(1)
|
|
$ |
0.25 |
|
Creation
Basket Fee(2)
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$ |
0.01 |
|
Estimated
Brokerage Fees (0.03%)(3)
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|
$ |
0.01 |
|
Other
Fund Fees and Expenses(4)
|
|
$ |
0.10 |
|
Interest
Income (0.10%)(5)
|
|
$ |
(0.03 |
) |
Amount
of trading income (loss) required for the redemption value at the end of
one year to equal the initial selling price of the Share
|
|
$ |
0.34 |
|
Percentage
of initial selling price per share
|
|
|
1.37 |
% |
(1) The
Fund is obligated to pay the Sponsor a management fee at the annual rate of
1.00% of the Fund’s average daily net assets, payable monthly.
(2) Authorized
Purchasers are required to pay a Creation Basket fee of $1,000 for each order
they place to create one or more baskets. An order must be at least
one basket, which is 100,000 Shares. This breakeven analysis assumes
a hypothetical investment in a single Share so the Creation Basket fee is $.01
(1,000/100,000).
(3) The
Fund determined this amount as follows. Assuming that the price of a
Share is $25.00, the Fund would receive $2,500,000 upon the sale of a Creation
Basket (100,000 Shares multiplied by $25.00). Assuming that this
entire amount is invested in Soybean Futures Contracts and that there is no
change in the settlement price of such contracts, the Fund would be required to
purchase approximately 55 Soybean Futures Contracts to support the Creation
Basket ($2,500,000 divided by $45,300, the value of the January 2011 Soybean
Futures Contract as of June 9, 2010, which is used to approximate the price of
the Benchmark Component Futures Contracts). In order to reflect
changes in the Benchmark Component Futures Contracts, the Fund would have to
replace one-third (approximately 18) of the contracts it holds with new
contracts five times per year. Assuming further that futures
commission merchants charge approximately $4.00 per Soybean Futures Contract for
each purchase or sale, the annual futures commission merchant charge would be
approximately $720.00 (36 total Soybean Futures Contract transactions (18
purchases and 18 sales) multiplied by five times per year multiplied by
$4.00). As a percentage of the total investment of $2,500,000, this
annual commission expense would be approximately 0.03%.
(4) Other
Fund Fees and expenses include legal, printing, accounting, custodial,
administration, bookkeeping, transfer agency and marketing agent
costs. The per-share cost of these fixed or estimated fees has been
calculated assuming that the Fund has $100 million in assets.
(5) The
Fund earns interest on funds it deposits with the futures commission merchant
and the Custodian and it estimates that the interest rate will be 0.10% based on
the interest rate on three-month Treasury Bills as of June 9,
2010. The actual rate may vary.
The
Offering
Offering
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The
Fund will offer Creation Baskets consisting of 100,000 Shares through the
Marketing Agent to Authorized Purchasers. Authorized Purchasers
may purchase Creation Baskets consisting of 100,000 Shares at the Fund’s
NAV, which is expected to initially be $25.00. The initial
Authorized Purchaser intends to offer the Shares of the initial Creation
Basket(s) publicly. The initial Creation Basket is expected to
be purchased by the initial Authorized Purchaser on the day the SEC
declares the registration statement effective. The Shares are
expected to begin trading on the NYSE Arca on the day following the
purchase of the initial Creation Basket(s) by the initial Authorized
Purchaser.
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Use
of Proceeds
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The
Sponsor will apply substantially all of the Fund’s assets toward investing
in Soybean Interests, Treasury Securities, cash and/or cash
equivalents. The Sponsor will deposit a portion of the Fund’s
net assets with the futures commission merchant, Newedge USA, LLC, or
other custodians to be used to meet its current or potential margin or
collateral requirements in connection with its investment in Soybean
Interests. The Fund will use only Treasury Securities, cash
and/or cash equivalents to satisfy these requirements. The
Sponsor expects that all entities that will hold or trade the Fund’s
assets will be based in the United States and will be subject to United
States regulations. The Sponsor believes that approximately 5%
to 10% of the Fund’s assets will normally be committed as margin for
Soybean Futures Contracts and collateral for Cleared Soybean Swaps and
Other Soybean Interests. However, from time to time, the
percentage of assets committed as margin/collateral may be substantially
more, or less, than such range. The remaining portion of the
Fund’s assets will be held in Treasury Securities, cash and/or cash
equivalents by the Custodian. All interest income earned on
these investments is retained for the Fund’s
benefit.
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NYSE
Arca Symbol
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“SOYB”
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Creation
and Redemption
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Authorized
Purchasers pay a $1,000 fee for each order to create or redeem one or more
Creation Baskets or Redemption Baskets. Authorized Purchasers
are not required to sell any specific number or dollar amount of
Shares. The per share price of Shares offered in Creation
Baskets on any day after the effective date of the registration statement
relating to this prospectus is the total NAV of the Fund calculated as of
the close of the NYSE Arca on that day divided by the number of issued and
outstanding Shares.
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Inter-Series
Limitation on Liability
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While
the Fund is currently one of six separate series of the Trust, additional
series may be created in the future. The Trust has been formed
and will be operated with the goal that the Fund and any other series of
the Trust will be liable only for obligations of such series, and a series
will not be responsible for or affected by any liabilities or losses of or
claims against any other series. If any creditor or shareholder
in any particular series (such as the Fund) were to successfully assert
against a series a claim with respect to its indebtedness or Shares, the
creditor or shareholder could recover only from that particular series and
its assets. Accordingly, the debts and other obligations
incurred, contracted for or otherwise existing solely with respect to a
particular series will be enforceable only against the assets of that
series, and not against any other series or the Trust generally or any of
their respective assets. The assets of the Fund and any other
series will include only those funds and other assets that are paid to,
held by or distributed to the series on account of and for the benefit of
that series, including, without limitation, amounts delivered to the Trust
for the purchase of Shares in a
series.
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Registration
Clearance and Settlement
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Individual
certificates will not be issued for the Shares. Instead, Shares
will be represented by one or more global certificates, which will be
deposited by the Custodian with the Depository Trust Company (“DTC”) and
registered in the name of Cede & Co., as nominee for
DTC. The global certificates evidence all of the Shares
outstanding at any time. Beneficial interests in Shares will be
held through DTC’s book-entry system, which means that Shareholders are
limited to: (1) participants in DTC such as banks, brokers,
dealers and trust companies (“DTC Participants”), (2) those who maintain,
either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those who hold interests in
the Shares through DTC Participants or Indirect Participants, in each case
who satisfy the requirements for transfers of Shares. DTC
Participants acting on behalf of investors holding Shares through such DTC
Participants’ accounts in DTC will follow the delivery practice applicable
to securities eligible for DTC’s Same-Day Funds Settlement System. Shares
will be credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
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Net
Asset Value
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The
NAV will be calculated by taking the current market value of the Fund’s
total assets and subtracting any liabilities. Under the Fund’s
current operational procedures, the Fund’s administrator, The Bank of New
York Mellon (the “Administrator”) will calculate the NAV of the Fund’s
Shares as of the earlier of 4:00 p.m. New York time or the close of the
New York Stock Exchange each day. NYSE Arca will calculate an
approximate net asset value every 15 seconds throughout each day that the
Fund’s Shares are traded on the NYSE Arca for as long as the CBOT’s main
pricing mechanism is open.
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Fund
Expenses
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|
The
Fund pays the Sponsor a management fee at an annual rate of 1.00% of the
Fund’s average daily net assets. The Fund is also responsible
for other ongoing fees, costs and expenses of its operations, including
(i) brokerage and
other fees and commissions incurred in connection with the trading
activities of the Fund; (ii) expenses incurred in connection with
registering additional Shares of the Fund or offering Shares of the Fund
after the time any Shares have begun trading on NYSE Arca; (iii) the
routine expenses associated with the preparation and, if required, the
printing and mailing of monthly, quarterly, annual and other reports
required by applicable U.S. federal and state regulatory authorities,
Trust meetings and preparing, printing and mailing proxy statements to
Shareholders; (iv) the payment of any distributions related to redemption
of Shares; (v) payment for routine services of the Trustee, legal counsel
and independent accountants; (vi) payment for routine accounting,
bookkeeping, custody and transfer agency services, whether performed by an
outside service provider or by Affiliates of the Sponsor; (vii) postage
and insurance; (viii) costs and expenses associated with client relations
and services; (ix) costs of preparation of all federal, state, local and
foreign tax returns and any taxes payable on the income, assets or
operations of the Fund; and (xi) extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto). The Sponsor will
bear the costs and expenses related to the initial offer and sale of
Shares, including registration fees paid or to be paid to the SEC, FINRA
or any other regulatory body. Total fees to be paid by the Fund
are currently estimated to be approximately 1.43% for the twelve-month
period ending ______, 2011, though this amount may change in future
years. The Sponsor may, in its discretion, pay or reimburse the
Fund for, or waive a portion of its management fee to offset, expenses
that would otherwise be borne by the Fund.
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General
expenses of the Trust will be allocated among the existing Funds and any
future series of the Trust as determined by the Sponsor in its
discretion. The Trust may be required to indemnify the Sponsor,
and the Trust and/or the Sponsor may be required to indemnify the Trustee,
Marketing Agent or Administrator, under certain
circumstances.
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Termination
Events
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|
The
Trust and the Fund shall continue in existence from the date of their
formation in perpetuity, unless the Trust or the Fund, as the case may be,
is sooner terminated upon the occurrence of certain events specified in
the Trust Agreement, including the following: (1) the filing of a
certificate of dissolution or cancellation of the Sponsor or revocation of
the Sponsor’s charter or the withdrawal of the Sponsor, unless
shareholders holding a majority of the outstanding shares of the Trust
elect within ninety (90) days after such event to continue the business of
the Trust and appoint a successor Sponsor; (2) the occurrence of any event
which would make the existence of the Trust or the Fund unlawful; (3) the
suspension, revocation, or termination of the Sponsor’s registration as a
CPO with the CFTC or membership with the NFA; (4) the insolvency or
bankruptcy of the Trust or the Fund; (5) a vote by the shareholders
holding at least seventy-five percent (75%) of the outstanding shares of
the Trust to dissolve the Trust, subject to certain conditions; and (6)
the determination by the Sponsor to dissolve the Trust or the Fund,
subject to certain conditions. Upon termination of the Fund,
the affairs of the Fund shall be wound up and all of its debts and
liabilities discharged or otherwise provided for in the order of priority
as provided by law. The fair market value of the remaining
assets of the Fund shall then be determined by the
Sponsor. Thereupon, the assets of the Fund shall be distributed
pro rata to the Shareholders in accordance with their
Shares.
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Authorized
Purchasers
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We
expect the initial Authorized Purchaser to be ________________, and we
expect that there will be additional Authorized Purchasers in the
future. A list of Authorized Purchasers will be available from
the Marketing Agent. Authorized Purchasers must be (1)
registered broker-dealers or other securities market participants, such as
banks and other financial institutions, that are not required to register
as broker-dealers to engage in securities transactions, and (2) DTC
Participants. To become an Authorized Purchaser, a person must
enter into an Authorized Purchaser Agreement with the Marketing
Agent.
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WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE FUND?
You
should consider carefully the risks described below before making an investment
decision. You should also refer to the other information included in this
prospectus, which includes the Fund’s and the Sponsor’s financial statements and
the related notes.
Risks
Associated With Investing Directly or Indirectly in Soybeans
Investing
in Soybean Interests subjects the Fund to the risks of the soybean market, and
this could result in substantial fluctuations in the price of the Fund’s
Shares.
The Fund
is subject to the risks and hazards of the soybean market because it invests in
Soybean Interests. The risks and hazards that are inherent in the
soybean market may cause the price of soybeans to fluctuate
widely. If the changes in percentage terms of the Fund’s Shares
accurately track the percentage changes in the Benchmark or the spot price of
soybeans, then the price of its Shares will fluctuate
accordingly.
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The
price and availability of soybeans is influenced by economic and industry
conditions, including but not limited to supply and demand factors such
as: crop disease; weed control; water availability; various planting,
growing, or harvesting problems; severe weather conditions such as
drought, floods, heavy rains, frost, or natural disasters that are
difficult to anticipate and which cannot be controlled; uncontrolled
fires, including arson; challenges in doing business with foreign
companies; legal and regulatory restrictions; transportation costs;
interruptions in energy supply; currency exchange rate fluctuations; and
political and economic instability. Additionally, demand for
soybeans is affected by changes in international, national, regional and
local economic conditions, and demographic trends. 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.
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The
supply of soybeans could be reduced by the spread of soybean
rust. Soybean rust is a wind-borne fungal disease that attacks
soybeans. Although soybean rust can be killed with chemicals,
chemical treatment increases production costs for
farmers.
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Soybean
production is subject to United States and foreign policies and
regulations that materially affect operations. Governmental
policies affecting the agricultural industry, such as taxes, tariffs,
duties, subsidies, incentives, acreage control, and import and export
restrictions on agricultural commodities and commodity products, can
influence the planting of certain crops, the location and size of crop
production, the volume and types of imports and exports, and industry
profitability. Additionally, soybean production is affected by
laws and regulations relating to, but not limited to, the sourcing,
transporting, storing and processing of agricultural raw materials as well
as the transporting, storing and distributing of related agricultural
products. Soybean producers also may need to comply with
various environmental laws and regulations, such as those regulating the
use of certain pesticides. In addition, international trade
disputes can adversely affect agricultural commodity trade flows by
limiting or disrupting trade between countries or
regions.
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Because
processing soybean oil can create trans-fats, the demand for soybean oil
may decrease due to heightened governmental regulation of trans-fats or
trans-fatty acids. The U.S. Food and Drug Administration
currently requires food manufacturers to disclose levels of trans-fats
contained in their products, and various local governments have enacted or
are considering restrictions on the use of trans-fats in
restaurants. Several food processors have either switched or
indicated an intention to switch to oil products with lower levels of
trans-fats or trans-fatty acids.
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In
recent years, there has been increased global interest in the production
of biofuels as alternatives to traditional fossil fuels and as a means of
promoting energy independence. Soybeans can be converted into
biofuels such as biodiesel. Accordingly, the soybean market has
become increasingly affected by demand for biofuels and related
legislation.
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The
costs related to soybean production could increase and soybean supply
could decrease as a result of restrictions on the use of genetically
modified soybeans, including requirements to segregate genetically
modified soybeans and the products generated from them from other soybean
products.
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Seasonal
fluctuations in the price of soybeans may cause risk to an investor
because of the possibility that Share prices will be depressed because of
the soybean harvest cycle. In the futures market, fluctuations
are typically reflected in contracts expiring in the harvest season (i.e.,
contracts expiring during the fall are typically priced lower than
contracts expiring in the winter and spring). 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, Soybean
Futures Contracts expiring in the
fall.
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The
Benchmark is not designed to correlate exactly with the spot price of soybean
and this could cause the changes in the price of the Shares to substantially
vary from the changes in the spot price of soybean. Therefore, you
may not be able to effectively use the Fund to hedge against soybean-related
losses or to indirectly invest in soybean.
The
Benchmark Component Futures Contracts reflect the price of soybeans for future
delivery, not the current spot price of soybeans, so at best the correlation
between changes in such Soybean Futures Contracts and the spot price of soybeans
will be only approximate. Weak correlation between the Benchmark and
the spot price of soybeans may result from the typical seasonal fluctuations in
soybean prices discussed above. Imperfect correlation may also result
from speculation in Soybean Interests, technical factors in the trading of
Soybean Futures Contracts, and expected inflation in the economy as a
whole. If there is a weak correlation between the Benchmark and the
spot price of soybeans, then the price of Shares may not accurately track the
spot price of soybeans and you may not be able to effectively use the Fund as a
way to hedge the risk of losses in your soybean-related transactions or as a way
to indirectly invest in soybeans.
Changes
in the Fund’s NAV may not correlate well with changes in the price of the
Benchmark. If this were to occur, you may not be able to effectively
use the Fund as a way to hedge against soybean-related losses or as a way to
indirectly invest in soybeans.
The
Sponsor endeavors to invest the Fund’s assets as fully as possible in Soybean
Interests so that the changes in percentage terms in the NAV closely correlate
with the changes in percentage terms in the Benchmark. However,
changes in the Fund’s NAV may not correlate with the changes in the Benchmark
for various reasons, including those set forth below:
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The
Fund does not intend to invest only in the Benchmark Component Futures
Contracts. While its investments in Soybean Futures Contracts
other than the Benchmark Component Futures Contracts, Cleared Soybean
Swaps and Other Soybean Interests would be for the purpose of
causing the Fund’s performance to track that of the Benchmark most
effectively and efficiently, the performance of these Soybean Interests
may not correlate well with the performance of the Benchmark Component
Futures Contracts, resulting in a greater potential for error in tracking
price changes in those futures contracts. Additionally, if the
trading market for Soybean Futures Contracts is suspended or closed, the
Fund may not be able to purchase these investments at the last reported
price for such investments.
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The
Fund will incur certain expenses in connection with its operations, and
will hold most of its assets in income-producing, short-term securities
for margin and other liquidity purposes and to meet redemptions that may
be necessary on an ongoing basis. These expenses and income
will cause imperfect correlation between changes in the Fund’s NAV and
changes in the Benchmark.
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The
Sponsor may not be able to invest the Fund’s assets in Soybean Interests
having an aggregate notional amount exactly equal to the Fund’s
NAV. As a standardized contract, a single Soybean Futures
Contracts or Cleared Soybean Swap is for a specified amount of soybean,
and the Fund’s NAV and the proceeds from the sale of a Creation Basket is
unlikely to be an exact multiple of that amount. In such case,
the Fund could not invest the entire proceeds from the purchase of the
Creation Basket in such futures contracts. (For example,
assuming the Fund receives $2,500,000 for the sale of a Creation Basket
and that the value (i.e., the notional amount) of a Soybean Futures
Contract is $45,300, the Fund could only enter into 55 Soybean Futures
Contracts with an aggregate value of $2,491,500). While the
Fund may be better able to achieve the exact amount of exposure to the
soybean market through the use of over-the-counter Other Soybean
Interests, there is no assurance that the Sponsor will be able to
continually adjust the Fund’s exposure to such Other Soybean Interests to
maintain such exact exposure. Furthermore, as noted above, the
use of Other Soybean Interests may itself result in imperfect correlation
with the Benchmark. Any amounts not invested in Soybean
Interests will be held in short-term Treasury Securities, cash and/or cash
equivalents.
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As
Fund assets increase, there may be more or less correlation. On
the one hand, as the Fund grows it should be able to invest in Soybean
Futures Contracts with a notional amount that is closer on a percentage
basis to the Fund’s NAV. For example, if the Fund’s NAV is
equal to 4.9 times the value of a single futures contract, it can purchase
only four futures contracts, which would cause only 81.6% of the Fund’s
assets to be exposed to the soybean market. On the other hand,
if the Fund’s NAV is equal to 100.9 times the value of a single Soybean
Futures Contract, it can purchase 100 such contracts, resulting in 99.1%
exposure. However, at certain asset levels the Fund may be
limited in its ability to purchase Soybean Futures Contracts due to
position limits or accountability levels. In these instances,
the Fund would likely invest to a greater extent in Soybean Interests not
subject to these restrictions. To the extent that the Fund
invests in Cleared Soybean Swaps and Other Soybean Interests, the
correlation between the Fund’s NAV and the Benchmark may be
lower. In certain circumstances, position limits or
accountability levels could limit the number of Creation Baskets that will
be sold.
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If
changes in the Fund’s NAV do not correlate with changes in the Benchmark, then
investing in the Fund may not be an effective way to hedge against
soybean-related losses or indirectly invest in soybeans.
Changes
in the price of the Fund’s Shares on the NYSE Arca may not correlate perfectly
with changes in the NAV of the Fund’s Shares. If this variation
occurs, then you may not be able to effectively use the Fund to hedge against
soybean-related losses or to indirectly invest in soybeans.
While it
is expected that the trading prices of the Shares will fluctuate in accordance
with the changes in the Fund’s NAV, the prices of Shares may also be influenced
by other factors, including the supply of and demand for the Shares, whether for
the short term or the longer term. There is no guarantee that the
Shares will not trade at appreciable discounts from, and/or premiums to, the
Fund’s NAV. This could cause the changes in the price of the Shares
to substantially vary from the changes in the spot price of soybeans, even if
the Fund’s NAV was closely tracking movements in the spot price of
soybeans. If this occurs, you may not be able to effectively use the
Fund to hedge the risk of losses in your soybean-related transactions or to
indirectly invest in soybeans.
The
Fund may experience a loss if it is required to sell Treasury Securities or cash
equivalents at a price lower than the price at which they were
acquired.
If the
Fund is required to sell Treasury Securities or cash equivalents at a price
lower than the price at which they were acquired, the Fund will experience a
loss. This loss may adversely impact the price of the Shares and may
decrease the correlation between the price of the Shares, the Benchmark, and the
spot price of soybeans. The value of Treasury Securities and other
debt securities generally moves inversely with movements in interest
rates. The prices of longer maturity securities are subject to
greater market fluctuations as a result of changes in interest
rates. While the short-term nature of the Fund’s investments in
Treasury Securities and cash equivalents should minimize the interest rate risk
to which the Fund is subject, it is possible that the Treasury Securities and
cash equivalents held by the Fund will decline in value.
Certain
of the Fund’s investments could be illiquid, which could cause large losses to
investors at any time or from time to time.
The Fund
may not always be able to liquidate its positions in its investments at the
desired price. 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 and price fluctuation limits, may
contribute to a lack of liquidity with respect to some exchange-traded Soybean
Interests. In addition, over-the-counter contracts and cleared swaps may be
illiquid because they are contracts between two parties and generally may not be
transferred by one party to a third party without the counterparty’s consent.
Conversely, a counterparty may give its consent, but the Fund still may not be
able to transfer an over-the-counter Soybean 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 soybean production or exports, or in another
major export, can also make it difficult to liquidate a position. Unexpected
market illiquidity may cause major losses to investors at any time or from time
to time. In addition, the Fund does not intend at this time to establish a
credit facility, which would provide an additional source of liquidity, but
instead will rely only on the Treasury Securities, cash and/or cash equivalents
that it holds to meet its liquidity needs. The anticipated large value of the
positions in Soybean Interests that the Sponsor will acquire or enter into for
the Fund increases the risk of illiquidity. Because Soybean Interests may be
illiquid, the Fund’s holdings may be more difficult to liquidate at favorable
prices in periods of illiquid markets and losses may be incurred during the
period in which positions are being liquidated.
If
the nature of the participants in the futures market shifts such that soybean
purchasers are the predominant hedgers in the market, the Fund might have to
reinvest at higher futures prices or choose Other Soybean
Interests.
The
changing nature of the participants in the soybean market will influence whether
futures prices are above or below the expected future spot price. Soybean
producers will typically seek to hedge against falling soybean prices by selling
Soybean Futures Contracts. Therefore, if soybean producers become the
predominant hedgers in the futures market, prices of Soybean Futures Contracts
will typically be below expected future spot prices. Conversely, if the
predominant hedgers in the futures market are the purchasers of soybeans who
purchase Soybean Futures Contracts to hedge against a rise in prices, prices of
Soybean Futures Contracts will likely be higher than expected future spot
prices. This can have significant implications for the Fund when it is time to
sell a Soybean Futures Contract that is no longer a Benchmark Component Futures
Contract and purchase a new Soybean Futures Contract or to sell a Soybean
Futures Contract to meet redemption requests.
While
the Fund does not intend to take physical delivery of soybeans under its Soybean
Interests, the possibility of physical delivery impacts the value of the
contracts.
While it
is not the current intention of the Fund to take physical delivery of soybeans
under its Soybean Interests, Soybean Futures Contracts are traditionally not
cash-settled contracts, and it is possible to take delivery under these and some
Other Soybean Interests. Storage costs associated with purchasing soybeans could
result in costs and other liabilities that could impact the value of Soybean
Futures Contracts or certain Other Soybean Interests. Storage costs include the
time value of money invested in soybeans as a physical commodity plus the actual
costs of storing the soybeans less any benefits from ownership of soybeans that
are not obtained by the holder of a futures contract. In general, Soybean
Futures Contracts have a one-month delay for contract delivery and 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 for
soybeans while the Fund holds Soybean Interests, the value of the Soybean
Interests, and therefore the Fund’s NAV, may change as well.
The
price relationship between the Benchmark Component Futures Contracts at any
point in time and the Soybean Futures Contacts that will become Benchmark
Component Futures Contracts on the next roll date will vary and may impact both
the Fund’s total return and the degree to which its total return tracks that of
soybean price indices.
The
design of the Fund’s Benchmark is such that the Benchmark Component Futures
Contracts will change five times per year, and the Fund’s investments must be
rolled periodically to reflect the changing composition of the Benchmark. For
example, when the second-to-expire Soybean Futures Contract becomes the
first-to-expire contract, such contract will no longer be a Benchmark Component
Futures Contract and the Fund’s position in it will no longer be consistent with
tracking the Benchmark. In the event of a soybean 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 soybean prices the value of the Benchmark Component
Futures Contracts would tend to rise as they approach expiration. As a result
the Fund may benefit because it would be selling more expensive contracts and
buying less expensive ones on an ongoing basis. Conversely, in the event of a
soybean 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 soybean prices the value of the
Benchmark Component Futures Contracts would tend to decline as they approach
expiration. As a result the Fund’s total return may be lower than might
otherwise be the case because it would be selling less expensive contracts and
buying more expensive ones. The impact of backwardation and contango may lead
the total return of the Fund to vary significantly from the total return of
other price references, such as the spot price of soybean. In the event of a
prolonged period of contango, and absent the impact of rising or falling soybean
prices, this could have a significant negative impact on the Fund’s NAV and
total return.
Regulation
of the commodity interests and commodity markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect the Fund.
The
regulation of futures 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 or higher margin
requirements, the establishment of daily price limits and the suspension of
trading.
The
regulation of commodity interest transactions in the United States is a rapidly
changing area of the law and is subject to ongoing modification by governmental
and judicial action. Considerable regulatory attention has recently been focused
on both over-the-counter commodity interests and non-traditional publicly
distributed investment pools such as the Fund, and a number of proposals that
would alter the regulation of Soybean Interests are being considered by federal
regulators and Congress. These proposals include the extension of position
limits and accountability levels to futures contracts on non-U.S. exchanges and
to over-the-counter commodity interests previously exempt from such limits, and
the forced use of certain clearinghouse mechanisms for all over-the-counter
transactions. There is a possibility that future regulatory changes would result
in changes, perhaps to a material extent, to the nature of an investment in the
Fund and the investments that may be available to the Fund, and that could
affect the ability of the Fund to continue to implement its investment strategy.
In addition, various national governments have expressed concern regarding the
disruptive effects of speculative trading in certain commodity markets and the
need to regulate the derivatives markets in general. The effect of any future
regulatory change on the 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, including the possibility of losing the benefit of favorable
market movements.
Producers
and commercial users of soybeans may use the Fund as a vehicle to hedge the risk
of losses in their soybean-related transactions. There are several risks in
connection with using the Fund as a hedging device. While hedging can provide
protection against an adverse movement in market prices, it can also preclude a
hedger’s opportunity to benefit from a favorable market movement. For instance,
in a hedging transaction the hedger may be a user of a commodity concerned that
the hedged commodity will increase in price, but must recognize the risk that
the price may instead decline. If this happens, the hedger will have lost the
benefit of being able to purchase the commodity at the lower price because the
hedging transaction will result in a loss that would offset (at least in part)
this benefit. Thus, the hedger forgoes the opportunity to profit from favorable
price movements. In addition, if the hedge is not a perfect one, the hedger can
lose on the hedging transaction and not realize an offsetting gain in the value
of the underlying item being hedged.
When
using Soybean Interests as a hedging technique, at best, the correlation between
changes in prices of futures contracts and of the items being hedged can be only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative markets, demand for futures and
for soybean products, technical influences in futures trading, and differences
between anticipated costs being hedged and the instruments underlying the
standard futures contracts available for trading. Even a well-conceived hedge
may be unsuccessful to some degree because of unexpected market behavior as well
as the expenses associated with creating the hedge.
In
addition, using an investment in the Fund as a hedge for changes in food costs
generally may not be successful because changes in the price of soybeans may
vary substantially from changes in the prices of other food products. In
addition, the price of soybeans and the Fund’s NAV would not reflect the
refining, transportation, and other costs that are specific to the
hedger.
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.
Historically,
Soybean Interests have not generally been correlated to the performance of other
asset classes such as stocks and bonds. Non-correlation means that there is a
low statistical relationship between the performance of Soybean Interests, on
the one hand, and stocks or bonds, on the other hand. However, there can be no
assurance that such non-correlation will continue during future periods. If,
contrary to historic patterns, the Fund’s performance were to move in the same
general direction as the financial markets, you will obtain little or no
diversification benefits from an investment in the Shares. In such a case, the
Fund may have no gains to offset your losses from other investments, and you may
suffer losses on your investment in the Fund at the same time you incur losses
with respect to other investments.
Variables
such as drought, floods, weather, embargoes, tariffs and other political events
may have a larger impact on soybean and Soybean Interest prices than on
traditional securities. These additional variables may create additional
investment risks that subject the Fund’s investments to greater volatility than
investments in traditional securities.
Non-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 soybeans and prices of other financial assets, such as
stocks and bonds, are negatively correlated. In the absence of negative
correlation, the Fund cannot be expected to be automatically profitable during
unfavorable periods for the stock market, or vice versa.
The
Fund’s Operating Risks
The
Fund is not a registered investment company, so you do not have the protections
of the Investment Company Act of 1940.
The Fund
is not an investment company subject to the Investment Company Act of 1940.
Accordingly, you do not have the protections afforded by that statute, which,
for example, requires investment companies to have a board of directors with a
majority of disinterested directors and regulates the relationship between the
investment company and its investment manager.
The
Sponsor has never operated a commodity pool.
While
certain of the Sponsor’s principals have experience with investing in Soybean
Interests and other commodity interests, the Sponsor has been formed for the
purpose of sponsoring the Trust and serving as the Teucrium Funds’ commodity
pool operator and has limited experience operating commodity pools. The Sponsor
currently sponsors six Teucrium Funds, but only the Teucrium Corn Fund, which
commenced operations on June 8, 2010, has commenced operations as of the date of
this prospectus. In addition, the Fund is new and has no operating
history.
Therefore,
only the Teucrium Corn Fund has past performance available for your review, and
that performance is for only a short period of time. Furthermore, the past
performance of the Teucrium Corn Fund will not necessarily reflect the future
performance of the Fund. If the experience of the Sponsor and its management is
not adequate or suitable, the operation and performance of the Fund may be
adversely affected.
The
Sponsor is leanly staffed and relies heavily on key personnel to manage trading
activities.
In
managing and directing the day-to-day activities and affairs of the Fund, the
Sponsor relies almost entirely on Mr. Sal Gilbertie, Mr. Dale Riker, Mr. Carl N.
Miller III and Mr. Kelly Teevan. If Mr. Gilbertie, Mr. Riker or Mr. Miller 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.
Position
limits and daily price fluctuation limits set by the exchanges have the
potential to cause tracking error, which could cause the price of Shares to
substantially vary from the Benchmark and prevent you from being able to
effectively use the Fund as a way to hedge against soybean-related losses or as
a way to indirectly invest in soybeans.
The CFTC
and U.S. designated contract markets such as the CBOT may establish position
limits on the maximum net long or net short futures contracts in commodity
interests that any person or group of persons under common trading control
(other than as a hedge, which an investment by the Fund is not) may hold, own or
control. For example, the current position limit for investments at any one time
in the Soybean Futures Contracts are 600 spot month contracts, 6,500 contracts
expiring in any other single month, and 10,000 total for all months. Cleared
Soybean Swaps are subject to position limits that are substantially identical
to, but measured separately from, the limits on Soybean Futures Contracts. These
position limits are fixed ceilings that the Fund would not be able to exceed
without specific CFTC authorization.
In
addition to position limits, 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, the CBOT imposes maximum daily price fluctuation
limits on Soybean Futures Contracts.
All of
these limits may potentially cause a tracking error between the price of the
Shares and the Benchmark. This may in turn prevent you from being able to
effectively use the Fund as a way to hedge against soybean-related losses or as
a way to indirectly invest in soybeans.
The Fund
does not intend to limit the size of the offering and will attempt to expose
substantially all of its proceeds to the soybean market utilizing Soybean
Interests. If the Fund encounters position limits or price fluctuation limits
for Soybean Futures Contracts and/or Cleared Soybean Swaps on the CBOT, it may
then, if permitted under applicable regulatory requirements, purchase Other
Soybean Interests and/or Soybean Futures Contracts listed on foreign exchanges.
However, the Soybean Futures Contracts available on such foreign exchanges may
have different underlying sizes, deliveries, and prices. In addition, the
Soybean Futures Contracts available on these exchanges may be subject to their
own position limits or similar restrictions. In any case, notwithstanding the
potential availability of these instruments in certain circumstances, position
limits could force the Fund to limit the number of Creation Baskets that it
sells.
There
are no independent advisers representing Fund investors.
The Sponsor has consulted with legal
counsel, accountants and other advisers regarding the formation and operation of
the Trust and Fund. No counsel has been appointed to represent you in connection
with the offering of Shares. Accordingly, you should consult your own legal, tax
and financial advisers regarding the desirability of an investment in the
Shares.
The
Fund and the Sponsor may have conflicts of interest, which may cause them to
favor their own interests to your detriment.
The Fund
and the Sponsor may have inherent conflicts to the extent the Sponsor attempts
to maintain the Fund’s asset size in order to preserve its fee income and this
may not always be consistent with the Fund’s objective of having the value of
its Shares’ NAV track changes in the Benchmark. The Sponsor’s officers,
directors and employees do not devote their time exclusively to the Fund. These
persons may be directors, officers or employees of other entities. They could
have a conflict between their responsibilities to the Fund and to those other
entities.
In
addition, the Sponsor’s principals, officers, directors or employees may trade
futures and related contracts for their own accounts. A conflict of interest may
exist if their trades are in the same markets and at the same time as the Fund
trades using the clearing broker to be used by the Fund. A potential conflict
also may occur if the Sponsor’s principals, officers, directors or employees
trade their accounts more aggressively or take positions in their accounts that
are opposite, or ahead of, the positions taken by the Fund.
The
Sponsor has sole current authority to manage the investments and operations of
the Fund, and this may allow it to act in a way that furthers its own interests
and in conflict with your best interests. 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. Shareholders must therefore rely upon the duties and judgment of the
Sponsor to manage the Fund’s affairs.
The
Sponsor may manage a large amount of assets and this could affect the Fund’s
ability to trade profitably.
Increases
in assets under management may affect trading decisions. While the Fund
currently has only nominal assets, the Sponsor does not intend to limit the
amount of Fund assets. The more assets the Sponsor manages, the more difficult
it may be for it to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of managing
risk associated with larger positions.
The
liability of the Sponsor and the Trustee are limited, and the value of the
Shares will be adversely affected if the Fund is required to indemnify the
Trustee or the Sponsor.
Under the
Trust Agreement, the Trustee and the Sponsor are not liable, and have the right
to be indemnified, for any liability or expense incurred absent gross negligence
or willful misconduct on the part of the Trustee or Sponsor, as the case may be.
That means the Sponsor may require the assets of a 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 in violation of its Trust
Agreement.
You
cannot be assured of the Sponsor’s continued services, and discontinuance may be
detrimental to the Fund.
You
cannot be assured that the Sponsor will be willing or able to continue to
service the Fund for any length of time. The Sponsor was formed for the purpose
of sponsoring the Fund and other commodity pools, and has limited financial
resources and no significant source of income apart from its management fee from
the Fund to support its continued service for the Fund. If the Sponsor
discontinues its activities on behalf of the 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.
The
Fund could terminate at any time and cause the liquidation and potential loss of
your investment and could upset the overall maturity and timing of your
investment portfolio.
The Fund
may terminate at any time, regardless of whether the Fund has incurred losses,
subject to the terms of the Trust Agreement. For example, the dissolution or
resignation of the Sponsor would cause the Trust to terminate unless
shareholders holding a majority of the outstanding shares of the Trust 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. However, no level of
losses will require the Sponsor to terminate the Fund. The Fund’s termination
would result in the liquidation of its investments and the distribution of its
remaining assets to the Shareholders on a pro rata basis in accordance with
their Shares, and the Fund could incur losses in liquidating its investments in
connection with a termination. Termination could also negatively affect the
overall maturity and timing of your investment portfolio.
As
a Shareholder, you will not have the rights enjoyed by investors in certain
other types of entities.
As
interests in separate series of a Delaware statutory trust, the Shares do not
involve the rights normally associated with the ownership of shares of a
corporation (including, for example, the right to bring shareholder oppression
and derivative actions). In addition, the Shares have limited voting and
distribution rights (for example, Shareholders do not have the right to elect
directors, as the Trust does not have a board of directors, and generally will
not receive regular distributions of the net income and capital gains earned by
the Fund). The Fund is also not subject to certain investor protection
provisions of the Sarbanes Oxley Act of 2002 and the NYSE Arca governance rules
(for example, audit committee requirements).
A
court could potentially conclude that the assets and liabilities of the Fund are
not segregated from those of another series of the Trust, thereby potentially
exposing assets in the Fund to the liabilities of another
series.
The Fund
is a series of a Delaware statutory trust and not itself a separate legal
entity. 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 are enforceable against the assets of such series. The
Sponsor is not aware of any court case that has interpreted this inter-series
limitation on liability or provided any guidance as to what is required for
compliance. The Sponsor intends to maintain separate and distinct records for
the Fund and account for the Fund separately from any other Trust series, but it
is possible a court could conclude that the methods used do not satisfy the
Delaware Statutory Trust Act, which would potentially expose assets in the Fund
to the liabilities of one or more of the Teucrium Funds and/or any other Trust
series created in the future.
The
Sponsor and the Trustee are not obligated to prosecute any action, suit or other
proceeding in respect of any Fund property.
Neither
the Sponsor nor the Trustee is obligated to, although each may in its respective
discretion, prosecute any action, suit or other proceeding in respect of any
Fund property. The Trust Agreement does not confer upon Shareholders the right
to prosecute any such action, suit or other proceeding.
The
Fund does not expect to make cash distributions.
The
Sponsor intends to re-invest any income and realized gains of the Fund in
additional Soybean Interests rather than distributing cash to Shareholders.
Therefore, unlike mutual funds, commodity pools or other investment pools that
generally distribute income and gains to their investors, the Fund generally
will not distribute cash to Shareholders. You should not invest in the Fund if
you will need cash distributions from the Fund to pay taxes on your share of
income and gains of the Fund, if any, or for any other reason. Although the Fund
does not intend to make cash distributions, 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 Soybean Interests and investors adversely react to
being taxed on such income without receiving distributions that could be used to
pay such tax. Cash distributions may be made in these and similar
instances.
There
is a risk that the Fund will not earn gains sufficient to compensate for the
fees and expenses that it must pay and as such the Fund may not earn any
profit.
The Fund
pays management fees at an annual rate of 1.00% of its average net assets,
brokerage charges of approximately 0.06% (based on futures commission merchant
fees of $4.00 per buy or sell), over-the-counter spreads and various other
expenses of its ongoing operations (e.g., fees of the Administrator, Trustee and
Marketing Agent), resulting in a total estimated expense ratio of approximately
[1.__]% of net assets
(not including the transaction fees paid by Authorized Purchaser when purchasing
or redeeming Creation Baskets). These fees and expenses must be paid in all
events, regardless of whether the Fund’s activities are profitable. Accordingly,
the Fund must realize interest income and/or gains on Soybean Interests
sufficient to cover these fees and expenses before it can earn any
profit.
If
this offering of Shares does not raise sufficient funds to make the Fund’s
future operations viable, the Fund may be forced to terminate and investors may
lose all or part of their investment.
All of
the expenses relating to the Fund incurred prior to the date of this prospectus
have been or will be paid by the Sponsor. These payments by the Sponsor were
designed to allow the Fund the ability to commence the public offering of its
Shares. As of the date of this prospectus, the Fund pays the fees, costs and
expenses of its operations. If the Sponsor and the Fund are unable to raise
sufficient funds so that the Fund’s expenses are reasonable in relation to its
NAV, the Fund may be forced to terminate and investors may lose all or part of
their investment.
The
Fund may incur higher fees and expenses upon renewing existing or entering into
new contractual relationships.
The
arrangements between clearing brokers and counterparties on the one hand and the
Fund on the other generally are terminable by the clearing brokers or
counterparty upon notice to the Fund. In addition, the agreements between the
Fund and its third-party service providers, such as the Marketing Agent and the
Custodian, are generally terminable at specified intervals. Upon termination,
the Sponsor may be required to renegotiate or make other arrangements for
obtaining similar services if the Fund intends to continue to operate.
Comparable services from another party may not be available, or even if
available, these services may not be available on the terms as favorable as
those of the expired or terminated arrangements.
The
Fund may miss certain trading opportunities because it will not receive the
benefit of the expertise of independent trading advisors.
The
Sponsor does not employ trading advisors for the Fund; however, it reserves the
right to employ them in the future. The only advisor to the Fund is the Sponsor.
A lack of independent trading advisors may be disadvantageous to the Fund
because it will not receive the benefit of their expertise.
The
net asset value calculation of the Fund may be overstated or understated due to
the valuation method employed when a settlement price is not available on the
date of net asset value calculation.
The
Fund’s NAV includes, in part, any unrealized profits or losses on open swap
agreements, futures or forward contracts. Under normal circumstances, the NAV
will reflect the settlement price of open futures contracts on the date when the
NAV is being calculated. However, if a futures contract traded on an exchange
could not be liquidated on such day (due to the operation of daily limits or
other rules of the exchange or otherwise), the settlement price on the most
recent day on which the futures contract position could have been liquidated
will be the basis for determining the market value of such position for such
day. In these situations, there is a risk that the calculation of the NAV of the
Fund on such day will not accurately reflect the realizable market value of the
futures contracts.
An
unanticipated number of redemption requests during a short period of time could
have an adverse effect on the NAV of the Fund.
If a
substantial number of requests for redemption of Redemption Baskets are received
by the Fund during a relatively short period of time, the Fund may not be able
to satisfy the requests from the Fund’s assets not committed to trading. As a
consequence, it could be necessary to liquidate the Fund’s trading positions
before the time that its trading strategies would otherwise call for
liquidation.
The
financial markets have recently been in a period of disruption and recession and
these conditions may not improve in the near future.
A period
of recession for the economy as a whole began in 2008, and the financial markets
have experienced very difficult conditions and volatility during that period.
The conditions in these markets resulted in a decrease in availability of
corporate credit and liquidity and led indirectly to the insolvency, closure or
acquisition of a number of major financial institutions and contributed to
further consolidation within the financial services industry. A continued
recession or a depression could adversely affect the financial condition and
results of operations of the Fund’s service providers and Authorized Purchasers,
which would impact the ability of the Sponsor to achieve the Fund’s investment
objective.
The
liquidity of the Shares may be affected by the withdrawal from participation of
Authorized Purchasers, which could adversely affect the market price of the
Shares.
In the
event that one or more Authorized Purchasers that are actively involved in
purchasing and selling Shares cease to be so involved, the liquidity of the
Shares will likely decrease, which could adversely affect the market price of
the Shares and result in your incurring a loss on your investment.
You
may be adversely affected by redemption orders that are subject to postponement,
suspension or rejection under certain circumstances.
The Trust
may, in its discretion, suspend the right to redeem Shares of the Fund or
postpone the redemption settlement date: (1) for any period during which an
applicable exchange is closed other than customary weekend or holiday closing,
or trading is suspended or restricted; (2) for any period during which an
emergency exists as a result of which delivery, disposal or evaluation of the
Fund’s assets is not reasonably practicable; or (3) for such other period as the
Sponsor determines to be necessary for the protection of Shareholders. In
addition, the Trust will reject a redemption order if the order is not in proper
form as described in the agreement with the Authorized Purchaser or if the
fulfillment of the order, in the opinion of its counsel, might be unlawful. Any
such postponement, suspension or rejection could adversely affect a redeeming
Shareholder. For example, the resulting delay may adversely affect the value of
the Shareholder’s redemption proceeds if the NAV of the Fund declines during the
period of delay. The Trust Agreement provides that the Sponsor and its designees
will not be liable for any loss or damage that may result from any such
suspension or postponement.
The
failure or bankruptcy of a clearing broker could result in substantial losses
for the Fund; the clearing broker could be subject to proceedings that impair
its ability to execute the Fund’s trades.
Under
CFTC regulations, a clearing broker with respect to the Fund’s exchange-traded
Soybean Interests must maintain customers’ assets in a bulk segregated account.
If a clearing broker fails to do so, or is unable to satisfy a substantial
deficit in a customer account, its other customers may be subject to risk of a
substantial loss of their funds in the event of that clearing broker’s
bankruptcy. In that event, the clearing broker’s customers, such as the Fund,
are entitled to recover, even in respect of property specifically traceable to
them, only a proportional share of all property available for distribution to
all of that clearing broker’s customers. The Fund also may be subject to the
risk of the failure of, or delay in performance by, any exchanges and markets
and their clearing organizations, if any, on which Soybean Interests are
traded.
From time
to time, the clearing brokers may be subject to legal or regulatory proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear the Fund’s
trades.
The
failure or insolvency of the Fund’s custodian could result in a substantial loss
of the Fund’s assets.
As noted
above, the vast majority of the Fund’s assets are held in short-term Treasury
Securities, cash and/or cash equivalents with the Custodian. The insolvency of
the Custodian could result in a complete loss of the Fund’s assets held by the
Custodian, which, at any given time, would likely comprise a substantial portion
of the Fund’s total assets.
Third
parties may infringe upon or otherwise violate intellectual property rights or
assert that the Sponsor has infringed or otherwise violated their intellectual
property rights, which may result in significant costs and diverted
attention.
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.
Third
parties may utilize the Sponsor’s intellectual property or technology, including
the use of its business methods, trademarks or trade names and trading program
software, without permission, which could cause competitive harm to the Sponsor
and the Fund. The Sponsor has not registered any trademarks and does not have
patent protections on any business methods or technology used with respect to
the Fund. The Sponsor does not currently have any proprietary software. However,
if it obtains proprietary software in the future, then any unauthorized use of
such proprietary software and other technology could also adversely affect the
competitive advantage of the Sponsor or the Fund and/or cause the Sponsor to
take legal action to protect its rights.
The
success of the Fund depends on the ability of the Sponsor to accurately
implement its trading strategies, and any failure to do so could subject the
Fund to losses on such transactions.
The
Sponsor’s trading strategy is quantitative in nature and it is possible that the
Sponsor will make errors in its implementation. The execution of the
quantitative strategy is subject to human error, such as incorrect inputs into
the Sponsor’s computer systems and incorrect information provided to the Fund’s
clearing brokers. In addition, it is possible that a computer or software
program may malfunction and cause an error in computation. Any failure,
inaccuracy or delay in executing the Fund’s transactions could affect its
ability to achieve its investment objective. It could also result in decisions
to undertake transactions based on inaccurate or incomplete information. This
could cause substantial losses on transactions.
The
Fund may experience substantial losses on transactions if the computer or
communications system fails.
The
Fund’s trading activities, including its risk management, 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 or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or even fail. Any
significant degradation or failure of the systems that the Sponsor uses to
gather and analyze information, enter orders, process data, monitor risk levels
and otherwise engage in trading activities may result in substantial losses on
transactions, liability to other parties, lost profit opportunities, damages to
the Sponsor’s and Fund’s reputations, increased operational expenses and
diversion of technical resources.
If
the computer and communications systems are not upgraded when necessary, the
Fund’s financial condition could be harmed.
The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting the
Fund’s trading activities obsolete. In addition, these computer and
communications systems must be compatible with those of third parties, such as
the systems of exchanges, clearing brokers and the executing brokers. As a
result, if these third parties upgrade their systems, the Sponsor will need to
make corresponding upgrades to continue effectively its trading activities. The
Fund’s future success may depend on the Fund’s ability to respond to changing
technologies on a timely and cost-effective basis.
The
Fund depends on the reliable performance of the computer and communications
systems of third parties, such as brokers and futures exchanges, and may
experience substantial losses on transactions if they fail.
The Fund
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other data
providers that the Sponsor uses to conduct trading activities. Failure or
inadequate performance of any of these systems could adversely affect the
Sponsor’s ability to complete transactions, including its ability to close out
positions, and result in lost profit opportunities and significant losses on
commodity interest transactions. This could have a material adverse effect on
revenues and materially reduce the Fund’s available capital. For example,
unavailability of price quotations from third parties may make it difficult or
impossible for the Sponsor to conduct trading activities so that the Fund will
closely track the Benchmark. Unavailability of records from brokerage firms may
make it difficult or impossible for the Sponsor to accurately determine which
transactions have been executed or the details, including price and time, of any
transaction executed. This unavailability of information also may make it
difficult or impossible for the Sponsor to reconcile its records of transactions
with those of another party or to accomplish settlement of executed
transactions.
Risk
of Leverage and Volatility
If
the Sponsor causes or permits the Fund to become leveraged, you could lose all
or substantially all of your investment if the Fund’s trading positions suddenly
turn unprofitable.
Commodity
pools’ trading positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds that represent
only a small percentage of a futures contract’s (or other commodity interest’s)
entire market value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity interests)
with an aggregate face amount in excess of the commodity pool’s assets. While
this leverage can increase a pool’s profits, relatively small adverse movements
in the price of the pool’s commodity interests can cause significant losses to
the pool. While the Sponsor does not intend to leverage the Fund’s assets, it is
not prohibited from doing so under the Trust Agreement. If the Sponsor were to
cause or permit the Fund to become leveraged, you could lose all or
substantially all of your investment if the Fund’s trading positions suddenly
turn unprofitable.
The
price of soybeans can be volatile which could cause large fluctuations in the
price of Shares.
Movements
in the price of soybeans will be the result of factors outside of the Sponsor’s
control and may not be anticipated by the Sponsor. As discussed in more detail
above, price movements for soybeans are influenced by, among other things,
weather conditions, crop disease, transportation difficulties, various planting,
growing and harvesting problems, governmental policies, changing demand, and
seasonal fluctuations in supply. More generally, commodity prices may be
influenced by economic and monetary events such as changes in interest rates,
changes in balances of payments and trade, U.S. and international inflation
rates, currency valuations and devaluations, U.S. and international economic
events, and changes in the philosophies and emotions of market participants.
Because the Fund invests primarily in interests in a single commodity, it is not
a diversified investment vehicle, and therefore may be subject to greater
volatility than a diversified portfolio of stocks or bonds or a more diversified
commodity pool.
Over-the-Counter
Contract Risk
Over-the-counter
transactions are subject to little, if any, regulation.
A portion
of the Fund’s assets may be used to trade over-the-counter Soybean Interests,
such as forward contracts or swaps. Over-the-counter contracts are typically
traded on a principal-to-principal basis through dealer markets that are
dominated by major money center and investment banks and other institutions and
are essentially unregulated by the CFTC. You therefore do not receive the
protection of CFTC regulation or the statutory scheme of the Commodity Exchange
Act in connection with this trading activity. The markets for over-the-counter
contracts rely upon the integrity of market participants in lieu of the
additional regulation imposed by the CFTC on participants in the futures
markets. The lack of regulation in these markets could expose the Fund in
certain circumstances to significant losses in the event of trading abuses or
financial failure by participants.
The
Fund will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by the Fund.
The Fund
faces the risk of non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these contracts is
generally a single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a result, there
will be greater counterparty credit risk in these transactions. A counterparty
may not be able to meet its obligations to the Fund, in which case the Fund
could suffer significant losses on these contracts.
If a
counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding.
During any such period, the Fund may have difficulty in determining the value of
its contracts with the counterparty, which in turn could result in the
overstatement or understatement of the Fund’s NAV. The Fund may eventually
obtain only limited recovery or no recovery in such circumstances.
The
Fund may be subject to liquidity risk with respect to its over-the-counter
contracts.
Over-the-counter
contracts may have terms that make them less marketable than futures contracts.
Over-the-counter contracts are less marketable because they are not traded on an
exchange, do not have uniform terms and conditions, and are entered into based
upon the creditworthiness of the parties and the availability of credit support,
such as collateral, and in general, they are not transferable without the
consent of the counterparty. These conditions may diminish the ability to
realize the full value of such contracts.
Risk
of Trading in International Markets
Trading
in international markets would expose the Fund to credit and regulatory
risk.
A
significant portion of the Soybean Futures Contracts entered into by the Fund
will be traded on United States exchanges including the CBOT. However, a portion
of the Fund’s trades may take place on markets and 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, nor
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, 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 has less
legal and regulatory protection than it does when it trades
domestically.
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 the Fund to credit risk. Additionally, trading
on non-U.S. exchanges is subject to the risks presented by exchange controls,
expropriation, increased tax burdens and exposure to local economic declines and
political instability. An adverse development with respect to any of these
variables could reduce the profit or increase the loss earned on trades in the
affected international markets.
International
trading activities subject the Fund to foreign exchange risk.
The price
of any non-U.S. Soybean 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. As a result, changes in the value of the local currency relative to
the U.S. dollar may cause losses to the Fund even if the contract is
profitable.
The
Fund’s international trading could expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.
Some
non-U.S. exchanges also may be in a more developmental stage so that prior price
histories may not be indicative of current price dynamics. In addition, the Fund
may not have the same access to certain positions on foreign trading exchanges
as do local traders, and the historical market data on which the Sponsor bases
its strategies may not be as reliable or accessible as it is for U.S.
exchanges.
Tax
Risk
Please
refer to “U.S. Federal Income Tax Considerations” for information regarding the
U.S. federal income tax consequences of the purchase, ownership and disposition
of Shares.
Your
tax liability from holding Shares may exceed the amount of distributions, if
any, on your Shares.
Cash or
property will be distributed at the sole discretion of the Sponsor, and the
Sponsor currently does not intend to make cash or other distributions with
respect to Shares. You will be required to pay U.S. federal income tax and, in
some cases, state, local, or foreign income tax, on your allocable share of the
Fund’s taxable income, without regard to whether you receive distributions or
the amount of any distributions. Therefore, the tax liability resulting from
your ownership of Shares may exceed the amount of cash or value of property (if
any) distributed.
Your
allocable share of income or loss for tax purposes may differ from your economic
income or loss on your Shares.
Due to
the application of the assumptions and conventions applied by the Fund in making
allocations for 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 if the IRS does not accept the assumptions and conventions applied
by the Fund in allocating those items, with potential adverse consequences for
you.
The Fund
will be treated as a partnership for United States federal income tax purposes.
The U.S. tax rules pertaining to entities taxed as partnerships are complex and
their application to publicly traded partnerships such as the Fund is in many
respects uncertain. The Fund will apply certain assumptions and conventions in
an attempt to comply with the intent of the applicable rules and to report
taxable income, gains, deductions, losses and credits in a manner that properly
reflects Shareholders’ economic gains and losses. These assumptions and
conventions may not fully comply with all aspects of the Internal Revenue Code
(the “Code”) and applicable Treasury Regulations, however, and it is possible
that the U.S. Internal Revenue Service 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.
The
Fund could be treated as a corporation for federal income tax purposes, which
may substantially reduce the value of your Shares.
The Trust
has received an opinion of counsel that, under current U.S. federal income tax
laws, the Fund will be treated as a partnership that is not taxable as a
corporation for U.S. federal income tax purposes, provided that (i) at least 90
percent of the Fund’s annual gross income consists of “qualifying income” as
defined in the Code, (ii) the Fund is organized and operated in accordance with
its governing agreements and applicable law, and (iii) the Fund does not elect
to be taxed as a corporation for 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 federal income tax purposes. If the IRS were to successfully
assert that the Fund is taxable as a corporation for 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. 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.
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
is a series of the Trust, a statutory trust organized under the laws of the
State of Delaware on September 11, 2009. Currently, the Trust has five
additional series that are separate commodity pools: the Teucrium Corn Fund, the
Teucrium Sugar Fund, the Teucrium Wheat Fund, the Teucrium Natural Gas Fund, and
the Teucrium WTI Crude Oil 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 232 Hidden Lake Road, Building A, Brattleboro, Vermont 05301. The Fund
is a commodity pool. It operates pursuant to the terms of the Trust Agreement,
which is dated as of March 31, 2010 and grants full management control to the
Sponsor.
The Fund
is publicly traded, and seeks to have the daily changes in percentage terms of
the Shares’ NAV reflect the daily changes in percentage terms of the price of
soybeans for future delivery, as measured by the Benchmark, less the Fund’s
expenses. The Fund will invest in a mixture of listed Soybean Futures Contracts,
Cleared Soybean Swaps, Other Soybean Interests, short-term Treasury Securities,
cash and cash equivalents.
THE
FUND HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
The
Sponsor
The
Sponsor of the Trust is Teucrium Trading, LLC, a Delaware limited liability
company. The principal office of the Sponsor and the Trust are located at 232
Hidden Lake Road, Building A, Brattleboro, Vermont 05301. The Sponsor registered
as a CPO with the CFTC and became a member of the NFA on November 10,
2009.
The
Sponsor established the Trust and the Fund and registered the Shares of the Fund
covered by this prospectus. Aside from establishing and registering the Fund and
the other Tecrium Funds, operating the Teucrium Corn Fund since its commencement
of operations on June 8, 2010, and obtaining capital from a small number of
outside investors in order to engage in these activities, the Sponsor did not
engage in any business activity prior to the date of this prospectus. Under the
Trust Agreement, the Sponsor is solely responsible for the management and
conducts or directs the conduct of the business of the Trust, the Fund, and any
other 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 futures commission merchants 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, Marketing Agent, 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
Marketing Agent will assist the Sponsor in marketing the Shares. The Sponsor may
determine to engage additional or successor marketing agents. See “Plan of
Distribution” for more information about the Marketing Agent.
The
Sponsor maintains a public website on behalf of the Fund, www.teucriumsoybeanfund.com,
which contains information about the Trust, the Fund and the Shares, and
oversees certain services for the benefit of Shareholders.
The
Sponsor has discretion to appoint one or more of its affiliates as additional
Sponsors.
The
Sponsor receives a fee as compensation for services performed under the Trust
Agreement. The Sponsor’s fee accrues daily and is paid monthly at an annual rate
of 1.00% of the average daily net assets of the Fund. The Sponsor receives no
compensation from the Fund other than such fee. The Fund is also responsible for
other ongoing fees, costs and expenses of its 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
bear the costs and expenses related to the initial offer and sale of
Shares.
Shareholders
have no right to elect the Sponsor on an annual or any other continuing basis or
to remove the Sponsor. If the Sponsor voluntarily withdraws, the holders of a
majority of the Trust’s outstanding shares (excluding for purposes of such
determination shares owned by the withdrawing Sponsor and its affiliates) may
elect its successor. Prior to withdrawing, the Sponsor must give ninety days’
written notice to the holders of the Trust’s outstanding shares and the
Trustee.
Ownership
or “membership” interests in the Sponsor are owned by persons referred to as
“members.” The Sponsor currently has three voting or “Class A” members – Mr. Sal
Gilbertie, Mr. Dale Riker and Mr. Carl N. Miller III – and a small number of
non-voting or “Class B” members who have provided working capital to the
Sponsor. Messrs. Gilbertie and Riker each currently own 45% of the Sponsor’s
Class A membership interests.
Management
of the Sponsor
In
general, under the Sponsor’s Limited Liability Company Agreement, the Sponsor
(and as a result the Trust and the Fund) is managed by the officers of the
Sponsor. In particular, the President of the Sponsor is responsible for the
general and active management of the business of the Sponsor, and for the
supervision and direction of the Sponsor’s other officers. However, certain
fundamental actions regarding the Sponsor, such as the removal of officers, the
addition or substitution of members, or the incurrence of liabilities other than
those incurred in the ordinary course of business and de minimis liabilities, may
not be taken without the affirmative vote of a majority of the Class A members
(which is generally defined as the affirmative vote of Mr. Gilbertie and one of
the other two Class A members). The Sponsor has no board of directors, and the
Trust has no board of directors or officers.
The three
Class A members of the Sponsor, two of whom also serve as its officers, are as
follows:
Sal Gilbertie
has been the President of the Sponsor since its inception, was approved
by the NFA as a principal of the Sponsor on September 23, 2009, and was
registered as an associated person of the Sponsor on November 10, 2009. He
maintains his main business office at 653A Garcia, Santa Fe, NM 87505. From
October, 2005 until December, 2009, Mr. Gilbertie was employed by Newedge USA,
LLC, 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 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. Mr. Gilbertie is 50
years old.
Dale Riker
has been the Treasurer of the Sponsor since its inception and its
Secretary since January, 2010, was approved by the NFA as a principal of the
Sponsor on October 29, 2009, and was registered as an associated person of the
Sponsor on February 17, 2010. He maintains his main business office at 232
Hidden Lake Road, Brattleboro, Vermont 05301. From February 2005 to the present,
Mr. Riker has been President of Cambial Emerging Markets LLC, a consulting
company specializing in emerging market equity investment. From July 1996 to
February 2005, Mr. Riker was a private investor. Mr. Riker is 52 years
old.
Carl N. (Chuck)
Miller III was approved by the NFA as a principal of the Sponsor on
November 10, 2009, and was registered as an associated person of the Sponsor on
April 19, 2010. He maintains his main business office at 369 Montezuma Avenue,
Suite 434, Santa Fe, New Mexico 87501. Mr. Miller has been a Member of Garnet
Advisors, LLC, a proprietary trading firm that focuses on a broad array of
investment opportunities, since he founded such firm in November, 2001. Mr.
Miller is 57 years old.
The three
individuals set forth above are individual “principals,” as that term is defined
in CFTC Rule 3.1, for the Sponsor. These individuals are principals due to their
positions and/or due to their ownership interests in the Sponsor. None of the
principals owns or has any other beneficial interest in the Fund. In addition,
each of the three Class A members of the Sponsor are registered with the CFTC as
associated persons of the Sponsor and are NFA associate members. GFI Group LLC
is a principal for the Sponsor under CFTC Rules due to its ownership of certain
non-voting securities of the Sponsor.
Mr.
Gilbertie and Kelly Teevan, an employee of the Sponsor who is not a member of
the Sponsor, are primarily responsible for making trading and investment
decisions for the Fund, and for directing Fund trades for execution. Mr. Teevan
has been a Managing Director of the Sponsor since October 2009, was approved by
the NFA as a principal of the Sponsor on March 25, 2010, and was registered as
an associated person of the Sponsor on February 24, 2010. He maintains his main
business office at 42 West Union Street, Goffstown, NH 03045. Mr. Teevan
graduated from Phillips Exeter Academy, Harvard College and Stanford Graduate
School of Business, following which he worked as commodities broker and trader
at several brokerage and investment firms in New York City, San Francisco and
Sydney, Australia. He was primarily retired between January 2003 and October
2009, although he was a self-employed market research consultant from August
2005 and September 2005, and he served during his retirement on non-profit
boards without compensation, focusing on financial, treasury and endowment
issues. Mr. Teevan is 59 years old.
Prior
Performance of the Sponsor and Affiliates
The
Sponsor and its trading principals have limited experience operating commodity
pools. Although the Sponsor currently operates six commodity pools (the Teucrium
Funds), none of the Teucrium Funds began operating prior to 2010. The Teucrium
Corn Fund, the only Teucrium Fund that commenced operations prior to the date of
this prospectus, commenced operations on June 8, 2010. Prior to June 8, 2010,
the Sponsor had never operated a commodity pool.
[Add
required prior performance disclosure.]
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
investment objective of the Fund is to have daily changes in percentage terms of
the Shares’ NAV reflect the daily changes in percentage terms of a weighted
average of the closing settlement prices of three Soybean Futures Contracts that
are traded on CBOT. Except as described in the following paragraph, the three
Soybean Futures Contracts will be: (1) second-to-expire Soybean Futures
Contract, weighted 35%, (2) the third-to-expire Soybean Futures Contract,
weighted 30%, and (3) the Soybean Futures Contract expiring in the March
following the expiration month of the third-to-expire contract, weighted
35%.
Soybean
Futures Contracts traded on the CBOT expire on a specified day in seven
different months: January, March, May, July, August, September and November.
However, there is generally a less liquid market for the Soybean Futures
Contracts expiring in August (the “August Contract”) and September (the
“September Contract” and, together with the August Contract, the “Excluded
Contracts”), and the Sponsor has determined not to incorporate the Excluded
Contracts into the Benchmark calculation. Accordingly, during the period when
the Excluded Contracts are the second-to-expire and third-to-expire Soybean
Futures Contract, the fourth-to-expire and fifth-to-expire Soybean Futures
Contracts will take the place of the second-to-expire and third-to-expire
Soybean Futures Contracts, respectively, as Benchmark Component Futures
Contracts. Similarly, when the August Contract is the third-to-expire Soybean
Futures Contract, the fifth-to-expire Soybean Futures Contract will take the
place of the August Contract as a Benchmark Component Futures Contract, and when
the September Contract is the second-to-expire Soybean Futures Contract, the
third-to-expire and fourth-to-expire Soybean Futures Contracts will be Benchmark
Component Futures Contracts.
The
following chart identifies the specific Soybean Futures Contracts that will be
used in the calculation of the Benchmark at any point in a given year, based on
the same 35%/30%/35% weighting methodology described above.
Period
|
|
Benchmark
Component Futures Contracts
|
From
expiration of January Year 0 contract until expiration of March Year 0
contract
|
|
May
Year 0, July Year 0 and November Year 0
|
From
expiration of March Year 0 contract until expiration of May Year 0
contract
|
|
July
Year 0, November Year 0 and November Year 1
|
From
expiration of May Year 0 contract until expiration of July Year 0
contract
|
|
November
Year 0, January Year 1 and November Year 1
|
From
expiration of July Year 0 contract until expiration of August Year 0
contract
|
|
November
Year 0, January Year 1 and November Year 1 (same as immediately
above)
|
From
expiration of August Year 0 contract until expiration of September Year 0
contract
|
|
November
Year 0, January Year 1 and November Year 1 (same as immediately
above)
|
From
expiration of September Year 0 contract until expiration of November Year
0 contract
|
|
January
Year 1, March Year 1 and November Year 1
|
From
expiration of November Year 0 contract until expiration of January Year 1
contract
|
|
March
Year 1, May Year 1 and November Year
1
|
The
Sponsor does not intend that the Fund will be operated in a fashion such that
its NAV will equal, in dollar terms, the spot price of a bushel or other unit of
soybeans or the price of any particular Soybean Futures Contract.
The Fund
seeks to achieve its investment objective by investing under normal market
conditions in Benchmark Component Futures Contracts or, in certain
circumstances, in other Soybean Futures Contracts traded on the CBOT or on
foreign exchanges. In addition, and to a limited extent, the Fund also may
invest in Cleared Soybean Swaps in furtherance of the Fund's investment
objective. Once position limits in Soybean Futures Contracts are applicable, the
Fund's intention is to invest first in Cleared Soybean Swaps to the extent
practicable in light of the position limits applicable to Cleared Soybean Swaps
and appropriate in light of the liquidity in the Cleared Soybean Swap market,
and then in Other Soybean Interests. See “The Offering – Futures Contracts”
below. By utilizing certain or all of these investments, the Sponsor will
endeavor to cause the Fund's performance to closely track that of the
Benchmark.
The Fund
will invest in Soybean Interests to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or collateral
obligations with respect to its investments in Soybean Interests. After
fulfilling such margin and collateral requirements, the Fund will invest the
remainder of its proceeds from the sale of baskets in short-term Treasury
Securities or cash equivalents, and/or merely hold such assets in cash
(generally in interest-bearing accounts). Therefore, the focus of the Sponsor in
managing the Fund is investing in Soybean Interests and in Treasury Securities,
cash and/or cash equivalents. The Sponsor expects to manage the Fund’s
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 investments consistent with meeting its
investment objective of closely tracking the Benchmark, including the
discretion: (1) to choose whether to invest in the Benchmark Component Futures
Contracts or other Soybean Futures Contracts, Cleared Soybean Swaps or Other
Soybean Interests with similar investment characteristics; (2) to choose when to
“roll” the Fund’s positions in Soybean Interests as described below, and (3) to
manage the Fund’s investments in Treasury Securities, cash and cash
equivalents.
The Fund
seeks to achieve its investment objective primarily by investing in Soybean
Interests such that the changes in its NAV will be expected to closely track the
changes in the Benchmark. The Fund’s positions in Soybean Interests will be
changed or “rolled” on a regular basis in order to track the changing nature of
the Benchmark. For example, four times a year (on the dates on which a Soybean
Futures Contract expires), a particular Soybean Futures Contract will no longer
be a Benchmark Component Futures Contract, and the Fund’s investments will have
to be changed accordingly. In order that the Fund’s trading does not cause
unwanted market movements and to make it more difficult for third parties to
profit by trading based on such expected market movements, the Fund’s
investments typically will not be rolled entirely on that day, but rather will
typically be rolled over a period of days.
Consistent
with achieving the Fund’s investment objective of closely tracking the
Benchmark, the Sponsor may for certain reasons cause the Fund to enter into or
hold Soybean Futures Contracts other than the Benchmark Component Futures
Contracts, Cleared Soybean Swaps and/or Other Soybean Interests. For example,
certain Cleared Soybean Swaps have standardized terms similar to, and are priced
by reference to, a corresponding Benchmark Component Futures Contract.
Additionally, over-the-counter Soybean Interests can generally be structured as
the parties to the contract desire. Therefore, the Fund might enter into
multiple Cleared Soybean Swaps and/or over-the-counter Soybean Interests
intended to exactly replicate the performance of each of the three Benchmark
Component Futures Contracts, or a single over-the-counter Soybean 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 Soybean Interest,
the performance of the Soybean 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 Soybean Interests other than
the Benchmark Component Futures Contracts to facilitate effective trading,
consistent with the discussion of the Fund’s “roll” strategy in the preceding
paragraph. In addition, the Fund might enter into or hold Soybean 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. By utilizing certain or all of the investments
described above, the Sponsor will endeavor to cause the Fund’s performance to
closely track that of the Benchmark.
The
Sponsor endeavors to place the Fund’s trades in Soybean Interests and otherwise
manage the Fund’s investments so that the Fund’s average daily tracking error
against the Benchmark will be less than 10 percent over any period of 30 trading
days. More specifically, the Sponsor will endeavor to manage the Fund so that A
will be within plus/minus 10 percent of B, where:
|
·
|
A
is the average daily change in the Fund’s NAV for any period of 30
successive valuation days; i.e., any trading day as of which the Fund
calculates its NAV, and
|
|
·
|
B
is the average daily change in the price of the Benchmark over the same
period.
|
The
Sponsor believes that market arbitrage opportunities cause daily changes in the
Fund’s Share price on the NYSE Arca to closely track daily changes in the Fund’s
NAV per share. The Sponsor believes that the net effect of this expected
relationship and the expected relationship described above between the Fund’s
NAV and the Benchmark will be that daily changes in the price of the Fund’s
Shares on the NYSE Arca will closely track daily changes in the Benchmark.
While the Benchmark is composed of Futures Contracts and is therefore a
measure of the price of Soybean for future delivery, there is nonetheless
expected to be a reasonable degree of correlation between the Benchmark and the
cash or spot price of Soybean.
These
relationships illustrated in the following diagram:
An
investment in the Shares provides a means for diversifying an investor’s
portfolio or hedging exposure to changes in soybean prices. An
investment in the Shares allows both retail and institutional investors to
easily gain this exposure to the Soybean 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 soybean market in a cost-effective
manner. Such investors may include participants in the soybean
industry and other industries seeking to hedge the risk of losses in their
soybean-related transactions, as well as investors seeking exposure to the
soybean market. Accordingly, depending on the investment objective of
an individual investor, the risks generally associated with investing in the
soybean market and/or the risks involved in hedging may exist. In
addition, an investment in the Fund involves the risk that the changes in the
price of the Fund’s Shares will not accurately track the changes in the
Benchmark, and that changes in the Benchmark will not closely correlate with
changes in the price of soybean on the spot market. Furthermore, as
noted above, the Fund will also hold short-term Treasury Securities, cash and/or
cash equivalents to meet its current or potential margin or collateral
requirements with respect to its investments in Soybean Interest and to invest
cash not required to be used as margin or collateral. The Fund does
not expect there to be any meaningful correlation between the performance of the
Fund’s investments in Treasury Securities/cash/cash equivalents and the changes
in the price of soybeans or Soybean Interests. 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 soybeans, this correlation is not
anticipated as part of the Fund’s efforts to meet its
objective.
The
Fund’s total portfolio composition is disclosed each business day that the NYSE
Arca is open for trading on the Fund’s website at www.teucriumsoybeanfund.com. The
website disclosure of portfolio holdings is made daily and includes, as
applicable, the name and value of each Soybean Futures Contract and Cleared
Soybean Swap, the specific types of Other Soybean Interests and characteristics
of such Other Soybean Interests, the name and value of each Treasury security
and cash equivalent, and the amount of cash held in the Fund’s
portfolio. The Fund’s website is publicly accessible at no
charge.
The
Shares issued by the Fund may only be purchased by Authorized Purchasers and
only in blocks of 100,000 Shares called Creation Baskets. The amount
of the purchase payment for a Creation Basket is equal to the aggregate NAV of
Shares in the Creation Basket. Similarly, only Authorized Purchasers
may redeem Shares and only in blocks of 100,000 Shares called Redemption
Baskets. The amount of the redemption proceeds for a Redemption
Basket is equal to the aggregate NAV of Shares in the Redemption
Basket. The purchase price for Creation Baskets and the redemption
price for Redemption Baskets are the actual NAV calculated at the end of the
business day when a request for a purchase or redemption is received by the
Fund. The NYSE Arca will publish an approximate NAV intra-day based
on the prior day’s NAV and the current price of the Benchmark Component Futures
Contracts, but the price of Creation Baskets and Redemption Baskets is
determined based on the actual NAV calculated at the end of each trading
day.
While the
Fund issues Shares only in Creation Baskets, Shares may also be purchased and
sold in much smaller increments on the NYSE Arca. These transactions,
however, are effected at the bid and ask prices established by the specialist
firm(s). Like any listed security, Shares can be purchased and sold
at any time a secondary market is open.
The
Fund’s Investment Strategy
In
managing the Fund’s assets, the Sponsor does not use a technical trading system
that automatically issues buy and sell orders. Instead, each time one
or more baskets are purchased or redeemed, the Sponsor will purchase or sell
Soybean Interests with an aggregate market value that approximates the amount of
cash received or paid upon the purchase or redemption of the
basket(s).
As an
example, assume that a Creation Basket is sold by the Fund, and that the Fund’s
closing NAV per share is $25.00. In that case, the Fund would receive
$2,500,000 in proceeds from the sale of the Creation Basket ($25.00 NAV per
share multiplied by 100,000 Shares, and ignoring the Creation Basket fee of
$1,000). If one were to assume further that the Sponsor wants to
invest the entire proceeds from the Creation Basket in the Benchmark Component
Futures Contracts and that the market value of each such Benchmark Component
Futures Contracts is $45,300, the Fund would be unable to buy an exact number of
Soybean Futures Contracts with an aggregate market value equal to
$2,500,000. Instead, the Fund would be able to purchase 55 Benchmark Component
Futures Contracts with an aggregate market value of
$2,491,500. Assuming a margin requirement equal to 10% of the value
of the Soybean Futures Contracts, the Fund would be required to deposit $249,150
in Treasury Securities and cash with the futures commission merchant through
which the Soybean Futures Contracts were purchased. The remainder of
the proceeds from the sale of the Creation Basket, $2,250,850, would remain invested in
cash, cash equivalents, and Treasury Securities as determined by the Sponsor
from time to time based on factors such as potential calls for margin or
anticipated redemptions.
The
specific Soybean Interests purchased will depend on various factors, including a
judgment by the Sponsor as to the appropriate diversification of the Fund’s
investments. While the Sponsor anticipates that a substantial
majority of its assets will be invested in CBOT Soybean Futures Contracts and
Cleared Soybean Swaps, for various reasons, including the ability to enter into
the precise amount of exposure to the soybean market and position limits on
Soybean Futures Contracts and Cleared Soybean Swaps, it will also invest in
Other Soybean Interests, including swaps other than Cleared Soybean Swaps, in
the over-the-counter market to a potentially significant degree.
The
Sponsor does not anticipate letting its Soybean Futures Contracts expire and
taking delivery of soybeans. Instead, the Sponsor will close out
existing positions, e.g., in response to ongoing changes in the Benchmark or if
it otherwise determines it would be appropriate to do so and reinvest the
proceeds in new Soybean Interests. Positions may also be closed out
to meet orders for Redemption Baskets, in which case the proceeds from closing
the positions will not be reinvested.
Futures
Contracts
Futures
contracts are agreements between two parties. One party agrees to buy
a commodity such as soybeans from the other party at a later date at a price and
quantity agreed-upon when the contract is made. In market
terminology, a party who purchases a futures contract is long in the market and
a party who sells a futures contract is short in the market. The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying commodity or by making an
offsetting sale or purchase of an identical futures contract on the same or
linked exchange before the designated date of delivery. The
difference between the price at which the futures contract is purchased or sold
and the price paid for the offsetting sale or purchase, after allowance for
brokerage commissions, constitutes the profit or loss to the
trader.
If the
price of the commodity increases after the original futures contract is entered
into, the buyer of the futures contract will generally be able to sell a futures
contract to close out its original long position at a price higher than that at
which the original contract was purchased, generally resulting in a profit to
the buyer. Conversely, the seller of a futures contract will
generally profit if the price of the underlying commodity decreases, as it will
generally be able to buy a futures contract to close out its original short
position at a price lower than that at the which the original contract was
sold. Because the Fund seeks to track the Benchmark directly and
profit when the price of soybeans and, as a likely result of an increase in the
price of soybeans, the price of Soybean Futures Contracts increase, the Fund
will generally be long in the market for soybeans, and will generally sell
Soybean Futures Contracts only to close out existing long
positions.
Soybean
Futures Contracts are traded on the CBOT in units of 5,000
bushels. Generally, futures contracts traded on the CBOT are priced
by floor brokers and other exchange members both through an “open outcry” of
offers to purchase or sell the contracts and through an electronic, screen-based
system that determines the price by matching electronically offers to purchase
and sell. Futures contracts may also be based on commodity indices,
in that they call for a cash payment based on the change in the value of the
specified index during a specified period. No futures contracts based
on an index of soybean prices are currently available, although the Fund could
enter into such contracts should they become available in the
future.
Certain
typical and significant characteristics of Soybean Futures Contracts are
discussed below. Additional risks of investing in Soybean Futures
Contracts are included in “What are the Risk Factors Involved with an Investment
in the Fund?”
Impact
of Position Limits, Accountability Levels, and Price Fluctuation
Limits.
The CFTC
and U.S. designated contract markets such as the CBOT may establish position
limits and accountability levels on the maximum net long or net short positions
in futures contracts in commodities that any person or group of persons under
common trading control (other than as a hedge, which an investment by the Fund
would not be) may hold, own or control. The net position is the
difference between an individual or firm’s open long contracts and open short
contracts in any one commodity. In addition, most U.S. futures
exchanges limit the daily price fluctuation for futures contracts.
Position
limits generally impose a fixed ceiling on aggregate holdings in futures
contracts relating to a particular commodity, and may also impose separate
ceilings on contracts expiring in any one month, contracts expiring in the spot
month, and/or contracts in certain specified final days of
trading. The position limits currently established by the CFTC apply
to certain agricultural commodity interests, including Soybean Futures
Contracts. Specifically, the CFTC’s position limits for Soybean
Futures Contracts (including related options) are 600 spot month contracts,
6,500 contracts expiring in any other single month, and 10,000 contracts for all
months. All Soybean Futures Contracts held under the control of the
Sponsor, including those held by any future series of the Trust, will be
aggregated in determining the application of these position
limits. Position limits could in certain circumstances effectively
limit the number of Creation Baskets that the Fund can sell but, because the
Fund is new, it is not expected to reach asset levels that would cause these
position limits to be implicated in the near future.
In
contrast to position limits, accountability levels are not fixed ceilings, but
rather thresholds above which an exchange may exercise greater scrutiny and
control over an investor, including by imposing position limits on the
investor. In light of the position limits discussed above, the CBOT
has not set any accountability levels for Soybean Futures
Contracts.
Futures
exchanges also may limit the amount of price fluctuation for Soybean 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. For example, the CBOT imposes a
$0.70 per bushel ($3,500 per contract) daily price fluctuation limit for Soybean
Futures Contracts. Once the daily price fluctuation limit has been
reached in a particular Soybean Futures Contract, no trades may be made at a
price beyond that limit. If two or more Soybean Futures Contract
months within the first seven listed non-spot contracts close at the limit, the
daily price limit increases to $1.05 per bushel ($5,250 per contract) the next
business day and to $1.60 per bushel ($8,000 per contract) the next business
day. These limits are based off the previous trading day’s settlement
price.
Price
Volatility
Despite
daily price limits, the price volatility of futures contracts generally has been
historically greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day-to-day as opposed to
intra-day. Economic factors that may cause volatility in Soybean
Futures Contracts include changes in interest rates; governmental, agricultural,
trade, fiscal, monetary and exchange control programs and policies; weather and
climate conditions; changing supply and demand relationships; changes in
balances of payments and trade; U.S. and international rates of inflation;
currency devaluations and revaluations; U.S. and international political and
economic events; and changes in philosophies and emotions of market
participants. Because the Fund invests a significant portion of its
assets in futures contracts, the assets of the Fund, and therefore the price of
the Fund’s Shares, may be subject to greater volatility than traditional
securities.
Term
Structure of Futures Contracts and the Impact on Total Return
Several
factors determine the total return from investing in futures
contracts. Because the Fund must periodically “roll” futures contract
positions, closing out soon-to-expire contracts that are no longer part of the
Benchmark and entering into subsequent-to-expire contracts, one such factor is
the price relationship between soon-to-expire contracts and later-to-expire
contracts. For example, if market conditions are such that the prices
of soon-to-expire contracts are higher than later-to-expire contracts (a
situation referred to as “backwardation” in the futures market), then the price
of contracts will rise as they approach expiration. Conversely, if
the price of soon-to-expire contracts is lower than later-to-expire contracts (a
situation referred to as “contango” in the futures market), then absent a change
in the market the price of contracts will decline as they approach
expiration.
Over
time, the price of soybeans will fluctuate based on a number of market factors,
including demand for soybeans relative to its supply. The value of
Soybean Futures Contracts will likewise fluctuate in reaction to a number of
market factors. If investors seek to maintain their holdings in
Soybean Futures Contracts with a roughly constant expiration profile and not
take delivery of the soybeans, they must on an ongoing basis sell their current
positions as they approach expiration and invest in later-to-expire
contracts.
If the
futures market is in a state of backwardation (i.e., when the price of soybeans
in the future is expected to be less than the current price), the Fund will buy
later-to-expire contracts for a lower price than the sooner-to-expire contracts
that it sells. Hypothetically, and assuming no changes to either
prevailing soybean prices or the price relationship between the spot price,
soon-to-expire contracts and later-to-expire contracts, the value of a contract
will rise as it approaches expiration, increasing the Fund’s total return
(ignoring the impact of commission costs and the interest earned on Treasury
Securities, cash and/or cash equivalents). As an example, assume that
the Fund owns 100 Soybean Futures Contracts that have recently become spot month
contracts, that the price of spot month Soybean Futures Contracts is $10 per
bushel, and the price of second-to-expire Soybean Futures Contracts is $9.50 per
bushel. The Fund will close out the spot month Soybean Futures
Contracts at a value of $5,000,000 (100 contracts multiplied by 5,000 bushels
per contract multiplied by $10), and will be able to enter into 105
second-to-expire Soybean Futures Contracts with the proceeds, representing an
additional 25,000 bushels of soybeans than it previously owned.
If the
futures market is in contango, the Fund will buy later-to-expire contracts for a
higher price than the sooner-to-expire contracts that it
sells. Hypothetically, and assuming no other changes to either
prevailing soybean prices or the price relationship between the spot price,
soon-to-expire contracts and later-to-expire contracts, the value of a contract
will fall as it approaches expiration, decreasing the Fund’s total return
(ignoring the impact of commission costs and the interest earned on Treasury
Securities, cash and/or cash equivalents). As an example, assume the
same facts as in the prior paragraph except that the price of second-to-expire
Soybean Futures Contracts is $10.50 per bushel. The Fund will sell
the spot month Soybean Futures Contracts for $2,500,000, and will be able to
purchase only 95 second-to-expire Soybean Futures Contracts with the proceeds,
representing 25,000 fewer bushels of soybeans than it previously
owned.
Historically,
the soybean futures markets have experienced periods of both contango and
backwardation. Typically, whether contango or backwardation exists is
largely a function of the seasonality of the soybean market and the soybean
harvest cycle, as discussed above.
Marking-to-Market
Futures Positions
Futures
contracts are marked to market at the end of each trading day and the margin
required with respect to such contracts is adjusted accordingly. This
process of marking-to-market is designed to prevent losses from accumulating in
any futures account. Therefore, if the Fund’s futures positions have
declined in value, the Fund may be required to post “variation margin” to cover
this decline. Alternatively, if the Fund’s futures positions have
increased in value, this increase will be credited to the Fund’s
account.
Cleared
Soybean Swaps
A swap
agreement is a bilateral contract to exchange a periodic stream of payments
determined by reference to a notional amount, with payment typically made
between the parties on a net basis. For instance, in the case of
soybean swap, the Fund may be obligated to pay a fixed price per bushel of
soybeans and be entitled to receive an amount per bushel equal to the current
value of an index of soybean prices, the price of a specified Soybean Futures
Contract, or the average price of a group of Soybean Futures Contracts such as
the Benchmark.
The CFTC
recently issued an order that permits certain privately-negotiated agricultural
swap contracts, including certain types of Soybean swaps, to be cleared by the
CBOT’s affiliated provider of clearing services. The Fund expects to
focus on investments in these Cleared Soybean Swaps, as well as Soybean Futures
Contracts, rather than over-the-counter soybean swaps. Cleared
Soybean Swaps are subject to position limits that are substantially identical
to, but measured separately from, the positions limits applicable to Soybean
Futures Contracts.
Like
Soybean Futures Contracts, Cleared Soybean Swaps are standardized as to certain
material economic terms, including that each such swap be for a quantity of
5,000 bushels, which permits less flexibility in their structuring than with
over-the-counter Soybean Interests. The two parties to a Cleared
Soybean Swap agree on the specific fixed price component and the calendar month
of expiration, and agree to submit the Cleared Soybean Swap to the clearing
organization. The clearing organization assumes the credit risk
relating to the transaction, which effectively eliminates the creditworthiness
of the counterparty as a risk. Unlike Soybean Futures Contracts,
Cleared Soybean Swaps call for settlement in cash, and do not permit settlement
by delivery or receipt of physical soybeans.
Over-the-Counter
Derivatives
In
addition to futures contracts, options on futures contracts and cleared swaps,
derivative contracts that are tied to various commodities, including soybeans,
are entered into outside of public exchanges. These
“over-the-counter” contracts are entered into between two parties in private
contracts. Unlike Soybean Futures Contracts and Cleared Soybean
Swaps, which are guaranteed by a clearing organization, each party to an
over-the-counter derivative contract bears the credit risk of the other party,
i.e., the risk that the
other party will not be able to perform its obligations under its
contract.
Some
over-the-counter derivatives contracts contain relatively standardized terms and
conditions and are available from a wide range of
participants. Others have highly customized terms and conditions and
are not as widely available. While the Fund may enter into these more
customized contracts, the Fund will only enter into over-the-counter contracts
containing certain terms and conditions, as discussed further below, that are
designed to minimize the credit risk to which the Fund will be subject and only
if the terms and conditions of the contract are consistent with achieving the
Fund’s investment objective of closely tracking the Benchmark. The
over-the-counter contracts that the Fund may enter into will take the form of
either forward contracts or swaps.
A forward
contract is a contractual obligation to purchase or sell a specified quantity of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike
futures contracts, however, forward contracts are typically traded in the
over-the-counter markets. In some instances such contracts may
provide for cash settlement instead of making or taking delivery of the
underlying commodity. Forward contracts for a given commodity are
generally available for various amounts and maturities and are subject to
individual negotiation between the parties involved. Moreover,
generally there is no direct means of offsetting or closing out a forward
contract by taking an offsetting position as one would a futures contract on a
U.S. exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the contract but
will settle and recognize the profit or loss on both positions simultaneously on
the delivery date. Thus, unlike in the futures contract market where
a trader who has offset positions will recognize profit or loss immediately, in
the forward market a trader with a position that has been offset at a profit
will generally not receive such profit until the delivery date, and likewise a
trader with a position that has been offset at a loss will generally not have to
pay money until the delivery date. However, in some instances such
contracts may provide a right of offset that will allow for the receipt of
profit and payment for losses prior to the delivery date.
Like a
Cleared Soybean Swap, an over-the-counter swap agreement is a bilateral contract
to exchange a periodic stream of payments determined by reference to a notional
amount, with payment typically made between the parties on a net
basis. For instance, in the case of a soybean swap, the Fund may be
obligated to pay a fixed price per bushel of soybeans and be entitled to receive
an amount per bushel equal to the current value of an index of soybean prices,
the price of a specified Soybean Futures Contract, or the average price of a
group of Soybean Futures Contracts such as the Benchmark. Unlike
Cleared Soybean Swaps, however, each party to the swap is subject to the credit
risk of the other party. The Fund will only enter into
over-the-counter swaps on a net basis, where the two payment streams are netted
out on a daily basis, with the parties receiving or paying, as the case may be,
only the net amount of the two payments. Swaps do not generally
involve the delivery of underlying assets or principal. Accordingly,
the Fund’s risk of loss with respect to an over-the-counter swap will generally
be limited to the net amount of payments that the counterparty is contractually
obligated to make less any collateral deposits the Fund is holding.
To reduce
the credit risk that arises in connection with over-the-counter contracts, the
Fund will generally enter into an agreement with each counterparty based on the
Master Agreement published by the International Swaps and Derivatives
Association, Inc. that provides for the netting of the Fund’s overall exposure
to its counterparty and for daily payments based on the marked to market value
of the contract.
The
creditworthiness of each potential counterparty will be assessed by the
Sponsor. The Sponsor will assess or review, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the
Sponsor. The creditworthiness of existing counterparties
will be reviewed periodically by the Sponsor. The Sponsor’s President has over
25 years of experience in over-the-counter derivatives trading, including the
counterparty creditworthiness analysis inherent therein, and the Sponsor’s
Treasurer and Secretary, through his prior experience as a Chief Financial
Officer and Treasurer, has extensive experience evaluating the creditworthiness
of business partners and counterparties to commercial and derivative
contracts. Notwithstanding this experience, there is no guarantee
that the Sponsor’s creditworthiness analysis will be successful and that
counterparties selected for Fund transactions will not default on their
contractual obligations.
The Fund
also may require that a counterparty be highly rated and/or provide collateral
or other credit support. The Sponsor on behalf of the Fund may enter
into over-the-counter contracts with various types of counterparties, including:
(a) banks regulated by a United States federal bank regulator, (b)
broker-dealers regulated by the SEC, (c) insurance companies domiciled in the
United States, (d) producers of Soybean such as farmers and related agricultural
enterprises, (e) users of Soybean such as producers of prepared food products
and biofuel producers, (f) any other person (including affiliates of any of the
above) who are engaged to a substantial degree in the business of trading
commodities. Certain of these types of counterparties will not be
subject to regulation by the CFTC or any other significant federal or state
regulatory structure; While it is the Sponsor’s preference to use regulated
entities as counterparties, the Sponsor will primarily consider creditworthiness
in selecting counterparties rather than the primary business of the prospective
counterparty or the regulatory structure to which it is
subject.
Benchmark
Performance
See the
graph below under “Benchmark Performance” in the Statement of Additional
Information at the end of this prospectus.
The Soybean
Market
Soybean
production is concentrated in the central U.S., Brazil, Argentina, and
China. The United States Department of Agriculture has estimated
that, in 2009, the United States produced approximately 3.36 billion bushels of
soybeans or approximately 36% of estimated world production.
The
soybean processing industry converts soybeans into soybean meal, soybean hulls,
and soybean oil. Soybean meal and soybean hulls are processed into
soy flour or soy protein, which are used by livestock producers and the farm
fishing industry as feed. Soybean oil is sold in multiple grades and
is used by the food and chemical industries. The food industry uses
soybean oil in cooking and salad dressings, baking and frying fats, and butter
substitutes, among other uses. In addition, the soybean industry
continues to introduce soy-based products as substitutes to various
petroleum-based products including lubricants, plastics, ink, crayons and
candles. Soybean oil is also converted to biodiesel for use as
fuel.
Standard
Soybean Futures Contracts trade on the CBOT in units of 5,000 bushels, although
1,000 bushel “mini-sized” Soybean Futures Contracts also trade. Three
grades of soybean are deliverable under CBOT Soybean Futures
Contracts: Number 1 yellow, which may be delivered at 6 cents per
bushel over the contract price; Number 2 yellow, which may be delivered at the
contract price; and Number 3 yellow, which may be delivered at 6 cents per
bushel under the contract price. There are seven months each year in
which CBOT Soybean Futures Contracts expire: January, March, May,
July, August, September and November.
The
Fund’s Investments in Treasury Securities, Cash and Cash
Equivalents
The Fund
seeks to have the aggregate “notional” amount of the Soybean Interests it holds
approximate at all times the Fund’s aggregate NAV. At any given time, however,
most of the Fund’s investments will be in Treasury Securities, cash and/or cash
equivalents that support the Fund’s positions in Soybean Interests. For example,
the purchase of a Soybean Futures Contract with a stated or notional amount of
$10 million would not require the Fund to pay $10 million upon entering into the
contract; rather, only a margin deposit, generally of 5%-10% of the notional
amount, would be required. To secure its Soybean Futures Contract obligations,
the Fund would deposit the required margin with the futures commission merchant
and would separately hold its remaining assets through its Custodian in Treasury
Securities, cash and/or cash equivalents. Such remaining assets may be used to
meet future margin payments that the Fund is required to make on its Soybean
Futures Contracts. Cleared Soybean Swaps and Other Soybean 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 Soybean
Interests will also be held in Treasury Securities, cash and cash
equivalents.
The Fund
earns interest income from the Treasury Securities and/or cash equivalents that
it purchases and on the cash it holds through the Custodian. The
Sponsor anticipates that the earned interest income will increase the Fund’s
NAV. The Fund applies the earned interest income to the acquisition
of additional investments or uses it to pay its expenses. If the Fund
reinvests the earned interest income, it makes investments that are consistent
with its investment objectives.
Any
Treasury Security and cash equivalent invested in by the Fund will have a
remaining maturity of less than two years at the time of investment, or will be
subject to a demand feature that enables that Fund to sell the security within
two years at approximately the security’s face value (plus accrued
interest). Any cash equivalents invested in by the Fund will be rated
in the highest short-term rating category by a nationally recognized statistical
rating organization or will be deemed by the Sponsor to be of comparable
quality.
Other
Trading Policies of the Fund
Exchange
For Risk
An
“exchange for risk” transaction, sometimes refers to a “exchange for swap” or
“exchange of futures for risk,” is a privately negotiated and simultaneous
exchange of a futures contract position for a swap or other over-the-counter
instrument on the corresponding commodity. An exchange for risk can
be used by the Fund as a technique to avoid taking physical delivery of
soybeans, in that a counterparty will take the Fund’s position in a Soybean
Futures Contract into its own account in exchange for a swap that does not by
its terms call for physical delivery. The Fund will become subject to
the credit risk of a counterparty when it acquires an over-the-counter position
in an exchange for risk transaction.
Options
on Futures Contracts
In
addition to Soybean Futures Contracts, there are also a number of options on
Soybean Futures Contracts listed on the CBOT. These contracts offer
investors and hedgers another set of financial vehicles to use in managing
exposure to the commodities market. The Fund may purchase and sell
(write) options on Soybean Futures Contracts in pursuing its investment
objective, except that it will not sell call options when it does not own the
underlying Soybean Futures Contract. The Fund would make use of
options on Soybean Futures Contracts if, in the opinion of the Sponsor, such an
approach would cause the 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 Soybean prices.
Liquidity
The Fund
invests only in Soybean Futures Contracts that, in the opinion of the Sponsor,
are traded in sufficient volume to permit the ready taking and liquidation of
positions in these financial interests and in over-the-counter Commodity
Interests that, in the opinion of the Sponsor, may be readily liquidated with
the original counterparty or through a third party assuming the Fund’s
position.
Spot
Commodities
While
most futures contracts can be physically settled, the Fund does not intend to
take or make physical delivery. However, the Fund may from time to
time trade in Other Soybean Interests based on the spot price of
soybeans.
Leverage
The
Sponsor endeavors to have the value of the Fund’s Treasury Securities, cash and
cash equivalents, whether held by the Fund or posted as margin or collateral, at
all times approximate the aggregate market value of its obligations under the
Fund’s Soybean Interests.
Borrowings
Borrowings
are not used by the Fund unless it is required to borrow money in the event of
physical delivery, if it trades in cash commodities, or for short-term needs
created by unexpected redemptions. The Fund does not plan to
establish credit lines.
Pyramiding
The Fund
does not and will not employ the technique, commonly known as pyramiding, in
which the speculator uses unrealized profits on existing positions as variation
margin for the purchase or sale of additional positions in the same or another
commodity interest.
The
Service Providers
In its
capacity as the Fund’s custodian, the Custodian holds the Fund’s Treasury
Securities, cash and/or cash equivalents pursuant to a custodial
agreement. The Custodian is also the registrar and transfer agent for
the Fund’s Shares. In addition, the Custodian 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. For these services, the Fund pays fees to the Custodian as set
forth in the table below.
The
Custodian’s principal business address is One Wall Street, New York, New York
10286. The Custodian is a New York state chartered bank subject to
regulation by the Board of Governors of the Federal Reserve System and the New
York State Banking Department.
The Fund
also employs ALPS Distributors, Inc. as Marketing Agent, which is further
discussed under “Plan of Distribution” The Fund pays the Marketing
Agent’s fees as set forth in the table below. In no event may the
aggregate compensation paid to the Marketing Agent and any affiliate of the
Marketing Agent for distribution-related services in connection with the
offering of Shares exceed ten percent (10%) of the gross proceeds of the
offering.
The
Marketing Agent’s principal business address is 1290 Broadway, Suite 1100,
Denver, Colorado 80203. The Marketing Agent is a broker-dealer
registered with the Financial Industry Regulatory Authority and a member of the
Securities Investor Protection Corporation.
Currently,
Newedge USA, LLC (“Newedge”) serves as the Fund’s clearing broker to execute and
clear the Fund’s futures transactions and provide other brokerage-related
services. Newedge USA’s affiliate, Newedge Alternative Strategies, Inc.
(“NAST”), may execute foreign exchange or other over-the-counter transactions
with the Fund as principal. Newedge USA and NAST are subsidiaries of Newedge
Group. Newedge is a futures commission merchant and broker-dealer registered
with the U.S. Commodity Futures Trading Commission and the U.S. Securities and
Exchange Commission. Newedge is a clearing member of all principal futures
exchanges located in the United States as well as a member of the Chicago Board
Options Exchange, International Securities Exchange, New York Stock Exchange,
Options Clearing Corporation, and Government Securities Clearing Corporation.
NAST is an eligible swap participant that is not registered or required to be
registered with the CFTC or the SEC, and is not a member of any
exchange.
Newedge
and NAST are headquartered at 550 W. Jackson, Suite 500, Chicago, IL 60661 with
branch offices in San Francisco, California; New York, New York; Philadelphia,
Pennsylvania; Kansas City, Missouri and Houston, Texas.
Prior to
January 2, 2008, Newedge USA was known as Fimat USA, LLC, while NAST was known
as Fimat Alternative Strategies Inc. On September 1, 2008, Newedge
merged with future commission merchant and broker-dealer Newedge Financial Inc.
(“NFI”) – formerly known as Calyon Financial Inc. Newedge was the
surviving entity.
In March
2008, NFI settled, without admitting or denying the allegations, a disciplinary
action brought by the NYMEX alleging that NFI violated NYMEX rules related to:
numbering and time stamping orders by failing properly to record a floor order
ticket; wash trading; failure to adequately supervise employees; and violation
of a prior NYMEX cease and desist order, effective as of December 5, 2006,
related to numbering and time stamping orders and block trades. NFI
paid a $100,000 fine to the NYMEX in connection with this
settlement.
Other
than the foregoing proceeding, which did not have a material adverse effect upon
the financial condition of Newedge, there have been no material administrative,
civil or criminal actions brought, pending or concluded against Newedge, NAST or
their principals in the past five years.
None of
Newedge, NAST or any affiliate, officer, director or employee thereof have
passed on the merits of this prospectus or the offering of Shares, or given any
guarantee as to the performance or any other aspect of the Fund.
Newedge
is not affiliated with the Fund or the Sponsor. Therefore, the
Sponsor and the Fund do not believe that the Fund has any conflicts of interest
with them or their trading principals arising from their acting as the Fund’s
futures commission merchant. While Sal Gilbertie, the President of
the Sponsor, was previously employed by Newedge, he no longer receives any
compensation from Newedge and will not receive any share of the commissions paid
to Newedge by the Fund.
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.
Fees
to be Paid by the Fund
Fees
and Compensation Arrangements with the Sponsor and Non-Affiliated Service
Providers
Service
Provider
|
|
Compensation
Paid by the Fund
|
Teucrium
Trading, LLC, Sponsor
|
|
1.00%
of average net assets annually
|
The
Bank of New York Mellon, Custodian, Transfer Agent and
Administrator
|
|
For
custody services: 0.0075% of average gross assets up to $1
billion, and 0.0050% of average gross assets over $1 billion,
annually, plus certain per-transaction
charges
|
|
|
|
|
|
For
transfer agency services: 0.0075% of average gross assets
annually
|
|
|
|
|
|
For
administrative services: 0.05% of average gross assets up to $1 billion,
0.04% of average gross assets between $1 billion and $3 billion, and 0.03%
of average gross assets over $3 billion, annually
|
|
|
|
|
|
A
combined minimum annual fee of $125,000 for custody, transfer agency and
administrative services will be assessed.
|
|
|
|
ALPS
Distributors, Inc., Marketing Agent
|
|
0.10%
of average net assets annually, with a minimum annual fee of
$100,000
|
Newedge
USA, LLC, Futures Commission Merchant and Clearing Broker
|
|
$4.00
per Soybean Futures Contract purchase or sale
|
Wilmington
Trust Company, Trustee
|
|
$3,000
annually
|
Asset-based
fees are calculated on a daily basis (accrued at 1/365 of the applicable
percentage of NAV on that day) and paid on a monthly basis. NAV is
calculated by taking the current market value of the Fund’s total assets and
subtracting any liabilities.
Form
of Shares
Registered
Form
Shares
are issued in registered form in accordance with the Trust
Agreement. The Custodian has been appointed registrar and transfer
agent for the purpose of transferring Shares in certificated
form. The Custodian keeps a record of all Shareholders and holders of
the Shares in certificated form in the registry (“Register”). The
Sponsor recognizes transfers of Shares in certificated form only if done in
accordance with the Trust Agreement. The beneficial interests in such
Shares are held in book-entry form through participants and/or accountholders in
DTC.
Book
Entry
Individual
certificates are not issued for the Shares. Instead, Shares are
represented by one or more global certificates, which are deposited by the
Administrator with DTC and registered in the name of Cede & Co., as nominee
for DTC. The global certificates evidence all of the Shares
outstanding at any time. Shareholders are limited to (1) participants
in DTC such as banks, brokers, dealers and trust companies (“DTC Participants”),
(2) those who maintain, either directly or indirectly, a custodial relationship
with a DTC Participant (“Indirect Participants”), and (3) those who hold
interests in the Shares through DTC Participants or Indirect Participants, in
each case who satisfy the requirements for transfers of Shares. DTC
Participants acting on behalf of investors holding Shares through such
participants’ accounts in DTC will follow the delivery practice applicable to
securities eligible for DTC’s Same-Day Funds Settlement
System. Shares are credited to DTC Participants’ securities accounts
following confirmation of receipt of payment.
DTC
DTC has
advised us as follows: It is a limited purpose trust company
organized under the laws of the State of New York and is a member of the Federal
Reserve System, a “clearing corporation” within the meaning of the New York
Uniform Commercial Code and a “clearing agency” registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities
for DTC 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. Consistent with
Delaware law, the Trustee acts in an entirely passive role, delegating all
authority for the management and operation of the Fund and the Trust to the
Sponsor. The Trustee does not provide custodial services with respect
to the assets of the Fund.
Plan
of Distribution
Buying
and Selling Shares
Most
investors buy and sell Shares of the Fund in secondary market transactions
through brokers. Shares trade on the NYSE Arca under the ticker
symbol “SOYB.” 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.
Marketing
Agent and Authorized Purchasers
The
offering of the Fund’s Shares is a best efforts offering. The Fund
will continuously offer Creation Baskets consisting of 100,000 Shares at their
NAV through the Marketing Agent, to Authorized Purchasers. ___________ is
expected to be the initial Authorized Purchaser. It is expected that
on the effective date, the initial Authorized Purchaser will purchase one or
more initial Creation Baskets of 100,000 Shares at the initial NAV of $25.00 per
share. The initial NAV of $25.00 was set as an appropriate and
convenient price that would facilitate secondary market trading of Shares, and
the Shares of the Fund acquired by the Sponsor in connection with its initial
capital contribution were purchased at a price of $25.00 per
Share. All Authorized Purchasers pay a $1,000 fee for each order to
create one or more Creation Baskets, regardless of the number of Creation
Baskets in the order.
The
Marketing Agent will receive, for its services as marketing agent to the Fund, a
fee at an annual rate of 0.10% of the Fund’s average daily net assets, subject
to a minimum annual fee of $100,000; provided, however, that in no event may the
aggregate compensation paid to the Marketing Agent and any affiliate of the
Marketing Agent for distribution-related services in connection with this
offering of Shares exceed 10 percent (10%) of the gross proceeds of this
offering. The maximum compensation the Marketing Agent may receive
over the expected two year period of this offering is estimated to be
$_______. This estimate assumes that: (1) all Shares being
registered are sold on the first day of the offering at a price equal
to the closing NAV on that day ($25.00); and (2) the value of the
Fund's net assets remain constant throughout the period.
This actual compensation received by the Marketing Agent may vary.
The actual compensation could be lower if the NAV of the Shares declines or
if, as is likely, the full number of Shares being registered is not sold on
the first day of the offering, and could be higher if the NAV of the Shares
increases.
In
exchange for its fees, the Marketing Agent will develop an overall sales and
marketing plan for the Fund, supervise sales-related activities, and participate
in field sales activities. The Marketing Agent Agreement among the
Marketing Agent, the Sponsor and the Trust calls for the Marketing Agent to
provide a shared National Accounts Manager, shared external and internal
wholesalers, and call center support for the Fund. The Marketing
Agent will also process orders for Creation Baskets and Redemption Baskets as
described below under “Creation and Redemption of Shares.”
The
offering of baskets is being made in compliance with Conduct Rule 2310 of
FINRA. Accordingly, Authorized Purchasers will not make any sales to
any account over which they have discretionary authority without the prior
written approval of a purchaser of Shares.
The per
share price of Shares offered in Creation Baskets on any subsequent day will be
the total NAV of the Fund calculated shortly after the close of the NYSE Arca on
that day divided by the number of issued and outstanding Shares. An
Authorized Purchaser is not required to sell any specific number or dollar
amount of Shares.
By
executing an Authorized Purchaser Agreement, an Authorized Purchaser becomes
part of the group of parties eligible to purchase baskets from, and put baskets
for redemption to, the Fund. An Authorized Purchaser is under no obligation to
create or redeem baskets or to offer to the public Shares of any baskets it does
create. If an Authorized Purchaser sells Shares that it has created to the
public, it will be
expected to sell them at per-Share offering prices that are expected to reflect,
among other factors, the trading price of the Shares on the NYSE Arca, the NAV
of the Fund at the time the Authorized Purchaser purchased the Creation Baskets
and the NAV at the time of the offer of the Shares to the public, the supply of
and demand for Shares at the time of sale, and the liquidity of the Soybean
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.
We expect
the initial Authorized Purchaser to be _____________, and we expect that there
will be additional Authorized Purchasers in the future. A list of
Authorized Purchasers will be available from the Marketing
Agent. Because new Shares can be created and issued on an ongoing
basis, at any point during the life of the Fund, a “distribution,” as such term
is used in the 1933 Act, will be occurring. Authorized Purchasers,
other broker-dealers and other persons are cautioned that some of their
activities may result in their being deemed participants in a distribution in a
manner that would render them statutory underwriters and subject them to the
prospectus-delivery and liability provisions of the 1933 Act. For
example, the initial Authorized Purchaser will be a statutory underwriter with
respect to the initial purchase of Creation Baskets. In addition, 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 this regard, the excess, if any, of the price at which an
Authorized Purchaser sells a Share over the price paid by such Authorized
Purchaser in connection with the creation of such Share in a Creation Basket may
be deemed to be underwriting compensation. In contrast, Authorized
Purchasers may engage in secondary market or other transactions in Shares that
would not be deemed “underwriting.” For example, an Authorized
Purchaser may act in the capacity of a broker or dealer with respect to Shares
that were previously distributed by other Authorized Purchasers. A
determination of whether a particular market participant is an underwriter must
take into account all the facts and circumstances pertaining to the activities
of the broker-dealer or its client in the particular case, and the examples
mentioned above should not be considered a complete description of all the
activities that would lead to designation as an underwriter and subject them to
the prospectus-delivery and liability provisions of the 1933 Act.
Dealers
who are neither Authorized Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with Shares that are part of an “unsold
allotment” within the meaning of Section 4(3)(C) of the 1933 Act, would be
unable to take advantage of the prospectus-delivery exemption provided by
Section 4(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
Flow of Shares
Calculating
NAV
The
Fund’s NAV is calculated by:
|
·
|
Taking
the current market value of its total assets,
and
|
|
·
|
Subtracting
any liabilities.
|
The
Administrator will calculate the NAV of the Fund once each trading
day. It will calculate NAV as of the earlier of the close of the New
York Stock Exchange or 4:00 p.m. New York time. The NAV for a
particular trading day will be released after 4:15 p.m. New York
time.
In
determining the value of Soybean Futures Contracts, the Administrator will use
the CBOT closing price (typically 2:15 p.m. New York time). The
Administrator will determine the value of all other Fund investments as of the
earlier of the close of the New York Stock Exchange or 4:00 p.m. New York time,
in accordance with the current Services Agreement between the Administrator and
the Trust. The value of Cleared Soybean Swaps and over-the-counter
Soybean Interests will be determined based on the value of the commodity or
Futures Contract underlying such Soybean Interest, except that a fair value may
be determined if the Sponsor believes that the Fund is subject to significant
credit risk relating to the counterparty to such Soybean
Interest. Treasury Securities held by the Fund will be valued by the
Administrator using values received from recognized third-party vendors (such as
Reuters) and dealer quotes. NAV will include any unrealized profit or
loss on open Soybean Interests and any other credit or debit accruing to the
Fund but unpaid or not received by the Fund.
In
addition, in order to provide updated information relating to the Fund for use
by investors and market professionals, NYSE Arca will calculate and disseminate
throughout the trading day an updated “indicative fund value.” The indicative
fund value is calculated by using the prior day’s closing NAV per share of the
Fund as a base and updating that value throughout the trading day to reflect
changes in the value of the Fund’s Soybean Interests during the trading day.
Changes in the value of Treasury Securities and cash equivalents will not be
included in the calculation of indicative value. For this and other reasons, the
indicative fund value disseminated during NYSE Arca trading hours should not be
viewed as an actual real time update of the NAV. NAV is calculated only once at
the end of each trading day.
The
indicative fund value will be disseminated on a per Share basis every 15 seconds
during regular NYSE Arca trading hours of 9:30 a.m. New York time to 4:00 p.m.
New York time. The
normal trading hours for Soybean Futures Contracts on the CBOT are 10:30 a.m.
New York time to 2:15 p.m. New York time. This means that there is a
gap in time at the end of each day during which the Fund’s Shares are traded on
the NYSE Arca, but real-time CBOT trading prices for Soybean Futures Contracts
traded on such exchange are not available. As a result, during those
gaps there will be no update to the indicative fund value.
The NYSE
Arca will disseminate 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 will 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. Such arbitrage trades can tighten the tracking between the
market price of the Fund and the indicative fund value and thus can be
beneficial to all market participants.
Creation
and Redemption of Shares
The Fund
creates and redeems Shares from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to the Fund or the distribution by the
Fund of the amount of Treasury Securities and/or cash 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. New York time 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 Treasury Securities and/or
cash required for such creations and redemptions. The Authorized
Purchaser Agreement and the related procedures attached thereto may be amended
by the Sponsor, without the consent of any Shareholder or Authorized
Purchaser. Authorized Purchasers pay a transaction fee of $1,000 to
the Sponsor for each order they place to create or redeem one or more
baskets. Authorized Purchasers who make deposits with the Fund in
exchange for baskets receive no fees, commissions or other form of compensation
or inducement of any kind from either the Trust or the Sponsor, and no such
person will have any obligation or responsibility to the Trust or the Sponsor to
effect any sale or resale of Shares.
Certain
Authorized Purchasers are expected to be capable of participating directly in
physical soybeans and the Soybean Interest markets. Some Authorized
Purchasers or their affiliates may from time to time buy or sell soybeans or
Soybean Interests and may profit in these instances. The Sponsor
believes that the size and operation of the soybean market make it unlikely that
Authorized Purchasers’ direct activities in the soybeans or securities markets
will significantly affect the price of soybeans, Soybean Interests, or the
Fund’s Shares.
Each
Authorized Purchaser will be required to be registered as a broker-dealer under
the Exchange Act and a member in good standing with FINRA, or exempt from being
or otherwise not required to be registered as a broker-dealer or a member of
FINRA, and will be qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain
Authorized Purchasers may also be regulated under federal and state banking laws
and regulations. Each Authorized Purchaser has its own set of rules
and procedures, internal controls and information barriers as it determines is
appropriate in light of its own regulatory regime.
Under the
Authorized Purchaser Agreement, the Sponsor has agreed to indemnify the
Authorized Purchasers against certain liabilities, including liabilities under
the 1933 Act, and to contribute to the payments the Authorized Purchasers may be
required to make in respect of those liabilities.
The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the Trust Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which has been filed as an exhibit to the registration
statement of which this prospectus is a part. See “Where You Can Find
More Information” for information about where you can obtain the registration
statement.
Creation
Procedures
On any
business day, an Authorized Purchaser may place an order with the Custodian to
create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the NYSE Arca, CBOT, or the New York Stock Exchange is closed for regular
trading. Purchase orders must be placed by 1:15 p.m. New York time or
the close of regular trading on the New York Stock Exchange, whichever is
earlier. The day on which the Custodian receives a valid purchase
order is referred to as the purchase order date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasury
Securities, cash or a combination of Treasury Securities and cash with the
Trust, as described below. Prior to the delivery of baskets for a
purchase order, the Authorized Purchaser must also have wired to the Custodian
the non-refundable transaction fee due for the purchase
order. Authorized Purchasers may not withdraw a creation
request.
Determination
of Required Deposits
The total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasury Securities and/or cash 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, the
requirements for Treasury Securities and cash, including the remaining
maturities of the Treasury Securities and proportions of Treasury Securities and
cash, that may be included in deposits to create baskets. The
Marketing Agent will publish an estimate of the Creation Basket Deposit
requirements at the beginning of each business 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 Treasury
Securities and/or cash by the end of the next business day following the
purchase order date or by the end of such later business day, not to exceed
three business days after the purchase order date, as agreed to between the
Authorized Purchaser and the Custodian when the purchase order is placed (the
“Purchase Settlement Date”). Upon receipt of the deposit amount, the
Custodian will direct DTC to credit the number of baskets ordered to the
Authorized Purchaser’s DTC account on the Purchase Settlement Date.
Because
orders to purchase baskets must be placed by 1:15 p.m., New York time, but the
total payment required to create a basket during the continuous offering period
will not be determined until 4:00 p.m., New York time, 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 Marketing Agent 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;
or
|
|
·
|
circumstances
outside the control of the Sponsor, Marketing Agent or Custodian make it,
for all practical purposes, not feasible to process creations of
baskets.
|
None of
the Sponsor, Marketing Agent or Custodian 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 Custodian to redeem one
or more baskets. Redemption orders must be placed by 1:15 p.m. New
York time 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
Custodian. The redemption procedures allow Authorized Purchasers to
redeem baskets and do not entitle an individual Shareholder to redeem any Shares
in an amount less than a Redemption Basket, or to redeem baskets other than
through an Authorized Purchaser. By placing a redemption order, an
Authorized Purchaser agrees to deliver the baskets to be redeemed through DTC’s
book-entry system to the Fund by the end of the next business day following the
effective date of the redemption order or by the end of such later business day,
not to exceed three business days after the effective date of the redemption
order, as agreed to between the Authorized Purchaser and the Custodian when the
redemption order is placed (the “Redemption Settlement Date”). 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.
Determination
of Redemption Distribution
The
redemption distribution from the Fund will consist of a transfer to the
redeeming Authorized Purchaser of an amount of Treasury Securities and/or cash
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, determines the requirements for Treasury
Securities and cash, including the remaining maturities of the Treasury
Securities and proportions of Treasury Securities and cash, that may be included
in distributions to redeem baskets. The Custodian will publish an
estimate of the redemption distribution per basket as of the beginning of each
business day.
Delivery
of Redemption Distribution
The
redemption distribution due from the 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 if the Sponsor receives the fee
applicable to the extension of the Redemption Settlement Date which the Sponsor
may, from time to time, determine and the remaining baskets to be redeemed are
credited to the Fund’s DTC account on such next business day. Any
further outstanding amount of the redemption order shall be
cancelled. 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 New York time on the Redemption Settlement Date if the Authorized Purchaser
has collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the Sponsor may from time to time
determine.
Suspension
or Rejection of Redemption Orders
The
Sponsor may, in its discretion, suspend the right of redemption, or postpone the
redemption settlement date, (1) for any period during which the NYSE Arca or
CBOT is closed other than customary weekend or holiday closings, or trading on
the NYSE Arca or CBOT, is suspended or restricted, (2) for any period during
which an emergency exists as a result of which delivery, disposal or evaluation
of Treasury Securities is not reasonably practicable, or (3) for such other
period as the Sponsor determines to be necessary for the protection of the
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 Marketing Agent, or the Custodian
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 100,000 Shares (i.e., one basket) or less, unless the Sponsor has
reason to believe that the placer of the redemption order does in fact possess
all the outstanding Shares and can deliver them.
Creation
and Redemption Transaction Fee
To
compensate the Sponsor for its expenses in connection with the creation and
redemption of baskets, an Authorized Purchaser is required to pay a transaction
fee to the Sponsor of $1,000 per order to create or redeem baskets, regardless
of the number of baskets in such order. The transaction fee may be
reduced, increased or otherwise changed by the Sponsor. The Sponsor
shall notify DTC of any change in the transaction fee and will not implement any
increase in the fee for the redemption of baskets until 30 days after the date
of the notice.
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 Treasury Securities and/or cash equal
to the aggregate NAV of the number of Shares included in the baskets being
created or redeemed determined on the day the order to create or redeem baskets
is properly received.
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public Shares of any baskets it does create.
Authorized Purchasers that do offer to the public Shares from the baskets they
create will do so at per-Share offering prices that are expected to reflect,
among other factors, the trading price of the Shares on the NYSE Arca, the NAV
of the Shares at the time the Authorized Purchaser purchased the Creation
Baskets, the NAV of the Shares at the time of the offer of the Shares to the
public, the supply of and demand for Shares at the time of sale, and the
liquidity of the Soybean 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 Soybean Interest markets. While
the Shares trade on the NYSE Arca until 4:00 p.m. New York time, liquidity in
the markets for Soybean Interests may be reduced after the close of regular CBOT
trading for Soybean Futures Contracts at 2:15 p.m. New York time. As a result,
during this time, trading spreads, and the resulting premium or discount, on the
Shares may widen.
Use
of Proceeds
The
Sponsor will cause the Fund to transfer the proceeds of the sale of Creation
Baskets to the Custodian or another custodian for use in trading
activities. The Sponsor will invest the Fund’s assets in Soybean
Futures Contracts, Cleared Soybean Swaps and Other Soybean Interests, short-term
Treasury Securities, cash and cash equivalents. When the Fund
purchases Soybean Futures Contracts and certain Other Soybean Interests that are
exchange-traded, the Fund will be required to deposit with the futures
commission merchant 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 Soybean Interests at maturity. This deposit is known as
initial margin. Counterparties in transactions in Cleared Soybean
Swaps and over-the-counter Soybean Interests will generally impose similar
collateral requirements on the Fund. The Sponsor will invest the
Fund’s assets that remain after margin and collateral is posted in short-term
Treasury Securities, cash and/or cash equivalents. Subject to these
margin and collateral requirements, the Sponsor has sole authority to determine
the percentage of assets that will be:
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held
as margin or collateral with futures commission merchants or other
custodians;
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used
for other investments; and
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held
in bank accounts to pay current obligations and as
reserves.
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In
general, the Fund expects that it will be required to post between 5% and 10% of
the notional amount of a Soybean Interest as initial margin when entering into
such Soybean Interest. Ongoing margin and collateral payments will
generally be required for both exchange-traded and over-the-counter Soybean
Interests based on changes in the value of the Soybean
Interests. Furthermore, ongoing collateral requirements with respect
to over-the-counter Soybean 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 Soybean
Interest, and each party’s creditworthiness. In light of the
differing requirements for initial payments under exchange-traded and
over-the-counter Soybean Interests and the fluctuating nature of ongoing margin
and collateral payments, it is not possible to estimate what portion of the
Fund’s assets will be posted as margin or collateral at any given
time. The Treasury Securities, cash and cash equivalents held by the
Fund will constitute reserves that will be available to meet ongoing margin and
collateral requirements. All interest income will be used for the
Fund’s benefit.
A futures
commission merchant, 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.
The
Fund’s assets will be held in segregation pursuant to the Commodity Exchange Act
and CFTC regulations.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Critical
Accounting Policies
Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. The Trust’s application of these policies involves
judgments and actual results may differ from the estimates used.
The
Sponsor has evaluated the nature and types of estimates that it will make in
preparing the Fund’s financial statements and related disclosures once the Fund
commences operations. The Sponsor has determined that the valuation of Soybean
Interests that are not traded on a U.S. or internationally recognized futures
exchange (such as swaps and other over-the-counter contracts) involves a
critical accounting policy. While not currently applicable given the fact that
the Fund is not currently involved in trading activities, the values which will
be used by the Fund for futures contracts will be provided by the commodity
broker who will use market prices when available, while over-the-counter
contracts will be valued based on the present value of estimated future cash
flows that would be received from or paid to a third party in settlement of
these derivative contracts prior to their delivery date. Values will be determined on
a daily basis.
Liquidity
and Capital Resources
The Fund
does not anticipate making use of borrowings or other lines of credit to meet
its obligations. It is anticipated that the Fund will meet its liquidity needs
in the normal course of business from the proceeds of the sale of its
investments or from the cash, cash equivalents and/or the Treasuries Securities
that it intends to hold at all times. The Fund’s liquidity needs include:
redeeming Shares, providing margin deposits for existing futures contracts or
the purchase of additional futures contracts, posting collateral for
over-the-counter Soybean Interests, and payment of expenses, summarized below
under “Contractual Obligations.”
The Fund
will generate cash primarily from (i) the sale of Creation Baskets and (ii)
interest earned on cash, cash equivalents and its investments in Treasuries
Securities. Trading activities for the Fund have not begun. Once the Fund begins
trading activities, it is anticipated that all of the net assets of the Fund
will be allocated to trading in Soybean Interests. Most of the assets of the
Fund will be held in Treasuries Securities, cash and/or cash equivalents that
could or will be used as margin or collateral for trading in Soybean Interests.
The percentage that such assets will bear to the total net assets will vary from
period to period as the market values of the Soybean Interests change. Interest
earned on interest-bearing assets of the Fund will be paid to the
Fund.
The
investments of the Fund in Soybean Interests will be subject to periods of
illiquidity because of market conditions, regulatory considerations and other
reasons. For example, the CBOT limits the fluctuations in Soybean Futures
Contract prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices beyond the
daily limit. Once the price of a Soybean Futures Contract has increased or
decreased by an amount equal to the daily limit, positions in the contracts can
neither be taken nor liquidated unless the traders are willing to effect trades
at or within the limit. Such market conditions could prevent the Fund from
promptly liquidating a position in Soybean Futures Contracts.
To date,
all of the expenses of the Fund
have been funded by the Sponsor. If the Fund is unsuccessful in raising
sufficient funds to cover its expenses and the Sponsor is unable or unwilling to
continue covering the Fund’s expenses, the Fund may terminate.
Market
Risk
Trading
in Soybean Interests such as Soybean Futures Contracts will involve the Fund
entering into contractual commitments to purchase or sell specific amounts of
soybeans at a specified date in the future. The gross or face amount of the
contracts is expected to significantly exceed the future cash requirements of
the Fund since the Fund
intends to close out any open positions prior to the contractual
expiration date. As a result, the Fund’s market risk is the risk of loss arising
from the decline in value of the contracts, not from the need to make delivery
under the contracts. The Fund considers the “fair value” of derivative
instruments to be the unrealized gain or loss on the contracts. The market risk
associated with the commitment by the Fund to purchase a specific commodity will
be limited to the aggregate face amount of the contacts held.
The
exposure of the Fund to market risk will depend on a number of factors including
the markets for soybeans, the volatility of interest rates and foreign exchange
rates, the liquidity of the Soybean Interest markets and the relationships among
the contracts held by the Fund. The lack of experience of the Sponsor in
utilizing its model to trade in Soybean Interests in a manner that tracks
changes in the Benchmark, as well as drastic market
events, could ultimately lead to the loss of all or substantially all of a
Shareholder’s investment.
Credit
Risk
When the
Fund enters into Soybean Interests, it will be exposed to the credit risk that
the counterparty will not be able to meet its obligations. For purposes of
credit risk, the counterparty for the Soybean Futures Contracts traded on the
CBOT and for Cleared Soybean Swaps is the clearinghouse associated with the
CBOT. In general, clearinghouses are backed by their members who may be required
to share in the financial burden resulting from the nonperformance of one of
their members, which should significantly reduce credit risk. Some foreign
exchanges are not backed by their clearinghouse members but may be backed by a
consortium of banks or other financial institutions. Unlike in the case of
exchange-traded futures contracts, the counterparty to an over-the-counter
Soybean Interest contract is generally a single bank or other financial
institution. As a result, there will be greater counterparty credit risk in
over-the-counter transactions. There can be no assurance that any counterparty,
clearing house, or their financial backers will satisfy their obligations to the
Fund.
The
Sponsor will attempt to manage the credit risk of the Fund by following certain
trading limitations and policies. In particular, the Fund intends to post margin
and collateral and/or hold liquid assets that will be equal to approximately the
face amount of the Soybean Interests it holds. The Sponsor will implement
procedures that will include, but will not be limited to, executing and clearing
trades and entering into over-the-counter transactions only with parties it
deems creditworthy and/or requiring the posting of collateral by such parties
for the benefit of the Fund to limit its credit exposure.
Any
commodity broker for the Fund, when acting as the futures commission merchant in
accepting orders to purchase or sell futures contracts on United States
exchanges, will be required by CFTC regulations to separately account for and
segregate as belonging to the Fund all of the Fund’s assets that relate to
domestic futures contract trading. These commodity brokers are not allowed to
commingle the assets of the Fund with the commodity broker’s other assets. In
addition, the CFTC requires commodity brokers to hold in a secure account the
assets of the Fund related to foreign futures contract trading.
Off
Balance Sheet Financing
As of the
date of this prospectus, neither the Trust nor the Fund has any loan guarantees,
credit support or other off-balance sheet arrangements of any kind other than
agreements entered into in the normal course of business, which may include
indemnification provisions relating to certain risks service providers undertake
in performing services which are in the best interests of the Fund. While the
Fund’s exposure under these indemnification provisions cannot be estimated, they
are not expected to have a material impact on the Fund’s financial
positions.
Redemption
Basket Obligation
Other
than as necessary to meet the investment objective of the Fund and pay its
contractual obligations described below, the Fund will require liquidity to
redeem Redemption Baskets. The Fund intends to satisfy this obligation through
the transfer of cash of the Fund (generated, if necessary, through the sale of
Treasury Securities) in an amount proportionate to the number of units being
redeemed, as described above under “Redemption
Procedures.”
Contractual
Obligations
The
Fund’s primary contractual obligation will be with the Sponsor and certain other
service providers. The Sponsor, in return for its services, will be entitled to
a management fee calculated as a fixed percentage of the Fund’s NAV, currently
1.00% of its average net assets. The Fund will also be responsible for all
ongoing fees, costs and expenses of its operation, including (i) brokerage and other fees and
commissions incurred in connection with the trading activities of the Fund; (ii)
expenses incurred in connection with registering additional Shares of the Fund
or offering Shares of the Fund after the time any Shares have begun trading on
NYSE Arca; (iii) the routine expenses associated with the preparation and, if
required, the printing and mailing of monthly, quarterly, annual and other
reports required by applicable U.S. federal and state regulatory authorities,
Trust meetings and preparing, printing and mailing proxy statements to
Shareholders; (iv) the payment of any distributions related to redemption of
Shares; (v) payment for routine services of the Trustee, legal counsel and
independent accountants; (vi) payment for routine accounting, bookkeeping,
custody and transfer agency services, whether performed by an outside service
provider or by Affiliates of the Sponsor; (vii) postage and insurance; (viii)
costs and expenses associated with client relations and services; (ix) costs of
preparation of all federal, state, local and foreign tax returns and any taxes
payable on the income, assets or operations of the Fund; and (xi) extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification related thereto).
While the
Sponsor has agreed to pay registration fees to the SEC, FINRA and any other
regulatory agency in connection with the offer and sale of the Shares offered
through this prospectus, the legal, printing, accounting and other expenses
associated with such registrations, and the initial fee of $5,000 for listing
the Shares on the NYSE Arca, the Fund will be responsible for any registration
fees and related expenses incurred in connection with any future offer and sale
of Shares of the Fund in excess of those offered through this
prospectus.
The Fund
pays its own brokerage and other transaction costs. The Fund will pay fees to
futures commission merchants in connection with its transactions in futures
contracts. Futures commission merchant fees are estimated to be 0.03% annually for the Fund.
In general, transaction costs on over-the-counter Soybean Interests and on
Treasuries and other short-term securities will be embedded in the purchase or
sale price of the instrument being purchased or sold, and may not readily be
estimated. Other expenses to be paid by the Fund are estimated to be 0.40% for the twelve-month
period ending ______, 2011, though this amount may change in future years. The
Sponsor may, in its discretion, pay or reimburse the Fund for, or waive a
portion of its management fee to offset, expenses that would otherwise be borne
by the Fund.
Any
general expenses of the Trust will be allocated among the Teucrium Funds and
each other series that may be established under the Trust in the future as
determined by the Sponsor in its sole and absolute discretion. The Trust is also
responsible for extraordinary expenses, including, but not limited to, legal
claims and liabilities and litigation costs and any indemnification related
thereto. The Trust and/or the Sponsor may be required to indemnify the Trustee,
Marketing Agent or Custodian/Administrator under certain
circumstances.
The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods as the Fund’s NAV and trading levels to
meet their investment objectives will not be known until a future date. These
agreements are effective for a specific term agreed upon by the parties with an
option to renew, or, in some cases, are in effect for the duration of the Fund’s
existence. The parties may terminate these agreements earlier for certain
reasons listed in the agreements.
The
Trust Agreement
The
following paragraphs are a summary of certain provisions of the Trust Agreement.
The following discussion is qualified in its entirety by reference to the Trust
Agreement.
Authority
of the Sponsor
The
Sponsor is generally authorized to perform all acts deemed necessary to carry
out the purposes of the Trust and to conduct the business of the Trust. The
Trust and the Fund will continue to exist until terminated in accordance with
the Trust Agreement. The Sponsor’s authority includes, without limitation, the
right to take the following actions:
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To
enter into, execute, deliver and maintain contracts, agreements and any
other documents as may be in furtherance of the Trust’s purpose or
necessary or appropriate for the offer and sale of the Shares and the
conduct of Trust activities;
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To
establish, maintain, deposit into, sign checks and otherwise draw upon
accounts on behalf of the Trust with appropriate banking and savings
institutions, and execute and accept any instrument or agreement
incidental to the Trust’s business and in furtherance of its
purposes;
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To
adopt, implement or amend, from time to time, such disclosure and
financial reporting information gathering and control policies and
procedures as are necessary or desirable to ensure compliance with
applicable disclosure and financial reporting obligations under any
applicable securities laws;
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To
pay or authorize the payment of distributions to the Shareholders and
expenses of the Fund;
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To
make any elections on behalf of the Trust under the Code, or any other
applicable U.S. federal or state tax law as the Sponsor shall determine to
be in the best interests of the Trust;
and
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In
its sole discretion, to determine to admit an affiliate or affiliates of
the Sponsor as additional Sponsors.
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The
Sponsor’s Obligations
In
addition to the duties imposed by the Delaware Trust Statute, under the Trust
Agreement the Sponsor has the following obligations as a sponsor of the
Trust:
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Devote
to the business and affairs of the Trust such of its time as it determines
in its discretion (exercised in good faith) to be necessary for the
benefit of the Trust and the
Shareholders;
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Execute,
file, record and/or publish all certificates, statements and other
documents and do any and all other things as may be appropriate for the
formation, qualification and operation of the Trust and for the conduct of
its business in all appropriate
jurisdictions;
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Appoint
and remove independent public accountants to audit the accounts of the
Trust and employ attorneys to represent the
Trust;
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Use
its best efforts to maintain the status of the Trust as a statutory trust
for state law purposes and as a partnership for U.S. federal income tax
purposes;
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Have
fiduciary responsibility for the safekeeping and use of the Trust’s
assets, whether or not in the Sponsor’s immediate possession or
control;
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Enter
into and perform agreements with each Authorized Purchaser, receive from
Authorized Purchasers and process properly submitted purchase orders,
receive Creation Basket Deposits, deliver or cause the delivery of
Creation Baskets to the Depository for the account of the Authorized
Purchaser submitting a purchase
order;
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Receive
from Authorized Purchasers and process, or cause the Marketing Agent to
process, properly submitted redemption orders, receive from the redeeming
Authorized Purchasers through the Depository, and thereupon cancel or
cause to be cancelled, Shares corresponding to the Redemption Baskets to
be redeemed;
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Interact
with the Depository; and
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Delegate
duties to one or more administrators, as the Sponsor
determines.
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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.
Liability
and Indemnification
Under the
Trust Agreement, the Sponsor, the Trustee and their respective Affiliates
(collectively, “Covered Persons”) shall have no liability to the Trust, the
Fund, or to any Shareholder for any loss suffered by the Trust or the Fund which
arises out of any action or inaction of such Covered Person if such Covered
Person, in good faith, determined that such course of conduct was in the best
interest of the Trust or the Fund and such course of conduct did not constitute
gross negligence or willful misconduct of such Covered Person. A Covered Person
shall not be liable for the conduct or willful misconduct of any administrator
or other delegatee 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
delegatee 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.
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, 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.
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 Trust’s shares (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 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 Shares of the
Trust or the Fund, as applicable (not including Shares acquired by the Sponsor
through its initial capital contribution), to vote on any matter with respect to
which Shareholders have a right to vote under the Trust Agreement. 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. When
the meeting is being requested by Shareholders, the notice of the meeting shall
be mailed or transmitted within 45 days after receipt of the written request
from Shareholders. Any notice of meeting shall be accompanied by a description
of the action to be taken at the meeting. Shareholders may vote in person or by
proxy at any such meeting. Any action required or permitted to be taken by
Shareholders by vote may be taken without a meeting by written consent setting
forth the actions so taken. Such written consents shall be treated for all
purposes as votes at a meeting. If the vote or consent of any Shareholder to any
action of the Trust, the Fund or any Shareholder, as contemplated by the Trust
Agreement, is solicited by the Sponsor, the solicitation shall be effected by
notice to each Shareholder given in the manner provided in accordance with the
Trust Agreement.
Voting
Rights
Shareholders
have very limited voting rights. Specifically, the Trust Agreement provides that
shareholders of the Trust ‘s series holding shares representing at least a
majority (50%) of the Trust’s outstanding shares (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 of the Trust’s series holding shares
representing seventy-five percent (75%) of the Trust’s outstanding shares
(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. Shareholders have no voting rights
with respect to the Trust or the Fund except as expressly provided in the Trust
Agreement.
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).
Every
written note, bond, contract, instrument, certificate or undertaking made or
issued by the Sponsor on behalf of the Trust or the Fund shall give notice to
the effect that the same was executed or made by or on behalf of the Trust or
the Fund and 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 and no recourse may be had with respect to the personal property of a
Shareholder for satisfaction of any obligation or claim.
The
Sponsor Has Conflicts of Interest
There are
present and potential future conflicts of interest in the Trust’s structure and
operation you should consider before you purchase Shares. The Sponsor may use
this notice of conflicts as a defense against any claim or other proceeding
made.
The
Sponsor’s principals, officers and employees do not devote their time
exclusively to the Fund. Under the organizational documents of the Sponsor, Mr.
Sal Gilbertie and Mr. Dale Riker are obligated to use commercially reasonable
efforts to manage the Sponsor, devote such amount of time to the Sponsor as
would be consistent with their roles in similarly placed commodity pool
operators, and remain active in managing the Sponsor until they are no longer
managing members of the Sponsor or the Sponsor dissolves. In addition, the
Sponsor expects that operating the Teucrium Funds will generally constitute the
principal and a full-time business activity of its principals, officers and
employees. Notwithstanding these obligations and expectations, the Sponsor’s
principals 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. In particular, the principals could have a conflict
between their responsibilities to the Fund on the one hand and to those other
entities on the other. The Sponsor believes that it currently has sufficient
personnel, time, and working capital to discharge its responsibilities to the
Fund in a fair manner and that these persons’ conflicts should not impair their
ability to provide services to the Fund. However, it is not possible to quantify
the proportion of their time that the Sponsor’s personnel will devote to the
Fund and its management.
The
Sponsor and its principals, officers and employees may trade futures and related
contracts for their own accounts. Shareholders will not be permitted to inspect
the trading records of such persons or any written policies of the Sponsor
related to such trading. A conflict of interest may exist if their trades are in
the same markets and at approximately the same times as the trades for the Fund.
A potential conflict also may occur when the Sponsor’s principals trade their
accounts more aggressively or take positions in their accounts which are
opposite, or ahead of, the positions taken by the Fund.
The
Sponsor has sole current authority to manage the investments and operations of
the Fund, and this may allow it to act in a way that furthers its own interests
which may create a conflict with your best interests. Shareholders have very
limited voting rights, which will limit the ability to influence matters such as
amendment of the Trust Agreement, change in the Fund’s basic investment
policies, or dissolution of the Fund or the Trust.
The
Sponsor serves as the Sponsor to the Teucrium Funds, and may in the future serve
as the Sponsor or investment adviser to commodity pools other than the Teucrium
Funds. The Sponsor may have a conflict to the extent that its trading decisions
for the Fund may be influenced by the effect they would have on the other pools
it manages. In addition, the Sponsor may be required to indemnify the officers
and directors of the other pools, if the need for indemnification arises. This
potential indemnification will cause the Sponsor’s assets to decrease. If the
Sponsor’s other sources of income are not sufficient to compensate for the
indemnification, it could cease operations, which could in turn result in Fund
losses and/or termination of the Fund.
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 Sponsor pursues such opportunity or
directs it to another person or does not communicate such opportunity to the
Fund. Neither the Fund nor any Shareholder has any rights or obligations by
virtue of the Trust Agreement, the trust relationship created thereby, or this
prospectus in such business ventures or the income or profits derived from such
business ventures. The pursuit of such business ventures, even if competitive
with the activities of the Fund, will not be deemed wrongful or
improper.
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 considering the relative
interest of each party (including its own interest) and the benefits and burdens
relating to such interests, any customary or accepted industry practices, and
any applicable accepted accounting practices or principles.
Interests
of Named Experts and Counsel
The
Sponsor has employed Sutherland Asbill & Brennan LLP to prepare this
prospectus. Neither the law firm nor any other expert hired by the Fund to give
advice on the preparation of this offering document have been hired on a
contingent fee basis. Nor do any of them have any present or future expectation
of interest in the Sponsor, Marketing Agent, 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 232 Hidden Lake
Road, Building A, Brattleboro, Vermont 05301, or at the offices of the
Administrator located at One Wall Street, New York, New York 10286, 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.
Analysis
of Critical Accounting Policies
The
Fund’s critical accounting policies are set forth in the financial statements
that are incorporated by reference in this prospectus prepared in accordance
with accounting principles generally accepted in the United States of America,
which require the use of certain accounting policies that affect the amounts
reported in these financial statements, including the following: (i) Fund trades
are accounted for on a trade-date basis and marked to market on a daily basis;
(ii) the difference between the cost and market value of Soybean Interests is
recorded as “change in unrealized profit/loss” for open (unrealized) contracts,
and recorded as “realized profit/loss” when open positions are closed out; and
(iii) earned interest income, as well as the fees and expenses of the Fund, are
recorded on an accrual basis. The Sponsor believes that all relevant accounting
assumptions and policies have been considered.
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.teucriumsoybeanfund.com).
These monthly reports will contain certain unaudited financial information
regarding the Fund, including the Fund’s NAV. The Sponsor will furnish to the
Shareholders other reports or information which the Sponsor, in its discretion,
determines to be necessary or appropriate. In addition, under SEC rules the
Trust will be required to file quarterly and annual reports for the Fund with
the SEC, which need not be sent to Shareholders but will be publicly available
through the SEC. The Trust will post the same information that would otherwise
be provided in the Trust’s CFTC, NFA and SEC reports on the Fund’s website www.teucriumsoybeanfund.com.
The
Sponsor is responsible for the registration and qualification of the Shares
under the federal securities laws, federal commodities laws, and laws of any
other jurisdiction as the Sponsor may select. The Sponsor is responsible for
preparing all required reports, but has entered into an agreement with the
Administrator to prepare these reports on the Trust’s behalf.
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 make such
elections, 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.
Rothstein,
Kass, & Company, LLP (“Rothstein Kass”), 4 Becker Farm Road, Roseland NJ
07068, the Fund’s independent registered public accounting firm, as
representative of the Trust and the Fund, will provide tax information in
accordance with applicable U.S. Treasury Regulations relating to information
reporting with respect to widely held fixed investment trusts. Persons treated
as middlemen for purposes of these regulations may obtain tax information
regarding the Fund from Rothstein Kass or from the Fund’s website, www.teucriumsoybeanfund.com.
Fiscal
Year
The
fiscal year of the Fund is the calendar year.
Governing
Law; Consent to Delaware Jurisdiction
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. The Sponsor, the Trust, the Fund and DTC and, by
accepting Shares, each DTC Participant and each Shareholder, consent to the
jurisdiction of the courts of the State of Delaware and any federal courts
located in Delaware. Such consent is not required for any person to assert a
claim of Delaware jurisdiction over the Sponsor, the Trust or the
Fund.
Legal
Matters
Litigation
and Claims
Within
the past 5 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
Sutherland
Asbill & Brennan LLP has been retained to advise the Trust and the Sponsor
with respect to the Shares being offered hereby and will pass upon the validity
of the Shares being issued hereunder. Sutherland Asbill & Brennan LLP has
also provided the Sponsor with its opinion with respect to federal income tax
matters addressed herein.
Experts
Rothstein
Kass, an independent registered public accounting firm, has audited the
financial statements of the Trust and the Sponsor as of December 31,
2009.
Privacy
Policy
The Trust
and the Sponsor collect certain nonpublic personal information about investors
from the information provided by them in certain documents, as well as in the
course of processing transaction requests. None of this information is disclosed
except as necessary in the course of processing creations and redemptions and
otherwise administering the Trust (and then only subject to customary
undertakings of confidentiality) or as required by law. The Trust and the
Sponsor restrict access to the nonpublic personal information they collect from
investors to those employees and service providers who need access to this
information to provide services relating to the Trust to investors. The Trust
and the Sponsor each maintain physical, electronic and procedural controls to
safeguard this information. These standards are reasonably designed to (1)
ensure the security and confidentiality of investors’ records and information,
(2) protect against any anticipated threats or hazards to the security or
integrity of investors’ records and information, and (3) protect against
unauthorized access to or use of investors’ records or information that could
result in substantial harm or inconvenience to any investor. A copy of the
current Privacy Policy can be provided on request and is provided to investors
annually.
U.S.
Federal Income Tax Considerations
The
following discussion summarizes the material U.S. federal income tax
consequences of the purchase, ownership and disposition of Shares of the Fund
and the U.S. federal income tax treatment of the Fund. Except where noted
otherwise, it deals only with the tax consequences relating to Shares held as
capital assets by persons not subject to special tax treatment. For example, in
general it does not address the tax consequences to dealers in securities or
currencies or commodities, traders in securities or dealers or traders in
commodities that elect to use a mark-to-market method of accounting, financial
institutions, tax-exempt entities, insurance companies, persons holding Shares
as a part of a position in a “straddle” or as part of a “hedging,” “conversion”
or other integrated transaction for federal income tax purposes, or holders of
Shares whose “functional currency” is not the U.S. dollar. Furthermore, the
discussion below is based upon the provisions of the Code, and regulations
(“Treasury Regulations”), rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified (possibly
with retroactive effect) so as to result in U.S. federal income tax consequences
different from those discussed below.
The
Sponsor has received the opinion of Sutherland Asbill & Brennan LLP
(“Sutherland”), 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, Sutherland has relied on the facts and assumptions described in
this prospectus as well as certain factual representations made by the Trust and
the Sponsor. This opinion is not binding on the Internal Revenue Service
(“IRS”). No ruling has been requested from the IRS with respect to any matter
affecting the Fund or prospective investors, and the IRS may disagree with the
tax positions taken by the Trust. If the IRS were to challenge the Trust’s tax
positions in litigation, they might not be sustained by the
courts.
As used
herein, the term “U.S. Shareholder” means a Shareholder that is, for United
States federal income tax purposes, (i) a citizen or resident of the United
States, (ii) a corporation or partnership 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 States federal income taxation
regardless of its source or (iv) a trust that (X) 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 (Y) 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 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, you
should consult your own tax advisor regarding the tax consequences.
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
Status 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
that trust, due to the nature of its activities the Fund will be treated as a
partnership rather than a trust for U.S. federal income tax purposes. In
addition, the trading of Shares on the NYSE Arca will cause the Fund to be
classified as a “publicly traded partnership” for federal income tax purposes.
Under the Code, a publicly traded partnership is generally taxable as a
corporation. In the case of an entity (such as the Fund) not registered under
the Investment Company Act of 1940, 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 a principal activity of which is the buying and
selling of commodities other than as inventory or of futures, forwards and
options with respect to commodities, “qualifying income” also includes income
and gains from commodities and from futures, forwards, options, and swaps and
other notional principal contracts with respect to commodities. The Trust and
the Sponsor have represented the following to Sutherland:
|
•
|
At
least 90% of the Fund’s gross income for each taxable year will constitute
“qualifying income” within the meaning of Code section 7704 (as described
above);
|
|
•
|
the
Fund is organized and will be operated in accordance with its governing
documents and applicable law;
and
|
|
•
|
the
Fund has not elected, and will not elect, to be classified as a
corporation for U.S. federal income tax
purposes.
|
Based in
part on these representations, Sutherland is of the opinion that the Fund will
be treated as a partnership that it is not taxable as a corporation for U.S.
federal income tax purposes. The Fund’s taxation as a partnership rather than a
corporation will require the Sponsor to conduct the Fund’s business activities
in such a manner that it satisfies the requirements of the qualifying income
exception on a continuing basis. No assurances can be given that the Fund’s
operations for any given year will produce income that satisfies these
requirements. Sutherland will not review the Fund’s ongoing compliance with
these requirements and will have no obligation to advise the Trust, the Fund or
the Fund’s Shareholders in the event of any subsequent change in the facts,
representations or applicable law relied upon in reaching its
opinion.
If the
Fund failed to satisfy the qualifying income exception in any year, other than a
failure that is determined by the IRS to be inadvertent and that is cured within
a reasonable time after discovery (in which case, as a condition of relief, the
Fund could be required to pay the government amounts determined by the IRS), the
Fund would be taxable as a corporation for federal income tax purposes and would
pay federal income tax on its income at regular corporate rates. In that event,
Shareholders would not report their share of the Fund’s income or loss on their
tax returns. In addition, any distributions to Shareholders would not be
deductible by the Fund in computing its taxable income. Such distributions would
be treated as ordinary dividend income to the Shareholders to the extent of the
Fund’s current and accumulated earnings and profits. Accordingly, if the Fund
were to be taxable as a corporation, it would likely have a material adverse
effect on the economic return from an investment in the Fund and on the value of
the Shares.
The
remainder of this summary assumes that the Fund is classified for federal income
tax purposes as a partnership that it is not taxable as a
corporation.
U.S.
Shareholders
Tax
Consequences of Ownership of Shares
Taxation of the Fund’s
Income. No U.S. federal income tax is paid by the Fund on its income.
Instead, the Fund files annual partnership returns, and each U.S. Shareholder is
required to report on its U.S. federal income tax return its allocable share of
the income, gain, loss, deductions and credits reflected on such returns. If the
Fund recognizes income in the form of interest on Treasury Securities and net
capital gains from cash settlement of Soybean Interests for a taxable year,
Shareholders must report their share of these items even though the Fund makes
no distributions of cash or property during the taxable year. Consequently, a
Shareholder may be taxable on income or gain recognized by the Fund but receive
no cash distribution with which to pay the resulting tax liability, or may
receive a distribution that is insufficient to pay such liability. Because the
Sponsor currently does not intend to make distributions, it is likely that that
a U.S. Shareholder that realizes net income or gain with respect to Shares for a
taxable year will be required to pay any resulting tax from sources other than
Fund distributions.
Monthly Conventions for Allocations
of the Fund’s Profit and Loss and Capital Account Restatements. Under
Code section 704, the determination of a partner’s distributive share of any
item of income, gain, loss, deduction or credit is governed by the applicable
organizational document unless the allocation provided by such document lacks
“substantial economic effect.” An allocation that lacks substantial economic
effect nonetheless will be respected if it is in accordance with the partners’
interests in the partnership, determined by taking into account all facts and
circumstances relating to the economic arrangements among the partners. Subject
to the discussion below concerning certain conventions to be used by the Fund,
allocations pursuant to the Trust Agreement should be considered as having
substantial economic effect or being in accordance with Shareholders’ interest
in the Fund.
In
situations where a partner’s interest in a partnership is redeemed or sold
during a taxable year, the Code generally requires that partnership tax items
for the year be allocated to the partner using either an interim closing of the
books or a daily proration method. The Fund intends to allocate tax items using
an interim closing of the books method under which income, gains, losses and
deductions will be determined on a monthly basis, taking into account the Fund’s
accrued income and deductions and gains and losses (both realized and
unrealized) for the month. The tax items for each month during a taxable year
will then be allocated among the holders of Shares in proportion to the number
of Shares owned by them as of the close of trading on the last trading day of
the preceding month (the “monthly allocation convention”).
Under the
monthly allocation convention, an investor who disposes of a Share during the
current month will be treated as disposing of the Share as of the beginning of
the first day of the immediately succeeding month. For example, an investor who
buys a Share on April 10 of a year and sells it on May 20 of the same year will
be allocated all of the tax items attributable to May (because he owned it is
deemed to hold it through the last day of May) but none of those attributable to
April. The tax items attributable to that Share for April will be allocated to
the person who is the actual or deemed holder of the Share as of the close of
trading on the last trading day of March. Under the monthly convention, an
investor who purchases and sells a Share during the same month, and therefore
does not hold (and is not deemed to hold) the Share at the close of the last
trading day of either that month or the previous month, will receive no
allocations with respect to that Share for any period. Accordingly, investors
may receive no allocations with respect to Shares that they actually held, or
may receive allocations with respect to Shares attributable to periods that they
did not actually hold the Share. Investors who hold a Share on the last trading
day of the first month of the Fund’s operation will be allocated the tax items
for that month, as well as the tax items for the following month, attributable
to the Share.
By
investing in Shares, a U.S. Shareholder agrees that, in the absence of new
legislation, regulatory or administrative guidance, or judicial rulings to the
contrary, it will file its U.S. income tax returns in a manner that is
consistent with the monthly allocation convention as described above and with
the IRS Schedule K-1 or any successor form provided to Shareholders by the
Trust.
For any
month in which a Creation Basket is issued or a Redemption Basket is redeemed,
the Fund will credit or debit the “book” capital accounts of existing
Shareholders with the amount of any unrealized gain or loss, respectively, on
Fund assets. For this purpose, unrealized gain or loss will be computed based on
the lowest NAV of the Fund’s assets during the month in which Shares are issued
or redeemed, which may be different than the value of the assets on the date of
an issuance or redemption. The capital accounts as adjusted in this manner will
be used in making tax allocations intended to account for differences between
the tax basis and fair market value of property owned by the Fund at the time
new Shares are issued or outstanding Shares are redeemed (so-called “reverse
Code section 704(c) allocations”). The intended effect of these adjustments is
to equitably allocate among Shareholders any unrealized appreciation or
depreciation in the Fund’s assets existing at the time of a contribution or
redemption for book and tax purposes.
The
Sponsor believes that application of the conventions and methods described above
is consistent with the intent of the partnership provisions of the Code and that
the resulting allocations should have substantial economic effect or otherwise
should be respected as being in accordance with Shareholders’ interests in the
Fund for federal income tax purposes. The Code and existing Treasury Regulations
do not expressly permit adoption of these conventions, although the monthly
allocation convention described above is consistent with a method permitted
under recently proposed Treasury Regulations. It is possible that the IRS could
successfully challenge the Fund’s allocation methods on the ground that they do
not satisfy the technical requirements of the Code or Treasury Regulations,
requiring a Shareholder to report a greater or lesser share of items of income,
gain, loss, or deduction than if the conventions were respected. The Sponsor is
authorized to revise the Fund’s methods to conform to the requirements of any
future Treasury Regulations.
As noted
above, the conventions used by the Fund in making tax allocations may cause a
Shareholder to be allocated more or less income or loss for federal income tax
purposes than its proportionate share of the economic income or loss realized by
the Fund during the period it held its Shares. This mismatch between taxable and
economic income or loss in some cases may be temporary, reversing itself in a
later year when the Shares are sold, but could be permanent. For example, a
Shareholder could be allocated income accruing before it purchased its Shares,
resulting in an increase in the basis of the Shares (see “Tax Basis of Shares”, below).
On a subsequent disposition of the Shares, the additional basis might produce a
capital loss the deduction of which may be limited (see “Limitations on Deductibility of
Losses and Certain Expenses”, below).
Section 754 election. The
Fund intends to make the election permitted by section 754 of the Code, which
election is irrevocable without the consent of the IRS. The effect of this
election is that when a secondary market sale of Shares occurs, the Fund adjusts
the purchaser’s proportionate share of the tax basis of the Fund’s assets to
fair market value, as reflected in the price paid for the Shares, as if the
purchaser had directly acquired an interest in the Fund’s assets. The section
754 election is intended to eliminate disparities between a partner’s basis in
its partnership interest and its share of the tax bases of the partnership’s
assets, so that the partner’s allocable share of taxable gain or loss on a
disposition of an asset will correspond to its share of the appreciation or
depreciation in the value of the asset since it acquired its interest. Depending
on the price paid for Shares and the tax bases of the Fund’s assets at the time
of the purchase, the effect of the section 754 election on a purchaser of Shares
may be favorable or unfavorable. In order to make the appropriate basis
adjustments in a cost effective manner, the Fund will use certain simplifying
conventions and assumptions. In particular, the Fund will obtain information
regarding secondary market transactions in its Shares and use this information
to make adjustments to Shareholders’ basis in Fund assets. It is possible the
IRS could successfully assert that the conventions and assumptions applied are
improper and require different basis adjustments to be made, which could
adversely affect some Shareholders.
Section 1256 Contracts. Under
the Code, special rules apply to instruments constituting “section 1256
contracts.” A section 1256 contract is defined as including, in relevant part:
(1) a futures contract that is traded on or subject to the rules of a national
securities exchange which is registered with the SEC, a domestic board of trade
designated as a contract market by the CFTC, or any other board of trade or
exchange designated by the Secretary of the Treasury, and with respect to which
the amount required to be deposited and the amount that may be withdrawn depends
on a system of “marking to market”; and (2) a non-equity option traded on or
subject to the rules of a qualified board or exchange. Section 1256 contracts
held at the end of each taxable year are treated as if they were sold for their
fair market value on the last business day of the taxable year (i.e., are “marked to
market”). In addition, any gain or loss realized from a disposition, termination
or marking-to-market of a section 1256 contract is treated as long-term capital
gain or loss to the extent of 60% thereof, and as short-term capital gain or
loss to the extent of 40% thereof, without regard to the actual holding period
(“60-40 treatment”).
Many of
the Fund’s Soybean Futures Contracts will qualify as “section 1256 contracts”
under the Code. Although they are privately negotiated and not traded on an
exchange, Cleared Soybean Swaps should qualify as section 1256 contracts because
they are cleared through and generally subject to the rules of the CBOT (i.e., a qualified board or
exchange), including a rule requiring mark to market and margin deposits. Some
Other Soybean Interests that are cleared through a qualified board or exchange
will also constitute section 1256 contracts. Gain or loss recognized as a result
of the disposition, termination or marking-to-market of the Fund’s section 1256
contracts during a calendar month will be subject to 60-40 treatment and
allocated to Shareholders in accordance with the monthly allocation
convention.
Limitations on Deductibility of
Losses and Certain Expenses. A number of different provisions of the Code
may defer or disallow the deduction of losses or expenses allocated to
Shareholders by the Fund, including but not limited to those described
below.
A
Shareholder’s deduction of its allocable share of any loss of the Fund is
limited to the lesser of (1) the tax basis in its Shares or (2) in the case of a
Shareholder that is an individual or a closely held corporation, the amount
which the Shareholder is considered to have “at risk” with respect to the Fund’s
activities. In general, the amount at risk will be a Shareholder’s invested
capital. Losses in excess of the amount at risk must be deferred until years in
which the Fund generates additional taxable income against which to offset such
carryover losses or until additional capital is placed at risk.
Individuals
and other non-corporate taxpayers are permitted to deduct capital losses only to
the extent of their capital gains for the taxable year plus $3,000 of other
income. Unused capital losses can be carried forward and used to offset capital
gains in future years. In addition, a non-corporate taxpayer may elect to carry
back net losses on section 1256 contracts to each of the three preceding years
and use them to offset section 1256 contract gains in those years, subject to
certain limitations. Corporate taxpayers generally may deduct capital losses
only to the extent of capital gains, subject to special carryback and
carryforward rules.
Otherwise
deductible expenses incurred by non-corporate taxpayers constituting
“miscellaneous itemized deductions,” generally including investment-related
expenses (other than interest and certain other specified expenses), are
deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross
income for the year. Although the matter is not free from doubt, we believe
management fees the Fund pays to the Sponsor and other expenses of the Fund
constitute investment-related expenses subject to this miscellaneous itemized
deduction limitation, rather than expenses incurred in connection with a trade
or business, and will report these expenses consistent with that
interpretation.
Non-corporate
Shareholders generally may deduct “investment interest expense” only to the
extent of their “net investment income.” Investment interest expense of a
Shareholder will generally include any interest accrued by the Fund and any
interest paid or accrued on direct borrowings by a Shareholder to purchase or
carry its Shares, such as interest with respect to a margin account. Net
investment income generally includes gross income from property held for
investment (including “portfolio income” under the passive loss rules but not,
absent an election, long-term capital gains or certain qualifying dividend
income) less deductible expenses other than interest directly connected with the
production of investment income.
To the
extent that the Fund allocates losses or expenses to you that must be deferred
or are disallowed as a result of these or other limitations in the Code, you may
be taxed on income in excess of your economic income or distributions (if any)
on your Shares. As one example, you could be allocated and required to pay tax
on your share of interest income accrued by the Fund for a particular taxable
year, and in the same year allocated a share of a capital loss that you cannot
deduct currently because you have insufficient capital gains against which to
offset the loss. As another example, you could be allocated and required to pay
tax on your share of interest income and capital gain for a year, but be unable
to deduct some or all of your share of management fees and/or margin account
interest incurred by you with respect to your Shares. Shareholders are urged to
consult their own professional tax advisor regarding the effect of limitations
under the Code on their ability to deduct your allocable share of the Fund’s
losses and expenses.
Tax
Basis of Shares
A
Shareholder’s tax basis in its Shares is important in determining (1) the amount
of taxable gain it will realize on the sale or other disposition of its Shares,
(2) the amount of non-taxable distributions that it may receive from the Fund,
and (3) its ability to utilize its distributive share of any losses of the Fund
on its tax return. A Shareholder’s initial tax basis of its Shares will equal
its cost for the Shares plus its share of the Fund’s liabilities (if any) at the
time of purchase. In general, a Shareholder’s “share” of those liabilities will
equal the sum of (i) the entire amount of any otherwise nonrecourse liability of
the Fund as to which the Shareholder or an affiliate is the creditor (a “partner
nonrecourse liability”) and (ii) a pro rata share of any nonrecourse liabilities
of the Fund that are not partner nonrecourse liabilities as to any
Shareholder.
A
Shareholder’s tax basis in its Shares generally will be (1) increased by (a) its
allocable share of the Fund’s taxable income and gain and (b) any additional
contributions by the Shareholder to the Fund and (2) decreased (but not below
zero) by (a) its allocable share of the Fund’s tax deductions and losses and (b)
any distributions by the Fund to the Shareholder. For this purpose, an increase
in a Shareholder’s share of the Fund’s liabilities will be treated as a
contribution of cash by the Shareholder to the Fund and a decrease in that share
will be treated as a distribution of cash by the Fund to the Shareholder.
Pursuant to certain IRS rulings, a Shareholder will be required to maintain a
single, “unified” basis in all Shares that it owns. As a result, when a
Shareholder that acquired its Shares at different prices sells less than all of
its Shares, such Shareholder will not be entitled to specify particular Shares
(e.g., those with a
higher basis) as having been sold. Rather, it must determine its gain or loss on
the sale by using an “equitable apportionment” method to allocate a portion of
its unified basis in its Shares to the Shares sold.
Treatment of Fund
Distributions. If the Fund makes non-liquidating distributions to
Shareholders, such distributions generally will not be taxable to the
Shareholders for federal income tax purposes except to the extent that the sum
of (i) the amount of cash and (ii) the fair market value of marketable
securities distributed exceeds the Shareholder’s adjusted basis of its interest
in the Fund immediately before the distribution. Any cash distributions in
excess of a Shareholder’s tax basis generally will be treated as gain from the
sale or exchange of Shares.
Constructive Termination of the
Partnership. The Fund will be considered to have been terminated for tax
purposes if there is a sale or exchange of 50% or more of the total interests in
its Shares within a 12-month period. A termination would result in the closing
of the Fund’s taxable year for all Shareholders. In the case of a Shareholder
reporting on a taxable year other than a fiscal year ending December 31, the
closing of the Fund’s taxable year may result in more than 12 months of our
taxable income or loss being includable in its taxable income for the year of
termination. We would be required to make new tax elections after a termination.
A termination could result in tax penalties if we were unable to determine that
the termination had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation enacted before the
termination.
Tax Consequences
of Disposition of Shares
If a
Shareholder sells its Shares, it will recognize gain or loss equal to the
difference between the amount realized and its adjusted tax basis for the Shares
sold. A Shareholder’s amount realized will be the sum of the cash or the fair
market value of other property received plus its share of any Fund debt
outstanding.
Gain or
loss recognized by a Shareholder on the sale or exchange of Shares held for more
than one year will generally be taxable as long-term capital gain or loss;
otherwise, such gain or loss will generally be taxable as short-term capital
gain or loss. A special election is available under the Treasury Regulations
that allows Shareholders to identify and use the actual holding periods for the
Shares sold for purposes of determining whether the gain or loss recognized on a
sale of Shares will give rise to long-term or short-term capital gain or loss.
It is expected that most Shareholders will be eligible to elect, and generally
will elect, to identify and use the actual holding period for Shares sold. If a
Shareholder fails to make the election or is not able to identify the holding
periods of the Shares sold, the Shareholder will have a split holding period in
the Shares sold. Under such circumstances, a Shareholder will be required to
determine its holding period in the Shares sold by first determining the portion
of its entire interest in the Fund that would give rise to long-term capital
gain or loss if its entire interest were sold and the portion that would give
rise to short-term capital gain or loss if the entire interest were sold. The
Shareholder would then treat each Share sold as giving rise to long-term capital
gain or loss and short-term capital gain or loss in the same proportions as if
it had sold its entire interest in the Fund.
Under
Section 751 of the Code, a portion of a Shareholder’s gain or loss from the sale
of Shares (regardless of the holding period for such Shares), will be separately
computed and taxed as ordinary income or loss to the extent attributable to
“unrealized receivables” or “inventory” owned by the Fund. The term “unrealized
receivables” includes, among other things, market discount bonds and short-term
debt instruments to the extent such items would give rise to ordinary income if
sold by the Fund.
If some
or all of a Shareholder’s Shares are lent by its broker or other agent to a
third party — for example, for use by the third party in covering a short sale —
the Shareholder may be considered as having made a taxable disposition of the
loaned Shares, in which case —
|
•
|
the
Shareholder may recognize taxable gain or loss to the same extent as if it
had sold the Shares for cash;
|
|
•
|
any
of the income, gain, loss or deduction allocable to those Shares during
the period of the loan is not reportable by the Shareholder for tax
purposes; and
|
|
•
|
any
distributions the Shareholder receives with respect to the Shares under
the loan agreement will be fully taxable to the Shareholder, most likely
as ordinary income.
|
Shareholders
desiring to avoid these and other possible consequences of a deemed disposition
of their Shares should consider modifying any applicable brokerage account
agreements to prohibit the lending of their Shares.
Other
Tax Matters
Information
Reporting. The Fund provides tax information to the beneficial owners of Shares
and to the IRS. Shareholders of the Fund are treated as partners for federal
income tax purposes. Accordingly, the Fund will furnish Shareholders each year
with tax information on IRS Schedule K-1 (Form 1065), which will be used by the
Shareholders in completing their tax returns. The IRS has ruled that assignees
of partnership interests who have not been admitted to a partnership as partners
but who have the capacity to exercise substantial dominion and control over the
assigned partnership interests will be considered partners for federal income
tax purposes. On the basis of this ruling, except as otherwise provided herein,
we will treat as a Shareholder any person whose shares are held on their behalf
by a broker or other nominee if that person has the right to direct the nominee
in the exercise of all substantive rights attendant to the ownership of the
Shares.
Persons
who hold an interest in the Fund as a nominee for another person are required to
furnish to us the following information: (1) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (2) whether the
beneficial owner is (a) a person that is not a U.S. person, (b) a foreign
government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (c) a tax-exempt entity; (3) the
number and a description of Shares acquired or transferred for the beneficial
owner; and (4) certain information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales. Brokers and
financial institutions are required to furnish additional information, including
whether they are U.S. persons and certain information on Shares they acquire,
hold or transfer for their own account. A penalty of $50 per failure, up to a
maximum of $100,000 per calendar year, is imposed by the Code for failure to
report such information to the Fund. The nominee is required to supply the
beneficial owner of the Shares with the information furnished to the
Fund.
Partnership
Audit Procedures. The IRS may audit the federal income tax returns filed by the
Fund. Adjustments resulting from any such audit may require each Shareholder to
adjust a prior year’s tax liability and could result in an audit of the
Shareholder’s own return. Any audit of a Shareholder’s return could result in
adjustments of non-partnership items as well as Fund items. Partnerships are
generally treated as separate entities for purposes of federal tax audits,
judicial review of administrative adjustments by the IRS, and tax settlement
proceedings. The tax treatment of partnership items of income, gain, loss and
deduction are determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with the partners. The Code
provides for one partner to be designated as the “tax matters partner” and to
represent the partnership purposes of these proceedings. The Trust Agreement
appoints the Sponsor as the tax matters partner of the Fund.
Tax
Shelter Disclosure Rules. In certain circumstances the Code and Treasury
Regulations require that the IRS be notified of transactions through a
disclosure statement attached to a taxpayer’s United States federal income tax
return. These disclosure rules may apply to transactions irrespective of whether
they are structured to achieve particular tax benefits. They could require
disclosure by the Trust or Shareholders if a Shareholder incurs a loss in excess
a specified threshold from a sale or redemption of its Shares and possibly in
other circumstances. While these rules generally do not require disclosure of a
loss recognized on the disposition of an asset in which the taxpayer has a
“qualifying basis” (generally a basis equal to the amount of cash paid by the
taxpayer for such asset), they apply to a loss recognized with respect to
interests in a pass-through entity, such as the Shares, even if the taxpayer’s
basis in such interests is equal to the amount of cash it paid. In addition,
significant monetary penalties may be imposed in connection with a failure to
comply with these reporting requirements. Investors should consult their own tax
advisor concerning the application of these reporting requirements to their
specific situation.
Tax-Exempt
Organizations. Subject to numerous exceptions, qualified retirement plans and
individual retirement accounts, charitable organizations and certain other
organizations that otherwise are exempt from federal income tax (collectively
“exempt organizations”) nonetheless are subject to the tax on unrelated business
taxable income (“UBTI”). Generally, UBTI means the gross income derived by an
exempt organization from a trade or business that it regularly carries on, the
conduct of which is not substantially related to the exercise or performance of
its exempt purpose or function, less allowable deductions directly connected
with that trade or business. If the Fund were to regularly carry on (directly or
indirectly) a trade or business that is unrelated with respect to an exempt
organization Shareholder, then in computing its UBTI, the Shareholder must
include its share of (1) the Fund’s gross income from the unrelated trade or
business, whether or not distributed, and (2) the Fund’s allowable deductions
directly connected with that gross income.
UBTI
generally does not include dividends, interest, or payments with respect to
securities loans and gains from the sale of property (other than property held
for sale to customers in the ordinary course of a trade or business).
Nonetheless, income on, and gain from the disposition of, “debt-financed
property” is UBTI. Debt-financed property generally is income-producing property
(including securities), the use of which is not substantially related to the
exempt organization’s tax-exempt purposes, and with respect to which there is
“acquisition indebtedness” at any time during the taxable year (or, if the
property was disposed of during the taxable year, the 12-month period ending
with the disposition). Acquisition indebtedness includes debt incurred to
acquire property, debt incurred before the acquisition of property if the debt
would not have been incurred but for the acquisition, and debt incurred
subsequent to the acquisition of property if the debt would not have been
incurred but for the acquisition and at the time of acquisition the incurrence
of debt was foreseeable. The portion of the income from debt-financed property
attributable to acquisition indebtedness is equal to the ratio of the average
outstanding principal amount of acquisition indebtedness over the average
adjusted basis of the property for the year. The Fund currently does not
anticipate that it will borrow money to acquire investments; however, the Fund
cannot be certain that it will not borrow for such purpose in the future. In
addition, an exempt organization Shareholder that incurs acquisition
indebtedness to purchase its Shares in the Fund may have UBTI.
The
federal tax rate applicable to an exempt organization Shareholder on its UBTI
generally will be either the corporate or trust tax rate, depending upon the
Shareholder’s form of organization. The Fund may report to each such Shareholder
information as to the portion, if any, of the Shareholder’s income and gains
from the Fund for any year that will be treated as UBTI; the calculation of that
amount is complex, and there can be no assurance that the Fund’s calculation of
UBTI will be accepted by the IRS. An exempt organization Shareholder will be
required to make payments of estimated federal income tax with respect to its
UBTI.
Regulated
Investment Companies. Interests in and income from “qualified publicly traded
partnerships” satisfying certain gross income tests are treated as qualifying
assets and income, respectively, for purposes of determining eligibility for
regulated investment company (“RIC”) status. A RIC may invest up to 25% of its
assets in interests in a qualified publicly traded partnership. The
determination of whether a publicly traded partnership such as the Fund is a
qualified publicly traded partnership is made on an annual basis. The Fund
expects to be a qualified publicly traded partnership in each of its taxable
years. However, such qualification is not assured.
Non-U.S.
Shareholders
Generally,
non-U.S. persons who derive U.S. source income or gain from investing or
engaging in a U.S. business are taxable on two categories of income. The first
category consists of amounts that are fixed, determinable, annual and periodic
income, such as interest, dividends and rent that are not connected with the
operation of a U.S. trade or business (“FDAP”). The second category is income
that is effectively connected with the conduct of a U.S. trade or business
(“ECI”). FDAP income (other than interest that is considered “portfolio
interest;” as discussed below) is generally subject to a 30% withholding tax,
which may be reduced for certain categories of income by a treaty between the
U.S. and the recipient’s country of residence. In contrast, ECI is generally
subject to U.S. tax on a net basis at graduated rates upon the filing of a U.S.
tax return. Where a non-U.S. person has ECI as a result of an investment in a
partnership, the ECI is subject to a withholding tax at a rate of 35% for both
individual and corporate Shareholders.
Withholding
on Allocations and Distributions. The Code provides that a non-U.S. person who
is a partner in a partnership that is engaged in a U.S. trade or business during
a taxable year will also be considered to be engaged in a U.S. trade or business
during that year. Classifying an activity by a partnership as an investment or
an operating business is a factual determination. Under certain safe harbors in
the Code, an investment fund whose activities consist of trading in stocks,
securities, or commodities for its own account generally will not be considered
to be engaged in a U.S. trade or business unless it is a dealer is such stocks,
securities, or commodities. This safe harbor applies to investments in
commodities only if the commodities are of a kind customarily dealt in on an
organized commodity exchange and if the transaction is of a kind customarily
consummated at such place. Although the matter is not free from doubt, the Fund
believes that the activities directly conducted by the Fund do not result in the
Fund being engaged in a trade or business within in the United States. However,
there can be no assurance that the IRS would not successfully assert that the
Fund’s activities constitute a U.S. trade or business.
In the
event that the Fund’s activities were considered to constitute a U.S. trade or
business, the Fund would be required to withhold at the highest rate specified
in Code section 1 (currently 35%) on allocations of our income to Non-U.S.
Shareholders. A Non-U.S. Shareholder with ECI will generally be required to file
a U.S. federal income tax return, and the return will provide the Non-U.S.
Shareholder with the mechanism to seek a refund of any withholding in excess of
such Shareholder’s actual U.S. federal income tax liability. Any amount withheld
by the Fund will be treated as a distribution to the Non-U.S.
Shareholder.
If the
Fund is not treated as engaged in a U.S. trade or business, a Non-U.S.
Shareholder may nevertheless be treated as having FDAP income, which would be
subject to a 30% withholding tax (possibly subject to reduction by treaty), with
respect to some or all of its distributions from the Fund or its allocable share
of Fund income. Amounts withheld on behalf of a Non-U.S. Shareholder will be
treated as being distributed to such Shareholder.
To the
extent any interest income allocated to a Non-U.S. Shareholder that otherwise
constitutes FDAP is considered “portfolio interest,” neither the allocation of
such interest income to the non-U.S. Shareholder nor a subsequent distribution
of such interest income to the non-U.S. Shareholder will be subject to
withholding, provided that the Non-U.S. Shareholder is not otherwise engaged in
a trade or business in the U.S. and provides the Fund with a timely and properly
completed and executed IRS Form W-8BEN or other applicable form. In general,
portfolio interest is interest paid on debt obligations issued in registered
form, unless the recipient owns 10% or more of the voting power of the
issuer.
The Trust
expects that most of the Fund’s interest income will qualify as portfolio
interest. In order for the Fund to avoid withholding on any interest income
allocable to Non-U.S. Shareholders that would qualify as portfolio interest, it
will be necessary for all Non-U.S. Shareholders to provide the Fund with a
timely and properly completed and executed Form W-8BEN (or other applicable
form).
Gain from
Sale of Shares. Gain from the sale or exchange of Shares may be taxable to a
Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident alien
individual who is present in the U.S. for 183 days or more during the taxable
year. In such case, the nonresident alien individual will be subject to a 30%
withholding tax on the amount of such individual’s gain.
Prospective
Non-U.S. Shareholders should consult their own tax advisor regarding these and
other tax issues unique to Non-U.S. Shareholders.
Backup
Withholding
The Fund
may be required to withhold U.S. federal income tax (“backup withholding”) at a
rate of 28% from payments to: (1) any Shareholder who fails to furnish the Fund
with his, her or its correct taxpayer identification number or a certificate
that the Shareholder is exempt from backup withholding, and (2) any Shareholder
with respect to whom the IRS notifies the Fund that the Shareholder has failed
to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect. Backup withholding is not an additional tax
and may be returned or credited against a taxpayer’s regular federal income tax
liability if appropriate information is provided to the IRS.
Other
Tax Considerations
In
addition to federal income taxes, Shareholders may be subject to other taxes,
such as state and local income taxes, unincorporated business taxes, business
franchise taxes, and estate, inheritance or intangible taxes that may be imposed
by the various jurisdictions in which the Fund does business or owns property or
where the Shareholders reside. Although an analysis of those various taxes is
not presented here, each prospective Shareholder should consider their potential
impact on its investment in the Fund. It is each Shareholder’s responsibility to
file the appropriate U.S. federal, state, local, and foreign tax returns.
Sutherland has not provided an opinion concerning any aspects of state, local or
foreign tax or U.S. federal tax other than those U.S. federal income tax issues
discussed herein.
Additionally,
under the recently-enacted Hiring Incentives to Restore Employment Act (“Hire
Act”), Congress modified certain rules with respect to information reporting and
certification requirements, in particular with respect to “U.S. accounts”
maintained at foreign financial institutions. Congress delegated broad
authority to the United States Treasury Department to promulgate regulations to
implement the new withholding and reporting regime. Prospective
investors in Shares should consult their tax advisors regarding elements of the
Hire Act that may be relevant to an investment in Shares.
Investment
By ERISA Accounts
General
Most
employee benefit plans and individual retirement accounts (“IRAs”) are subject
to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or
the Code, or both. This section discusses certain considerations that
arise under ERISA and the Code that a fiduciary of an employee benefit plan as
defined in ERISA or a plan as defined in Section 4975 of the Code who has
investment discretion should take into account before deciding to invest the
plan’s assets in the Fund. Employee benefit plans under ERISA and
plans under the Code are collectively referred to below as “plans,” and
fiduciaries with investment discretion are referred to below as “plan
fiduciaries.”
This
summary is based on the provisions of ERISA and the Code as of the date
hereof. This summary is not intended to be complete, but only to
address certain questions under ERISA and the Code likely to be raised by your
advisors. The summary does not include state or local
law.
Potential
plan investors are urged to consult with their own professional advisors
concerning the appropriateness of an investment in the Fund and the manner in
which Shares should be purchased.
Special
Investment Considerations
Each plan
fiduciary must consider the facts and circumstances that are relevant to an
investment in the Fund, including the role that an investment in the Fund would
play in the plan’s overall investment portfolio. Each plan fiduciary,
before deciding to invest in the Fund, must be satisfied that the investment is
prudent for the plan, that the investments of the plan are diversified so as to
minimize the risk of large losses, and that an investment in the Fund complies
with the terms of the plan.
The
Fund and Plan Assets
A
regulation issued under ERISA contains rules for determining when an investment
by a plan in an equity interest of a statutory trust will result in the
underlying assets of the statutory trust being deemed plan assets for purposes
of ERISA and Section 4975 of the Code. Those rules provide that
assets of a statutory trust will not be plan assets of a plan that purchases an
equity interest in the statutory trust if the equity interest purchased is a
publicly-offered security. If the underlying assets of a statutory
trust are considered to be assets of any plan for purposes of ERISA or Section
4975 of the Code, the operations of that trust would be subject to and, in some
cases, limited by the provisions of ERISA and Section 4975 of the
Code.
The
publicly-offered security exception described above applies if the equity
interest is a security that is:
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(1)
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freely
transferable (determined based on the relevant facts and
circumstances);
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(2)
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part
of a class of securities that is widely held (meaning that the class of
securities is owned by 100 or more investors independent of the issuer and
of each other); and
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(3)
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either
(a) part of a class of securities registered under Section 12(b) or 12(g)
of the Exchange Act or (b) sold to the plan as part of a public offering
pursuant to an effective registration statement under the 1933 Act and the
class of which such security is a part is registered under the Exchange
Act within 120 days (or such later time as may be allowed by the SEC)
after the end of the fiscal year of the issuer in which the offering of
such security occurred.
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The plan
asset regulations under ERISA state that the determination of whether a security
is freely transferable is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of an offering
in which the minimum investment is $10,000 or less, the following requirements,
alone or in combination, ordinarily will not affect a finding that the security
is freely transferable: (1) a requirement that no transfer or assignment of the
security or rights relating to the security be made that would violate any
federal or state law; and (2) a requirement that no transfer or assignment be
made without advance written notice given to the entity that issued the
security.
The
Sponsor believes that the conditions described above are satisfied with respect
to the Shares. The Sponsor believes that the Shares therefore
constitute publicly-offered securities, and the underlying assets of the Fund
should not be considered to constitute plan assets of any plan that purchases
Shares.
Prohibited
Transactions
ERISA and
the Code generally prohibit certain transactions involving a plan and persons
who have certain specified relationships to the plan. In general,
Shares may not be purchased with the assets of a plan if the Sponsor, the
clearing brokers, the trading advisors (if any), or any of their affiliates,
agents or employees either:
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·
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exercise
any discretionary authority or discretionary control with respect to
management of the plan;
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·
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exercise
any authority or control with respect to management or disposition of the
assets of the plan;
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·
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render
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of the
plan;
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·
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have
any authority or responsibility to render investment advice with respect
to any monies or other property of the plan;
or
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·
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have
any discretionary authority or discretionary responsibility in the
administration of the plan.
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Also, a
prohibited transaction may occur under ERISA or the Code when circumstances
indicate that (1) the investment in Shares is made or retained for the purpose
of avoiding application of the fiduciary standards of ERISA, (2) the investment
in Shares constitutes an arrangement under which the Fund is expected to engage
in transactions that would otherwise be prohibited if entered into directly by
the plan purchasing the Shares, (3) the investing plan, by itself, has the
authority or influence to cause the Fund to engage in such transactions, or (4)
a person who is prohibited from transacting with the investing plan may, but
only with the aid of certain of its affiliates and the investing plan, cause the
Fund to engage in such transactions with such person.
Special
IRA Rules
IRAs are
not subject to ERISA’s fiduciary standards, but are subject to their own rules,
including the prohibited transaction rules of Section 4975 of the Code, which
generally mirror ERISA’s prohibited transaction rules. For example,
IRAs are subject to special custody rules and must maintain a qualifying IRA
custodial arrangement separate and distinct from the Fund and its custodial
arrangement. If a separate qualifying custodial arrangement is not
maintained, an investment in the Shares will be treated as a distribution from
the IRA. Second, IRAs are prohibited from investing in certain
commingled investments, and the Sponsor makes no representation regarding
whether an investment in Shares is an inappropriate commingled investment for an
IRA. Third, in applying the prohibited transaction provisions of
Section 4975 of the Code, in addition to the rules summarized above, the
individual for whose benefit the IRA is maintained is also treated as the
creator of the IRA. For example, if the owner or beneficiary of an
IRA enters into any transaction, arrangement, or agreement involving the assets
of his or her IRA to benefit the IRA owner or beneficiary (or his or her
relatives or business affiliates) personally, or with the understanding that
such benefit will occur, directly or indirectly, such transaction could give
rise to a prohibited transaction that is not exempted by any available
exemption. Moreover, in the case of an IRA, the consequences of a
non-exempt prohibited transaction are that the IRA’s assets will be treated as
if they were distributed, causing immediate taxation of the assets (including
any early distribution penalty tax applicable under Section 72 of the Code), in
addition to any other fines or penalties that may apply.
Exempt
Plans
Certain
employee benefit plans may be governmental plans or church
plans. Governmental plans and church plans are generally not subject
to ERISA, nor do the prohibited transaction provisions described above apply to
them. These plans are, however, subject to prohibitions against
certain related-party transactions under Section 503 of the Code, which are
similar to the prohibited transaction rules described above. In
addition, the fiduciary of any governmental or church plan must consider any
applicable state or local laws and any restrictions and duties of common law
imposed upon the plan.
No view
is expressed as to whether an investment in the Fund (and any continued
investment in the Fund), or the operation and administration of the fund, is
appropriate or permissible for any governmental plan or church plan under Code
Section 503, or under any state, county, local or other law relating to that
type of plan.
Allowing
an investment in the Fund is not to be construed as a representation by the
Trust, the Fund, the Sponsor, any trading advisor, any clearing broker, the
Marketing Agent or legal counsel or other advisors to such parties or any other
party that this investment meets some or all of the relevant legal requirements
with respect to investments by any particular plan or that this investment is
appropriate for any such particular plan. The person with investment
discretion should consult with the plan’s attorney and financial advisors as to
the propriety of an investment in the Fund in light of the circumstances of the
particular plan, current tax law and ERISA.
INFORMATION
YOU SHOULD KNOW
This
prospectus contains information you should consider when making an investment
decision about the Shares. You should rely only on the information
contained in this prospectus or any applicable prospectus
supplement. None of the Trust, the Fund or the Sponsor has authorized
any person to provide you with different information and, if anyone provides you
with different or inconsistent information, you should not rely on
it. This prospectus is not an offer to sell the Shares in any
jurisdiction where the offer or sale of the Shares is not
permitted.
The
information contained in this prospectus was obtained from us and other sources
believed by us to be reliable.
You
should disregard anything we said in an earlier document that is inconsistent
with what is included in this prospectus or any applicable prospectus
supplement. Where the context requires, when we refer to this
“prospectus,” we are referring to this prospectus and (if applicable) the
relevant prospectus supplement.
You
should not assume that the information in this prospectus or any applicable
prospectus supplement is current as of any date other than the date on the front
page of this prospectus or the date on the front page of any applicable
prospectus supplement.
We
include cross references in this prospectus to captions in these materials where
you can find further related discussions. The table of contents tells
you where to find these captions.
WHERE
YOU CAN FIND MORE INFORMATION
The Trust
has filed on behalf of the Fund a registration statement on Form S-1 with the
SEC under the 1933 Act. This prospectus does not contain all of the
information set forth in the registration statement (including the exhibits to
the registration statement), parts of which have been omitted in accordance with
the rules and regulations of the SEC. For further information about
the Trust, the Fund or the Shares, please refer to the registration statement,
which you may inspect, without charge, at the public reference facilities of the
SEC at the below address or online at www.sec.gov, or obtain at prescribed rates
from the public reference facilities of the SEC at the below
address. Information about the Trust, the Fund and the Shares can
also be obtained from the Fund’s website, which is www.teucriumsoybeanfund.com. The
Fund’s website address is only provided here as a convenience to you and the
information contained on or connected to the website is not part of this
prospectus or the registration statement of which this prospectus is
part. The Trust is subject to the informational requirements of the
Exchange Act and will file certain reports and other information with the SEC
under the Exchange Act. The Sponsor will file an updated prospectus
annually for the Fund pursuant to the 1933 Act. The reports and other
information can be inspected at the public reference facilities of the SEC
located at 100 F Street, N.E., Washington, DC 20549 and online at www.sec.gov.
You may also obtain copies of such material from the public reference facilities
of the SEC at 100 F Street, NE, Washington, D.C. 20549, at prescribed rates. You
may obtain more information concerning the operation of the public reference
facilities of the SEC by calling the SEC at 1-800-SEC-0330 or visiting online at
www.sec.gov.
TEUCRIUM
TRADING, LLC — INDEX TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
100
|
|
|
Consolidated
Statement of Financial Condition
|
101
|
|
|
Consolidated
Statement of Operations |
102
|
|
|
Consolidated
Statement of Changes in Members’ Equity
|
103
|
|
|
Consolidated
Statement of Cash Flows
|
104
|
|
|
Notes
to Consolidated Financial Statements
|
105
|
Report of
Independent Registered Public Accounting Firm
To the
Members of
Teucrium
Trading, LLC
We have
audited the accompanying consolidated statement of financial condition of
Teucrium Trading, LLC ( a corporation in the development stage ) (the
“Company”) as of December 31, 2009, and the related consolidated statements of
operations, changes in members’ equity, and cash flows for the period from
September 1, 2009 (date of inception) to December 31, 2009. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Teucrium Trading, LLC as of
December 31, 2009, and the results of its operations, changes in members’ equity
and its cash flows for the period from September 1, 2009 (date of inception) to
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Rothstein, Kass & Company,
P.C.
Roseland,
New Jersey
March
22, 2010
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
|
|
March 31, 2010
(unaudited)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
642,251 |
|
|
$ |
847,433 |
|
Prepaid
Expenses
|
|
|
11,552 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
653,803 |
|
|
$ |
853,433 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued
Expenses
|
|
$ |
323,980 |
|
|
$ |
163,040 |
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
|
|
379,823 |
|
|
|
740,393 |
|
Less
Subscription Receivable
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
|
|
|
329,823 |
|
|
|
690,393 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Members' Equity
|
|
$ |
653,803 |
|
|
$ |
853,433 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
For
the three months ended March 31, 2010
|
|
|
From
Inception (September 1, 2009) through December 31,
2009
|
|
|
From
Inception (September
1,
2009) through March 31, 2010
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
397 |
|
|
$ |
- |
|
|
$ |
397 |
|
Change
in Unrealized Gain/Loss
|
|
|
73 |
|
|
|
- |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Income
|
|
|
470 |
|
|
|
- |
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit-based
compensation
|
|
|
86,000 |
|
|
|
- |
|
|
|
86,000 |
|
Salaries,
Wages and Benefits
|
|
|
82,675 |
|
|
|
41,118 |
|
|
|
123,793 |
|
Business
Permits and Licenses
|
|
|
585 |
|
|
|
117,580 |
|
|
|
118,165 |
|
Professional
Fees
|
|
|
254,794 |
|
|
|
816,374 |
|
|
|
1,071,168 |
|
General
and Administrative
|
|
|
22,986 |
|
|
|
11,035 |
|
|
|
34,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
447,040 |
|
|
|
986,107 |
|
|
|
1,433,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(446,570 |
) |
|
$ |
(986,107 |
) |
|
$ |
(1,432,677 |
) |
The
accompanying notes are an integral part of this consolidated financial
statement.
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF CHANGES IN MEMBERS' EQUITY
For
the Period from Inception (September 31, 2009) through
December
31, 2009 and for the Three Months Ended March 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B-1
|
|
Class
B-2
|
|
|
|
|
|
|
|
Members'
|
|
|
|
|
|
|
Per
Unit
|
|
|
Equity
|
|
|
Equity
|
|
Equity
|
|
|
|
|
Subscription
|
|
|
Equity
|
|
|
|
Units
|
|
|
Value
|
|
|
Total
|
|
|
Total
|
|
Total
|
|
Subtotal
|
|
|
Receivable
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
at Inception
|
|
|
|
|
|
|
|
$ |
- |
|
|
$ |
- |
|
$ |
-
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Contributed through Note Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B-1 Units - issued October 26, 2009
|
|
|
38.961 |
|
|
$ |
5,775.01 |
|
|
|
|
|
|
|
225,000 |
|
|
|
|
|
225,000 |
|
|
|
(50,000 |
) |
|
|
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Contributed for Member Interest and Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units - issued August 12, 2009
|
|
|
1000.000 |
|
|
|
1.50 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B-1 Units - issued October 26, 2009
|
|
|
259.740 |
|
|
|
5,775.01 |
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
(882 |
) |
|
|
(985,225 |
) |
|
|
|
|
(986,107 |
) |
|
|
|
|
|
|
(986,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2009
|
|
|
1,298.701 |
|
|
|
|
|
|
|
618 |
|
|
|
739,775 |
|
|
|
|
|
740,393 |
|
|
|
(50,000 |
) |
|
|
690,393 |
|
Class
B-2 Units- issued February 11, 2010 (Unaudited) |
|
|
100.000 |
|
|
|
860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss (Unaudited) |
|
|
|
|
|
|
|
|
|
|
(352 |
) |
|
|
(422,221 |
) |
|
(23,997
|
) |
|
(446,570 |
) |
|
|
|
|
|
|
(446,570 |
) |
Balances,
March 31, 2010 (Unaudited) |
|
|
1,398.701 |
|
|
|
|
|
|
$ |
266 |
|
|
$ |
317,554 |
|
$ |
|
|
$ |
379,823 |
|
|
$ |
(50,000 |
) |
|
$ |
329,823 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
For
the three months ended March 31, 2010
|
|
|
From
Inception (September 1, 2009) through December 31,
2009
|
|
|
From
Inception (September
1,
2009) through March 31, 2010
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(446,570 |
) |
|
$ |
(986,107 |
) |
|
$ |
(1,432,677 |
) |
Adjustments
to reconcile net loss to net cash used in
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit-based
compensation
|
|
|
86,000 |
|
|
|
|
|
|
|
86,000 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in Prepaid Expenses
|
|
|
(5,551 |
) |
|
|
(6,000 |
) |
|
|
(11,551 |
) |
Increase
in Accrued Expenses
|
|
|
160,940 |
|
|
|
163,040 |
|
|
|
323,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(205,181 |
) |
|
|
(829,067 |
) |
|
|
(1,034,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Convertible Debt
|
|
|
- |
|
|
|
175,000 |
|
|
|
175,000 |
|
Proceeds
from Sale of Member Equity and Option
|
|
|
- |
|
|
|
1,501,500 |
|
|
|
1,501,500 |
|
Net
cash provided by financing activities
|
|
|
- |
|
|
|
1,676,500 |
|
|
|
1,676,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
(205,181 |
) |
|
|
847,433 |
|
|
|
642,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
beginning of period
|
|
|
847,433 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
end of period
|
|
$ |
642,252 |
|
|
$ |
847,433 |
|
|
$ |
642,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt into members' equity (including
$50,000
which had not been received by the company)
|
|
$ |
- |
|
|
$ |
225,000 |
|
|
$ |
225,000 |
|
Issuance
of B-2 units
|
|
$ |
86,000 |
|
|
|
- |
|
|
$ |
86,000 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization and Operation
Teucrium
Trading, LLC, (the “Company”), a Delaware limited liability company, formed on
July 28, 2009 and began operations on September 1, 2009. The
principal office is located at 232 Hidden Lake Road, Brattleboro, Vermont
05301. The Company is registered as a commodity pool operator (“CPO”)
with the Commodity Futures Trading Commission (“CFTC”) and became a member of
the National Futures Association (“NFA”) on November 10, 2009.
The
Company is solely responsible for the management and conducts or directs the
conduct of the business of the Teucrium Commodity Trust (the “Trust”), a
Delaware statutory trust, and any other series of the Trust that may from time
to time be established and designated by the Company. Teucrium Corn Fund (the
“Fund”) is a commodity pool that is a series of the Trust.
The
Company is required to oversee the purchase and sale of Shares by Authorized
Purchasers (one that
purchases or redeems creation baskets or redemption baskets, respectively, from
or to the Fund), and to manage the Fund’s investments, including to evaluate the
credit risk of futures commission merchants and swap counterparties and to
review daily positions and margin/collateral requirements.
The
Company has the power to enter into agreements as may be necessary or
appropriate for the offer and sale of the Fund’s units and the conduct of the
Trust’s activities.
The
Company, together with the Fund, entered into marketing agent agreements with
ALPS Distributors, Inc. (“ALPS”), a Colorado corporation, whereby ALPS provides
certain marketing services for the Funds as outlined in their respective
agreements.
Subsequent
Events
The
audited financial statements for the period from Inception (September 1, 2009)
through December 31, 2009 were approved by management and available for issuance
on March 22, 2010. Subsequent events related to the audited financial statements
have been evaluated through this date.
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the Company and the Trust. All
material inter-company transactions and balances have been eliminated in the
consolidation.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements for the three
months ended March 31, 2010 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and were prepared on the
same basis as the consolidated financial statements for the period ended
December 31, 2009. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the information for this interim period, have been
made. The operations for such interim period are not necessarily
indicative of the operations for the full year.
Development
Stage Company
The
Company is considered to be in the development stage as defined by U.S.
Generally Accepted Accounting Principles (“GAAP”) and subject to the reporting
requirements associated therewith.
Revenue
Recognition
The
Company will receive a fee as compensation for services performed under the
Trust agreement. The Company’s fee will accrue daily and will be paid
monthly at an annual rate of 1.00% of the average daily net assets of the
Fund. The Company will receive no compensation from the Fund other
than such fee. The Fund is also responsible for other ongoing fees,
costs and expenses of its operations, including brokerage fees, SEC (“Securities
and Exchange Commission”) and the Financial Industry Regulatory Authority
(“FINRA”) registration fees and legal, printing, accounting, custodial,
administration and transfer agency costs. The Company has borne or will bear the
costs and expenses related to the initial offering and sale of
units.
Calculation
of Net Asset Value
The
Fund will calculate its net asset value on each trading day by taking the
current market value of its total assets, subtracting any liabilities, and
dividing the amount by the total number of its units issued and outstanding. The
Fund will use the Chicago Board of Trade closing price on that day for contracts
held on the Chicago Board of Trade.
Additions and
Redemptions
Authorized
purchasers may purchase creation baskets of the Fund only in blocks of 100,000
units equal to the net asset value of the units calculated shortly after the
close of the core trading session on the NYSE (“New York Stock Exchange”) Arca
on the day the order is placed. Authorized purchasers may redeem units from the
Fund only in blocks of 100,000 units called “Redemption Baskets”. The amount of
the redemption proceeds for a Redemption Basket will be equal to the net asset
value of the Fund’s units in the Redemption Basket as of the end of each
business day.
The
Fund will receive or pay the proceeds from units sold or redeemed within three
business days after the trade-date of the purchase or redemption. The amounts
due from authorized purchasers will be reflected in the Fund’s statement of
financial condition as receivables for units sold, and amounts payable to
authorized purchasers upon redemption are reflected as payable for units
redeemed.
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income
Taxes
The
Company does not record a provision for income taxes because the partners report
their share of the Company’s income or loss on their income tax
returns. The financial statements reflect the Company’s transactions
without adjustment, if any, required for income tax purposes.
In
accordance with GAAP, the Company is required to determine whether a tax
position is more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The Company files an income tax return in the U.S. federal
jurisdiction, and may file income tax returns in various U.S. states and foreign
jurisdictions. The Company is subject to income tax examinations by
major taxing authorities for all tax years since inception. The tax benefit
recognized is measured as the largest amount of benefit that has a greater than
fifty percent likelihood of being realized upon ultimate
settlement. De-recognition of a tax benefit previously recognized
results in the Company recoding a tax liability that reduces net
assets. This policy has been applied to all existing tax positions
upon the Company’s initial adoption for the period ended December 31,
2009. Based on its analysis, the Company has determined that the
adoption of this policy did not have a material impact on the Company’s
financial statements upon adoption. However, the Company’s
conclusions regarding this policy may be subject to review and adjustment at a
later date based on factors including, but not limited to, on-going analysis of
and changes to tax laws, regulations, and interpretations
thereof. The Company recognizes interest accrued related to
unrecognized tax benefits and penalties related to unrecognized tax benefits in
income tax fees payable, if assessed. No interest expense or
penalties have been recognized as of and for the periods ended March 31, 2010
(unaudited) and December 31, 2009.
Offering
Costs
The
Company expenses all initial offering costs associated with the registration of
the Fund. Costs include, but are not limited to, legal fees pertaining to the
Fund’s units offered for sale, SEC and state registration fees, initial fees
paid to be listed on an exchange and underwriting and other similar costs. The
initial offering and organization costs incurred to start the Fund will be borne
by the Company and not be charged to the Fund.
Cash
Equivalents
Cash
equivalents are highly-liquid investments with original maturity dates of three
months or less. The Company reported its cash equivalents in the
Consolidated Statement of Financial Condition at market value, or at carrying
amounts that approximate fair value, because of their highly-liquid nature and
short-term maturities. The Company has a substantial portion of its assets on
deposit with banks. Assets deposited with the bank may, at times, exceed
federally insured limits. The Company had a balance of $202,129
(unaudited) and $183,167 in money market funds at March 31, 2010 and December
31, 2009, respectively; these balances are included in cash and cash equivalents
on the Consolidated Statement of Financial Condition.
Valuation
of Cash Equivalents at Fair Value - Definition and Hierarchy
In
accordance with GAAP, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement
date.
In
determining fair value, the Fund uses various valuation approaches. In
accordance with GAAP, a fair value hierarchy for inputs is used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are those that market participants would use
in pricing the asset or liability based on market data obtained from sources
independent of the Fund. Unobservable inputs reflect the Fund’s
assumptions about the inputs market participants would use in pricing the asset
or liability developed based on the best information available in the
circumstances. The fair value hierarchy is categorized into three levels
based on the inputs as follows:
Level 1 - Valuations based on
unadjusted quoted prices in active markets for identical assets or liabilities
that the Fund has the ability to access. Valuation adjustments and block
discounts are not applied to Level 1 securities. Since valuations are
based on quoted prices that are readily and regularly available in an active
market, valuation of these securities does not entail a significant degree of
judgment.
Level 2 - Valuations based on
quoted prices in markets that are not active or for which all significant inputs
are observable, either directly or indirectly.
Level 3 - Valuations based on
inputs that are unobservable and significant to the overall fair value
measurement.
The
availability of valuation techniques and observable inputs can vary from
security to security and is affected by a wide variety of factors including, the
type of security, whether the security is new and not yet established in the
marketplace, and other characteristics particular to the transaction. To
the extent that valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value requires more
judgment. Those estimated values do not necessarily represent the amounts
that may be ultimately realized due to the occurrence of future circumstances
that cannot be reasonably determined. Because of the inherent uncertainty
of valuation, those estimated values may be materially higher or lower than the
values that would have been used had a ready market for the securities
existed. Accordingly, the degree of judgment exercised by the Fund in
determining fair value is greatest for securities categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement in its entirety falls, is determined based on the lowest level
input that is significant to the fair value
measurement.
Fair
value is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, the Fund’s own assumptions are set
to reflect those that market participants would use in pricing the asset or
liability at the measurement date. The Fund uses prices and inputs that
are current as of the measurement date, including periods of market
dislocation. In periods of market dislocation, the observability of prices
and inputs may be reduced for many securities. This condition could cause
a security to be reclassified to a lower level within the fair value hierarchy.
The Company’s adoption this standard did not have a material effect on its
consolidated financial position, results of operations or
liquidity.
Note
3 – Fair Value Measurements
The
Fund’s assets and liabilities recorded at fair value have been categorized based
upon a fair value hierarchy as described in the Fund’s significant accounting
policies in Note 2.
The
following table presents information about the Fund’s assets measured at fair
value as of March 31, 2010 and December 31, 2009:
March 31, 2010
(Unaudited)
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
as
of
March
31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
202,129
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
202,129
|
|
December 31,
2009
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
as
of
December
31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
183,167
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
183,167
|
|
Note
4 – Capitalization (including convertible debt)
The
Company is authorized to issue equity interests in the Company designated as
"membership units" which shall constitute "membership interests" and shall
initially include Class A units, Class B-1 units and Class B-2 units. Class A
Units are granted the right to vote on all matters regarding management and
members. The voting rights granted to Class B units are limited to matters
requiring a majority vote of Class A units, including but not limited to,
dissolution.
The
members (acting by a majority vote of the Class A members) are authorized, by
resolution or resolutions, to create and to issue, on behalf of the Company,
different classes, groups or series of membership units and to fix for each such
class, group or series such voting powers (full or limited or no voting powers),
and such distinctive designations, preferences and relative participating,
optional or other special rights and qualifications, limitations or restrictions
as determined by the members (acting by a majority vote of the Class A members)
in exchange for contributions of cash or property, the provision of services or
such other consideration, as may be determined by the members (acting by a
majority vote of the Class A members). Each membership unit of a class of
membership units shall be identical in all respects to each other membership
unit of such class. All membership units may be issued as fractional
units.
During
the period from inception (September 1, 2009) through December 31, 2009,
GFI Group LLC contributed $1,500,000 in cash in connection with its interest in
the Company through Class B-1 units and an option agreement.
The
Company granted GFI Group LLC the right and option to purchase that number of
Class B-1 units of the Company representing the Percentage Interest in the
Company at the exercise price shown below (the “Option”):
Percentage
Interest subject to Option: Up to 5%
Exercise
Price: $2,500,000 per each two and one-half percent (2.5%) (the “Incremental
Exercise Percentage”) Percentage Interest, for an aggregate exercise
price of $5,000,000.
This
option shall become vested and exercisable in full as of the date of
grant.
The
Option shall expire and cease to be exercisable upon the five-year anniversary
of the date the option was granted, October 28, 2009.
Ownership
or “membership” interests in the Company are owned by persons referred to as
“members.” The Company 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 Company. Messrs. Gilbertie and Riker each currently
own 45% of the Company’s Class A membership interests.
The
Company entered into convertible notes on September 28, 2009 for $225,000, and
the note holders have rights to convert for 3% interest in the Company. On
October 28, 2009, the note holders converted $225,000, including $50,000 which
had not been received by the Company. Due primarily to the short-term nature of
the convertible notes, the Company has determined that the bifurcation of the
convertible debt would not have had material impact on the consolidated
financial statements.
In
February 2010, the Company issued Class B-2 shares to a small number of
non-employee individuals representing 7% of the total collective Company
membership interests. The Class B-2 shares were awarded based on
services. The Class B-2 shares generally have the same rights as Class B-1
shares; however, in the event of termination, the Class B-2 shares are
subordinate to Class B-1 shares regarding any distributions. The
Class B-2 shares are redeemable at the sole option of the Company at a
predetermined price of $1,000,000 per 1% of collective membership interests
represented by the Class B-2 shares. For the three months and inception to date
period ended March 31, 2010, $86,000 (unaudited) of unit-based compensation
expense representing the estimated fair value of the Class B-2 shares issued is
included on the statement of operations. In accordance with FASB
Accounting Standards Codification Topic No. 505, “Equity,” the Company
determined the estimated fair value of the Class B-2 shares issued based on
recent similar transactions, the financial condition and book value of the
Company at time of issuance, and the respective rights of the Class B-2 shares
versus the other classes of membership interests.
Note
5 — Related Party Transactions
The
Riker Group has invoiced $60,000 (unaudited) and $100,000 for professional
services rendered by Dale Riker for the periods ending March 31, 2010 and
December 31, 2009, respectively; $20,000 is included in the accounts
payable balance on the accompanying Consolidated Statement of Financial
Condition at March 31, 2010 (unaudited) and December 31, 2009.
Carl
Miller received a salary of $30,000 (unaudited) and $20,000 for the periods
ending March 31, 2010 and December 31, 2009,
respectively.
Gilbertie
Herb Farm was paid $9,000 for rent for the period September 1, 2009 through
December 31, 2010. Prepaid Expenses on the Statement of Financial
Condition included prepaid rent of $4,500 (unaudited) and $6,000 at March 31,
2010 and December 31, 2009, respectively.
Note 6 — Recent
Accounting Pronouncements
In
June 2009, the FASB issued SFAS No.
168, “The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162 ” (“SFAS 168”). The
FASB Accounting Standards
Codification TM , (“Codification” or “ASC”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative.
Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as
authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles. The Company has adopted SFAS No. 168, and the
Company will provide reference to both the Codification topic reference and the
previously authoritative references related to Codification topics and
subtopics, as appropriate.
In
March 2008, the FASB released FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“Statement No.
161”). Statement No. 161, which is incorporated in FASB ASC Topic No.
815, “Derivatives
and Hedging”, requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The adoption of this standard did not have a material impact on the
Company’s financial position and results of operations.
In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
addresses the application of Statement of Financial Accounting Standards
(“SFAS”) No.157 for illiquid financial instruments. FSP FAS 157-3,
which is incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, clarifies that approaches to determining fair value other
than the market approach may be appropriate when the market for a financial
asset is not active. The adoption of FSP FAS 157-3 did not have a
material effect on the Company’s financial statements.
In
April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 157-4, “Determining Fair Value when the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying
Transactions that are not Orderly” (“FSP 157-4”), which is effective for the
Company for the quarterly period beginning September 1, 2009. FSP 157-4, which
is also incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, affirms that the objective of fair value when the market
for an asset is not active is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. The FSP
provides guidance for estimating fair value when the volume and level of market
activity for an asset or liability have significantly decreased and determining
whether a transaction was orderly. This FSP applies to all fair value
measurements when appropriate. The adoption of FSP FAS 157-4 did not have a
material effect on the Company’s financial
statements.
In
April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 107-1
and Accounting Principles Board (“APB”) Opinion No. 28-1 (“APB
No. 28-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. FSP SFAS No. 107-1 and APB
No. 28-1, which is now incorporated in FASB ASC Topic No. 825, “Financial Instruments”,
also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information for interim reporting
periods. FSP SFAS No. 107-1 and APB No. 28-1 is effective for interim
reporting periods ending after June 15, 2009. The adoption of FSP SFAS No.
107-1 and APB No. 28-1 did not have a material effect on the Company’s financial
position and results of operations.
In
May 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent
Events” (“SFAS 165”). This standard, which is incorporated in FASB ASC Topic No.
855, “Subsequent
Events”, is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective for
fiscal years and interim periods ended after June 15, 2009 and will be
applied prospectively. The adoption of this standard did not have a material
impact on the Company’s financial position and results of
operations.
In
June 2009, the FASB issued guidance on the consolidation of variable interest
entities. The new guidance requires revised evaluations of whether entities
represent variable interest entities, ongoing assessments of control over such
entities, and additional disclosures for variable interests. The adoption of
this standard did not have a material impact on the Company’s financial position
and results of operations.
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales,
issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). Other than
requiring additional disclosures, adoption of this new guidance will not have a
material impact on the Company’s consolidated financial statements and will be
effective January 1, 2011.
At
inception, the Company adopted the guidance issued by the FASB that changes the
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on the
Company’s consolidated financial statements.
Note
7 – Subsequent Events (Unaudited)
On June
7, 2010, the Company entered into a debt agreement (the “Loan Agreement”) with
GFI Group LLC. Under the terms of the Loan Agreement, the Company borrowed
$800,000 for a one year term at an annual interest rate of 8.25%.
The payment of principal and interest is due at maturity and is subject to
optional prepayment by the Company at anytime without premium or
penalty. The Loan Agreement is collateralized by substantially all of
the current and future assets of the Company.
As
discussed in Note 4, the Company previously granted GFI Group LLC the right and
option to purchase Class B-1 units of the Company (the “Option
Agreement”). In connection with the execution of the Loan Agreement,
the terms of the Option Agreement were modified to allow GFI Group LLC to
purchase that number of Class B-1 units of the Company representing the
Percentage Interest in the Company at the exercise price shown below (the
“Modified Option”):
Percentage
Interest subject to the Modified Option: Up to 5%
Exercise
Price: $2,100,000 per each two and one-half percent (2.5%)
Incremental Exercise Percentage Interest for an aggregate exercise price of
$4,200,000.
On June
9, 2010, the Teucrium Corn Fund began trading on the NYSE Arca
exchange.
TEUCRIUM
COMMODITY TRUST — INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
113
|
|
|
|
Statement
of Assets and Liabilities
|
|
114
|
|
|
|
Notes
to Statement of Assets and Liabilities
|
|
114
|
Report of
Independent Registered Public Accounting Firm
To the
Sponsor of
Teucrium
Commodity Trust
We have
audited the accompanying statement of assets and liabilities of Teucrium
Commodity Trust (the
“Trust”) as of December 31, 2009. These financial statements are the
responsibility of the Trust’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Trust is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Trust’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Teucrium Commodity Trust as of December 31, 2009,
in conformity with U.S. generally accepted accounting principles.
/s/ Rothstein, Kass & Company,
P.C.
Roseland,
New Jersey
March
22, 2010
TEUCRIUM
COMMODITY TRUST
STATEMENT
OF ASSETS AND LIABILITIES
Assets
|
March
31, 2010
(unaudited)
|
|
December
31, 2009
|
|
|
|
|
|
|
Cash
|
|
$ |
100 |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$ |
100 |
|
|
$ |
100 |
|
The
accompanying notes are an integral part of this financial
statement.
Teucrium
Commodity Trust
NOTES
TO STATEMENT OF ASSETS AND LIABILITIES
Note
1 — Organization and Business
Teucrium
Commodity Trust (“Trust”) is a Delaware statutory trust organized on September
11, 2009, and is a series trust which includes Teucrium Corn Fund (the “Fund”),
a commodity pool that will issue shares that may be purchased and sold on the
New York Stock Exchange (“NYSE”) Arca. Additional series of the Trust that will
be separate commodity pools may be created in the future, but the Fund is
currently the Trust’s only series. The Trust and the Fund operate
pursuant to the Trust’s Declaration of Trust and Trust Agreement (the “Trust
Agreement”). The Fund was formed and is managed and controlled by the
Sponsor, Teucrium Trading, LLC. The Sponsor is a limited liability company
formed in Delaware on July 28, 2009 that is registered as a commodity pool
operator (“CPO”) with the Commodity Futures Trading Commission (“CFTC”) and is a
member of the National Futures Association (“NFA”).
The
investment objective of the Fund is to have the daily changes in percentage
terms of the shares’ net asset value (“NAV”) reflect the daily changes in
percentage terms of a weighted average of the closing settlement prices for
three futures contracts for corn (“Corn Futures Contracts”) that are traded on
the Chicago Board of Trade (“CBOT”), specifically (1) the second-to-expire CBOT
Corn Futures Contract, 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%, less the Fund’s expenses.
The
Fund seeks to achieve its investment objective by investing under normal market
conditions in the three Corn Futures Contracts set forth in the preceding
paragraph or, in certain circumstances, in other Corn Futures Contracts traded
on the CBOT or on foreign exchanges. In addition, and to a limited
extent, the Fund also may invest in corn-based swap agreements that are cleared
through the CBOT or its affiliated provider of clearing services (“Cleared Corn
Swaps”) in furtherance of the Fund's investment objective. Once
position limits in Corn Futures Contracts are applicable, the Fund's intention
is to invest first in Cleared Corn Swaps to the extent permitted by the position
limits applicable to Cleared Corn Swaps and appropriate in light of the
liquidity in the Cleared Corn Swap market, and then in contracts and instruments
such as cash-settled options on Corn Futures Contracts and forward contracts,
swaps other than Cleared Corn Swaps, and other over-the-counter transactions
that are based on the price of corn and Corn Futures Contracts (collectively,
“Other Corn Interests,” and together with Corn Futures Contracts and Cleared
Corn Swaps, “Corn Interests”). The Sponsor expects to
manage the Fund’s 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 is
also authorized to select futures commission merchants to execute the Fund’s
transactions in Corn Futures Contracts.
The
Fund will invest in Corn Interests to the fullest extent possible without being
leveraged or unable to satisfy its expected current or potential margin or
collateral obligations with respect to its investments in Corn
Interests. After fulfilling such margin and collateral requirements,
the Fund will invest the remainder of its proceeds from the sale of baskets in
short-term obligations of the United States government (“Treasury Securities”)
or other cash equivalents, and/or merely hold such assets in cash (generally in
interest-bearing accounts). Therefore, the focus of the Sponsor in
managing the Fund is investing in Corn Interests and in Treasury Securities,
cash and/or cash equivalents. The Fund will earn interest
income from the Treasury Securities and/or cash equivalents that it purchases
and on the cash it holds through the Custodian.
The
Fund will create and redeem units only in blocks called creation baskets and
redemption baskets, respectively. Only authorized purchasers may
purchase or redeem creation baskets or redemption baskets. An
authorized purchaser is under no obligation to create or redeem baskets, and an
authorized purchaser is under no obligation to offer to the public units of any
baskets it does create. Baskets are generally created when there is a
demand for units, including, but not limited to, when the market price per unit
is at (or perceived to be at) a premium to the NAV per
share. Authorized purchasers will then sell such units, which will be
listed on the NYSE (“New York Stock Exchange”) Arca, to the public at per-unit
offering prices that are expected to reflect, among other factors, the trading
price of the units on the NYSE Arca, the NAV of the Fund at the time the
authorized purchaser purchased the creation baskets and the NAV at the time of
the offer of the units to the public, the supply of and demand for units at the
time of sale, and the liquidity of the corn futures contracts market and the
market for other corn interests. The prices of units offered by
authorized purchasers are expected to fall between the Fund’s NAV and the
trading price of the units on the NYSE Arca at the time of
sale. Similarly, baskets are generally redeemed when the market price
per unit is at (or perceived to be at) a discount to the NAV per
share. Retail investors seeking to purchase or sell units on any day
are expected to effect such transactions in the secondary market, on the NYSE
Arca, at the market price per unit, rather than in connection with the creation
or redemption of baskets.
Sponsor
Fee
Under
the Trust Agreement, 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 will arrange for one or more third parties to provide
administrative, custody, accounting, transfer agency and other necessary
services to the Fund. For these 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 on average net assets. The Fund will pay for
all brokerage fees, taxes and other expenses, including licensing fees for the
use of intellectual property, registration or other fees paid to the Securities
and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority
(“FINRA”), formerly the National Association of Securities Dealers, or any other
regulatory agency in connection with the offer and sale of subsequent Units
after its initial registration and all legal, accounting, printing and other
expenses associated therewith. The Fund also pays the fees and expenses
associated with the Trust’s tax accounting and reporting requirements with the
exception of certain initial implementation services fees and base services fees
which will be paid by the Sponsor.
Income
Taxes
The
Trust does not record a provision for income taxes because the partners report
their share of the Trust’s income or loss on their income tax
returns. The financial statements reflect the Trust’s transactions
without adjustment, if any, required for income tax purposes.
In
accordance with GAAP, the Trust is required to determine whether a tax position
is more likely than not to be sustained upon examination by the applicable
taxing authority, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The Trust
files an income tax return in the U.S. federal jurisdiction, and may file income
tax returns in various U.S. states and foreign jurisdictions. The Trust is
subject to income tax examinations by major taxing authorities for all tax years
since inception. The tax benefit recognized is measured as the largest
amount of benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. De-recognition of a tax benefit
previously recognized results in the Trust recoding a tax liability that reduces
net assets. This policy has been applied to all existing tax
positions upon the Trust’s initial adoption for the period ended December 31,
2009. Based on its analysis, the Trust has determined that the
adoption of this policy did not have a material impact on the Trust’s financial
statements upon adoption. However, the Trust’s conclusions regarding
this policy may be subject to review and adjustment at a later date based on
factors including, but not limited to, on-going analysis of and changes to tax
laws, regulations, and interpretations thereof. The Trust recognizes
interest accrued related to unrecognized tax benefits and penalties related to
unrecognized tax benefits in income tax fees payable, if assessed. No
interest expense or penalties have been recognized as of and for the periods
ended March 31, 2010 (unaudited) and December 31, 2009.
Additions
and Redemptions
Authorized
purchasers may purchase creation baskets consisting of 100,000 units from the
Fund as of the beginning of each business day based upon the prior day’s net
asset value. Authorized purchasers may redeem units from the Fund only in blocks
of 100,000 units called “redemption baskets”. The amount of the redemption
proceeds for a redemption basket will be equal to the net asset value of the
units in the redemption basket determined as of 4:00 p.m. New York Time on the
day the order to redeem the basket is properly received.
The
Fund receives or pays the proceeds from units sold or redeemed within three
business days after the trade date of the purchase or redemption. The amounts
due from authorized purchasers are reflected in the Fund’s statement of assets
and liabilities as receivable for Units sold and amounts payable to authorized
purchasers upon redemption is reflected as payable for Units
redeemed.
Calculation
of Net Asset Value
The
Fund’s NAV is calculated by:
|
·
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Taking
the current market value of its total assets,
and
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|
·
|
Subtracting
any liabilities.
|
The
administrator will calculate the NAV of the Fund once each trading
day. It will calculate NAV as of the earlier of the close of the New
York Stock Exchange or 4:00 p.m. New York time. The NAV for a
particular trading day will be released after 4:15 p.m. New York
time.
In
determining the value of Corn Futures Contracts, the administrator will use the
CBOT closing price (typically 2:15 p.m. New York time). The
administrator will determine the value of all other Fund investments as of the
earlier of the close of the New York Stock Exchange or 4:00 p.m. New York time.
The value of over-the-counter corn interests will be determined based on the
value of the commodity or futures contract underlying such corn interest, except
that a fair value may be determined if the sponsor believes that the Fund is
subject to significant credit risk relating to the counterparty to such corn
interest. Treasury Securities held by the Fund will be valued by the
administrator using values received from recognized third-party vendors and
dealer quotes. NAV will include any unrealized profit or loss on open
corn interests and any other income or expense accruing to the Fund but unpaid
or not received by the Fund.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements for the three
months ended March 31, 2010 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and were prepared on the
same basis as the consolidated financial statements for the period ended
December 31, 2009. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the information for this interim period, have been
made. The operations for such interim period are not necessarily
indicative of the operations for the full year.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of the revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Subsequent
Events
The
audited financial statements for the period from Inception (September 1, 2009)
through December 31, 2009 were approved by management and available for issuance
on March 22, 2010. Subsequent events related to the audited financial statements
have been evaluated through this date.
Note 2 — Recent
Accounting Pronouncements
In
June 2009, the FASB issued SFAS No.
168, “The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162 ” (“SFAS 168”). The
FASB Accounting Standards
Codification TM , (“Codification” or “ASC”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative.
Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as
authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles. The Trust has adopted SFAS No. 168, and the
Company will provide reference to both the Codification topic reference and the
previously authoritative references related to Codification topics and
subtopics, as appropriate.
In March
2008, the FASB released FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“Statement No.
161”). Statement No. 161, which is incorporated in FASB ASC Topic No.
815, “Derivatives
and Hedging”, requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The adoption of this standard did not have a material impact on the
Trust’s financial position and results of operations.
In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
addresses the application of Statement of Financial Accounting Standards
(“SFAS”) No.157 for illiquid financial instruments. FSP FAS 157-3,
which is incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, clarifies that approaches to determining fair value other
than the market approach may be appropriate when the market for a financial
asset is not active. The adoption of FSP FAS 157-3 did not have a
material effect on the Trust’s financial statements.
In
April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 157-4, “Determining Fair Value when the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying
Transactions that are not Orderly” (“FSP 157-4”), which is effective for the
Company for the quarterly period beginning September 1, 2009. FSP 157-4, which
is also incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, affirms that the objective of fair value when the market
for an asset is not active is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. The FSP
provides guidance for estimating fair value when the volume and level of market
activity for an asset or liability have significantly decreased and determining
whether a transaction was orderly. This FSP applies to all fair value
measurements when appropriate. The adoption of FSP FAS 157-4 did not have a
material effect on the Trust’s financial statements.
In
April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 107-1
and Accounting Principles Board (“APB”) Opinion No. 28-1 (“APB
No. 28-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. FSP SFAS No. 107-1 and APB
No. 28-1, which is now incorporated in FASB ASC Topic No. 825, “Financial Instruments”,
also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information for interim reporting
periods. FSP SFAS No. 107-1 and APB No. 28-1 is effective for interim
reporting periods ending after June 15, 2009. The adoption of FSP SFAS
No. 107-1 and APB No. 28-1 did not have a material effect on the
Trust’s financial position and results of operations.
In
May 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent
Events” (“SFAS 165”). This standard, which is incorporated in FASB ASC Topic No.
855, “Subsequent
Events”, is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective for
fiscal years and interim periods ended after June 15, 2009 and will be
applied prospectively. The adoption of this standard did not have a material
impact on the results of operations and financial position.
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales,
issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). Other than
requiring additional disclosures, adoption of this new guidance will not have a
material impact on the Trust’s financial statements.
Note
3 - Organizational and Offering Costs
Expenses
incurred in organizing of the Trust and the initial offering of the shares,
including applicable SEC registration fees will be borne directly by the
Sponsor. The Trust will not be obligated to reimburse the
Sponsor.
Note
4 - Indemnification
Under
the Trust Agreement, the trustee (and its directors, employees and agents) is
indemnified against any liability, cost or expense it incurs without gross
negligence, bad faith or willful misconduct on its part and without reckless
disregard on its part of its obligations and duties under the Trust’s
organizational documents. The Trust’s maximum exposure under these arrangements
is unknown as this would involve future claims that may be made against the
Trust that have not yet occurred.
Note 5 –
Subsequent Event (Unaudited)
On June 9, 2010, the Teucrium Corn Fund began trading on the
NYSE Arca exchange.
[Financial
Statements for Teucrium Soybean Fund to be added by amendment.]
APPENDIX
A
Glossary
of Defined Terms
In this
prospectus, each of the following terms have the meanings set forth after such
term:
Administrator: The Bank of New
York Mellon
Authorized
Purchaser: One that purchases or redeems Creation Baskets or
Redemption Baskets, respectively, from or to the Fund.
Benchmark: A
weighted average of the closing settlement prices for three Soybean Futures
Contracts that are traded on the CBOT: (1) the second-to-expire Soybean Futures
Contract, weighted 35%, (2) the third-to-expire Soybean Futures Contract,
weighted 30%, and (3) the Soybean Futures Contract expiring in the March
following the expiration month of the third-to-expire contract, weighted 35%,
except that the Benchmark will never include Soybean Futures Contracts expiring
in August or September.
Benchmark Component Futures
Contracts: The three Soybean Futures Contracts that at any
given time make up the Benchmark.
Business Day: Any
day other than a day when any of the NYSE Arca, CBOT, or the New York Stock
Exchange is closed for regular trading.
CFTC: Commodity
Futures Trading Commission, an independent agency with the mandate to regulate
commodity futures and options in the United States.
Chicago Board of Trade
(CBOT): The primary exchange on which Soybean Futures
Contracts are traded in the U.S. The Fund expressly disclaims any
association with the CBOT or endorsement of the Fund by the CBOT and
acknowledges that “CBOT” and “Chicago Board of Trade” are registered trademarks
of such exchange.
Cleared Soybean
Swap: A soybean-based swap agreement that is cleared through
CBOT or its affiliated provider of clearing services.
Code: Internal Revenue
Code.
Commodity Pool: An
enterprise in which several individuals contribute funds in order to trade
futures contracts or options on futures contracts collectively.
Commodity Pool Operator or
CPO: Any person engaged in a business which is of the nature
of an investment trust, syndicate, or similar enterprise, and who, in connection
therewith, solicits, accepts, or receives from others, funds, securities, or
property, either directly or through capital contributions, the sale of stock or
other forms of securities, or otherwise, for the purpose of trading in any
commodity for future delivery or commodity option on or subject to the rules of
any contract market.
Creation Basket: A
block of 100,000 Shares used by the Fund to issue Shares.
Custodian: The Bank
of New York Mellon
DTC: The Depository
Trust Company. DTC will act as the securities depository for the
Shares.
DTC Participant: An
entity that has an account with DTC.
DTEF: A derivatives
transaction execution facility.
Exchange Act: The
Securities Exchange Act of 1934.
Exchange for
Risk: A privately negotiated and simultaneous exchange of a
futures contract position for a swap or other over-the-counter instrument on the
corresponding commodity.
FINRA: Financial
Industry Regulatory Authority, formerly the National Association of Securities
Dealers.
Indirect
Participants: Banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly.
Limited Liability Company
(LLC): A type of business ownership combining several features
of corporation and partnership structures.
Margin: The amount
of equity required for an investment in futures contracts.
NAV: Net Asset
Value of the Fund.
NFA: National
Futures Association.
NSCC: National
Securities Clearing Corporation.
1933 Act: The
Securities Act of 1933.
Option: The right,
but not the obligation, to buy or sell a futures contract or forward contract at
a specified price on or before a specified date.
Other Soybean
Interests: Other soybean-related investments such as
cash-settled options on Soybean Futures Contracts, swaps agreements other than
Cleared Soybean Swaps and forward contracts relating to soybeans, and
over-the-counter transactions that are based on the price of soybeans, Soybean
Futures Contracts and indices based on the foregoing.
Over-the-Counter
Derivative: A financial contract, whose value is designed to
track the return on stocks, bonds, currencies, commodities, or some other
benchmark, that is traded over-the-counter or off organized
exchanges.
Redemption
Basket: A block of 100,000 Shares used by the Fund to redeem
Shares.
SEC: Securities and
Exchange Commission.
Secondary
Market: The stock exchanges and the over-the-counter market.
Securities are first issued as a primary offering to the public. When the
securities are traded from that first holder to another, the issues trade in
these secondary markets.
Shareholders: Holders
of Shares.
Shares: Common
units representing fractional undivided beneficial interests in the
Fund.
Sponsor: Teucrium
Trading, LLC, a Delaware limited liability company, which is registered as a
Commodity Pool Operator, who controls the investments and other decisions of the
Fund.
Spot Contract: A
cash market transaction in which the buyer and seller agree to the immediate
purchase and sale of a commodity, usually with a two-day
settlement.
Soybean Futures
Contracts: Futures contracts for soybeans that are traded on
CBOT or foreign exchanges.
Soybean
Interests: Soybean Futures Contracts, Cleared Soybean Swaps
and Other Soybean Interests.
Swap Agreement: An
over-the-counter derivative that generally involves an exchange of a stream of
payments between the contracting parties based on a notional amount and a
specified index.
Tracking
Error: Possibility that the daily NAV of the Fund will not
track the Benchmark.
Treasury
Securities: Obligations of the U.S. government with remaining
maturities of 2 years or less.
Trust
Agreement: The Amended and Restated Declaration of Trust and
Trust Agreement of the Trust effective as of March 31, 2010.
Valuation Day: Any
day as of which the Fund calculates its NAV.
You: The owner of
Shares.
[This
page intentionally left blank.]
STATEMENT
OF ADDITIONAL INFORMATION
TEUCRIUM
SOYBEAN FUND
This
statement of additional information is the second part of a two part
document. The first part is the Fund’s disclosure
document. The disclosure document and this statement of additional
information are bound together, and both parts contain important
information. This statement of additional information should be read
in conjunction with the disclosure document. Before you decide
whether to invest, you should read the entire prospectus carefully and consider
the risk factors beginning on page [ ].
This
statement of additional information and accompanying disclosure document are
both dated [date],
2010.
TEUCRIUM
SOYBEAN FUND
TABLE
OF CONTENTS
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Page
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The
Commodity Interest Markets
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133
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Potential
Advantages of Investment
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143
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Benchmark
Performance
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144
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The
Commodity Interest Markets
General
The
Commodity Exchange Act or CEA governs the regulation of commodity interest
transactions, markets and intermediaries. In December 2000, the CEA
was amended by the Commodity Futures Modernization Act of 2000, or CFMA, which
substantially revised the regulatory framework governing certain commodity
interest transactions and the markets on which they trade. The CEA,
as amended by the CFMA, now provides for varying degrees of regulation of
commodity interest transactions depending upon the variables of the
transaction. In general, these variables include (1) the type of
instrument being traded (e.g., contracts for future delivery, options, swaps or
spot contracts), (2) the type of commodity underlying the instrument
(distinctions are made between instruments based on agricultural commodities,
energy and metals commodities and financial commodities), (3) the nature of the
parties to the transaction (retail, eligible contract participant, or eligible
commercial entity), (4) whether the transaction is entered into on a
principal-to-principal or intermediated basis, (5) the type of market on which
the transaction occurs, and (6) whether the transaction is subject to clearing
through a clearing organization. Information regarding commodity
interest transactions, markets and intermediaries, and their associated current
regulatory environment, is provided below. Legislative and regulatory
changes relating to the information set forth below are currently being
discussed, so such information is subject to change.
Futures
Contracts
A futures
contract such as a Soybean Futures Contract is a standardized contract traded
on, or subject to the rules of, an exchange that calls for the future delivery
of a specified quantity and type of a commodity at a specified time and
place. Futures contracts are traded on a wide variety of physical and
financial commodities, including agricultural products, bonds, stock indices,
interest rates, currencies, energy and metals. The size and terms of
futures contracts on a particular commodity are identical and are not subject to
any negotiation, other than with respect to price and the number of contracts
traded between the buyer and seller.
The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying commodity or by making an
offsetting sale or purchase of an identical futures contract on the same or
linked exchange before the designated date of delivery. The
difference between the price at which the futures contract is purchased or sold
and the price paid for the offsetting sale or purchase, after allowance for
brokerage commissions, constitutes the profit or loss to the
trader. Some futures contracts, such as stock index contracts, settle
in cash (reflecting the difference between the contract purchase/sale price and
the contract settlement price) rather than by delivery of the underlying
commodity.
In market
terminology, a trader who purchases a futures contract is long in the market and
a trader who sells a futures contract is short in the market. Before
a trader closes out his long or short position by an offsetting sale or
purchase, his outstanding contracts are known as open trades or open
positions. The aggregate amount of open positions held by traders in
a particular contract is referred to as the open interest in such
contract.
Options
on Futures Contracts
Options
on futures contracts are standardized contracts traded on an
exchange. An option on futures contract gives the buyer of the option
the right, but not the obligation, to take a position at a specified price (the
striking, strike, or exercise price) in the underlying futures contract or
underlying interest. The buyer of a call option acquires the right,
but not the obligation, to purchase or take a long position in the underlying
interest, and the buyer of a put option acquires the right, but not the
obligation, to sell or take a short position in the underlying
interest.
The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer if the
option is exercised. Thus, the seller of a call option must stand
ready to take a short position in the underlying interest at the strike price if
the buyer should exercise the option. The seller of a put option, on
the other hand, must stand ready to take a long position in the underlying
interest at the strike price.
A call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market
levels. Conversely, a put option is said to be in-the-money if the
strike price is above the current market levels and out-of-the-money if the
strike price is below current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date of the
underlying interest. Some options, however, expire significantly in
advance of such date. The purchase price of an option is referred to
as its premium, which consists of its intrinsic value (which is related to the
underlying market value) plus its time value. As an option nears its
expiration date, the time value shrinks and the market and intrinsic values move
into parity. An option that is out-of-the-money and not offset by the
time it expires becomes worthless. On certain exchanges, in-the-money
options are automatically exercised on their expiration date, but on others all
unexercised options simply become worthless after their expiration
date.
Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and
the money goes to the option seller. 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.
Over-the-Counter
Contracts (Forward Contracts and Swaps)
A forward
contract is a contractual obligation to purchase or sell a specified quantity of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike
futures contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward
contracts for a given commodity are generally available for various amounts and
maturities and are subject to individual negotiation between the parties
involved. Moreover, generally there is no direct means of offsetting
or closing out a forward contract by taking an offsetting position as one would
a futures contract on a U.S. exchange. If a trader desires to close
out a forward contract position, he generally will establish an opposite
position in the contract but will settle and recognize the profit or loss on
both positions simultaneously on the delivery date. Thus, unlike in
the futures contract market where a trader who has offset positions will
recognize profit or loss immediately, in the forward market a trader with a
position that has been offset at a profit will generally not receive such profit
until the delivery date, and likewise a trader with a position that has been
offset at a loss will generally not have to pay money until the delivery
date. In recent years, however, the terms of forward contracts have
become more standardized, and in some instances such contracts now provide a
right of offset or cash settlement as an alternative to making or taking
delivery of the underlying commodity.
The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward
markets are largely unregulated. Forward contracts are, in general,
not cleared or guaranteed by a third party. Commercial banks
participating in trading foreign exchange forward contracts often do not require
margin deposits, but rely upon internal credit limitations and their judgments
regarding the creditworthiness of their counterparties. In recent
years, however, many over-the-counter market participants in foreign exchange
trading have begun to require that their counterparties post
margin.
Swap
transactions generally involve contracts between two parties to exchange a
stream of payments computed by reference to a notional amount and the price of
the asset that is the subject of the swap. Like forward contracts,
swap agreements are principally traded off-exchange. Swaps are
usually entered into on a net basis, that is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
agreement, with the parties receiving or paying, as the case may be, only the
net amount of the two payments. Swaps do not generally involve the
delivery of underlying assets or principal. Accordingly, the risk of
loss with respect to swaps is generally limited to the net amount of payments
that the party is contractually obligated to make. In some swap
transactions one or both parties may require collateral deposits from the
counterparty to support that counterparty’s obligation under the swap
agreement. If the counterparty to such a swap defaults, the risk of
loss consists of the net amount of payments that the party is contractually
entitled to receive less to any collateral deposits it is holding.
As the
result of the CFMA, over-the-counter derivative instruments such as forward
contracts and swap agreements (and options on forwards and physical commodities)
may begin to be traded on lightly-regulated exchanges or electronic trading
platforms that may, but are not required to, provide for clearing
facilities. (Exchanges and electronic trading platforms on which
over-the-counter instruments may be traded and the regulation and criteria for
that trading are more fully described below under “Futures Exchanges and
Clearing Organizations.”) While derivative instruments based on
agricultural commodities such as soybeans generally are not eligible to rely on
the CFMA exemptions, the CFTC has recently issued an order that permits Cleared
Soybean Swaps. Absent a clearing facility, trading in forward
contracts and swap agreements is exposed to the creditworthiness of the
counterparties on the other side of the trades. In contrast, where a
clearing facility is present, a market participant can look to the clearing
facility to guarantee the counterparty’s performance, which effectively
eliminates counterparty risk as a concern in entering into derivative
instruments.
Options
on Forward Contracts or Commodities
Options
on forward contracts or commodities operate in a manner similar to options on
futures contracts. An option on a forward contract or commodity gives
the buyer of the option the right, but not the obligation, to take a position at
a specified price in the underlying forward contract or
commodity. However, similar to forward contracts, options on forward
contracts or on commodities are individually negotiated contracts between
counterparties and are typically traded in the over-the-counter
market. Therefore, options on forward contracts and physical
commodities possess many of the same characteristics of forward contracts with
respect to offsetting positions and credit risk that are described
above.
Participants
The two
broad classes of persons who trade commodities are hedgers and
speculators. Hedgers include financial institutions that manage or
deal in interest rate-sensitive instruments, foreign currencies or stock
portfolios, and commercial market participants, such as farmers and
manufacturers, that market or process commodities. Hedging is a
protective procedure designed to effectively lock in prices that would otherwise
change due to an adverse movement in the price of the underlying commodity, for
example, the adverse price movement between the time a merchandiser or processor
enters into a contract to buy or sell a raw or processed commodity at a certain
price and the time he must perform the contract. For example, if a
hedger contracts to physically sell the commodity at a future date, he may
simultaneously buy a futures or forward contract for the necessary equivalent
quantity of the commodity. At the time for performance of the
physical contract, the hedger may accept delivery under his futures contract and
sell the commodity quantity as required by the physical contract or he may buy
the actual commodity, sell it under the physical contract and close out his
futures contract position by making an offsetting sale.
The
commodity interest markets enable the hedger to shift the risk of price
fluctuations. The usual objective of the hedger is to protect the
profit that he expects to earn from farming, merchandising, or processing
operations rather than to profit from his trading. However, at times
the impetus for a hedge transaction may result in part from speculative
objectives and hedgers can end up paying higher prices than they would have if
they did not enter into a commodity interest transaction if current market
prices are lower than the locked-in price.
Unlike
the hedger, the speculator generally expects neither to make nor take delivery
of the underlying commodity. Instead, the speculator risks his
capital with the hope of making profits from price fluctuations in the
commodities. The speculator is, in effect, the risk bearer who
assumes the risks that the hedger seeks to avoid. Speculators rarely
make or take delivery of the underlying commodity; rather they attempt to close
out their positions prior to the delivery date. A speculator who
takes a long position generally will make a profit if the price of the
underlying commodity goes up and incur a loss if the price of the underlying
commodity goes down, while a speculator who takes a short position generally
will make a profit if the price of the underlying commodity goes down and incur
a loss if the price of the underlying commodity goes up.
Futures
Exchanges and Clearing Organizations
Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of
trades at a physical location utilizing trading pits and/or may provide for
trading to be done electronically through computerized matching of bids and
offers pursuant to various algorithms. Members of a particular
exchange and the trades executed on such exchange are subject to the rules of
that exchange. Futures exchanges and clearing organizations are given
reasonable latitude in promulgating rules and regulations to control and
regulate their members. Examples of regulations by exchanges and
clearing organizations include the establishment of initial margin levels, rules
regarding trading practices, contract specifications, speculative position
limits, daily price fluctuation limits, and execution and clearing
fees.
Clearing
organizations provide services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or
electronic trading facility have been confirmed, the clearing organization
becomes substituted for the clearing member acting on behalf of each buyer and
each seller of contracts traded on the exchange or trading platform and in
effect becomes the other party to the trade. Thereafter, each
clearing member party to the trade looks only to the clearing organization for
performance. The clearing organization generally establishes some
sort of security or guarantee fund to which all clearing members of the exchange
must contribute; this fund acts as an emergency buffer that is intended to
enable the clearing organization to meet its obligations with regard to the
other side of an insolvent clearing member’s contracts. Furthermore,
the clearing organization requires margin deposits and continuously marks
positions to market to provide some assurance that its members will be able to
fulfill their contractual obligations. Thus, a central function of
the clearing organization is to ensure the integrity of trades, and members
effecting transactions on an exchange need not concern themselves with the
solvency of the party on the opposite side of the trade; their only remaining
concerns are the respective solvencies of their own customers, their clearing
broker and the clearing organization. The clearing organizations do
not deal with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers.
U.S.
Futures Exchanges
Futures
exchanges in the United States are subject to varying degrees of regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail
customers on an unrestricted basis. To be designated as a contract
market, the exchange must demonstrate that it satisfies specified general
criteria for designation, such as having the ability to prevent market
manipulation, rules and procedures to ensure fair and equitable trading,
minimization of conflicts of interest and protection of market participants,
position limits and dispute resolution procedures. Among the
principal designated contract markets in the United States are the CBOT, the New
York Mercantile Exchange, the ICE Futures U.S., and the Chicago Mercantile
Exchange. Each of the designated contract markets in the United
States must provide for the clearance and settlement of transactions with a
CFTC-registered derivatives clearing organization.
A
derivatives transaction execution facility, or DTEF, is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant
limitations. DTEFs limit access to eligible traders that qualify as
either eligible contract participants or eligible commercial entities for
futures and option contracts on commodities that have a nearly inexhaustible
deliverable supply, are highly unlikely to be susceptible to the threat of
manipulation, or have no cash market, security futures products, and futures and
option contracts on commodities that the CFTC may determine, on a case-by-case
basis, are highly unlikely to be susceptible to the threat of
manipulation. In addition, certain commodity interests excluded or
exempt from the CEA, such as swaps, may be traded on a DTEF. There is
no requirement that a DTEF use a clearing organization, except with respect to
trading in security futures contracts, in which case the clearing organization
must be a securities clearing agency. However, if futures contracts
and options on futures contracts traded on a DTEF are cleared, then it must be
through a CFTC-registered derivatives clearing organization, except that some
excluded or exempt commodities traded on a DTEF may be cleared through a
clearing organization other than one registered with the CFTC.
An exempt
board of trade is also a newly designated form of exchange. An exempt
board of trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to
trade futures contracts and options on futures contracts provided that the
underlying commodity is not a security or securities index and has an
inexhaustible deliverable supply or no cash market. All traders on an
exempt board of trade must qualify as eligible contract
participants. Contracts deemed eligible to be traded on an exempt
board of trade include contracts on interest rates, exchange rates, currencies,
credit risks or measures, debt instruments, measures of inflation, or other
macroeconomic indices or measures. There is no requirement that an
exempt board of trade use a clearing organization. However, if
contracts on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade
electing to operate as an exempt board of trade must file a written notification
with the CFTC.
An
electronic trading facility is a new form of trading platform that operates by
means of an electronic or telecommunications network and maintains an automated
audit trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not
apply to, and the CFTC has no jurisdiction over, transactions on an electronic
trading facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to CFTC
anti-fraud and anti-manipulation authority. In general, excluded
commodities include interest rates, currencies, securities, securities indices
or other financial, economic or commercial indices or measures, but not physical
commodities.
The
Sponsor intends to monitor the development of and opportunities and risks
presented by the new less-regulated exchanges and exempt boards as well as other
trading platforms currently in place or that are being considered by regulators
and may, in the future, allocate a percentage of the Fund’s assets to trading in
products on these exchanges. Provided the Fund maintains assets exceeding $5
million, the Fund would qualify as an eligible contract participant and thus
would be able to trade on such exchanges.
Non-U.S.
Futures Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S.
counterparts. Importantly, non-U.S. futures exchanges are not subject
to regulation by the CFTC, but rather are regulated by their home country
regulator. In contrast to U.S. designated contract markets, some
non-U.S. exchanges are principals’ markets, where trades remain the liability of
the traders involved, and the exchange or a clearing organization does not
become substituted for any party. Due to the absence of a clearing
system, such exchanges are significantly more susceptible to
disruptions. Further, participants in such markets must often satisfy
themselves as to the individual creditworthiness of each entity with which they
enter into a trade. Trading on non-U.S. exchanges is often in the
currency of the exchange’s home jurisdiction. Consequently, if it
enters into transactions on these non-U.S. exchanges, the Fund would be subject
to the additional risk of fluctuations in the exchange rate between such
currency and the U.S. dollar and the possibility that exchange controls could be
imposed in the future. Trading on non-U.S. exchanges may differ from
trading on U.S. exchanges in a variety of ways and, accordingly, may subject the
Fund to additional risks.
Accountability
Levels and Position Limits
The CFTC
and U.S. designated contract markets may establish accountability levels and
position limits on the maximum net long or net short futures contracts in
commodity interests that any person or group of persons under common trading
control (other than a hedger, which the Fund is not) may hold, own or
control. In contrast to position limits, accountability levels are
not fixed ceilings, but rather thresholds above which an exchange may exercise
greater scrutiny and control over an investor including by imposing position
limits. Among the purposes of accountability levels and position
limits is to prevent a corner or squeeze on a market or undue influence on
prices by any single trader or group of traders. The position limits
currently established by the CFTC apply to certain agricultural commodity
interests, such as grains (oats, barley, and flaxseed), soybeans, wheat, cotton,
eggs, rye, and potatoes. Specifically, the CFTC’s position limits for
soybean future contracts are 600 spot month contracts, 6,500 contracts expiring
in any other single month, and 10,000 contracts for all months. In
addition, U.S. exchanges (such as the CBOT) may set accountability levels and
position limits for all commodity interests traded on that
exchange. The CBOT has not set any accountability levels for Soybean
Futures Contracts. Certain exchanges or clearing organizations
also set limits on the total net positions that may be held by a clearing
broker. In general, no position limits are in effect in forward or
other over-the-counter contract trading or in trading on non-U.S. futures
exchanges, although the principals with which the Fund and the clearing brokers
may trade in such markets may impose such limits as a matter of credit
policy. The Fund’s commodity interest positions will not be
attributable to Shareholders for purposes of determining whether those
Shareholders have exceeded applicable accountability levels and position
limits.
Daily
Price Limits
Most U.S.
futures exchanges (but generally not non-U.S. exchanges) limit the amount of
fluctuation in some futures contract or options on futures contract prices
during a single trading period by regulations. These regulations
specify what are referred to as daily price fluctuation limits or more commonly,
daily limits. The daily limits establish the maximum amount that the
price of a futures or option on a futures contract may vary either up or down
from the previous day’s settlement price. In general, the Chicago
Board of Trade daily limit for soybean futures contracts is $0.70 per bushel
($3,500 per contract). Once the daily limit has been reached in a
particular futures or option on a futures contract, no trades may be made at a
price beyond the limit. Positions in the futures or options contract
may then be taken or liquidated, if at all, only if traders are willing to
effect trades at or within the limit. Because the daily limit rule
governs price movement only for a particular trading day, it does not limit
losses and may in fact substantially increase losses because it may prevent the
liquidation of unfavorable positions. Futures contract prices have
occasionally moved the daily limit for several consecutive trading days, thus
preventing prompt liquidation of positions and subjecting the trader to
substantial losses for those days. The concept of daily price limits
is not relevant to over-the-counter contracts, including forwards and swaps, and
thus such limits are not imposed by banks and others who deal in those
markets.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the
interaction of supply and demand, are subject to many other influences,
including the psychology of the marketplace and speculative assessments of
future world and economic events. Political climate, interest rates,
treaties, balance of payments, exchange controls and other governmental
interventions as well as numerous other variables affect the commodity markets,
and even with comparatively complete information it is impossible for any trader
to predict reliably commodity prices.
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading
facility. Derivatives clearing organizations are also subject to the
CEA and CFTC regulation. The CFTC is the governmental agency charged
with responsibility for regulation of futures exchanges and commodity interest
trading conducted on those exchanges. The CFTC’s function is to
implement the CEA’s objectives of preventing price manipulation and excessive
speculation and promoting orderly and efficient commodity interest
markets. In addition, the various exchanges and clearing
organizations themselves exercise regulatory and supervisory authority over
their member firms.
The CFTC
possesses exclusive jurisdiction to regulate the activities of commodity pool
operators and commodity trading advisors and has adopted regulations with
respect to the activities of those persons and/or entities. Under the
CEA, a registered commodity pool operator, such as the Sponsor, is required to
make annual filings with the CFTC describing its organization, capital
structure, management and controlling persons. In addition, the CEA
authorizes the CFTC to require and review books and records of, and documents
prepared by, registered commodity pool operators. Pursuant to this
authority, the CFTC requires commodity pool operators to keep accurate, current
and orderly records for each pool that they operate. The CFTC may
suspend the registration of a commodity pool operator (1) if the CFTC finds that
the operator’s trading practices tend to disrupt orderly market conditions, (2)
if any controlling person of the operator is subject to an order of the CFTC
denying such person trading privileges on any exchange, and (3) in certain other
circumstances. Suspension, restriction or termination of the
Sponsor’s registration as a commodity pool operator would prevent it, until that
registration were to be reinstated, from managing the Fund, and might result in
the termination of the Fund if a successor sponsor is not elected pursuant to
the Trust Agreement. Neither the Trust nor the Fund is required to be
registered with the CFTC in any capacity.
The CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor
registration were to be terminated, restricted or suspended, the trading advisor
would be unable, until the registration were to be reinstated, to render trading
advice to the Fund.
The CEA
requires all futures commission merchants, such as the Fund’s clearing brokers,
to meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’
funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority
over introducing brokers, who are persons that solicit or accept orders for
commodity interest trades but that do not accept margin deposits for the
execution of trades. The CEA authorizes the CFTC to regulate trading
by futures commission merchants and by their officers and directors, permits the
CFTC to require action by exchanges in the event of market emergencies, and
establishes an administrative procedure under which customers may institute
complaints for damages arising from alleged violations of the
CEA. The CEA also gives the states powers to enforce its provisions
and the regulations of the CFTC.
The
Fund’s investors are afforded prescribed rights for reparations under the
CEA. Investors may also be able to maintain a private right of action
for violations of the CEA. The CFTC has adopted rules implementing
the reparation provisions of the CEA, which provide that any person may file a
complaint for a reparations award with the CFTC for violation of the CEA against
a floor broker or a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, and their respective associated
persons.
Pursuant
to authority in the CEA, the NFA has been formed and registered with the CFTC as
a registered futures association. At the present time, the NFA is the
only self-regulatory organization for commodity interest professionals, other
than futures exchanges. The CFTC has delegated to the NFA
responsibility for the registration of commodity trading advisors, commodity
pool operators, futures commission merchants, introducing brokers, and their
respective associated persons and floor brokers. The Sponsor, any
trading advisor, the selling agents and the clearing brokers will be members of
the NFA. As such, they will be subject to NFA standards relating to
fair trade practices, financial condition and consumer
protection. Neither the Trust nor the Fund is itself required to
become a member of the NFA. As the self-regulatory body of the commodity
interest industry, the NFA promulgates rules governing the conduct of
professionals and disciplines those professionals that do not comply with these
rules. The NFA also arbitrates disputes between members and their
customers and conducts registration and fitness screening of applicants for
membership and audits of its existing members.
The
regulations of the CFTC and the NFA prohibit any representation by a person
registered with the CFTC or by any member of the NFA, that registration with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed that person or that person’s
trading program or objectives. The registrations and memberships of
the parties described in this summary must not be considered as constituting any
such approval or endorsement. Likewise, no futures exchange has given
or will give any similar approval or endorsement.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made
in this summary are subject to modification by legislative action and changes in
the rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among
other things, provides that the trading of commodity interest contracts
generally must be upon exchanges designated as contract markets or DTEFs and
that all trading on those exchanges must be done by or through exchange
members. Under the CFMA, commodity interest trading in some
commodities between sophisticated persons may be traded on a trading facility
not regulated by the CFTC. As a general matter, trading in spot
contracts, forward contracts, options on forward contracts or commodities, or
swap contracts between eligible contract participants is not within the
jurisdiction of the CFTC and may therefore be effectively
unregulated. The Sponsor may engage in those transactions on behalf
of the Fund in reliance on this exclusion from regulation. Although
U.S. banks that may act as the Fund’s counterparties in commodity interest
transactions are regulated in various ways by the Federal Reserve Board, the
Comptroller of the Currency and other U.S. federal and state banking officials,
banking authorities do not regulate the commodity interest markets.
The CFTC
is prohibited by statute from regulating trading on non-U.S. futures exchanges
and markets. The CFTC, however, has adopted regulations relating to the
marketing of non-U.S. futures contracts in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold in
the United States.
Commodity
Margin
Margin is
the minimum amount of funds that must be deposited by a commodity interest
trader with the trader’s broker to initiate and maintain an open position in
futures contracts. A margin deposit is like a cash performance
bond. It helps assure the trader’s performance of the futures
contracts that he or she purchases or sells. Futures contracts are
customarily bought and sold on initial margin that represents a very small
percentage (ranging upward from less than 2%) of the aggregate purchase or sales
price of the contract. Because of such low margin requirements, price
fluctuations occurring in the futures markets may create profits and losses
that, in relation to the amount invested, are greater than are customary in
other forms of investment or speculation. As discussed below, adverse
price changes in the futures contract may result in margin requirements that
greatly exceed the initial margin. In addition, the amount of margin
required in connection with a particular futures contract is set from time to
time by the exchange on which the contract is traded and may be modified from
time to time by the exchange during the term of the
contract. Brokerage firms, such as the Fund’s clearing brokers,
carrying accounts for traders in commodity interest contracts generally require
higher amounts of margin as a matter of policy to further protect
themselves. Over-the-counter trading generally involves the extension
of credit between counterparties, so the counterparties may agree to require the
posting of collateral by one or both parties to address credit
exposure.
When a
trader purchases an option, there is no margin requirement; however, the option
premium must be paid in full. When a trader sells an option, on the
other hand, he or she is required to deposit margin in an amount determined by
the margin requirements established for the underlying interest and, in
addition, an amount substantially equal to the current premium for the
option. The margin requirements imposed on the selling of options,
although adjusted to reflect the probability that out-of-the-money options will
not be exercised, can in fact be higher than those imposed in dealing in the
futures markets directly. Complicated margin requirements apply to
spreads and conversions, which are complex trading strategies in which a trader
acquires a mixture of options positions and positions in the underlying
interest.
Ongoing
or “maintenance” margin requirements are computed each day by a trader’s
clearing broker. When the market value of a particular open futures
contract changes to a point where the margin on deposit does not satisfy
maintenance margin requirements, a margin call is made by the
broker. If the margin call is not met within a reasonable time, the
broker may close out the trader’s position. With respect to the
Fund’s trading, the Fund (and not its Shareholders personally) is subject to
margin calls.
Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the total risk of
the combined positions.
Potential
Advantages of Investment
The
Advantages of Non-Correlation
Given
that historically, the price of soybeans and of Soybean Interests has had very
little correlation to the stock and bond markets, the Sponsor believes that the
performance of the Fund should also exhibit little correlation with the
performance of traditional equity and debt portfolio
components. However, non-correlation does not mean that the Fund’s
performance will be better than that of other types of investment, and it is
entirely possible that the Fund may not outperform other sectors of an
investor’s portfolio, or may produce losses. Additionally, although
adding the Fund’s Shares to an investor’s portfolio may provide diversification,
the Fund is not a hedging mechanism vis-a-vis traditional debt and equity
portfolio components and you should not assume that Fund Shares will appreciate
during periods of inflation or stock and bond market declines.
Non-correlated
performance should not be confused with negatively correlated
performance. Negative correlation occurs when the performance of two
asset classes tend to move in opposite direction to each
other. Non-correlation means only that the Fund’s performance will
likely have little relation to the performance of equity and debt instruments,
reflecting that certain factors that affect equity and debt prices may affect
the Fund differently and that certain factors that affect equity and debt prices
may not affect the Fund at all. The Fund’s net asset value per share
may decline or increase more or less than equity and debt instruments during
periods of both rising and falling equity and debt markets. The
Sponsor does not expect that the Fund’s performance will be negatively
correlated to general debt and equity markets.
Interest
Income
Unlike
some alternative investment funds, the Fund does not borrow money in order to
obtain leverage, so the Fund does not incur any interest
expense. Rather, the Fund’s margin deposits and cash reserves are
maintained in Treasury Securities and interest is earned on 100% of the Fund’s
available assets, which include unrealized profits credited to the Fund’s
accounts
Benchmark
Performance
The
following graph provides certain information about the historical performance
and volatility of the Benchmark, and the historical correlation of the Benchmark
with the spot price of soybeans. The graph shows (1) historical price
information for the Benchmark by taking the prices of each Benchmark Component
Futures Contract according to CBOT data, weighting each such futures contract as
weighted in the Benchmark, and deducting estimated commission charges and other
fees and expenses that the Fund will pay, and (2) historical information on the
spot price of soybeans using the price of the spot month Soybean Futures
Contract as a proxy. The graph assumes that each Benchmark Component
Futures Contract was rolled into its replacement on the date that it no longer
was a Benchmark Component Futures Contract, and each spot month Soybean Futures
Contract was rolled into the new spot month Soybean Futures Contract on its
expiration date, and each of these “rolls” is volume adjusted to account for
price differentials between the original Soybean Futures Contract and its
replacement. For example, if the original Soybean Futures Contracts
were closed out at a lower price than the price at which the replacement Soybean
Futures Contracts were entered into, then a lesser number of replacement Soybean
Futures Contracts were entered into than were closed out. In this
way, the graph takes the hypothetical effect of contango and backwardation into
account. The spot month data in the chart does not reflect any
commission charges or the other fees and expenses that the Fund will
pay.
The information regarding
the Benchmark in the graph is hypothetical, in that neither the Sponsor nor the
Fund was using the Benchmark to trade Soybean Interests during the period
covered by the chart. HYPOTHETICAL PERFORMANCE RESULTS HAVE
MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT THE FUND WILL OR IS LIKELY TO ACHIEVE PROFITS
OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP
DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE
OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE
GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION,
HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL
TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL
TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO
A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS
WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE
NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE
IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED
FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN
ADVERSELY AFFECT ACTUAL TRADING RESULTS.
THE
SPONSOR HAS HAD NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OF FOR
CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO
THE HYPOTHETICAL PERFORMANCE RESULTS, INVESTORS SHOULD BE PARTICULARLY WARY OF
PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
Furthermore,
while the graph below provides information on the hypothetical correlation of
the Benchmark with the spot price of soybeans, it does not attempt to provide
any information on the ability of the Sponsor to cause the Fund’s performance to
correlate closely with that of the Benchmark.
PART II
Information Not Required in the
Prospectus
Item
13.
|
Other Expenses of Issuance and
Distribution
|
Set forth below is an estimate (except as indicated) of the amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
registrant in connection with the issuance and distribution of the units
pursuant to the prospectus contained in this registration
statement.
|
|
Amount
|
|
SEC
registration fee (actual)
|
|
$ |
139.50 |
|
NYSE
Arca Listing Fee
|
|
$ |
5,000 |
|
FINRA
filing fees
|
|
$ |
750 |
|
Blue
Sky expenses
|
|
|
n/a |
|
Auditor’s
fees and expenses
|
|
$ |
30,000 |
|
Legal
fees and expenses
|
|
$ |
325,000 |
|
Printing
expenses
|
|
$ |
20,000 |
|
Miscellaneous
expenses
|
|
|
n/a |
|
Total
|
|
$ |
380,889.50 |
|
Item
14.
|
Indemnification of Directors
and Officers
|
The
Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the
“Trust Agreement”) provides that the Sponsor shall be indemnified by the Trust
(or, by a series of the Trust separately to the extent the matter in question
relates to a single series or disproportionately affects a series in relation to
other series) against any losses, judgments, liabilities, expenses and amounts
paid in settlement of any claims sustained by it in connection with its
activities for the Trust, provided that (i) the Sponsor was acting on behalf of
or performing services for the Trust and has determined, in good faith, that
such course of conduct was in the best interests of the Trust and such liability
or loss was not the result of gross negligence, willful misconduct, or a breach
of the Trust Agreement on the part of the Sponsor and (ii) any such
indemnification will only be recoverable from the applicable trust estate or
trust estates. All rights to indemnification permitted by the Trust
Agreement and payment of associated expenses shall not be affected by the
dissolution or other cessation to exist of the Sponsor, or the withdrawal,
adjudication of bankruptcy or insolvency of the Sponsor, or the filing of a
voluntary or involuntary petition in bankruptcy under Title 11 of the Bankruptcy
Code by or against the Sponsor.
Notwithstanding
the foregoing, the Sponsor shall not be indemnified for any losses, liabilities
or expenses arising from or out of an alleged violation of U.S. federal or state
securities laws unless (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee and the court approves the indemnification of such
expenses (including, without limitation, litigation costs), (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee and the court approves the
indemnification of such expenses (including, without limitation, litigation
costs) or (iii) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The Trust
and its series shall not incur the cost of that portion of any insurance which
insures any party against any liability, the indemnification of which is
prohibited by the Trust Agreement.
Expenses
incurred in defending a threatened or pending civil, administrative or criminal
action suit or proceeding against the Sponsor shall be paid by the Trust 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
under the Trust Agreement.
For
purposes of the indemnification provisions of the Trust Agreement, the term
“Sponsor” includes, in addition to the Sponsor, any other covered person
performing services on behalf of the Trust and acting within the scope of the
Sponsor’s authority as set forth in the Trust Agreement.
In the
event the Trust is made a party to any claim, dispute, demand or litigation or
otherwise incurs any loss, liability, damage, cost or expense as a result of or
in connection with any Shareholder’s (or assignee’s) obligations or liabilities
unrelated to Trust business, such Shareholder (or assignees cumulatively) shall
indemnify, defend, hold harmless, and reimburse the Trust for all such loss,
liability, damage, cost and expense incurred, including attorneys’ and
accountants’ fees.
The payment of any amount pursuant to
the Trust Agreement shall take into account the allocation of liabilities and
other amounts, as appropriate, among the series of the Trust.
Item
15.
|
Recent Sales of Unregistered
Securities
|
Item
16.
|
Exhibits and Financial
Statement Schedules
|
|
3.1(1)
|
Amended
and Restated Declaration of Trust and Trust Agreement of the
registrant.
|
|
3.2(2)
|
Certificate
of Trust of the registrant.
|
|
3.3(3)
|
Instrument
establishing the Fund.
|
|
5.1(3)
|
Opinion
of Sutherland Asbill & Brennan LLP relating to the legality of
the Shares.
|
|
8.1(3)
|
Opinion
of Sutherland Asbill & Brennan LLP with respect to federal income
tax consequences.
|
|
10.1(3)
|
Form
of Authorized Purchaser Agreement.
|
|
10.2(3)
|
Marketing
Agent Agreement
|
|
10.3(3)
|
Global
Custody Agreement.
|
|
10.4(3)
|
Services
Agreement.
|
|
10.5(4)
|
Transfer
Agency and Service Agreement.
|
|
10.6(3)
|
Form
of Transfer Agency and Service Agreement incorporating the
Fund.
|
|
23.1(3)
|
Consent
of Sutherland Asbill & Brennan LLP (to be included in Exhibit
5.1).
|
|
23.2(5)
|
Consent
of Independent Registered Public Accounting
Firm.
|
(1)
|
Previously
filed as like-numbered exhibit to Pre-Effective Amendment No. 4 to
Registration Statement No. 333-162033, filed on May 26, 2010 and
incorporated by reference
herein.
|
(2)
|
Previously
filed as like-numbered exhibit to Registration Statement No. 333-162033,
filed on September 21, 2009 and incorporated by reference
herein.
|
(3)
|
To
be filed by amendment.
|
(4)
|
Previously
filed as like-numbered exhibit to Pre-Effective Amendment No. 3 to
Registration Statement No. 333-162033, filed on March 29, 2010 and
incorporated by reference
herein.
|
(b) Financial Statement
Schedules
The
financial statement schedules are either not applicable or the required
information is included in the financial statements and footnotes related
thereto.
(a) Each
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) If
the registrant is subject to Rule 430C (§230.430C of this chapter), each
prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A
(§230.430A of this chapter), shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§230.424 of this
chapter);
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(b)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunder duly authorized, in the city of New York, state of New
York, on June 16, 2010.
Teucrium
Commodity Trust
|
|
|
By:
|
Teucrium
Trading, LLC, Sponsor
|
|
|
By:
|
/s/ Sal Gilbertie
|
June
16, 2010
|
Name:
|
Sal
Gilbertie
|
Title:
|
President,
Principal Executive Officer and
Member
|
POWER
OF ATTORNEY
The
undersigned members and officers of Teucrium Trading, LLC, the sponsor of
Teucrium Commodity Trust, hereby constitute and appoint Sal Gilbertie and Dale
Riker and each of them with full power to act with full power of substitution
and resubstitution, our true and lawful attorneys-in-fact with full power to
execute in our name and behalf in the capacities indicated below this
Registration Statement on Form S-1 and any and all amendments thereto, including
post-effective amendments to this Registration Statement and to sign any and all
additional registration statements relating to the same offering of securities
as this Registration Statement that are filed pursuant to Rule 462(b) of the
Securities Act of 1933, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission and thereby ratify and confirm that such attorneys-in-fact, or any of
them, or their substitutes shall lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
President/Member
of the Sponsor
|
|
|
/s/
Sal Gilbertie
|
|
|
|
June
16, 2010
|
Sal
Gilbertie
|
|
|
|
|
|
|
Secretary/Treasurer/Member
of the Sponsor
|
|
|
/s/
Dale Riker
|
|
|
|
|
Dale
Riker
|
|
|
|
|
|
Member
of the Sponsor
|
|
|
/s/
Carl N. Miller III
|
|
|
|
|
Carl
N. Miller III
|
|
|
|
EXHIBIT INDEX
23.2
|
Consent
of Independent Registered Public Accounting
Firm.
|