Filed Pursuant to Rule
424(b)(3)
SEC File No.
333-167593
Teucrium
Natural Gas Fund
40,000,000
Shares
Teucrium
Natural Gas 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 50,000 Shares at their net asset value (“NAV”) to
“Authorized Purchasers” (as defined below) through Foreside Fund Services, LLC,
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. Deutsche Bank Securities Inc. 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
natural gas 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 are
expected to trade on the secondary market on the NYSE Arca at prices that are
lower or higher than their net asset value per Share. Fund Shares will be
listed on the NYSE Arca under the symbol “NAGS.”
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 four natural gas
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 October 22,
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 16. 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.
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Per share
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Per Basket
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Price
of the Shares*
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$
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25.00
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$
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1,250,000
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* Based
on closing net asset value on October 22, 2010. The price may vary based on net
asset value in effect on a particular day.
The date
of this prospectus is October 22,
2010.
COMMODITY
FUTURES TRADING COMMISSION
RISK
DISCLOSURE STATEMENT
YOU
SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO
PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE
THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS
WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE
OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN
ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR
PARTICIPATION IN THE POOL.
THE
RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU
SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN
LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR
TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE
FOLLOWING:
-IF
YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND
OF ALL TRANSACTION COSTS.
-IF
YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A COMMODITY OPTION OR
ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU MAY SUSTAIN A TOTAL LOSS OF
THE INITIAL MARGIN FUNDS OR SECURITY DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU
DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF
THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO
DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN
ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED
FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND
YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR
ACCOUNT.
-UNDER
CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO LIQUIDATE
A POSITION. THIS CAN OCCUR FOR EXAMPLE, WHEN THE MARKET MAKES A
“LIMIT MOVE.”
-THE
PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, SUCH AS A
“STOP-LOSS” OR “STOP-LIMIT” ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE
INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH
ORDER.
-A
“SPREAD” POSITION MAY NOT BE LESS RISKY THAN A SIMPLE “LONG” OR “SHORT”
POSITION.
-THE
HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING
CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD
TO LARGE LOSSES AS WELL AS GAINS.
-IN
SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OF EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT
CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL BY
THE COMMODITY TRADING ADVISOR BEGINNING AT PAGE 59
THIS
BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ASPECTS OF
THE COMMODITY INTEREST MARKETS. YOU SHOULD, THEREFORE, CAREFULLY STUDY
THIS DISCLOSURE DOCUMENT, AND COMMODITY INTEREST TRADING, BEFORE YOU TRADE,
INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT
PAGE 7.
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADE ADVISOR MAY ENGAGE IN
TRADING 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. 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. BEFORE YOU TRADE YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO
YOUR PARTICULAR CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND
TO TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR LOCAL AND
OTHER RELEVANT JURISDICTIONS.
THIS
POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
TEUCRIUM
NATURAL GAS FUND
TABLE
OF CONTENTS
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
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iii
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PROSPECTUS
SUMMARY
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1
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Principal
Offices of the Fund and the Sponsor
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1
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Breakeven
Point
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1
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Overview
of the Fund
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1
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The
Shares
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5
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The
Fund’s Investments in Natural Gas Interests
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6
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Principal
Investment Risks of an Investment in the Fund
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7
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Financial
Condition of the Fund
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9
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Defined
Terms
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9
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Breakeven
Analysis
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10
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The
Offering
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11
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WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND?
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16
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Risks
Associated With Investing Directly or Indirectly in Natural
Gas
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16
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The
Fund’s Operating Risks
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24
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Risk
of Leverage and Volatility
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35
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Over-the-Counter
Contract Risk
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36
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Risk
of Trading in International Markets
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37
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Tax
Risk
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38
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THE
OFFERING
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39
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The
Fund in General
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39
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The
Sponsor
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40
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The
Trustee
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42
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Operation
of the Fund
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43
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Futures
Contracts
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48
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Cleared Natural Gas
Swaps
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52 |
Over-the-Counter
Derivatives
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52
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Benchmark
Performance
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54
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Natural
Gas and the Natural Gas Market
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54
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The
Fund’s Investments in Treasury Securities, Cash and Cash
Equivalents
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55
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Other
Trading Policies of the Fund
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56
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The
Service Providers
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57
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Fees
to be Paid by the Fund
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59
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Form
of Shares
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60
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Transfer
of Shares
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60
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Inter-Series
Limitation on Liability
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61
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Plan
of Distribution
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61
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The
Flow of Shares
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64
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Calculating
NAV
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64
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Creation
and Redemption of Shares
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66
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Secondary
Market Transactions
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71
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Use
of Proceeds
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71
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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72
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The
Trust Agreement
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76
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The
Sponsor Has Conflicts of Interest
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81
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Provisions
of Federal and State Securities Laws
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82
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Books
and Records
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83
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Analysis
of Critical Accounting Policies
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83
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Statements,
Filings, and Reports to Shareholders
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83
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Fiscal
Year
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84
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Governing
Law; Consent to Delaware Jurisdiction
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84
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Legal
Matters
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84
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Privacy
Policy
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85
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U.S.
Federal Income Tax Considerations
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85
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Investment
By ERISA Accounts
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98
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INFORMATION
YOU SHOULD KNOW
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101
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WHERE
YOU CAN FIND MORE INFORMATION
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101
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TEUCRIUM
TRADING, LLC - INDEX TO FINANCIAL STATEMENTS |
102 |
TEUCRIUM
COMMODITY TRUST - INDEX TO FINANCIAL STATEMENTS |
115 |
TEUCRIUM
NATURAL GAS FUND — INDEX TO FINANCIAL STATEMENTS
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130
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APPENDIX
A - GLOSSARY OF DEFINED TERMS |
136 |
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 16, 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 $0.36 or
1.44% of the initial selling price. For more information, see
“Breakeven Analysis” below.
Overview
of the Fund
Teucrium
Natural Gas 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. The Fund is one of six series of the
Trust; each series is operated as a separate commodity pool. 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
October
22, 2010, the date of this prospectus.
The
investment objective of the Fund is to have the daily changes in percentage
terms of the Shares’ NAV reflect the daily changes in percentage terms of a
weighted average of the following: the nearest
to spot month March, April, October and November Henry Hub Natural Gas
Futures Contracts traded on the NYMEX, weighted 25% equally in each contract
month, before taking Fund expenses and interest income into account. (This
weighted average of the four referenced Natural Gas Futures Contracts is
referred to herein as the “Benchmark,” and the four Natural Gas Futures
Contracts that at any given time make up the Benchmark are referred to herein as
the “Benchmark Component Futures Contracts.”)
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 Natural Gas Futures Contracts traded on the NYMEX, the
IntercontinentalExchange (“ICE”), and other foreign exchanges. In
addition, and to a
limited extent, the Fund will invest in natural gas-based swap agreements
that are cleared through the ICE or its affiliated provider of clearing services
(“Cleared Natural Gas Swaps”) to the extent permitted and appropriate in light
of the liquidity in the Cleared Natural Gas Swap market. Once position
limits or accountability levels in Natural Gas Futures Contracts are
applicable, the Fund’s intention is to invest first in Cleared Natural Gas Swaps
to the extent permitted by the position limits or accountability levels
applicable to Cleared Natural Gas Swaps and appropriate in light of the
liquidity in the Cleared Natural Gas Swap market, and then in contracts
and instruments such as cash-settled options on Natural Gas Futures Contracts
and forward contracts, swaps other than Cleared Natural Gas Swaps, and other
over-the-counter transactions that are based on the price of natural gas and
Natural Gas Futures Contracts (collectively, “Other Natural Gas Interests” and
together with Natural Gas Futures Contracts and Cleared Natural Gas Swaps,
“Natural Gas 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, before taking Fund expenses and any
interest income from the cash, cash equivalents and U.S. Treasury securities
held by the Fund into account, 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 Natural Gas Futures
Contracts.
Natural
Gas Futures Contracts traded on the NYMEX are listed for the current year and
the next five years. However, the nature of the Benchmark is such that the Fund
will not hold futures contracts beyond approximately the first 14 months of
listed Natural Gas Futures Contracts.
It is the
intent of the Sponsor to never hold a Benchmark Component Futures Contract to
spot. For example, in terms of the Benchmark, in January of a given year, the
Benchmark Component Futures Contracts will be the contracts expiring in March
(the first-to-expire Benchmark Component), April (the second-to-expire Benchmark
Component), October (the third-to-expire Benchmark Component), and November (the
fourth-to-expire Benchmark Component). Because the next-to-expire Benchmark
Component Natural Gas Futures Contract (the March contract) will become spot on
the third-to-last trading day in January, the Sponsor will “roll” or change that
contract prior to the third-to-last trading day in January for a position in the
same month (March) of the following year, not intending to hold any futures
contract to spot. The Fund seeks to achieve its investment objective
primarily by investing in Natural Gas 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 Natural Gas 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 (in the month in which a Benchmark Component Natural
Gas Futures Contract is set to become the first-to-expire Natural Gas Futures
Contract listed on NYMEX (commonly call the “spot” contract), the
first-to-expire Benchmark Component Contract will become the next-to-expire
(spot) Natural Gas Futures Contract and 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 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 Natural Gas Futures Contracts other than the Benchmark Component Futures
Contracts, Cleared Natural Gas Swaps and/or Other Natural Gas Interests.
For example, certain Cleared Natural Gas Swaps have standardized terms similar
to, and are priced by reference to, a corresponding Benchmark Component Futures
Contract. Additionally, Other Natural Gas Interests that do not have
standardized terms and are not exchange-traded, referred to as
“over-the-counter” Natural Gas Interests, can generally be structured as the
parties to the Natural Gas Interest contract desire. Therefore, the Fund
might enter into multiple Cleared Natural Gas Swaps and/or over-the-counter
Natural Gas Interests intended to exactly replicate the performance of each of
the Benchmark Component Futures Contracts, or a single over-the-counter Natural
Gas 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 Natural Gas Interest, the performance of the Natural Gas
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 Natural Gas 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 Natural Gas 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, before taking
Fund expenses and any interest income from the cash, cash equivalents and U.S.
Treasury securities held by the Fund into account, to closely track that of the
Benchmark.
The Fund
invests in Natural Gas 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 Natural Gas
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 Natural Gas 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 Natural Gas 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:
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·
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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
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·
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B
is the average daily change in the Benchmark over the same
period.
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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, before taking Fund
expenses and any interest income into account.
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 natural gas market in a cost-effective manner. Such
investors may include participants in the natural gas market and other
industries seeking to hedge the risk of losses in their natural gas-related
transactions, as well as investors seeking exposure to the natural gas
market. Accordingly, depending on the investment objective of an
individual investor, the risks generally associated with investing in the
natural gas 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 natural gas on the spot market. Furthermore, as
noted above, the Fund also invests in Treasury Securities, cash and/or cash
equivalents to meet its current or potential margin or collateral requirements
with respect to its investments in Natural Gas 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 natural gas or Natural Gas 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 natural gas, 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
natural gas. 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
British Thermal Units (“MMBtu”) of natural gas or the price of any particular
Natural Gas 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 Natural Gas 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, accountability levels and position limits on Natural Gas
Futures Contracts, Cleared Natural Gas Swaps or Other Natural Gas 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
Natural Gas Interests with an aggregate market value that approximates the
amount of Treasury Securities and/or 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 50,000 Shares and therefore may require a commitment of over a million
dollars (e.g. , 50,000
Shares times an initial Share price of $25.00 equals $1.25 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 “NAGS” 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” below. 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 October
22, 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
50,000 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 Natural Gas Interests
A brief
description of the principal types of Natural Gas Interests in which the Fund
may invest is set forth below.
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·
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A
futures contract is a standardized contract traded on a futures exchange
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.
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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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·
|
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.
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|
·
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Over-the-counter
contracts (such as swap contracts) generally involve an exchange of a
stream of payments between the contracting parties. Over-the-counter
contracts generally are not uniform and not
exchange-traded.
|
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 natural gas 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 Natural
Gas Futures Contracts.
A more
detailed description of Natural Gas Interests and other aspects of the natural
gas and Natural Gas Interest markets can be found later in this
prospectus.
As
noted, the Fund invests in Natural Gas Futures Contracts, including those traded
on the NYMEX and the ICE, as well as Cleared Natural Gas Swaps cleared through
the ICE. The Fund expressly disclaims any association with the NYMEX or
ICE or endorsement of the Fund by such exchanges and acknowledges that “NYMEX”
and “New York Mercantile Exchange,” as well as “ICE” and
“IntercontinentalExchange” are registered trademarks of each respective
exchange.
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 16.
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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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There
is a risk that the changes in the price of the Fund’s Shares on the NYSE
Arca in percentage terms will not closely track the changes in the price
of natural gas in percentage terms. 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 the changes in the price of the Benchmark Component Futures
Contracts; or the changes in the Benchmark Component Futures Contracts do
not correlate closely with the changes in the cash or spot price of
natural gas. This is 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 natural gas or as a hedge
against the risk of loss in natural gas-related
transactions.
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·
|
Investors
may choose to use the Fund as a means of investing indirectly in natural
gas, and there are risks involved in such investments. The risks and
hazards that are inherent in natural gas production may cause the price of
natural gas to fluctuate widely. The exploration for, and production
of, natural gas is an uncertain process with many risks. The cost of
drilling, completing and operating wells for natural gas is often
uncertain, and a number of factors can delay or prevent drilling
operations or production. These include, but are not limited
to: unexpected drilling conditions; pressure or irregularities in
formations; equipment failures or repairs; fires or other accidents;
adverse weather conditions; pipeline ruptures or spills; shortages or
delays in the availability of drilling rigs and the delivery of equipment;
and environmental hazards. Environmental hazards include natural gas
leaks, ruptures and discharges of toxic gases. Natural gas
operations are also subject to various U.S. federal, state and local
regulations that materially affect operations. Natural gas
production is also mostly concentrated to North America in that
transporting natural gas is primarily limited to pipelines, although
under limited circumstances, natural gas may be liquefied and
shipped to or from North
America.
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·
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The
Sponsor has limited experience operating a commodity
pool.
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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 Natural Gas 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 natural gas 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
natural gas 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 natural gas 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 natural gas 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
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 Natural Gas 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 exposure to losses from its investments in
Natural Gas 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 Natural Gas Interests. To the extent that
these Other Natural Gas Interests are contracts individually negotiated
between their parties, they may not be as liquid as Natural Gas 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 Natural Gas Interests that are traded or sold in
the United States and 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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|
·
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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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Regulation
of the financial markets is extensive and dynamic. On July 21,
2010, “The Dodd-Frank Wall Street Reform and Consumer Protection Act” was
signed into law. This new law contains broad changes to the
financial services industry including provisions changing the regulation
of commodity interests. Such changes include the requirement
that position limits on energy-based commodity futures contracts be
established; new registration, recordkeeping, capital and margin
requirements for “swap dealers” and “major swap participants”; the forced
use of clearinghouse mechanisms for most over-the-counter transactions;
and the aggregation, for purposes of position limits, of all positions in
energy futures held by a single entity and its affiliates, whether such
positions exist on U.S. futures exchanges, non-U.S. futures exchanges, or
in over-the-counter contracts. The new law and the rules to be
promulgated thereunder may negatively impact the Fund’s ability to meet
its investment objective.
|
For
additional risks, see “What Are the Risk Factors Involved with an Investment in
the Fund?”
Financial
Condition of the Fund
The Fund
will not calculate the NAV prior to the effective date. 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
|
|
Redemption
Basket Fee (2)
|
|
$
|
0.01
|
|
Estimated
Brokerage Fees (0.02%) (3)
|
|
$
|
0.01
|
|
Interest
Income (0.17%) (4)
|
|
$
|
(0.04
|
)
|
Fees
to Trustee(s) (5) |
|
$ |
0.0004 |
|
Custodial,
Administrative and Bookkeeping Expenses (6) |
|
$ |
0.07 |
|
Marketing
Agent Expenses (7) |
|
$ |
0.04 |
|
Other
Fund Fees and Expenses (8) |
|
$ |
0.02 |
|
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
|
|
$
|
0.36
|
|
Percentage
of initial selling price per share
|
|
|
1.44
|
%
|
(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 Redemption Basket fee of $500.00 for
each order they place to redeem one or more baskets. A redemption
order must be at least one basket, which is 50,000 Shares. This
breakeven analysis assumes a hypothetical investment in a single Share so the
Redemption Basket fee is shown as $.01 (500/50,000).
(3)
The Fund determined this amount as follows. Assuming that the price
of a Share is $25.00, the Fund would receive $1,250,000 upon the sale of a
Creation Basket (50,000 Shares multiplied by $25.00). Assuming that
this entire amount is invested in Natural Gas Futures Contracts and that there
is no change in the settlement price of such contracts, the Fund would be
required to purchase approximately 29 Natural Gas Futures Contracts to support
the Creation Basket ($1,250,000 divided by $42,000, the value of the April 2010
Natural Gas Futures Contract as of March 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-quarter (approximately 7) of the contracts it holds with new
contracts four times per year. Assuming further that futures
commission merchants charge approximately $4.00 per Natural Gas Futures Contract
for each purchase or sale, the annual futures commission merchant charge would
be approximately $224.00 (14 total Natural Gas Futures Contract transactions (7
purchases and 7 sales) multiplied by four times per year multiplied by
$4.00). As a percentage of the total investment of $1,250,000, this
annual commission expense would be approximately 0.02%.
(4)
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 0.17%
based on the interest rate on three-month Treasury Bills as of July 6,
2010. The actual rate will vary.
(5)
As Trustee, Wilmington Trust Company receives an annual fee in the amount of
$3,000 for all series in the Trust as of the date the fee is paid. For
purposes of this breakeven analysis, the table assumes the portion payable by
the Fund to Wilmington Trust Company is $500. ($500 divided by
$1,250,000=0.0004.)
(6)
The Fund has contracted to pay The Bank of New York Mellon to provide custodial,
administrative and transfer agency services on behalf of the Fund. The
Fund will pay 0.0075% annually of the average gross assets for custody services
and 0.0075% annually of the average gross assets for transfer agency
services. A fee of 0.05% annually of the average gross assets will be paid
for administrative services.
(7)
A minimum annual fee of $300,000 per year is paid to Foreside Fund Services, LLC
for services as marketing agent. This minimum is for all series of the
Trust as of the date the fee is paid. For purposes of this breakeven
analysis, the table assumes the portion payable to Foreside Fund Services, LLC
is $50,000 ($50,000 divided by $1,250,000 = $0.04).
(8)
The Fund has assumed the aggregate costs attributable to tax reporting and
accounting to be $5,000. This estimate is based on the experience of the
Sponsor with other series available in the Trust. The amount assumed also
takes into account fees paid for the portion attributable to the Fund for shared
services provided to all series of funds available in the Trust for which common
tax reporting and accounting expenses are borne. All legal expenses
attributable to startup costs of the Fund will be borne by the Sponsor.
Legal expenses borne by the Fund after the Fund begins sales are expected to be
$25,000 per year. This is based upon the Sponsor’s experience with other
series in the Trust. The Other Fees and Expenses also assume a printing
fee of $500.00.
The
Offering
Offering
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|
The
Fund will offer Creation Baskets consisting of 50,000 Shares through the
Marketing Agent to Authorized Purchasers. Authorized Purchasers may
purchase Creation Baskets consisting of 50,000 Shares at the Fund’s NAV,
which is expected to be $25.00. The initial Authorized
Purchaser intends to offer the Shares of the initial Creation Baskets
publicly. The initial Creation Basket is expected to be purchased
by the initial Authorized Purchaser on, or soon after, 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
|
|
The
Sponsor will apply substantially all of the Fund’s assets toward investing
in Natural Gas 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 Natural Gas
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 Natural Gas
Futures Contracts and collateral for Cleared Natural Gas Swaps and Other
Natural Gas 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.
|
NYSE
Arca Symbol
|
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“NAGS”
|
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|
|
Creation
and Redemption
|
|
Authorized
Purchasers do not pay for each order of Creation
Baskets. However, Authorized Purchasers pay a $500.00 fee for
each order to redeem one or more 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
|
|
The
Fund is one of multiple 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.
|
Registration
Clearance and Settlement
|
|
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
|
|
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 NYMEX’s main
pricing mechanism is open.
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Fund
Expenses
|
|
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 the 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 investor
relations and services; (ix) costs of preparation of all federal, state,
local and foreign tax returns and any taxes payable on the income, assets
or operations of the Fund; and (x) 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 1.44%
of the daily net assets for the twelve-month period ending October,
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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|
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General
expenses of the Trust will be allocated among the existing 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.
|
Termination
Events
|
|
The
Trust and the Fund shall continue in existence from the date of their
formation in perpetuity, unless the Trust or the Fund, as the case may be,
is sooner terminated upon the occurrence of certain events specified in
the Trust Agreement, including the following: (1) the filing of a
certificate of dissolution or cancellation of the Sponsor or revocation of
the Sponsor’s charter or the withdrawal of the Sponsor, unless
shareholders holding a majority of the outstanding shares of the Trust
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
|
|
We
expect the initial Authorized Purchaser to be Deutsche Bank Securities
Inc., and we expect 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, the Trust’s and the Sponsor’s
financial statements and the related notes.
Risks
Associated With Investing Directly or Indirectly in Natural Gas
Investing
in Natural Gas Interests subjects the Fund to the risks of the natural gas
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 natural gas market because it invests
in Natural Gas Interests. The risks and hazards that are inherent in the
natural gas market may cause the price of natural gas 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 natural gas, then the
price of its Shares will fluctuate accordingly.
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The
exploration for, and production of, natural gas is an uncertain process
with many risks. The costs of drilling, completing and operating
wells for natural gas is often uncertain, and a number of factors can
delay or prevent drilling operations or production, including but not
limited to:
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Unexpected
drilling conditions;
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Pressure
or irregularities in formations;
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Equipment
failures or repairs;
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Fires
or other accidents;
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Pipeline
ruptures or spills;
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Shortages
or delays in the availability of drilling rigs and the delivery of
equipment;
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Adverse
weather conditions;
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Compliance
with government regulations; and
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Environmental
hazards, including natural gas leaks, ruptures and discharges of toxic
gases.
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Natural
gas production and distribution is primarily centralized to North America
due to the limited means of transporting natural gas (i.e., natural gas is
most efficiently transported through pipelines, although it can be
liquefied and then transported outside of the pipeline
distribution). Consequently, regulations on the production and
distribution of natural gas are primarily concentrated in the United
States, Canada and Mexico. Regulations by countries outside North
America generally have little impact on the spot price of natural
gas.
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Natural
gas production is subject to U.S. federal, state, and local policies and
regulations that materially affect operations. Matters regulated
include discharge permits for drilling operations, drilling and
abandonment bonds, reports concerning operations, the spacing of wells and
pooling of properties and taxation. At various times, regulatory
agencies have imposed price controls and limitations on production.
In order to conserve supplies of natural gas, these agencies have
restricted the rates of flow of natural gas wells below actual production
capacity. Federal, state and local laws regulate production,
handling, storage, transportation and disposal of natural gas, by-products
from natural gas and other substances and materials produced or used in
connection with natural gas
operations.
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Natural
gas transmission, distribution, gathering, and processing activities involve
numerous risks that may affect the price of natural gas.
There are
a variety of hazards inherent in natural gas transmission, distribution,
gathering and processing, such as leaks, explosions, pollution, release of toxic
substances, adverse weather conditions (such as hurricanes and flooding),
pipeline failure, abnormal pressures, uncontrollable flows of natural gas,
scheduled and unscheduled maintenance, physical damage to the gathering or
transportation system, and other hazards which could affect the price of natural
gas. To the extent these hazards limit the supply or delivery of natural
gas, natural gas prices will increase.
The
price of natural gas may fluctuate on a seasonal and quarterly basis and this
would result in fluctuations in the price of the Fund’s Shares.
Natural
gas prices fluctuate seasonally. For example, in some parts of the United
States and other markets, the natural gas demand for power peaks during the cold
winter months, with market prices peaking at that time. As a result, in
the future, the overall price of natural gas may fluctuate substantially on a
seasonal and quarterly basis and thus make consecutive period to period
comparisons less relevant.
Natural
gas transmission and storage operations are subject to government regulations
and rate proceedings which could have an impact on the price of natural
gas.
Natural
gas transmission and storage operations in North America are subject to
regulation and oversight by the Federal Energy Regulatory Commission, various
state regulatory agencies, and Canadian regulatory authorities. These
regulatory bodies have the authority to effect rate settlements on natural gas
storage, transmission and distribution services. As a consequence, the
price of natural gas may be affected by a change in the rate settlements
effected by one or more of these regulatory bodies.
The
limited method for transporting and storing natural gas may cause the price of
natural gas to increase.
Natural
gas is primarily transported and stored throughout the United States by way of
pipeline and underground storage facilities. These systems may not be
adequate to meet demand, especially in times of peak demand or in areas of the
United States where natural gas service is already limited due to minimal
pipeline and storage infrastructure. As a result of the limited method for
transporting and storing natural gas, the price of natural gas may
fluctuate.
The
Benchmark is not designed to correlate exactly with the spot price of natural
gas and this could cause the changes in the price of the Shares to substantially
vary from the changes in the spot price of natural gas. Therefore, you may
not be able to effectively use the Fund to hedge against natural gas-related
losses or to indirectly invest in natural gas.
The
Benchmark Component Futures Contracts reflect the price of natural gas for
future delivery, not the current spot price of natural gas, so at best the
correlation between changes in such Natural Gas Futures Contracts and the spot
price of natural gas will be only approximate. Weak correlation between
the Benchmark and the spot price of natural gas may result from the typical
seasonal fluctuations in natural gas prices discussed above. Imperfect
correlation may also result from speculation in Natural Gas Interests, technical
factors in the trading of Natural Gas 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 natural gas, then the price of Shares may not
accurately track the spot price of natural gas and you may not be able to
effectively use the Fund as a way to hedge the risk of losses in your natural
gas-related transactions or as a way to indirectly invest in natural
gas.
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 natural gas-related losses or as a way to
indirectly invest in natural gas.
The
Sponsor endeavors to invest the Fund’s assets as fully as possible in Natural
Gas 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 Natural Gas Futures Contracts
other than the Benchmark Component Futures Contracts, Cleared Natural Gas
Swaps and Other Natural Gas 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 Natural Gas 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 Natural Gas 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 Natural Gas
Interests having an aggregate notional amount exactly equal to the Fund’s
NAV. As a standardized contract, a single Natural Gas Futures
Contract or Cleared Natural Gas Swap is for a specified amount of natural
gas, 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 $1,250,000 for the sale of a Creation Basket
and that the value (i.e., the
notional amount) of a Natural Gas Futures Contract is $42,000, the Fund
could only enter into 29 Natural Gas Futures Contracts with an aggregate
value of $1,218,000). While the Fund may be better able to achieve
the exact amount of exposure to the natural gas market through the use of
over-the-counter Other Natural Gas Interests, there is no assurance that
the Sponsor will be able to continually adjust the Fund’s exposure to such
Other Natural Gas Interests to maintain such exact exposure.
Furthermore, as noted above, the use of Other Natural Gas Interests may
itself result in imperfect correlation with the Benchmark. Any
amounts not invested in Natural Gas Interests will be held in 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 Natural Gas
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 natural gas market. On the other hand, if the
Fund’s NAV is equal to 100.9 times the value of a single Natural Gas
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 Natural Gas Futures Contracts due to applicable
accountability levels and position limits. In these instances, the
Fund would likely invest to a greater extent in Natural Gas Interests not
subject to these accountability levels and position limits. To the
extent that the Fund invests in Cleared Natural Gas Swaps and Other
Natural Gas Interests, the correlation between the Fund’s NAV and the
Benchmark may be lower. In certain circumstances, accountability
levels and position limits 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 natural
gas-related losses or indirectly invest in natural gas.
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 natural
gas-related losses or to indirectly invest in natural gas.
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 natural gas, even if
the Fund’s NAV was closely tracking movements in the spot price of natural
gas. If this occurs, you may not be able to effectively use the Fund to
hedge the risk of losses in your natural gas-related transactions or to
indirectly invest in natural gas.
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 natural gas. 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 accountability levels, position limits and price
fluctuation limits, may contribute to a lack of liquidity with respect to some
exchange-traded Natural Gas 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 Natural Gas 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 natural gas 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 Natural Gas Interests that the
Sponsor will acquire or enter into for the Fund increases the risk of
illiquidity. Because Natural Gas 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 natural
gas purchasers are the predominant hedgers in the market, the Fund might have to
reinvest at higher futures prices or choose Other Natural Gas
Interests.
The
changing nature of the participants in the natural gas market will influence
whether futures prices are above or below the expected future spot price.
Natural gas producers and distributors will typically seek to hedge against
falling natural gas prices by selling Natural Gas Futures Contracts.
Therefore, if natural gas producers and distributors become the predominant
hedgers in the futures market, prices of Natural Gas Futures Contracts will
typically be below expected future spot prices. Conversely, if the
predominant hedgers in the futures market are the purchasers of natural gas who
purchase Natural Gas Futures Contracts to hedge against a rise in prices, the
prices of Natural Gas 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 Natural Gas Futures Contract that is no longer a
Benchmark Component Futures Contract and purchase a new Natural Gas Futures
Contract or to sell a Natural Gas Futures Contract to meet redemption
requests.
While
the Fund does not intend to take physical delivery of natural gas under its
Natural Gas 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 natural
gas under its Natural Gas Interests, Natural Gas Futures Contracts are
traditionally not cash-settled contracts, and it is possible to take delivery
under these and some Other Natural Gas Interests. Storage costs associated
with purchasing natural gas could result in costs and other liabilities that
could impact the value of Natural Gas Futures Contracts or certain Other Natural
Gas Interests. Storage costs include the time value of money invested in
natural gas as a physical commodity plus the actual costs of storing the natural
gas less any benefits from ownership of natural gas that are not obtained by the
holder of a futures contract. In general, Natural Gas Futures Contracts
have a one-month delay for contract delivery and the pricing of back month
contracts (the back month is any future delivery month other than the spot
month) includes storage costs. To the extent that these storage costs
change for natural gas while the Fund holds Natural Gas Interests, the value of
the Natural Gas 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 Natural Gas 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
natural gas price indices.
The
design of the Fund’s Benchmark is such that the Benchmark Component Futures
Contracts will change four 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 Natural Gas 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 Natural Gas 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 natural gas 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 natural gas 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 natural gas 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 natural gas.
In the event of a prolonged period of contango, and absent the impact of rising
or falling natural gas 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 Natural Gas Interests are being
considered by federal regulators and Congress. These proposals include the
extension of position and accountability limits 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.
On July 21, 2010, “The Dodd-Frank Wall
Street Reform and Consumer Protection Act” was signed into law. It
includes provisions altering the regulation of commodity
interests. Provisions in the new law include the requirement that
position limits on energy-based commodity futures contracts be established; new
registration, recordkeeping, capital and margin requirements for “swap dealers”
and “major swap participants”; and the forced use of clearing house mechanisms
for most over-the-counter transactions. Additionally, the new law
requires the aggregation, for purposes of position limits, of all positions in
energy futures held by a single entity and its affiliates, whether such
positions exist on U.S. futures exchanges, non-U.S. futures exchanges, or in
over-the-counter contracts. The CFTC, along with the SEC and other
federal regulators, has been tasked with developing the rules and regulations
enacting the provisions noted above. The new law and rules to be
promulgated may negatively impact the Fund’s ability to meet its investment
objective either through limits or requirements imposed on it or upon its
counterparties. In particular, new position limits imposed on the
Fund or its counterparty may impact the Fund’s ability to invest in a manner
that most efficiently meets its investment objective, and new requirements,
including capital and mandatory clearing, may increase the cost of the Fund’s
investments and doing business.
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.
Participants
in the natural gas industry may use the Fund as a vehicle to hedge the risk of
losses in their natural gas-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 Natural Gas 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 natural gas 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 energy costs
generally may not be successful because changes in the price of natural gas may
vary substantially from changes in the prices of other energy-related
products. In addition, the price of natural gas 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,
Natural Gas 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 Natural Gas
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 floods, weather, embargoes, tariffs and other political events may have
a larger impact on natural gas and Natural Gas 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 natural gas 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 limited experience operating a commodity pool.
While certain of the Sponsor’s
principals have experience with investing in Natural Gas Interests and other
commodity interests, the Sponsor has been formed for the purpose of sponsoring
the Trust and serving as the Fund’s commodity pool operator and has limited
experience operating a commodity pool or trading other commodity accounts.
In addition, the Fund is new and has no operating history. Therefore, you
do not have the benefit of reviewing past performance of the Sponsor, the Fund
or other series of the Trust. 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 one or more of these individuals were
to leave or be unable to carry out their present responsibilities, it may have
an adverse effect on the management of the Fund. These individuals
currently manage one commodity pool which is the first series of the
Trust. The first series of the Trust was available to the public on June
9, 2010. It is the intention of the Sponsor to establish additional
commodity pools in the future. 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 and
any other series of the Trust, 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.
Accountability
levels, position limits and price fluctuation limits set by the CFTC and the
exchanges have the potential to cause tracking error, which could cause the
price of Shares to substantially vary from the Benchmark and prevent you from
being able to effectively use the Fund as a way to hedge against natural
gas-related losses or as a way to indirectly invest in natural gas.
The CFTC
and designated contract markets such as the NYMEX and ICE have established
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 may hold, own or control (other than as a hedge,
which an investment by the Fund is not). For example, the current
accountability level for investments at any one time in Natural Gas Futures
Contracts is 12,000 in any one month. While this is not a fixed ceiling,
it is a threshold above which the NYMEX may exercise scrutiny and control over
an investor, including limiting an investor to holding no more than 12,000
Natural Gas Futures Contracts.
The
Cleared Natural Gas Swaps that are most comparable to the Benchmark Component
Futures Contracts are subject to accountability levels that are substantially
identical to, but measured separately from, the accountability levels on Natural
Gas Futures Contracts. Accountability levels are imposed by ICE of 48,000
contracts for all months (12,000 NYMEX NG contract equivalents); 24,000
contracts for any one month (6,000 NYMEX NG contract equivalents).
Exemptions may be obtained from these accountability levels for bona fide
hedging, risk management and spread positions.
In
addition to accountability levels, the NYMEX and ICE may impose position limits
on contracts held in the last few days of trading in the near month contract to
expire. It is unlikely that the Fund will be subject to such position
limits because of the Fund’s investment strategy to “roll” from the near month
contract to expire to the same month of the following year during the period
beginning two weeks from the expiration of the contract. On January 26,
2010, the CFTC proposed additional position limits to be placed on energy
futures contracts, which would include Natural Gas Futures Contracts (see , Commodity Futures
Trading Commission, Federal Speculative Position Limits for Referenced Energy
Contracts and Associated Regulations 17 CFR parts 1, 20 and 151). The
Sponsor does not believe that the proposed rules, if adopted, will have any
material impact on the Fund’s investment objective.
The
exchanges may also 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.
The NYMEX
does not impose a daily limit. Instead, it imposes a $3.00 per
MMBtu ($30,000 per contract) price fluctuation limit for Natural Gas Futures
Contracts. This limit is initially based off of the previous NYMEX trading
day’s settlement price. If any Natural Gas Futures Contract is traded, bid
or offered at the limit for five minutes, trading is halted for five
minutes. When trading resumes it begins at the point where the limit was
imposed and the limit is reset to be $3.00 per MMBtu in either direction of that
point. If another halt were triggered, the market would continue to be
expanded by $3.00 per MMBtu in either direction after each successive
five-minute trading halt. There is not maximum price fluctuation limit
during any one trading session.
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 natural gas-related losses or
as a way to indirectly invest in natural gas.
The Fund
does not intend to limit the size of the offering and will attempt to expose
substantially all of its proceeds to the natural gas market utilizing Natural
Gas Interests. If the Fund encounters position limits, accountability
levels, or price fluctuation limits for Natural Gas Futures Contracts on the
NYMEX or Cleared Natural Gas Swaps on the ICE, it may then, if permitted under
applicable regulatory requirements, purchase Natural Gas Interests, including
Natural Gas Futures Contracts listed on foreign exchanges. However, the
Natural Gas Futures Contracts available on such foreign exchanges may have
different underlying sizes, deliveries, and prices. The Natural Gas
Futures Contracts available on such foreign exchanges may be subject to their
own position limits and accountability levels. 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.
There
are technical and fundamental risks inherent in the trading system the Sponsor
intends to employ.
The
Sponsor’s trading system is quantitative in nature and it is possible that the
Sponsor may make errors. In addition, it is possible that a computer or
software program may malfunction and cause an error in computation.
The
Sponsor may use spreads and straddles as part of its trading strategy which may
cause the Fund’s NAV to not closely track the change in the
Benchmark.
The
Sponsor may use spreads and straddles as part of its overall trading strategy to
closely follow the Benchmark. There is a risk that the Fund’s NAV may not
closely track the change in the Benchmark.
Spreads combine simultaneous long
and short positions in related futures contracts that differ by commodity, by
market or by delivery month (long April, short November). Spreads gain or
lose value as a result of relative changes in price between the long and short
positions. Spreads often reduce risk to investors, because the contracts
tend to move up or down together. However, both legs of the spread could
move against an investor simultaneously, in which case the spread would lose
value. Certain types of spreads may face unlimited risk, e.g., because the price of a
futures contract underlying a short position can increase by an unlimited amount
and the investor would have to take delivery or offset at that
price.
A
commodity straddle takes both long and short option position in the same
commodity in the same market and delivery month simultaneously. The buyer
of a straddle profits if either the long or the short leg of the straddle moves
further than the combined cost of both options. The seller of the straddle
profits if both the long and short positions do not trade beyond a range equal
to the combined premium for selling both options.
If the Sponsor were to utilize a
spread or straddle position and the position performed differently than
expected, the results could impact the Fund’s tracking error. This could
affect the Fund’s investment objective of having its NAV closely track the
Benchmark. Additionally, a loss on the position would negatively impact
the Fund’s absolute return.
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 series of the Trust and other commodity pools, and has
limited financial resources and no significant source of income apart from its
management fee from the series of the Trust to support its continued service for
the Fund. If the Sponsor discontinues its activities on behalf of the Fund
or another series of the Trust, the Fund may be adversely affected. If the
Sponsor’s registrations with the CFTC or memberships in the NFA were revoked or
suspended, the Sponsor would no longer be able to provide services to the
Fund.
The
Fund could terminate at any time and cause the liquidation and potential loss of
your investment and could upset the overall maturity and timing of your
investment portfolio.
The Fund
may terminate at any time, regardless of whether the Fund has incurred losses,
subject to the terms of the Trust Agreement. For example, the dissolution
or resignation of the Sponsor would cause the Fund 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 any other series of the Trust currently in existence, as well as
any 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 Natural Gas 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, it
reserves the right to do so in the Sponsor’s sole discretion, in certain
situations, including for example, if the income earned from its investments
held directly or posted as margin reaches levels that merit distribution, e.g.,
at levels where such income is not necessary to support its underlying
investments in Natural Gas 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 0.02% (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 first year expense ratio of
approximately 1.44% of net assets (including any transaction fees paid by an
Authorized Purchaser when redeeming 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 Natural Gas 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
Natural Gas 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 Natural
Gas 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 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.
The
NYSE Arca may halt trading in the Shares which would adversely impact your
ability to sell Shares.
Trading in Shares of the Fund may
be halted due to market conditions or, in light of NYSE Arca rules and
procedures, for reasons that, in view of the NYSE Arca, make trading in Shares
inadvisable. In addition, trading is subject to trading halts caused by
extraordinary market volatility pursuant to “circuit breaker” rules that require
trading to be halted for a specified period based on a specified market
decline. There can be no assurance that the requirements necessary to
maintain the listing of the Shares will continue to be met or will remain
unchanged. The Fund will be terminated if its Shares are
delisted.
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 natural gas can be volatile which could cause large fluctuations in the
price of Shares.
Movements
in the price of natural gas 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 natural gas are influenced by, among
other things: regional demand for energy, which is affected by
economic and seasonal conditions; the domestic supply and inventories of natural
gas; weather conditions, including abnormally mild or harsh winters; political
conditions; the price and availability of alternative fuels; and the impact of
energy conservation efforts. 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.
There has
been tremendous volatility in the price of Natural Gas Futures Contracts in
recent years. For example, the price of the NYMEX spot month futures
contract on natural gas rose to a high of $13.69 on July 3, 2008 and dropped to
a low of $3.25 on April 27, 2009. The Sponsor anticipates that there will
be continued volatility in the price of the Natural Gas Futures Contracts.
Consequently, investors should know that this volatility can lead to a loss of
all or substantially all of their investment in the Fund.
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 Natural Gas
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.
In
general, valuing over-the-counter (“OTC”) derivatives is less certain than
valuing actively traded financial instruments such as exchange traded futures
contracts and securities because the price and terms on which such OTC
derivatives are entered into or can be terminated are individually negotiated,
and those prices and terms may not reflect the best price or terms available
from other sources. In addition, while market makers and dealers
generally quote indicative prices or terms for entering into or terminating OTC
contracts, they typically are not contractually obligated to do so, particularly
if they are not a party to the transaction. As a result, it may be
difficult to obtain an independent value for an outstanding OTC derivatives
transaction.
Risk
of Trading in International Markets
Trading
in international markets would expose the Fund to credit and regulatory
risk.
The
Sponsor may make substantial investments for the Fund in Natural Gas Futures
Contracts, a significant portion of which will be on United States and foreign
exchanges, including the NYMEX and ICE. 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. Natural Gas 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. The Fund is currently one of six
series of the Trust; additional series may be offered 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
dated as of March 31, 2010, which 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
natural gas delivered to Sabine Pipe Line County’s Henry Hub in Louisiana,
referred to as “Henry Hub” for future delivery, as measured by the Benchmark,
before taking Fund expenses and interest income into account. The Fund
will invest in a mixture of Natural Gas Futures Contracts, Cleared Natural Gas
Swaps, Other Natural Gas Interests, 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 caused the Trust to establish one series, the
Teucrium Corn Fund, that commenced offering its shares to the public on June 9,
2010; and five other series, including the Teucrium Natural Gas Fund, the shares
of which are covered by this prospectus. Aside from the activity described
in the previous sentence and obtaining capital from a small number of outside
investors in order to engage in this activity, 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. See “Plan
of Distribution” for more information about the Marketing Agent.
The
Sponsor maintains a public website on behalf of the Fund,
www.teucriumnagsfund.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 Shareholders and the Trustee.
Ownership
or “membership” interests in the Sponsor are owned by persons referred to as
“members.” The Sponsor currently has three voting or “Class A”
members – Mr. Sal Gilbertie, Mr. Dale Riker and Mr. Carl N. Miller III – and a
small number of non-voting or “Class B” members who have provided working
capital to the Sponsor. Messrs. Gilbertie and Riker each currently own 45%
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 436 Cerrillos Road, Suite C, Santa Fe, New
Mexico 87501. 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. While at Cambial Asset Management, LLC
and Cambial Financing Dynamics, Mr. Gilbertie served as principal and managed
the day-to-day activities of the business and the portfolio of both
companies. Mr. Gilbertie is 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. As
President of Cambial Emerging Markets LLC, Mr. Riker had responsibility for the
business strategy, planning and operations. 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, was registered as an associated person of the Sponsor on
April 19, 2010 and was registered as a branch office manager of the Sponsor on
June 4, 2010. He maintains his main business office at 436
Cerrillos Road, Suite C, Santa Fe, New Mexico 87501. Mr. Miller is an
investor in the Sponsor, and his duties include business development and serving
as the branch office manager of the Sponsor’s branch office noted
above. Mr. Miller co-founded Garnet Advisors, LLC, a proprietary
trading firm that focuses on a broad array of investment opportunities, in
November, 2001. He served as a Member of Garnet Advisors, LLC, from
November 2001 until December 2008 and, in his role as co-founding Member, was
responsible for new business development and risk management oversight of
trading and management within the firm. Mr. Miller was a private
investor in Teucrium Trading, LLC from December, 2008 through August,
2009. Mr. Miller is 58 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,
was registered as an associated person of the Sponsor on February 24, 2010 and
was registered as a branch office manager of the Sponsor on June 1, 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. Mr.
Teevan has worked as a commodities broker and trader for the period of April
1984 to April 1989. From April 1984 through November 1984, Mr. Teevan
was the Account Executive, Energy and Options Specialist in charge of commercial
client and execution with ACLI Futures in White Plains, New York. In
December 1984, the ACLI Futures team in White Plains moved to Rudolf Wolff
Futures Brokers Inc. located in New York, New York where Mr. Teevan continued
his same job responsibilities. In July 1986, Rudolf Wolff Futures
Brokers Inc. was acquired by Elders Futures Inc. in New York, New York where Mr.
Teevan continued his same job responsibilities until October 1987. In
October 1987, Mr. Teevan joined the group of Drury, Teevan and Salomon located
in San Francisco, California, as a partner engaging in the business development
in commodities trading. Mr. Teevan continued that roll until June
1988 see below when Drury, Teevan and Salomon joined Capel Court Investment Bank
in Sydney, Australia in November 1988. At Capel Court Investment
Bank, Mr. Teevan served as the Director, Capel Court Futures, leading business
plan work for trading in global markets. Mr. Teevan served in that
roll until April 1989. From April 1989 until January 2003, Mr. Teevan
was primarily engaged in non-profit management and development. Mr.
Teevan has primarily been retired since January 2003. Mr. Teevan is
59 years old.
Contributions
to the Fund
The
Sponsor contributed $100.00 to the Fund representing an initial contribution of
capital to the pool. In connection with the commencement of the
offering, the Sponsor will receive four Shares of the Fund to be issued in
exchange for the capital contribution, representing a beneficial interest in the
pool.
Executive
Compensation and Fees to the Sponsor
The Fund
is contractually obligated to pay the Sponsor a management fee based on the
daily net assets and paid monthly of 1.00% per annum on average net
assets. These fees are calculated on a daily basis.
Prior
Performance of the Sponsor and Affiliates
THIS
POOL OPERATOR AND ITS TRADING PRINCIPALS HAVE LIMITED EXPERIENCE OPERATING ANY
OTHER POOLS OR TRADING ANY OTHER ACCOUNTS.
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 nearest
to spot month March, April, October and November Henry Hub Natural Gas
Futures Contracts traded on the NYMEX, weighted 25% equally in each contract
month, before taking Fund expenses and interest into account. (This
weighted average of the four referenced Natural Gas Futures Contracts is
referred to herein as the “Benchmark” and the four Natural Gas Futures Contracts
that at any given time make up the Benchmark are referred to herein as the
“Benchmark Component Futures Contracts.”)
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 Natural Gas Futures Contracts traded on the NYMEX, ICE
and foreign exchanges. In addition, and to a limited extent, the Fund may
invest in Cleared Natural Gas Swaps to the
extent permitted and appropriate in light of the liquidity in the Cleared
Natural Gas Swap market. Once position limits or accountability levels in
Natural Gas Futures Contracts are applicable, the Fund’s intention is to invest
first in Cleared Natural Gas Swaps to the
extent permitted by
the position limits or accountability levels applicable to Cleared Natural
Gas Swaps and
appropriate in light of the liquidity in the Cleared Natural Gas Swap market,
and then in Other Natural Gas 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, before taking Fund expenses and any interest
income from the cash, cash equivalents and U.S. Treasury securities held by the
Fund into account, to closely track that of the Benchmark.
The Fund
intends to invest in Natural Gas Interests, to the fullest extent possible, an
aggregate notional amount equal to the Fund’s NAV without being leveraged or
unable to satisfy its current or potential margin or collateral obligations with
respect to its investments in Natural Gas Interests. After fulfilling such
margin and collateral requirements, the Fund will invest the remainder of its
proceeds from the sale of baskets in 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 Natural Gas 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, Cleared Natural
Gas Swaps or Other Natural Gas Interests with similar investment
characteristics; (2) to choose when to “roll” the Fund’s positions in Natural
Gas 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 Natural Gas
Interests such that the changes in its NAV will be expected to closely track the
changes in the Benchmark. The Fund’s positions in Natural Gas Interests
will be changed or “rolled” on a regular basis in order to track the changing
nature of the Benchmark. For example, in terms of the Benchmark, in January of a
given year, the Benchmark Component Futures Contracts will be the contracts
expiring in March (the first-to-expire Benchmark Component), April (the
second-to-expire Benchmark Component), October (the third-to-expire Benchmark
Component), and November (the fourth-to-expire Benchmark Component). Because the
next-to-expire Benchmark Component Natural Gas Futures Contract (the March
contract) will become spot on the third-to-last trading day in January, the
Sponsor will “roll” or change that contract prior to the third-to-last trading
day in January for a position in the same month (March) of the following year,
not intending to hold any futures contract to spot. The Fund seeks to
achieve its investment objective primarily by investing in Natural Gas 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 Natural Gas 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 (in the month in which a Benchmark
Component Natural Gas Futures Contract is set to become the
first-to-expire-natural Gas Futures contract listed on NYMEX (commonly call the
“spot” contract), the first-to-expire Benchmark Component Contract will become
the next-to-expire (spot) Natural Gas Futures Contract and 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 Natural Gas Futures Contracts other than the Benchmark Component Futures
Contracts, Cleared Natural Gas Swaps and/or Other Natural Gas Interests.
For example, certain Cleared Natural Gas Swaps have standardized terms similar
to, and are priced by reference to, a corresponding Benchmark Component Futures
Contract. Additionally, over-the-counter Natural Gas Interests can
generally be structured as the parties to the contract desire. Therefore,
the Fund might enter into multiple Cleared Natural Gas Swaps and/or
over-the-counter Natural Gas Interests intended to exactly replicate the
performance of each of the four Benchmark Component Futures Contracts, or a
single over-the-counter Natural Gas 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 Natural Gas Interest, the performance
of the Natural Gas 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 Natural Gas 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
Natural Gas 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 a
certain or all of the investments described above, the Sponsor will endeavor to
cause the Fund’s performance, before taking Fund expenses and any interest
income from the cash, cash equivalents and Treasury Securities held by the Fund
into account, to closely track that of the Benchmark.
The
Sponsor endeavors to place the Fund’s trades in Natural Gas 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,
before taking Fund expenses and interest income into account. While the
Benchmark is composed of Natural Gas Futures Contracts and is therefore a
measure of the price of natural gas for future delivery, there is nonetheless
expected to be a reasonable degree of correlation between the Benchmark and the
cash or spot price of natural gas.
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 natural gas prices. An
investment in the Shares allows both retail and institutional investors to
easily gain this exposure to the natural gas 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 natural gas market in a cost-effective manner. Such investors may
include participants in the natural gas market and other industries seeking to
hedge the risk of losses in their natural gas-related transactions, as well as
investors seeking exposure to the natural gas market. Accordingly,
depending on the investment objective of an individual investor, the risks
generally associated with investing in the natural gas 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 natural gas on the spot
market. Furthermore, as noted above, the Fund will also hold Treasury
Securities, cash and/or cash equivalents to meet its current or potential margin
or collateral requirements with respect to its investments in Natural Gas
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 natural gas or
Natural Gas 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 natural gas, 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.teucriumnagsfund.com. The website disclosure of portfolio holdings is
made daily and includes, as applicable, the name and value of each Natural Gas
Futures Contract and Cleared Natural Gas Swap, the specific types of Other
Natural Gas Interests and characteristics of such Other Natural Gas 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 50,000 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 50,000 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
Natural Gas 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
$1,250,000 in proceeds from the sale of the Creation Basket ($25.00 NAV per
share multiplied by 50,000 Shares). If one were to assume further that the
Sponsor wants to expose the entire proceeds from the Creation Basket to the
Benchmark Component Futures Contracts and that the market value of each such
Benchmark Component Futures Contracts is $42,000, the Fund would be unable to
buy an exact number of Natural Gas Futures Contracts with an aggregate market
value equal to $1,250,000. Instead, the Fund would be able to purchase 29
Benchmark Component Futures Contracts with an aggregate market value of
$1,218,000. Assuming a margin requirement equal to 10% of the value of the
Natural Gas Futures Contracts, the Fund would be required to deposit $121,800 in
Treasury Securities and cash with the futures commission merchant through which
the Natural Gas Futures Contracts were purchased. The remainder of the
proceeds from the sale of the Creation Basket, $1,128,200 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 Natural Gas 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 exposed to Natural Gas Futures Contracts and
Cleared Natural Gas Swaps, for various reasons, including the ability to enter
into the precise amount of exposure to the natural gas market and accountability
levels on Natural Gas Futures Contracts and Cleared Natural Gas Swaps, it will
also invest in Other Natural Gas Interests, including swaps other than Cleared
Natural Gas Swaps, in the over-the-counter market to a potentially significant
degree.
The
Sponsor does not anticipate letting its Natural Gas Futures Contracts expire and
taking delivery of Natural Gas. 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 Natural Gas 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 reallocated.
Futures
Contracts
Futures
contracts are agreements between two parties. One party agrees to buy a
commodity such as natural gas 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
natural gas and, as a likely result of an increase in the price of natural gas,
the price of Natural Gas Futures Contracts increase, the Fund will generally be
long in the market for natural gas, and will generally sell Natural Gas Futures
Contracts only to close out existing long positions.
Natural
Gas Futures Contracts are traded on the NYMEX in units of 10,000 MMBtu.
Generally, futures contracts traded on the NYMEX 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
natural gas 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 Natural Gas Futures Contracts are discussed below. The
Fund anticipates that it will also enter into various non-exchange traded
derivative contracts to hedge the short-term price movements of Natural Gas
Futures Contracts and Other Natural Gas Interests against the current Benchmark
Component Futures Contracts. Additional risks of investing in Natural Gas
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 and foreign designated contract markets such as the NYMEX and ICE have
established 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, such as the NYMEX, limit the daily price fluctuation for
futures contracts.
Accountability
levels for the Natural Gas Futures Contracts traded on the NYMEX are not a fixed
ceiling, but rather a threshold above which the NYMEX may exercise greater
scrutiny and control over an investor’s positions. The current
accountability level for any one month in the Benchmark Component Futures
Contracts is 6,000 contracts. In addition, the NYMEX imposes an
accountability level for all months of 12,000 net futures contracts for
investments in futures contracts for Henry Hub natural gas. If the Fund
exceeds these accountability levels for investments in the futures contracts for
Henry Hub natural gas, the NYMEX will monitor the Fund’s exposure and ask for
further information on its activities, including the total size of all
positions, investment and trading strategy, and the extent of liquidity
resources of the Fund. If deemed necessary by the NYMEX, it could also
order the Fund to reduce its position back to the accountability
level.
If the
NYMEX or other exchange orders the Fund to reduce its position back to the
accountability level, or to an accountability level that the NYMEX or other
exchange deems appropriate for the Fund, such an accountability level may impact
the mix of investments in Natural Gas Interests made by the Fund. To
illustrate, assume that the price of each Benchmark Component Futures Contract
is $4.00 per MMBtu, and the NYMEX has determined that the Fund may not own more
than 12,000 Benchmark Component Futures Contracts total. In such case, the
Fund could invest up to $480 million in Benchmark Component Futures Contracts (
i.e., $4.00 per MMBtu
multiplied by 10,000 MMBtu per contract multiplied by 12,000 contracts) before
reaching the accountability level imposed by the NYMEX. Once the daily net
assets of the Fund exceed $600,000,000 in the Benchmark Component Futures
Contracts, the Fund may not be able to make any further investments in the
Benchmark Component Futures Contract, depending on whether the NYMEX imposes
limits.
The Fund
is new and is not expected to reach asset levels that would cause these
accountability levels to be implicated in the near future. If such
accountability levels did become applicable to the Fund, the Sponsor may enter
into for the Fund Other Natural Gas Interests that are not subject to
accountability levels to a greater degree than would otherwise be the
case. Accountability levels could, in certain circumstances,
effectively limit the number of Creation Baskets that the Fund can
sell.
In
addition to accountability levels, the NYMEX and ICE may impose position limits
on contracts held in the last few days of trading in the near month contract to
expire. It is unlikely that the Fund will be subject to such position
limits because the Fund’s investment strategy is to “roll” from the near month
contract to expire to the same month contract of the next year following during
the period beginning two weeks from the expiration of the contract.
There is
a limit on the amount of price fluctuation for Natural Gas Futures Contracts
imposed by the NYMEX of $3.00 per MMBtu ($30,000 per contract). This limit
is initially based off the previous trading day’s settlement price. If any
Natural Gas Futures Contract is traded, bid, or offered at the limit for five
minutes, trading is halted for five minutes. When trading resumes it
begins at the point where the limit was imposed and the limit is reset to be
$3.00 per MMBtu in either direction after each successive five-minute trading
halt. There is no maximum price fluctuation limit during any one trading
session. Generally, futures contracts traded on the NYMEX are priced by
floor brokers and other exchange members through an “open outcry” to offers to
purchase and 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 commodities indices, in that
they call for a cash payment based on the change in the value of the specified
index during a specified period.
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 Natural Gas
Futures Contracts include changes in interest rates; governmental, 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 the natural gas will fluctuate based on a number of market
factors, including demand for natural gas relative to its supply. The
value of Natural Gas Futures Contracts will likewise fluctuate in reaction to a
number of market factors. If investors seek to maintain their holdings in
Natural Gas Futures Contracts with a roughly constant expiration profile and not
take delivery of the natural gas, 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 natural
gas 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 natural gas 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). For example, assume the price
of natural gas for immediate delivery (“spot price”) is $4 per MMBtu and the
value of a position in the near month futures contract was also $4. In
backwardation, the investment would tend to rise slower than the spot price of
natural gas, or fall faster. As a result, it would be possible for the
spot price of natural gas to have risen on to $6 after some period of time,
while the value of the investment in the futures contract would have only risen
to $5, assuming the backwardation is large enough or enough time has
elapsed. Similarly, the spot price of natural gas could have fallen to $3
while the value of an investment in the futures contract could have remained at
$5. Over time, if backwardation remained constant, the differences would
continue to increase.
If the
futures market is in contango, the Fund will buy later-to-expire contracts for a
higher price than the sooner-to-expire contracts that it sells.
Hypothetically, and assuming no other changes to either prevailing natural gas
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). For example, in contango, the $4 investment would rise
faster than the spot price of natural gas, or fall slower. As a result, it
is possible, for the spot price to have risen to $6 per MMBtu after some period
of time, while the value of the investment in the futures contract has risen to
$7, assuming contango is large enough or enough time has elapsed.
Similarly, the spot price of natural gas could have fallen to $2 while the value
of an investment in the futures contract would have fallen to $3. Over
time, if contango remained constant, the difference would continue to
increase.
Historically,
the natural gas 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 natural gas market.
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
Natural Gas 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 a natural
gas swap, the Fund may be obligated to pay a fixed price per MMBtu of natural
gas and be entitled to receive an amount per MMBtu equal to the current value of
an index of natural gas prices, the price of a specified Natural Gas Futures
Contract, or the average price of a group of Natural Gas Contracts such as the
Benchmark.
Various
privately-negotiated swap contracts, including certain types of natural gas
swaps, are cleared by the ICE’s provider of clearing services. The
Fund expects to focus on investments in these Cleared Natural Gas Swaps, as well
as Natural Gas Futures Contracts, rather than over-the-counter swaps. The
Cleared Natural Gas Swaps that are most comparable to the Benchmark Component
Futures Contracts are subject to accountability levels that are substantially
identical to, but measured differently from, the accountability levels
applicable to Natural Gas Futures Contracts. The accountability levels
imposed by ICE on those Cleared Natural Gas Swaps are 48,000 contracts for all
months (12,000 NYMEX NG contract equivalents) and 24,000 contracts for any one
month (6,000 NYMEX NG contract equivalents).
Like
Natural Gas Futures Contracts, Cleared Natural Gas Swaps are standardized as to
certain material economic terms, including that each swap be for a specific
quantity of MMBtu, which permits less flexibility in their structuring than with
over-the counter Natural Gas Interests. The two parties to Cleared Natural
Gas Swap agree on the specific fixed price component and the calendar month of
the expiration, and agree to submit the Cleared Natural Gas 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 Natural Gas Futures Contracts, Cleared
Natural Gas Swaps call for settlement in cash, and do not permit settlement by
delivery or receipt of physical natural gas.
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 natural
gas, are entered into outside of public exchanges. These
“over-the-counter” contracts are entered into between two parties in private
contracts. Unlike Natural Gas Futures Contracts and Cleared Natural Gas
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 Natural Gas 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 natural gas swap, the Fund may be
obligated to pay a fixed price per MMBtu of natural gas and be entitled to
receive an amount per MMBtu equal to the current value of an index of natural
gas prices, the price of a specified Natural Gas Futures Contract, or the
average price of a group of Natural Gas Futures Contracts such as the
Benchmark. Unlike Cleared Natural Gas 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 natural gas and natural gas-related products, (e) users of
natural gas and (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.
The Fund
may also employ spreads or straddles to mitigate the differences in its
investment portfolio and in order to achieve its goal of tracking the
Benchmark.
Benchmark
Performance
See the
graph below under “Benchmark Performance” in the Statement of Additional
Information at the end of this prospectus.
Natural
Gas and the Natural Gas Market
Natural
gas accounts for almost a quarter of U.S. energy consumption. The price of
natural gas is established by the supply and demand conditions in the North
American market, and more particularly, in the main refining center of the U.S.
Gulf Coast.
Natural
gas has limited means of transportation and distribution and therefore is not
commodity with a “global” price. As a result, the natural gas market is
mostly affected by events that happen locally or are concentrated to the North
American Continent. The primary means for transporting natural gas is
through pipeline, although natural gas may be liquefied in order to be
transported outside the pipeline structure.
There are
four main costs, therefore prices, associated with natural gas – wellhead price,
transport (long-distance and local distribution), storage and delivery.
Wellhead prices are deregulated in North America. Transportation costs are
regulated by the National Energy Boards and local regulators regulate local
distribution costs. Prices are also measured for different end-users such
as residential usage, commercial, industrial or electrical utility. The
largest share of the final price to all end-users is the distribution costs due
to the limited means of distribution. Most large commercial users buy
natural gas directly from producers or market makers, thereby reducing
price.
Both
weather and population changes affect consumption of natural gas. In
addition, alternative fuels and competition from other sources of energy such as
oil, wind energy and coal can affect the price of natural gas.
The
natural gas market essentially constitutes an auction, where the highest bidder
wins the supply. When markets are “strong” ( i.e., when demand is high
and/or supply is low), the bidder must be willing to pay a higher premium to
capture the supply. When markets are “weak” ( i.e., when demand is low
and/or supply is high), a bidder may choose not to outbid competitors, waiting
instead for later, possibly lower priced, supplies. Demand for natural gas
by consumers, as well as agricultural, manufacturing and transportation
industries, determines overall demand for natural gas. Since the
precursors of product demand are linked to economic activity, natural gas demand
will tend to reflect economic conditions.
The NYMEX
is the world’s largest physical commodity futures exchange and the dominant
market for the trading of energy and precious metals. The Natural Gas
Futures Contracts trades in units of 10,000 MMBtu and is based on delivery at
the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas
pipeline systems that draw supplies from the region’s prolific gas
deposits. The pipelines serve markets throughout the U.S. East Coast, the
Gulf Coast, the Midwest and up to the Canadian border.
The ICE
is an Internet-based exchange for the trading of over-the counter energy
contracts, such as the Cleared Natural Gas Swaps.
The
Fund’s Investments in Treasury Securities, Cash and Cash
Equivalents
The Fund
seeks to have the aggregate “notional” amount of the Natural Gas 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 Natural Gas
Interests. For example, the purchase of a Natural Gas 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 Natural Gas 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 Natural Gas Futures Contracts.
Cleared Natural Gas Swaps and Other Natural Gas 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 Natural Gas 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
one year 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 natural
gas, in that a counterparty will take the Fund’s position in a Natural Gas
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 Natural Gas Futures Contracts, there are also a number of options on
Natural Gas Futures Contracts listed on the NYMEX and ICE. 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 Natural Gas Futures Contracts in pursuing its investment objective,
except that it will not sell call options when it does not own the underlying
Natural Gas Futures Contract. The Fund would make use of options on
Natural Gas 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 natural gas prices.
Liquidity
The Fund
invests only in Natural Gas 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
Natural Gas 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 Natural Gas Interests based on the spot price of natural
gas.
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 Natural Gas Interests. Commodity pools’ trading positions in
futures contracts are typically required to be secured by the deposit of margin
funds that represent only a small percentage of a futures contract’s (or other
commodity interest’s) entire market value. While the Sponsor does not
intend to leverage the Fund’s assets, it is not prohibited from doing so under
the Trust Agreement.
Borrowings
The Fund
does not intend to, nor foresee the need to borrow money or establish credit
lines. The Fund maintains the value of its Treasury Securities, cash and
cash equivalents, whether held by the Fund or posted as margin or collateral, to
at all times approximate the aggregate market value of its obligations under
Natural Gas Interests.
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 Foreside Fund Services, LLC, 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 Three Canal Plaza, Suite 100,
Portland, Maine 04101. 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 and NAST are subsidiaries of Newedge
Group. Newedge is a futures commission merchant and broker-dealer
registered with the CFTC and the SEC. In its capacity as a broker-dealer,
Newedge may act as an Authorized Purchaser for the Fund and, accordingly, may
engage in the marketing and distribution of Fund Shares. 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, LLC 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 New York Mercantile Exchange (“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 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.
|
|
|
|
Foreside
Fund Services, LLC
|
|
0.10%
of average net assets annually, with a minimum annual fee of
$300,000. The minimum annual fee is an aggregate fee for all
series of the Trust currently in operation.
|
|
|
|
Newedge
USA, LLC, Futures Commission Merchant and Clearing Broker
|
|
$4.00
per Natural Gas 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.
The maximum compensation the Marketing Agent may receive over the
expected two year period of this offering is estimated to be $2,000,000.
The maximum expenses that will be reimbursed to the Marketing Agent over the
expected two year period of this offering is estimated to be $137,209. The
maximum expenses that will be reimbursed to registered principals of the
Marketing Agent who are also employess or officers of the Sponsor over the
expected two year period of the offering is estimated to be $31,333.
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, the Fund and each other
series established under the Trust 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 any 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
“NAGS.” 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 50,000 Shares at their NAV
through the Marketing Agent, to Authorized Purchasers. It is expected that
on the effective date, the initial Authorized Purchaser will purchase one or
more initial Creation Baskets of 50,000 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.
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 $300,000 in the aggregate for all commodity pools
sponsored by the Sponsor for which the Marketing Agent serves as such; 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 $2,000,000. 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. The
maximum expenses that will be reimbursed to the Marketing Agent over the
expected two year period of this offering is estimated to be $137,209.
The
maximum expenses that will be reimbursed to registered representatives and
registered principals of the Marketing Agent who are also employees or officers
of the Sponsor over the expected two year period of the offering is estimated to
be $31,333. These reimbursements will be for the respective
costs of: (1) obtaining space at various industry conferences to
market the Fund; (2) generating marketing materials for use at such conferences;
(3) attendance at such conferences by the Marketing Agent’s wholesalers and by
certain employees and officers of the Sponsor who are also registered
representatives of the Sponsor; (4) attendance at training and continuing
education sessions by such employees and officers of the Sponsor as may be
required by applicable regulatory requirements; (5) miscellaneous meetings with
financial intermediaries who may be interested in having their clients or
customers invest in the Fund; and (6) other minor miscellaneous
expenses.
The
Distribution Services Agreement and Distribution Consulting and Marketing
Service Agreement among the Marketing Agent, the Sponsor and the Trust together
call for the Marketing Agent, among other responsibilities, to: (1) work with
the Custodian in connection with the receipt and processing of orders for
Creation Baskets and Redemption Baskets; (2) market the Fund to financial
intermediaries and increase the financial intermediaries’ awareness of the Fund;
(3) assist with the marketing positioning of the Fund; (4) attend relevant
industry conferences as appropriate; and (5) deploy sales team resources as
needed to target markets. The
Marketing Agent and the Sponsor have also entered into a Securities Activities
and Services Agreement (the “SASA”) under which certain employees and officers
of the Sponsor are licensed as registered representatives or registered
principals of the Marketing Agent under FINRA rules. As registered
persons of the Marketing Agent, these persons are permitted to engage in certain
marketing activities for the Fund that they would otherwise not be permitted to
engage in. Under the SASA, the Sponsor is obligated to ensure that
such marketing activities comply with applicable law and are permitted by the
SASA and the Marketing Agent’s internal procedures.
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 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 Natural Gas 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 Deutsche Bank Securities Inc., and we
expect 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, an Authorized Purchaser, other
broker-dealer firm or its client will be deemed a statutory underwriter if it
purchases a basket from the Fund, breaks the basket down into the constituent
Shares and sells the Shares to its customers; or if it chooses to couple the
creation of a supply of new Shares with an active selling effort involving
solicitation of secondary market demand for the Shares. In contrast,
Authorized Purchasers may engage in secondary market or other transactions in
Shares that would not be deemed “underwriting.” For example, an
Authorized Purchaser may act in the capacity of a broker or dealer with respect
to Shares that were previously distributed by other Authorized Purchasers.
A determination of whether a particular market participant is an underwriter
must take into account all the facts and circumstances pertaining to the
activities of the broker-dealer or its client in the particular case, and the
examples mentioned above should not be considered a complete description of all
the activities that would lead to designation as an underwriter and subject them
to the prospectus-delivery and liability provisions of the 1933
Act.
Dealers
who are neither Authorized Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with Shares that are part of an “unsold
allotment” within the meaning of Section 4(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.
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 Natural Gas Futures Contracts, the Administrator will
use the NYMEX closing price (usually determined as of 2:30 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 Natural
Gas Swaps and over-the-counter Natural Gas Interests will be determined based on
the value of the commodity or Futures Contract underlying such Natural Gas
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 Natural Gas 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 Natural Gas 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 Natural Gas 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 Natural Gas Futures Contracts on the NYMEX are 9:00
a.m. New York time to 2:30 p.m. New York time. This means that there
is a gap in time at the beginning and the end of each day during which the
Fund’s Shares are traded on the NYSE Arca, but real-time NYMEX trading prices
for Natural Gas 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 procedures may
be amended by the Sponsor, without the consent of any Shareholder or Authorized
Purchaser. Authorized Purchasers pay a redemption fee of $500.00 to
the Sponsor for each order they place to redeem one or more
baskets. There is no fee charged for the purchase of Creation
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
the physical natural gas and the Natural Gas Interest markets. Some
Authorized Purchasers or their affiliates may from time to time buy or sell
natural gas or Natural Gas Interests and may profit in these
instances. The Sponsor believes that the size and operation of the
Natural Gas market make it unlikely that Authorized Purchasers’ direct
activities in the natural gas or securities markets will significantly affect
the price of natural gas, Natural Gas 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, the NYMEX or the New York Stock Exchange is closed for regular
trading. Purchase orders must be placed by 12:00 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. 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 will 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 12:00 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:
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it
determines that, due to position limits or otherwise, investment
alternatives that will enable the Fund to meet its investment objective
are not available or practicable at that
time;
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it
determines that the purchase order or the Creation Basket Deposit is not
in proper form;
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it
believes that acceptance of the purchase order or the Creation Basket
Deposit would have adverse tax consequences to the Fund or its
Shareholders;
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the
acceptance or receipt of the Creation Basket Deposit would, in the opinion
of counsel to the Sponsor, be unlawful;
or
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circumstances
outside the control of the Sponsor, Marketing Agent or Custodian make it,
for all practical purposes, not feasible to process creations of
baskets.
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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 12:00 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
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 Arc , the
NYMEX or the ICE is closed other than customary weekend or holiday closings, or
trading on the NYSE Arca, the NYMEX or the ICE 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., two baskets) 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.
Redemption
Transaction Fee
To
compensate the Sponsor for its expenses in connection with the redemption of
baskets, an Authorized Purchaser is required to pay a transaction fee to the
Sponsor of $500.00 per order to 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 Natural Gas 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 Natural Gas Interest markets.
While the Shares trade on the NYSE Arca until 4:00 p.m. New York time, liquidity
in the markets for Natural Gas Interests may be reduced after the close of the
NYMEX at 2:30 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 Natural Gas
Futures Contracts, Cleared Natural Gas Swaps and Other Natural Gas Interests,
Treasury Securities, cash and cash equivalents. When the Fund
purchases Natural Gas Futures Contracts and certain Other Natural Gas 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 Natural Gas Interests at maturity. This deposit is known as
initial margin. Counterparties in transactions in Cleared Natural Gas
Swaps and over-the-counter Natural Gas 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 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 Natural Gas Interest as initial margin when entering
into such Natural Gas Interest. Ongoing margin and collateral
payments will generally be required for both exchange-traded and
over-the-counter Natural Gas Interests based on changes in the value of the
Natural Gas Interests. Furthermore, ongoing collateral requirements
with respect to over-the-counter Natural Gas 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 Natural Gas Interest, and each party’s
creditworthiness. In light of the differing requirements for initial
payments under exchange-traded and over-the-counter Natural Gas 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 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 Natural Gas 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 Administrator
will use the NYMEX closing price to determine the value of Natural Gas Futures
Contracts, and will determine the value of Cleared Natural Gas Swaps and
over-the-counter Natural Gas Interests based on the value of the commodity or
futures contract underlying such Natural Gas 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 Natural Gas
Interests. 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 Treasury
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 Natural Gas 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 the Fund will invest in Natural Gas Interests that have a notional value
approximate to the net asset value of the Fund. Most of the assets of
the Fund will be held in Treasury Securities, cash and/or cash equivalents that
could or will be used as margin or collateral for trading in Natural Gas
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 Natural Gas
Interests change. Interest earned on interest-bearing assets of the
Fund will be paid to the Fund.
The
investments of the Fund in Natural Gas Interests will be subject to periods of
illiquidity because of market conditions, regulatory considerations and other
reasons.
To date,
all of the expenses of the Fund have been funded by Sponsor. If the
Fund is unsuccessful in raising sufficient funds to cover the expenses of the
Fund or in locating any other source of funding, the Fund may
terminate.
Market
Risk
Trading
in Natural Gas Interests such as Natural Gas Futures Contracts will involve the
Fund entering into contractual commitments to purchase or sell specific amounts
of natural gas 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 natural gas, the volatility of interest rates and foreign
exchange rates, the liquidity of the Natural Gas 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 Natural Gas 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 Natural Gas 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 Natural Gas Futures Contracts
traded on the NYMEX is the clearinghouse associated with the NYMEX. For
Cleared Natural Gas Swaps settled on the ICE, the counterparty is the
clearinghouse associated with the ICE. 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 Natural Gas 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 Natural Gas 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
treat 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,
although commodity brokers are allowed to commingle the assets of multiple
customers in a bulk segregated account. 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 Shares
being redeemed, as described above under “Redemption Procedures.”
Contractual
Obligations
The
Fund’s primary contractual obligations 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 all future
registration fees and related expenses.
Each 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 0.02%
annually for the Fund. In general, transaction costs on over-the-counter
Natural Gas Interests and on Treasury Securities 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, including but not limited to the fees paid to the Custodian and
Marketing Agent with respect to the Fund, are estimated to be 0.35%
for the twelve-month period ending October, 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 Fund and any other
series of the Trust 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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·
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To
pay or authorize the payment of distributions to the Shareholders and
expenses of the Fund;
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·
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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.
|
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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|
·
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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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|
·
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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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|
·
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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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|
·
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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 or
other Fund service provider 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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|
·
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Interact
with the Depository; and
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|
·
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Delegate
duties to one or more administrators, as the Sponsor
determines.
|
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 all Shareholders 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 the Fund 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 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) may vote to (i) continue the
Trust by electing a successor Sponsor as described above, and (ii) approve
amendments to the Trust Agreement that impair the right to surrender Redemption
Baskets for redemption. (Trustee consent to any amendment to the Trust
Agreement is required if the Trustee reasonably believes that such amendment
adversely affects any of its rights, duties or liabilities.) In
addition, Shareholders holding Shares representing seventy-five percent (75%) of
the Trust’s outstanding Shares (excluding Shares acquired by the Sponsor in
connection with its initial capital contribution) 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 it 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 through the Sponsor or otherwise. The Fund is currently one
of several commodity pools managed by the Sponsor and its personnel. In
addition, the Sponsor may establish additional pools in the future. 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, which
in large part will depend on whether the Sponsor establishes additional
commodity pools in the future and how many such pools are
established.
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
and conflicts 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 or investment adviser to commodity pools other
than the Fund. 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 or any
Shareholder 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.
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 in
this prospectus and are prepared in accordance with accounting principles
generally accepted in the United States, 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 Natural Gas 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.teucriumnagsfund.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 Fund’s CFTC, NFA and
SEC reports on the Fund’s website www.teucriumnagsfund.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.
PricewaterhouseCoopers
(“PwC”), 2001 Ross Avenue, Suite 1800, Dallas, Texas 75201-2997, will provide
tax information in accordance with applicable U.S. Treasury Regulations.
Persons treated as middlemen for purposes of these regulations may obtain tax
information regarding the Fund from PwC or from the Fund’s website,
www.teucriumnagsfund.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
The
validity of the Shares being issued hereunder has been passed upon on behalf of
the Trust and the Sponsor by Dykema Gossett PLLC. Dykema Gossett PLLC has
also provided the Trust and the Sponsor with its opinion with respect to federal
income tax matters addressed herein.
Experts
Rothstein,
Kass & Company, P.C., an independent registered public accounting firm, has
audited the financial statements of the Trust and the Sponsor as of December 31,
2009, and has audited the financial statements of the Fund as of July 31,
2010.
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 Dykema Gossett PLLC (“Dykema”), 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,
Dykema 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 Dykema:
|
•
|
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, Dykema 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. Dykema 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 Natural Gas
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’ interests
in the Fund.
In
situations where a partner’s interest in a partnership is redeemed or sold
during a taxable year, the Code generally requires that partnership tax items
for the year be allocated to the partner using either an interim closing of the
books or a daily proration method. The Fund intends to allocate tax items
using an interim closing of the 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
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 Natural Gas Futures Contracts will qualify as “section 1256
contracts” under the Code. Some Other Natural Gas Interests that are
cleared through a qualified board or exchange will 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. Under recently enacted legislation, Cleared Natural Gas
Swaps and other commodity swaps will most likely not qualify as 1256 contracts
for the Fund’s taxable years beginning after July 21, 2010. If a
commodity swap is not taxable as a section 1256 contract, it is likely
that: (i) any gain or loss recognized by the Fund on the sale of such
a swap will be treated as a gain or loss from the sale or exchange of a capital
asset, (ii) any such gain or loss will be long-term or short-term
capital gain or loss depending on the holding period of the swap in the Fund’s
hands, and (iii) such swap will no longer be marked to market for federal income
tax purposes like a 1256 contract.
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 —
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•
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the
Shareholder may recognize taxable gain or loss to the same extent as if it
had sold the Shares for cash;
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•
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any
of the income, gain, loss or deduction allocable to those Shares during
the period of the loan is not reportable by the Shareholder for tax
purposes; and
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•
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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.
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Shareholders
desiring to avoid these and other possible consequences of a deemed disposition
of their Shares should consider modifying any applicable brokerage account
agreements to prohibit the lending of their Shares.
Other
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 currently subject to a
withholding tax at a rate of 35% for both individual and corporate
Shareholders. The tax withholding on ECI, which is the highest tax
rate under Code section 1 for non-corporate Non-U.S. Shareholders and Code
section 11(b) for corporate Non-U.S. Shareholders may increase in future tax
years if tax rates increase from their current levels.
Withholding on Allocations and
Distributions. The Code provides that a non-U.S. person who is a
partner in a partnership that is engaged in a U.S. trade or business during a
taxable year will also be considered to be engaged in a U.S. trade or business
during that year. Classifying an activity by a partnership as an
investment or an operating business is a factual determination. Under
certain safe harbors in the Code, an investment fund whose activities consist of
trading in stocks, securities, or commodities for its own account generally will
not be considered to be engaged in a U.S. trade or business unless it is a
dealer 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-corporate
Non-U.S. Shareholders and the highest rate specified in Code section 11(b) on
allocations of our income to corporate 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
current 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. The backup withholding rate is the fourth lowest rate applicable
to individuals under Code section 1(c), and may increase in future tax
years.
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. Dykema 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 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 advisor 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:
|
(1)
|
freely
transferable (determined based on the relevant facts and
circumstances);
|
|
(2)
|
part
of a class of securities that is widely held (meaning that the class of
securities is owned by 100 or more investors independent of the issuer and
of each other); and
|
|
(3)
|
either
(a) part of a class of securities registered under Section 12(b) or 12(g)
of the Exchange Act or (b) sold to the plan as part of a public offering
pursuant to an effective registration statement under the 1933 Act and the
class of which such security is a part is registered under the Exchange
Act within 120 days (or such later time as may be allowed by the SEC)
after the end of the fiscal year of the issuer in which the offering of
such security occurred.
|
The plan
asset regulations under ERISA state that the determination of whether a security
is freely transferable is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of an offering
in which the minimum investment is $10,000 or less, the following requirements,
alone or in combination, ordinarily will not affect a finding that the security
is freely transferable: (1) a requirement that no transfer or assignment of the
security or rights relating to the security be made that would violate any
federal or state law; and (2) a requirement that no transfer or assignment be
made without advance written notice given to the entity that issued the
security.
The
Sponsor believes that the conditions described above are satisfied with respect
to the Shares. The Sponsor believes that the Shares therefore
constitute publicly-offered securities, and the underlying assets of the Fund
should not be considered to constitute plan assets of any plan that purchases
Shares.
Prohibited
Transactions
ERISA and
the Code generally prohibit certain transactions involving a plan and persons
who have certain specified relationships to the plan. In general,
Shares may not be purchased with the assets of a plan if the Sponsor, the
clearing brokers, the trading advisors (if any), or any of their affiliates,
agents or employees either:
|
·
|
exercise
any discretionary authority or discretionary control with respect to
management of the plan;
|
|
·
|
exercise
any authority or control with respect to management or disposition of the
assets of the plan;
|
|
·
|
render
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of the
plan;
|
|
·
|
have
any authority or responsibility to render investment advice with respect
to any monies or other property of the plan;
or
|
|
·
|
have
any discretionary authority or discretionary responsibility in the
administration of the plan.
|
Also, a
prohibited transaction may occur under ERISA or the Code when circumstances
indicate that (1) the investment in Shares is made or retained for the purpose
of avoiding application of the fiduciary standards of ERISA, (2) the investment
in Shares constitutes an arrangement under which the Fund is expected to engage
in transactions that would otherwise be prohibited if entered into directly by
the plan purchasing the Shares, (3) the investing plan, by itself, has the
authority or influence to cause the Fund to engage in such transactions, or (4)
a person who is prohibited from transacting with the investing plan may, but
only with the aid of certain of its affiliates and the investing plan, cause the
Fund to engage in such transactions with such person.
Special
IRA Rules
IRAs are
not subject to ERISA’s fiduciary standards, but are subject to their own rules,
including the prohibited transaction rules of Section 4975 of the Code, which
generally mirror ERISA’s prohibited transaction rules. For example, IRAs are
subject to special custody rules and must maintain a qualifying IRA custodial
arrangement separate and distinct from the Fund and its custodial arrangement.
If a separate qualifying custodial arrangement is not maintained, an investment
in the Shares will be treated as a distribution from the IRA. Second, IRAs are
prohibited from investing in certain commingled investments, and the Sponsor
makes no representation regarding whether an investment in Shares is an
inappropriate commingled investment for an IRA. Third, in applying the
prohibited transaction provisions of Section 4975 of the Code, in addition to
the rules summarized above, the individual for whose benefit the IRA is
maintained is also treated as the creator of the IRA. For example, if the owner
or beneficiary of an IRA enters into any transaction, arrangement, or agreement
involving the assets of his or her IRA to benefit the IRA owner or beneficiary
(or his or her relatives or business affiliates) personally, or with the
understanding that such benefit will occur, directly or indirectly, such
transaction could give rise to a prohibited transaction that is not exempted by
any available exemption. Moreover, in the case of an IRA, the consequences of a
non-exempt prohibited transaction are that the IRA’s assets will be treated as
if they were distributed, causing immediate 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.teucriumnagsfund.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
|
103
|
|
|
Consolidated
Statement of Financial Condition
|
104
|
|
|
Consolidated
Statement of Operations
|
106
|
|
|
Consolidated
Statement of Changes in Members’ Equity
|
107
|
|
|
Consolidated
Statement of Cash Flows
|
108
|
|
|
Notes
to Consolidated Financial Statements
|
109
|
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 and subsidiary (A Development Stage Company) (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 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
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 and
subsidiary 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
STATEMENTS OF FINANCIAL CONDITION
|
|
|
June 30, 2010
(Unaudited)
|
|
|
December 31, 2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
5,697,882 |
|
|
$ |
847,433 |
|
Prepaid
expenses
|
|
|
7,701 |
|
|
|
6,000 |
|
Commodity
futures contracts
|
|
|
204,495 |
|
|
|
- |
|
Collateral,
due from broker
|
|
|
481,410 |
|
|
|
- |
|
Interest
receivable
|
|
|
609 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
6,392,097 |
|
|
$ |
853,433 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$ |
621,941 |
|
|
$ |
163,040 |
|
Short-term
debt
|
|
|
800,000 |
|
|
|
- |
|
Other
liabilities
|
|
|
25,469 |
|
|
|
- |
|
Interest
payable
|
|
|
4,159 |
|
|
|
- |
|
|
|
|
1,451,569 |
|
|
|
163,040 |
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
|
|
|
|
|
|
|
|
Members'
(deficit) equity
|
|
|
(186,999 |
) |
|
|
740,393 |
|
Less
subscription receivable
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
Total
Teucrium Trading, LLC members' equity
|
|
|
(236,999 |
) |
|
|
690,393 |
|
Noncontrolling
interest
|
|
|
5,177,527 |
|
|
|
- |
|
Total
members' equity
|
|
|
4,940,528 |
|
|
|
690,393 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and members' equity
|
|
$ |
6,392,097 |
|
|
$ |
853,433 |
|
See
accompanying notes.
Teucrium
Trading, LLC and Subsidiary
(A
Development Stage Company)
CONSOLIDATED
SCHEDULE OF INVESTMENTS
June 30,
2010 (Unaudited)
|
|
Fair
|
|
|
Percentage of
|
|
|
Notional
|
|
Description
|
|
Value
|
|
|
Net Assets
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
futures contracts
|
|
|
|
|
|
|
|
|
|
United
States Corn Futures Contracts
|
|
|
|
|
|
|
|
|
|
CBOT
Corn Futures (100 contracts, settlement date Sept. 14,
2010)
|
|
$ |
83,350 |
|
|
|
1.61
|
% |
|
$ |
1,813,750 |
|
CBOT
Corn Futures (84 contracts, settlement date Dec. 14,
2010)
|
|
|
71,064 |
|
|
|
1.37 |
|
|
|
1,568,700 |
|
CBOT
Corn Futures (89 contracts, settlement date Dec. 14,
2011)
|
|
|
50,081 |
|
|
|
0.97 |
|
|
|
1,806,700 |
|
|
|
$ |
204,495 |
|
|
|
3.95
|
% |
|
$ |
5,189,150 |
|
See
accompanying notes.
Teucrium
Trading, LLC and Subsidiary
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the six months ended
June 30, 2010
(unaudited)
|
|
|
From Inception
(September 1, 2009)
through December 31,
2009
|
|
|
From Inception
(September
1, 2009) through June
30, 2010 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Realized
and unrealized gain on trading of commodity futures
contracts:
|
|
|
|
|
|
|
|
|
|
Realized
gain on commodity futures contracts
|
|
$ |
980 |
|
|
$ |
- |
|
|
$ |
980 |
|
Net
change in unrealized appreciation or depreciation on commodity
futures contracts
|
|
|
204,495 |
|
|
|
- |
|
|
|
204,495 |
|
Interest
income
|
|
|
1,314 |
|
|
|
- |
|
|
|
1,314 |
|
Other
income
|
|
|
196 |
|
|
|
- |
|
|
|
196 |
|
Total
income
|
|
|
206,985 |
|
|
|
- |
|
|
|
206,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
fees
|
|
|
680,217 |
|
|
|
816,374 |
|
|
|
1,496,591 |
|
Salaries,
wages and benefits
|
|
|
166,500 |
|
|
|
41,118 |
|
|
|
207,618 |
|
General
and administrative
|
|
|
97,602 |
|
|
|
11,035 |
|
|
|
108,637 |
|
Unit-based
compensation
|
|
|
86,000 |
|
|
|
- |
|
|
|
86,000 |
|
Custodian's
fees and expenses
|
|
|
7,787 |
|
|
|
- |
|
|
|
7,787 |
|
Interest
expense
|
|
|
4,159 |
|
|
|
- |
|
|
|
4,159 |
|
Business
permits and licenses
|
|
|
585 |
|
|
|
117,580 |
|
|
|
118,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
1,042,850 |
|
|
|
986,107 |
|
|
|
2,028,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(835,865 |
) |
|
|
(986,107 |
) |
|
|
(1,821,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to noncontrolling interest
|
|
|
(177,527 |
) |
|
|
- |
|
|
|
(177,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to Teucrium Trading, LLC
|
|
$ |
(1,013,392 |
) |
|
$ |
(986,107 |
) |
|
$ |
(1,999,499 |
) |
See
accompanying notes.
TEUCRIUM
TRADING, LLC and Subsidiary
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF CHANGES IN MEMBERS' EQUITY
For
the period from Inception (September 1, 2009) through December 31,
2009
and
for the Six Months Ended June 30, 2010 (unaudited)
|
|
|
|
|
Par
Unit
|
|
|
Class
A
|
|
|
Class
B-1
|
|
|
Class
B-2
|
|
|
Subscription
|
|
|
|
|
|
Noncontrolling
|
|
|
Members'
|
|
|
|
Units
|
|
|
Value
|
|
|
Equity
Total
|
|
|
Equity
Total
|
|
|
Equity
Total
|
|
|
Receivable
|
|
|
Subtotal
|
|
|
Interest
|
|
|
Equity
Total
|
|
Balances,
at Inception
|
|
|
|
|
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Equity
Contributed through Note Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B-1 Units - issued October 26, 2009
|
|
|
38.961 |
|
|
|
5,775.01 |
|
|
|
|
|
|
|
225,000 |
|
|
|
|
|
|
|
(50,000 |
) |
|
|
175,000 |
|
|
|
|
|
|
|
175,000 |
|
Equity
Contributed for Member Interest and Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units - issued August 12, 2009
|
|
|
1,000.000 |
|
|
|
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 |
|
|
|
- |
|
|
|
(50,000 |
) |
|
|
690,393 |
|
|
|
|
|
|
|
690,393 |
|
Class
B-2 Units - issued February 11, 2010 (Unaudited)
|
|
|
100.000 |
|
|
|
860.00 |
|
|
|
|
|
|
|
|
|
|
|
86,000 |
|
|
|
|
|
|
|
86,000 |
|
|
|
|
|
|
|
86,000 |
|
Purchase
of Units by Noncontrolling
Interest (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
Net
(loss) income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(131,517 |
) |
|
|
(782,785 |
) |
|
|
(99,090 |
) |
|
|
|
|
|
|
(1,013,392 |
) |
|
|
177,527 |
|
|
|
(835,865 |
) |
Balances,
June 30, 2010 (Unaudited)
|
|
|
1,398.701 |
|
|
|
|
|
|
$ |
(130,899 |
) |
|
$ |
(43,010 |
) |
|
$ |
(13,090 |
) |
|
$ |
(50,000 |
) |
|
$ |
(236,999 |
) |
|
$ |
5,177,527 |
|
|
$ |
4,940,528 |
|
See
accompanying notes.
Teucrium
Trading, LLC and Subsidiary
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the six months ended
June 30, 2010
(unaudited)
|
|
|
From Inception
(September 1, 2009)
through December 31,
2009
|
|
|
From Inception
(September
1, 2009) through June
30, 2010 (unaudited)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
loss before allocation to noncontrolling interest
|
|
$ |
(835,865 |
) |
|
$ |
(986,107 |
) |
|
$ |
(1,821,972 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized appreciation or depreciation on commodity
futures contracts
|
|
|
(204,495 |
) |
|
|
- |
|
|
|
(204,495 |
) |
Unit-based
compensation
|
|
|
86,000 |
|
|
|
- |
|
|
|
86,000 |
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
(1,701 |
) |
|
|
(6,000 |
) |
|
|
(7,701 |
) |
Collateral,
due from broker
|
|
|
(481,410 |
) |
|
|
- |
|
|
|
(481,410 |
) |
Interest
receivable
|
|
|
(609 |
) |
|
|
- |
|
|
|
(609 |
) |
Accrued
expenses
|
|
|
458,901 |
|
|
|
163,040 |
|
|
|
621,941 |
|
Other
liabilities
|
|
|
25,469 |
|
|
|
- |
|
|
|
25,469 |
|
Interest
payable
|
|
|
4,159 |
|
|
|
- |
|
|
|
4,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(949,551 |
) |
|
|
(829,067 |
) |
|
|
(1,778,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term debt
|
|
|
800,000 |
|
|
|
- |
|
|
|
800,000 |
|
Proceeds
from convertible debt
|
|
|
- |
|
|
|
175,000 |
|
|
|
175,000 |
|
Proceeds
from sale of member equity and option
|
|
|
- |
|
|
|
1,501,500 |
|
|
|
1,501,500 |
|
Purchase
of units by noncontrolling interest
|
|
|
5,000,000 |
|
|
|
- |
|
|
|
5,000,000 |
|
Net
cash provided by financing activities
|
|
|
5,800,000 |
|
|
|
1,676,500 |
|
|
|
7,476,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
4,850,449 |
|
|
|
847,433 |
|
|
|
5,697,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
beginning of period
|
|
|
847,433 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
end of period
|
|
$ |
5,697,882 |
|
|
$ |
847,433 |
|
|
$ |
5,697,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt into members' equity (including $50,000
which had not been received by the Company)
|
|
$ |
- |
|
|
$ |
225,000 |
|
|
$ |
225,000 |
|
See
accompanying notes.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On June
5, 2010 the Fund’s initial registration of 30,000,000 shares on form S-1 was
declared effective by the Securities and Exchange Commission
(“SEC”). On June 9, 2010, the Fund listed its shares on the NYSE Arca
under the ticker symbol “CORN”. On that day, the Fund issued 200,000
shares in exchange for $5,000,000 at the Fund’s initial net asset value (“NAV”)
of $25 per share. The Fund also commenced investment operations on
June 9, 2010 by purchasing commodity futures contracts traded on the Chicago
Board of Trade (“CBOT”). As of June 30, 2010, the Fund had a total of
200,004 shares outstanding. Registration statements have also been
filed to register units of the Teucrium WTI Crude Oil Fund (“CRUD”), Teucrium
Natural Gas Fund (“NAGS”), Teucrium Sugar Fund (“CANE”), Teucrium Soybean Fund
(“SOYB”), and Teucrium Wheat Fund (“WEAT”), which would represent additional
future series of the Trust. The Trust and the Fund operate pursuant
to the Trust’s Declaration of Trust and Trust Agreement (the “Trust
Agreement”).
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. The consolidated financial statements of the Company
also include the noncontrolling interests of the unit holders in the
Fund.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements for the six
months ended June 30, 2010 have been prepared pursuant to the rules and
regulations of the SEC 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.
Noncontrolling
Interests
The consolidated financial statements
of the Company include the noncontrolling interests of the unitholders in the
Fund. Net income and loss is allocated between the Company and the
noncontrolling interests based on their respective relative ownership interest
in the Fund.
Development
Stage Company
The
Company has been classified as a development stage enterprise. The accompanying
consolidated financial statements have been prepared in accordance with FASB
Accounting Standards Codification (“ASC”) Topic 915, “Development Stage
Entities.”A development-stage enterprise is one in which planned principal
operations have not commenced or if its operations have commenced, there has
been no significant revenues there from.
Revenue
Recognition
The
Company receives a fee as compensation for services performed under the Trust
agreement. The Company’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
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 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.
Commodity
futures contracts are recorded on the trade date. All such transactions are
recorded on the identified cost basis and marked to market daily. Unrealized
appreciation or depreciation on commodity futures contracts are reflected in the
statement of operations as the difference between the original contract amount
and the market value (as determined by exchange settlement prices) as of the
last business day of the year or as of the last date of the financial
statements. Changes in the appreciation or depreciation between periods are
reflected in the statement of operations. The Fund earns interest
on its assets denominated in U.S. dollars on deposit with the futures
commission merchant at a rate equal to 85% of the overnight of Federal
Funds Rate. In addition, the Fund earns interest on funds held at the custodian
at prevailing market rates for such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Creations
and Redemptions
Authorized
purchasers 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 Arca on the day the order is placed.
Authorized purchasers 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 FASB ASC 740-10, Accounting for Uncertainty in Income
Taxes, 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 June 30, 2010
(unaudited) and December 31, 2009.
Offering
Costs
The
Company expenses all initial offering costs associated with the registration of
the Funds. Costs include, but are not limited to, legal fees pertaining to the
Funds’ 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 Funds will be
borne by the Company and not be charged to the Funds.
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 of $250,000. The Company had a balance of
$5,519,755(unaudited) and $183,167 in money market funds at June 30, 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 of 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 June 30, 2010 and December 31, 2009:
June
30, 2010 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets
for
|
|
|
other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Observable
|
|
|
as
of
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
June
30,
|
|
|
|
Levels
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$ |
5,519,755 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,519,755 |
|
Futures
contracts
|
|
|
204,495 |
|
|
|
- |
|
|
|
- |
|
|
|
204,495 |
|
Total
|
|
$ |
5,724,250 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,724,250 |
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Markets
for
|
|
|
other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Observable
|
|
|
as
of
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
June
30,
|
|
|
|
Levels
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$ |
183,167 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
183,167 |
|
Note
4 -Derivative Instruments and Hedging Activities
In the
normal course of business, the Fund utilizes derivative contracts in connection
with its proprietary trading activities. Investments in derivative
contracts are subject to additional risks that can result in a loss of all or
part of an investment. The Fund’s derivative activities and exposure to
derivative contracts are classified by the following primary underlying risks:
interest rate, credit, commodity price, and equity price risks. In
addition to its primary underlying risks, the Fund is also subject to additional
counterparty risk due to inability of its counterparties to meet the terms
of their contracts. For the period ended June 30, 2010, the Fund had
invested only in corn commodity futures contracts.
Futures
Contracts
The Fund
is subject to commodity price risk in the normal course of pursuing its
investment objectives. A futures contract represents a commitment for the future
purchase or sale of an asset at a specified price on a specified
date.
The
purchase and sale of futures contracts requires margin deposits with a Futures
Commission Merchant (“FCM”). Subsequent payments (variation margin) are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the contract, and are recorded as unrealized gains or losses by the
Fund. Futures contracts may reduce the Fund’s exposure to counterparty
risk since futures contracts are exchange-traded; and the exchange’s
clearinghouse, as the counterparty to all exchange-traded futures, guarantees
the futures against default.
The
Commodity Exchange Act requires an FCM to segregate all customer transactions
and assets from the FCM's proprietary activities. A customer's cash and
other equity deposited with an FCM are considered commingled with all other
customer funds subject to the FCM’s segregation requirements. In the event
of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of
segregated customer funds available. It is possible that the recovery
amount could be less than the total of cash and other equity
deposited.
The
following tables identify the fair value amounts of derivative instruments
(unaudited) included in the consolidated statements of financial condition as
commodity futures contracts, categorized by primary underlying risk, at June 30,
2010. Balances are presented on a gross basis, prior to the application of
the impact of counterparty and collateral netting. Total derivative assets
and liabilities are adjusted on an aggregate basis to take into consideration
the effects of master netting arrangements and have been reduced by the
application of cash collateral receivables and payables with its counterparties.
The following tables also identify the net gain and loss amounts (unaudited)
included in the consolidated statement of operations as realized and
unrealized gain on trading of commodity futures contracts, categorized by
primary underlying risk, for the period ended June 30, 2010.
At June
30, 2010, the fair values of derivative instruments (unaudited) were as
follows:
Primary Underlying Risk
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
Net Derivatives
|
|
Commodity
Price
|
|
|
|
|
|
|
|
|
|
Futures
Contracts
|
|
$
|
204,495
|
|
|
$
|
-
|
|
|
$
|
204,495
|
|
The
following is a summary of realized and unrealized gains and losses of the
derivative instruments (unaudited) utilized by the Fund, as of June 30,
2010.
|
|
Realized Gain on
|
|
|
Net Change in Unrealized Gain
|
|
Primary Underlying Risk
|
|
Derivative Instruments
|
|
|
on Derivative Instruments
|
|
Commodity
Price
|
|
|
|
|
|
|
Futures
Contracts
|
|
$
|
980
|
|
|
$
|
204,495
|
|
Volume
of Derivative Activities
At June
30, 2010, the notional amounts and number of contracts (unaudited), categorized
by primary underlying risk, are as follows:
|
|
Long
exposure
|
|
|
|
|
|
|
Notional
|
|
|
Number
|
|
Primary
underlying risk
|
|
amounts
|
|
|
of
contracts
|
|
Commodity
price
|
|
|
|
|
|
|
Futures
contracts
|
|
$
|
5,189,150
|
|
|
|
273
|
|
Note
5 – Capitalization (including 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.
Ownership
or “membership” interests in the Company are owned by persons referred to as
“members.” The Company currently has three voting or “ClassA” 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
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.
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 August 2010, the Company received the
$50,000 included in subscription receivable.
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.
-TheOption
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.
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.
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.
The
Company determined that modification of the Option Agreement did not change the
de minimus value of the Option.
Note
6 — Unit-Based Compensation
In
February 2010, the Company issued 100 units of 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
six months and inception to date period ended June 30, 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 ASC Topic 505, “Equity,” the Company determined the fair
value of the Class B-2 shares issued based on recent similar transactions, the
financial condition and book value of the Company at the time of issuance,
and the respective rights of the Class B-2 shares versus the other classes of
membership interests.
Note
7 — Related Party Transactions
The Riker
Group has invoiced $120,000 (unaudited) and $100,000 for professional services
rendered by Dale Riker for the periods ended June 30, 2010 and December 31,
2009, respectively; $20,000 is included in the accrued expenses balance on
the accompanying Consolidated Statements of Financial Condition at June 30, 2010
(unaudited) and December 31, 2009.
Carl
Miller received a salary of $60,000 (unaudited) and $20,000 for the periods
ending June 30, 2010 and December 31, 2009, respectively.
Sal
Gilbertie received a salary of $67,500 (unaudited) for the period ending June
30, 2010.
Gilbertie
Herb Farm was paid $9,000 for rent for the period September 1, 2009 through
December 31, 2010. Prepaid expenses on the Consolidated Statements of
Financial Condition included prepaid rent of $3,000 (unaudited) and $6,000 at
June 30, 2010 and December 31, 2009, respectively.
Note
8 — Recent Accounting Pronouncements
In
June 2009, the FASB issued the FASB Accounting Standards Codification (the
“Codification”) and a new Hierarchy of Generally Accepted Accounting Principles
which establishes only two levels of GAAP: authoritative and nonauthoritative.
The Codification is now the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP, except for rules and interpretive releases
of the SEC, which are additional sources of authoritative GAAP for SEC
registrants. All other nongrandfathered, non-SEC accounting literature not
included in the Codification will become nonauthoritative. The Codification is
effective for financial statements for interim or annual reporting periods
ending after September 15, 2009. The Company adopted the new guidelines and
numbering system prescribed by the Codification when referring to GAAP for the
year ended December 31, 2009. The application of the Codification did not have
an impact on the Company’s consolidated financial statements; however, all
references to authoritative accounting literature will now be references in
accordance with the Codification.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value,” to amend FASB ASC Topic 820, “Fair Value Measurements and
Disclosures,” to provide guidance on the measurement of liabilities at fair
value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Company adopted the guidance for the year ended
December 31, 2009, and there was no material impact on the Company’s
consolidated financial statements or related footnotes.
In
December 2009, the FASB issued ASU 2009-17, “Consolidations (FASB ASC Topic 810)
- Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which codifies FASB Statement No. 167, Amendments to
FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former
FASB Interpretation No. 46 (Revised December 2003), “Consolidation of
Variable Interest Entities,” and changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on, among
other things, the other entity’s purpose and design and the reporting entity’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance. ASU 2009-17 also requires a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entity’s
financial statements. ASU 2009-17 is effective at the start of a reporting
entity’s first fiscal year beginning after November 15, 2009, or the
Company’s fiscal year beginning January 1, 2010.The Company adopted this
guidance on January 1, 2010 with no impact on the Company’s consolidated
financial statements.
In
January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements”
(ASU 2010-06), to require new disclosures related to transfers into and out of
Levels 1 and 2 of the fair value hierarchy and additional disclosure
requirements related to Level 3 measurements. The guidance also clarifies
existing fair value measurement disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. The
additional disclosure requirements are effective for the first reporting period
beginning after December 15, 2009, except for the additional disclosure
requirements related to Level 3 measurements, which are effective for fiscal
years beginning after December 15, 2010. The Company adopted
this guidance on January 1, 2010 with no impact on the Company’s consolidated
financial statements.
Note 9 - Financial Highlights - Fund
(Unaudited)
The
following table presents per unit performance data and other supplemental
financial data for the Fund for the period June 9, 2010 (commencement of
operations) to June 30, 2010. This information has been derived from information
presented in the financial statements.
Per
Share Operation Performance
|
|
|
|
Net
asset value at beginning of period
|
|
$ |
25.00 |
|
Income
from investment operations:
|
|
|
|
|
Investment
income
|
|
|
- |
|
Net
realized and unrealized gain on commodityfutures contracts
|
|
|
1.04 |
|
Total
expenses
|
|
|
(0.15 |
) |
Net
increase in net asset value
|
|
|
0.89 |
|
Net
asset value end of period
|
|
$ |
25.89 |
|
Total
Return
|
|
|
3.56 |
% |
|
|
|
|
|
Total
expense
|
|
|
9.95 |
% |
Total
returns are calculated based on the change in value during the period. An
individual shareholder’s total return and ratio may vary from the above total
returns and ratios based on the timing of contributions to and withdrawals from
the Fund. The ratios, excluding non-recurring expenses, have been
annualized.
TEUCRIUM
COMMODITY TRUST — INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
116
|
|
|
|
Statement
of Assets and Liabilities
|
|
117
|
|
|
|
Notes
to Statement of Assets and Liabilities
|
|
122
|
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.
Roseland,
New Jersey
March 22,
2010
TEUCRIUM
COMMODITY TRUST
CONDENSED
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
|
|
June
30, 2010
(unaudited)
|
|
|
December
31,
2009
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in BNY Mellon trading accounts:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,519,670
|
|
|
$
|
100
|
|
Commodity
futures contracts
|
|
|
204,495
|
|
|
-
|
|
Collateral,
due from broker
|
|
|
481,410
|
|
|
|
-
|
|
Interest
receivable
|
|
|
609
|
|
|
|
-
|
|
|
|
|
5,206,184
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fee payable to Sponsor
|
|
|
3,084
|
|
|
|
-
|
|
Other
liabilities
|
|
|
25,469
|
|
|
|
-
|
|
Total
liabilities
|
|
|
28,553
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$
|
5,177,631
|
|
|
$
|
100
|
|
The
accompanying notes are an integral part of this financial
statement.
TEUCRIUM
COMMODITY TRUST
CONDENSED
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited)
June 30,
2010
|
|
Fair
|
|
|
Percentage of
|
|
|
Notional
|
|
Description
|
|
Value
|
|
|
Net
Assets
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
futures contracts
|
|
|
|
|
|
|
|
|
|
United
States Corn Futures Contracts
|
|
|
|
|
|
|
|
|
|
CBOT
Corn Futures (100 contracts, settlement date Sept. 14,
2010)
|
|
$
|
83,350
|
|
|
|
1.61
|
%
|
|
$
|
1,813,750
|
|
CBOT
Corn Futures (84 contracts, settlement date Dec. 14, 2010)
|
|
|
71,064
|
|
|
|
1.37
|
|
|
|
1,568,700
|
|
CBOT
Corn Futures (89 contracts, settlement date Dec. 14, 2011)
|
|
|
50,081
|
|
|
|
0.97
|
|
|
|
1,806,700
|
|
|
|
$
|
204,495
|
|
|
|
3.95
|
%
|
|
$
|
5,189,150
|
|
The
accompanying notes are an integral part of this financial
statement.
TEUCRIUM
COMMODITY TRUST
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
|
|
From commencement of
|
|
|
|
operations (June 9, 2010)
|
|
|
|
through June 30, 2010
|
|
Income
|
|
|
|
Realized
and unrealized gain on trading of commodity futures
contracts:
|
|
|
|
Realized
gain on commodity futures contracts
|
|
$
|
980
|
|
Net
change in unrealized appreciation or depreciation on commodity futures
contracts
|
|
|
204,495
|
|
Interest
income
|
|
|
609
|
|
Total
Income
|
|
|
206,084
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Audit
fee
|
|
|
8,010
|
|
Custodian's
fees and expenses
|
|
|
7,787
|
|
Distribution
and marketing fee
|
|
|
6,230
|
|
Other
fees
|
|
|
3,442
|
|
Management
fee
|
|
|
3,084
|
|
Total
Expenses
|
|
|
28,553
|
|
|
|
|
|
|
Net
Income
|
|
$
|
177,531
|
|
The
accompanying notes are an integral part of this financial
statement.
TEUCRIUM
COMMODITY TRUST
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
|
|
From commencement of
|
|
|
|
operations (June 9, 2010)
|
|
|
|
through
June 30, 2010
|
|
Operations
|
|
|
|
Net
Income
|
|
$
|
177,531
|
|
|
|
|
|
|
Capital
transactions
|
|
|
|
|
Issuance
of 200,000 Shares
|
|
|
5,000,000
|
|
Net
change in net assets
|
|
|
5,177,531
|
|
|
|
|
|
|
Net
assets, beginning of period
|
|
|
100
|
|
|
|
|
|
|
Net
assets, end of period
|
|
$
|
5,177,631
|
|
The
accompanying notes are an integral part of this financial
statement.
TEUCRIUM
COMMODITY TRUST
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
|
|
From
commencement of
|
|
|
|
operations
(June 9, 2010)
|
|
|
|
through
June 30, 2010
|
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
income
|
|
$
|
177,531
|
|
Net
change in unrealized appreciation or depreciation on commodity fututures
contracts
|
|
|
(204,495
|
)
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Collateral,
due from broker
|
|
|
(481,410
|
)
|
Interest
receivable
|
|
|
(609
|
)
|
Management
fee payable to Sponsor
|
|
|
3,084
|
|
Other
liabilities
|
|
|
25,469
|
|
Net
cash used in operating activities
|
|
|
(453,466
|
)
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
Proceeds
from sale of Shares
|
|
|
5,000,000
|
|
Net
change in cash
|
|
|
4,519,570
|
|
Cash
and cash equivalents, beginning of period
|
|
|
100
|
|
Cash
and cash equivalents, end of period
|
|
$
|
4,519,670
|
|
The
accompanying notes are an integral part of this financial
statement.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Organization and Operation
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 which shares may be purchased and sold on the New York Stock
Exchange (“NYSE”) Arca. The Fund issues common units, called the “Shares,”
representing fractional undivided beneficial interests in the Fund.
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 in
operation. Registration statements have also been filed to register units
of the Teucrium WTI Crude Oil Fund (“CRUD”), Teucrium Natural Gas Fund (“NAGS”),
Teucrium Sugar Fund (“CANE”), Teucrium Soybean Fund (“SOYB”), and Teucrium Wheat
Fund (“WEAT”), which would represent additional future series of the
Trust. The Trust and the Fund operate pursuant to the Trust’s Declaration
of Trust and Trust Agreement (the “Trust Agreement”).
The
investment objective of the Fund is to have the 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 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. (This weighted average of the three referenced
Corn Futures Contracts is referred to herein as the “Benchmark,” and the three
Corn Futures Contracts that at any given time make up the Benchmark are referred
to herein as the “Benchmark Component Futures Contracts.”)
The Fund
commenced investment operations on June 9, 2010 and has a fiscal year ending on
December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The
Sponsor is responsible for the management of the Fund. The Sponsor is a member
of the National Futures Association (the “NFA”) and became a commodity pool
operator registered with the Commodity Futures Trading Commission (the “CFTC”)
effective November 10, 2009.
The
accompanying unaudited financial statements have been prepared in accordance
with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and
Exchange Commission (the “SEC”) and, therefore, do not include all
information and footnote disclosure required under accounting principles
generally accepted in the United States of America. The financial
information included herein is unaudited; however, such financial information
reflects all adjustments which are, in the opinion of management, necessary for
the fair presentation of the Fund’s financial statements for the interim
period. It is suggested that these condensed consolidated interim
financial statements be read in conjunction with the consolidated financial
statements and related notes included in Amendment No. 3 to Form S-1. The
operating results from the commencement of operations (June 9, 2010) through
June 30, 2010 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2010.
On June
5, 2010, the Fund’s initial registration of 30,000,000 shares on Form S-1 was
declared effective by the SEC. On June 9, 2010, the Fund listed its shares on
the NYSE Arca under the ticker symbol “CORN”. On that day, the Fund issued
200,000 shares in exchange for $5,000,000 at the Fund’s initial NAV of $25 per
share. The Fund also commenced investment operations on June 9, 2010 by
purchasing commodity futures contracts traded on the Chicago Board of Trade
(“CBOT”). As of June 30, 2010, the Fund had a total of 200,004 shares
outstanding.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of the Trust and the
Fund. All intercompany transactions and balances have been eliminated in
consolidation. For the period ended June 30, 2010, the operations of the
Trust consist entirely of the operations of the Fund, which commenced operations
on June 9, 2010.
Revenue
Recognition
Commodity
futures contracts are recorded on the trade date. All such transactions are
recorded on the identified cost basis and marked to market daily. Unrealized
appreciation or depreciation on commodity futures contracts are reflected in the
statement of operations as the difference between the original contract amount
and the market value (as determined by exchange settlement prices) as of the
last business day of the year or as of the last date of the financial
statements. Changes in the appreciation or depreciation between periods are
reflected in the statement of operations. The Fund earns interest
on its assets denominated in U.S. dollars on deposit with the futures
commission merchant at a rate equal to 85% of the overnight of Federal
Funds Rate. In addition, the Fund earns interest on funds held at the custodian
at prevailing market rates for such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
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 Generally Accepted Accounting Principles (“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 June 30, 2010 (unaudited) and December 31,
2009.
Creations
and Redemptions
Authorized
Purchasers may purchase creation baskets consisting of 100,000 shares from the
Fund as of the beginning of each business day based upon the prior day’s net
asset value. Authorized Purchasers may redeem shares from the Fund only in
blocks of 100,000 shares called “redemption baskets”. The amount of the
redemption proceeds for a redemption basket will be equal to the net asset value
of the shares 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 shares sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts due from
Authorized Purchasers are reflected in the statement of assets and liabilities
as receivable for shares sold and amounts payable to Authorized Purchasers upon
redemption is reflected as payable for shares redeemed.
Cash
Equivalents
Cash
equivalents are highly-liquid investments with original maturity dates of three
months or less at inception. The Trust reported its cash equivalents in
the statement of assets and liabilities at market value, or at carrying amounts
that approximate fair value, because of their highly-liquid nature and
short-term maturities. The Trust has a substantial portion of its assets on
deposit with banks. Assets deposited with the bank may, at times, exceed
federally insured limits. The Trust had a balance of $4,519,670
(unaudited) and $0 in money market funds at June 30, 2010 and December 31, 2009,
respectively; these balances are included in cash and cash equivalents on the
statement of assets and liabilities.
Sponsor
Fee
The
Sponsor is responsible for investing the assets of the Fund in accordance with
the objectives and policies of the Fund. In addition, the Sponsor arranges for
one or more third parties to provide administrative, custody, accounting,
transfer agency and other necessary services to the Trust and 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 pays for all brokerage fees, taxes and
other expenses, including licensing fees for the use of intellectual property,
registration or other fees paid to the SEC, 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
Shares 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.
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.
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 Trust 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 Trust. Unobservable inputs reflect the Trust’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 Trust’s own assumptions are
set to reflect those that market participants would use in pricing the asset or
liability at the measurement date. The Trust 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.
Note
3 – Fair Value Measurements
The
Trust’s assets and liabilities recorded at fair value have been categorized
based upon a fair value hierarchy as described in the Trust’s significant
accounting policies in Note 2.
The
following table presents information about the Trust’s assets measured at fair
value as of June 30, 2010:
June
30, 2010 (Unaudited)
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
as of
June 30,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2010
|
|
Cash
Equivalents
|
|
$
|
4,519,670
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,519,670
|
|
Futures
Contracts
|
|
|
204,495
|
|
|
|
-
|
|
|
|
-
|
|
|
|
204,495
|
|
Total
|
|
$
|
4,724,165
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,724,165
|
|
Note
4 -Derivative Instruments and Hedging Activities
In
the normal course of business, the Fund utilizes derivative contracts in
connection with its proprietary trading activities. Investments in
derivative contracts are subject to additional risks that can result in a loss
of all or part of an investment. The Fund’s derivative activities and
exposure to derivative contracts are classified by the following primary
underlying risks: interest rate, credit, commodity price, and equity price
risks. In addition to its primary underlying risks, the Fund is also
subject to additional counterparty risk due to inability of its
counterparties to meet the terms of their contracts. For the period ending
June 30, 2010, the Fund had invested only in corn commodity futures
contracts.
Futures
Contracts
The Fund
is subject to commodity price risk in the normal course of pursuing its
investment objectives. A futures contract represents a commitment for the future
purchase or sale of an asset at a specified price on a specified
date.
The
purchase and sale of futures contracts requires margin deposits with a Futures
Commission Merchant (“FCM”). Subsequent payments (variation margin) are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the contract, and are recorded as unrealized gains or losses by the
Fund. Futures contracts may reduce the Fund’s exposure to counterparty
risk since futures contracts are exchange-traded; and the exchange’s
clearinghouse, as the counterparty to all exchange-traded futures, guarantees
the futures against default.
The
Commodity Exchange Act requires an FCM to segregate all customer transactions
and assets from the FCM's proprietary activities. A customer's cash and
other equity deposited with an FCM are considered commingled with all other
customer funds subject to the FCM’s segregation requirements. In the event
of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of
segregated customer funds available. It is possible that the recovery
amount could be less than the total of cash and other equity
deposited.
The
following tables identify the fair value amounts of derivative instruments
included in the condensed statement of assets and liabilities as derivative
contracts, categorized by primary underlying risk, at June 30, 2010.
Balances are presented on a gross basis, prior to the application of the impact
of counterparty and collateral netting. Total derivative assets and
liabilities are adjusted on an aggregate basis to take into consideration the
effects of master netting arrangements and have been reduced by the application
of cash collateral receivables and payables with its counterparties. The
following tables also identify the net gain and loss amounts included in the
condensed statement of operations as net gain (loss) from derivative contracts,
categorized by primary underlying risk, for the period ended June 30,
2010.
At June
30, 2010, the fair value of derivative instruments were as follows:
Primary Underlying Risk
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
Net Derivatives
|
|
Commodity
Price
|
|
|
|
|
|
|
|
|
|
Futures
Contracts
|
|
$
|
204,495
|
|
|
$
|
-
|
|
|
$
|
204,495
|
|
The
following is a summary of realized and unrealized gains and losses of the
derivative instruments utilized by the Fund, as of June 30, 2010.
|
|
Realized Gain on
|
|
|
Net Change in Unrealized Gain
|
|
Primary Underlying Risk
|
|
Derivative Instruments
|
|
|
on Derivative Instruments
|
|
Commodity
Price
|
|
|
|
|
|
|
Futures
Contracts
|
|
$
|
980
|
|
|
$
|
204,495
|
|
Volume
of Derivative Activities
At June
30, 2010, the notional amounts and number of contracts, categorized by primary
underlying risk, are as follows:
|
|
Long
exposure
|
|
|
|
Notional
|
|
|
Number
|
|
Primary
underlying risk
|
|
amounts
|
|
|
of
contracts
|
|
Commodity
price
|
|
|
|
|
|
|
Futures
contracts
|
|
$
|
5,189,150
|
|
|
|
273
|
|
Total
|
|
$
|
5,189,150
|
|
|
|
273
|
|
Note
5 – Recent Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair
Value Measurements.” ASU No. 2010-06 clarifies existing disclosure
and requires additional disclosures regarding fair value
measurements. Effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years, entities will need to
disclose information about purchases, sales, issuances and settlements of
Level 3 securities on a gross basis, rather than as a net number
as currently required. The Sponsor is currently evaluating the impact ASU
No. 2010-06 will have on the Trust’s financial
statement disclosures.
Note
6 - 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.
TEUCRIUM NATURAL GAS FUND — INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
131
|
|
|
|
Statement
of Assets and Liabilities
|
|
132
|
|
|
|
Notes
to Statement of Assets and Liabilities
|
|
133
|
Report
of Independent Registered Public Accounting Firm
To the
Sponsor of
Teucrium
Natural Gas Fund
We have
audited the accompanying statement of assets and liabilities of Teucrium Natural
Gas Fund (the “Fund”) as of July 31, 2010. This financial statement
is the responsibility of the Fund’s management. Our responsibility is
to express an opinion on this financial statement 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 Fund 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 Fund’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 statement, 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 statement referred to above presents fairly, in all
material respects, the financial position of Teucrium Natural Gas Fund as of
July 31, 2010, in conformity with U.S. generally accepted accounting
principles.
/s/
Rothstein, Kass & Company, P.C.
Roseland,
New Jersey
September
2, 2010
TEUCRIUM
NATURAL GAS FUND
STATEMENT
OF ASSETS AND LIABILITIES
July
31, 2010
Assets
|
|
Cash
|
|
$ |
100 |
|
|
|
|
|
|
Net
Assets
|
|
$ |
100 |
|
The
accompanying notes are an integral part of this financial
statement.
TeucriumNatural
Gas Fund
NOTES
TO STATEMENT OF ASSETS AND LIABILITIES
Note
1 — Organization and Business
TeucriumNatural
GasFund (the “Fund”), is a series of Teucrium Commodity Trust
(“Trust”), a Delaware statutory trust organized on September 11, 2009. The
Fund operates pursuant to the Trust’s Amended and Restated Declaration of Trust
and Trust Agreement (the “Trust Agreement”). The Fund was formed and
is managed and controlled by Teucrium Trading, LLC (the “Sponsor”). 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 Fund
seeks to achieve its investment objective by investing under normal market
conditions in Benchmark Component Futures Contracts or, in certain
circumstances, in other Natural Gas Futures Contracts traded on the NYMEX and
the IntercontinentalExchange (“ICE”), as well as other foreign exchanges.
In addition, the Fund will invest in natural gas-based swap agreements that are
cleared through the ICE or its affiliated provider of clearing services
(“Cleared Natural Gas Swaps”) to the extent permitted and appropriate in light
of the liquidity in the Cleared Natural Gas Swap market. The Fund then
intends to invest in contracts and instruments such as cash-settled options
on Natural Gas Futures Contracts and forward contracts, swaps, other than
Cleared Natural Gas Swaps, and other over-the-counter transactions that are
based on the price of natural gas and Natural Gas Futures Contracts
(collectively, “Other Natural Gas Interests” and together with Natural Gas
Futures Contracts and Cleared Natural Gas Swaps, “Natural Gas
Interests”). By utilizing certain or all of these investments, the
Sponsor will endeavor to cause the Fund's performance, before taking Fund
expenses and any interest income from the cash, cash equivalents and U.S.
Treasury securities held by the Fund into account, 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 Natural Gas Futures
Contracts.
The Fund
invests in Natural Gas 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 Natural Gas
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 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 Natural Gas 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 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 New York Stock Exchange (“NYSE”) 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 Natural GasFutures Contracts market and
the market for Other Natural GasInterests. 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 affect 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 Fund
does not record a provision for income taxes because the partners report their
share of the Fund’s income or loss on their income tax returns. The
financial statements reflect the Fund’s transactions without adjustment, if any,
required for income tax purposes.
In
accordance with Generally Accepted Accounting Principles (“GAAP”), the Fund is
required to determine whether a tax position is more likely than not to be
sustained upon examination by the applicable taxing authority, including
resolution of any related appeals or litigation processes, based on the
technical merits of the position. The Fund 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 Fund 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 Fund recording a tax liability that reduces net
assets. This policy has been applied to all existing tax positions
upon the Fund’s initial adoption at July 31, 2010. Based on its
analysis, the Fund has determined that the adoption of this policy did not have
a material impact on the Fund’s financial statements upon
adoption. However, the Fund’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 Fund 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 July 31, 2010.
Additions
and Redemptions
Authorized
purchasers may purchase creation baskets consisting of 50,000 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 50,000 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 the proceeds from units sold or pays for redeemed units within three
business days after the trade date of the purchase or redemption, respectively.
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:
|
·
|
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 Natural Gas Futures Contracts, the administrator will
use the NYMEX closing price (usually determined as of 2:30 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 Natural
Gas Swaps and over-the-counter Natural Gas Interests will be determined based on
the value of the commodity or futures contract underlying such Natural Gas
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 Natural Gas 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 Natural Gas Interests and any
other income or expense accruing to the Fund but unpaid or not received by the
Fund.
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.
Note 2 — Recent
Accounting Pronouncements
In
June 2009, the FASB issued the FASB Accounting Standards Codification (the
“Codification”) and a new Hierarchy of Generally Accepted Accounting Principles
(“GAAP”) which establishes only two levels of GAAP: authoritative and
nonauthoritative. The Codification is now the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP, except for rules
and interpretive releases of the SEC, which are additional sources of
authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC
accounting literature not included in the Codification will become
nonauthoritative. The Codification is effective for financial statements for
interim or annual reporting periods ending after September 15, 2009. The
Fund adopted the new guidelines and numbering system prescribed by the
Codification when referring to GAAP upon formation. The application of the
Codification did not have an impact on the Fund’s financial statements; however,
all references to authoritative accounting literature will now be references in
accordance with the Codification.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 (ASU 2009-05),
“Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
Fair Value,” to amend FASB ASC Topic 820, “Fair Value Measurements and
Disclosures,” to provide guidance on the measurement of liabilities at fair
value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Fund adopted this guidance upon
formation.
In
December 2009, the FASB issued ASU 2009-17 (“ASU 2009-17”), “Consolidations
(FASB ASC Topic 810) - Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities,” which codifies FASB Statement
No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17
represents a revision to former FASB Interpretation No. 46 (Revised
December 2003), “Consolidation of Variable Interest Entities,” and changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic performance. ASU
2009-17 also requires a reporting entity to provide additional disclosures about
its involvement with variable interest entities and any significant changes in
risk exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity’s financial statements. The Fund adopted the guidance in
ASU 2009-17 upon formation.
In
January 2010, the FASB issued Accounting Standards Update 2010-06 (“ASU
2010-06”), “Fair Value Measurements and Disclosures (Topic 820) - Improving
Disclosures about Fair Value Measurements” (ASU 2010-06), to require new
disclosures related to transfers into and out of Levels 1 and 2 of the fair
value hierarchy and additional disclosure requirements related to Level 3
measurements. The guidance also clarifies existing fair value measurement
disclosures about the level of disaggregation and about inputs and valuation
techniques used to measure fair value. The additional disclosure requirements
are effective for the first reporting period beginning after December 15,
2009, except for the additional disclosure requirements related to Level 3
measurements, which are effective for fiscal years beginning after
December 15, 2010. The Fund adopted the guidance in ASU 2010-06
upon formation.
Note
3 - Organizational and Offering Costs
Expenses
incurred in organizing of the Fund and the initial offering of the shares,
including applicable SEC registration fees will be borne directly by the
Sponsor. The Fund 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 Fund’s maximum exposure under these arrangements
is unknown as this would involve future claims that may be made against the Fund
that have not yet occurred.
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 : The weighted
average of the nearest to spot
month March, April, October and November Henry Hub Natural Gas Futures
Contracts traded on the NYMEX, weighted 25% equally in each contract
month, before taking Fund expenses and interest income into
account.
Benchmark Component Futures
Contracts: The four Natural Gas 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, the NYMEX, 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.
Cleared Natural Gas Swap : A
natural gas-based swap agreement that is cleared through the ICE 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
50,000 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.
IntercontinentalExchange
(ICE): An Internet-based exchange for the trading of over-the counter
energy contracts, such as the Cleared Natural Gas Swaps. The Fund expressly
disclaims any association with the ICE or endorsement of the Fund by the ICE and
acknowledges that “ICE” and the “IntercontinentalExchange” are registered
trademarks of such exchange.
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.
Natural Gas Futures Contracts:
Futures contracts for Henry Hub natural gas that are traded on the NYMEX or
foreign exchanges.
Natural Gas Interests: Natural
Gas Futures Contracts, Cleared Natural Gas Swaps and Other Natural Gas
Interests.
NAV: Net Asset Value of the
Fund.
New York Mercantile Exchange
(NYMEX): The primary exchange on which Natural Gas Futures Contracts are
traded in the U.S. The Fund expressly disclaims any association with the NYMEX
or endorsement of the Fund by the NYMEX and acknowledges that “NYMEX” and “New
York Mercantile Exchange” are registered trademarks of such
exchange.
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 Natural Gas Interests:
Other natural gas-related investments such as options on Natural Gas Futures
Contracts, swap agreements other than Cleared Natural Gas Swaps and forward
contracts relating to natural gas, and over-the-counter transactions that are
based on the price of natural gas, Natural Gas Futures Contracts and indices
based on the foregoing.
Redemption Basket: A block of
50,000 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.
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 October 21, 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
NATURAL GAS 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 16.
This
statement of additional information and accompanying disclosure document are
both dated October 22, 2010.
TEUCRIUM
NATURAL GAS FUND
TABLE
OF CONTENTS
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Page
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The
Commodity Interest Markets
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142
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Potential
Advantages of Investment
|
152
|
Benchmark
Performance
|
153
|
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.
On July 21, 2010, “The Dodd-Frank
Wall Street Reform and Consumer Protection Act” was signed into
law. It includes provisions altering the regulation of commodity
interests. Because most of the changes in the new law will not be effected
and their precise parameters will not be clear until implementing rules are
adopted by the CFTC and other regulators, the information set forth below does
not reflect the new law. Accordingly, the information set forth below is
subject to change in the near future.
Futures
Contracts
A futures
contract such as a Natural Gas 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.”) 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. As a result of certain regulatory limitations, options on
forward contracts and other over-the-counter options relating to energy
commodities such as natural gas may not be generally available in United States
markets.
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 natural gas producers 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 drilling, 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
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 have established 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.
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 natural corner or squeeze on a market or undue
influence on prices by any single trader or group of traders. The accountability
levels and position limits currently established by the CFTC, NYMEX and ICE
apply to certain energy commodity interests, such as natural gas and crude oil.
Specifically, the NYMEX’s accountability levels for Henry Hub Natural Gas
Futures Contracts are 6,000 futures contracts in any one month, 12,000 all
months and 1,000 in the expiring month. The accountability levels for Cleared
Natural Gas Swaps settled on the ICE are 48,000 contracts for all months (12,000
NYMEX NG contract equivalents); 24,000 contracts for any one month
(6,000 NYMEX NG contract equivalents). In addition to accountability levels, the
NYMEX and ICE may impose position limits on contracts held in the last few days
of trading in the near month contract to expire. It is unlikely that the Fund
will be subject to such position limits because of the Fund’s investment
strategy to “roll” from the near month contract to expire to the same month of
the following year during the period beginning two weeks from the expiration of
the contract.
U.S.
exchanges may set accountability levels and position limits for all commodity
interests traded on that exchange. 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. The NYMEX does not impose daily limit for
natural gas futures contracts. Instead it imposes a $3.00 per MMBtu
($30,000 per contract) price fluctuation limit for Natural Gas Futures
Contracts.
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 natural gas and of Natural Gas 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 cash and interest is earned on 100% of these 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 natural gas. The graph shows (1) historical price
information for the Benchmark by taking the prices of each Benchmark Component
Futures Contract according to publicly available 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 natural gas using the price of the
spot month Natural Gas 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 Natural Gas Futures Contract was rolled into the new spot month Natural
Gas Futures Contract on its expiration date, and each of these “rolls” is volume
adjusted to account for price differentials between the original Natural Gas
Futures Contract and its replacement. For example, if the original Natural Gas
Futures Contracts were closed out at a lower price than the price at which the
replacement Natural Gas Futures Contracts were entered into, then a lesser
number of replacement Natural Gas 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 Natural Gas
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 natural gas, 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.
155