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 substantially all of the Fund’s assets
in shares of the Underlying Funds, although some residual amount of Fund
assets may be held in short-term Treasury Securities, cash and/or cash
equivalents. The Sponsor will invest the Underlying Funds’ assets in Futures
Contracts, Cleared Swaps and Other Commodity Interests, short-term Treasury
Securities, cash and cash equivalents. When the Underlying Funds purchase
Futures Contracts and certain Other Commodity Interests that are
exchange-traded, the Underlying 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 Commodity Interests at maturity. This deposit is known
as initial margin. Counterparties in transactions in Cleared Swaps and
over-the-counter Commodity Interests will generally impose similar collateral
requirements on the Underlying Funds. The Sponsor will invest the Underlying
Funds’ assets that remain after margin and collateral is posted in short-term
Treasury Securities, cash and/or cash equivalents. Subject to these margin
and collateral requirements, the Sponsor has sole authority to determine the
percentage of assets that will be:
• held as margin or collateral with futures commission merchants or other
custodians;
• used for other investments; and
• held in bank accounts to pay current obligations and as reserves.
In general, the Underlying Funds expect that they will be required to post
between 5% and 10% of the notional amount of a Commodity Interest as initial
margin when entering into such Commodity Interest. Ongoing margin and
collateral payments will generally be required for both exchange-traded and
over-the-counter Commodity Interests based on changes in the value of the
Commodity Interests. Furthermore, ongoing collateral requirements with
respect to over-the-counter Commodity Interests are negotiated by the parties,
and may be affected by overall market volatility, volatility of the underlying
commodity or index, the ability of the counterparty to hedge its exposure
under the Commodity Interest, and each party’s creditworthiness. In light of
the differing requirements for initial payments under exchange-traded and
over-the-counter Commodity Interests and the fluctuating nature of ongoing
margin and collateral payments, it is not possible to estimate what portion
of the Underlying Funds’ assets will be posted as margin or collateral at any
given time. The Treasury Securities, cash and cash equivalents held by the
Underlying Fund will constitute reserves that will be available to meet
ongoing margin and collateral requirements. All interest income received by
an Underlying Fund will be used for such Underlying Fund’s benefit.
A futures commission merchant, counterparty, government agency or commodity
exchange could increase margin or collateral requirements applicable to the
Underlying Funds 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 and Underlying Funds’ assets will be held in segregation pursuant
to the Commodity Exchange Act and CFTC regulations.
one
of seven series of the Trust; each series operates 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 Second 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 March 26, 2012, 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 (the “Underlying Fund Average”) of the NAVs per
share of four other commodity pools that are series of the Trust and are
sponsored by the Sponsor: the Teucrium Corn Fund, the Teucrium Wheat Fund,
the Teucrium Soybean Fund and the Teucrium Sugar Fund (collectively, the
“Underlying Funds”). The Fund seeks to achieve its investment objective by
investing under normal market conditions in the publicly-traded shares of
each Underlying Fund so that the Underlying Fund Average will have a weighting
of 25% to each Underlying Fund, and the Fund’s assets will be rebalanced,
generally on a daily basis, to maintain the approximate 25% allocation to
each Underlying Fund. The Fund does not intend to invest directly in futures
contracts (“Futures Contracts”), although it reserves the right to do so in
the future, including if an Underlying Fund ceases operations or if shares of
an Underlying Fund cease trading on NYSE Arca.
The investment objective of each Underlying Fund is to have the daily changes
in percentage terms of its shares’ NAV reflect the daily changes in percentage
terms of a weighted average of the closing settlement prices for certain
Futures Contracts for the commodity specified in the Underlying Fund’s name.
(This weighted average is referred to herein as the Underlying Fund’s
“Benchmark,” the Futures Contracts that at any given time make up an
Underlying Fund’s Benchmark are referred to herein as the Underlying Fund’s
“Benchmark Component Futures Contracts,” and the commodity specified in the
Underlying Fund’s name is referred to herein as its “Specified Commodity.”)
Specifically, the Teucrium Corn Fund’s Benchmark is: (1) the second-to-expire
Futures Contract for corn traded on the Chicago Board of Trade (“CBOT”),
weighted 35%, (2) the third-to-expire CBOT corn Futures Contract, weighted
30%, and (3) the CBOT corn Futures Contract expiring in the December
following the expiration month of the third-to-expire contract, weighted 35%.
The Teucrium Wheat Fund’s Benchmark is: (1) the second-to-expire CBOT wheat
Futures Contract, weighted 35%, (2) the third-to-expire CBOT wheat Futures
Contract, weighted 30%, and (3) the CBOT wheat Futures Contract expiring in
the December following the expiration month of the third-to-expire contract,
weighted 35%. The Teucrium Soybean Fund’s Benchmark is: (1) the
second-to-expire CBOT soybean Futures Contract, weighted 35%, (2) the
third-to-expire CBOT soybean Futures Contract, weighted 30%, and (3) the CBOT
soybean Futures Contract expiring in the November following the expiration
month of the third-to-expire contract, weighted 35%, except that CBOT soybean
Futures Contracts expiring in August and September will not be part of the
Teucrium Soybean Fund’s Benchmark because of the less liquid market for these
Futures Contracts. The Teucrium Sugar Fund’s Benchmark is: (1) the
second-to-expire Sugar No. 11 Futures Contract traded on ICE Futures US
(“ICE Futures”), weighted 35%, (2) the third-to-expire ICE Futures Sugar
No. 11 Futures Contract, weighted 30%, and (3) the ICE Futures Sugar No. 11
Futures Contract expiring in the March following the expiration month of
the third-to-expire contract, weighted 35%. (Although sugar Futures Contracts
are primarily traded on the ICE Futures, they may also be traded on the New
York Mercantile Exchange (“NYMEX”). Any reference to the ICE Futures in
relation to the Teucrium Sugar Fund should also be read as a reference to
NYMEX.)
Each Underlying Fund seeks to achieve its investment objective by investing
under normal market conditions in Benchmark Component Futures Contracts or,
in certain circumstances, in other Futures Contracts for its Specified
Commodity. In addition, and to a limited extent, an Underlying Fund also may
invest in exchange-traded options on Futures Contracts for its Specified
Commodity and in swap agreements based on its Specified Commodity that are
cleared through a futures exchange or its affiliated provider of clearing
services (“Cleared Swaps”) in furtherance of the Underlying Fund's investment
objective. Once position limits or accountability levels on Futures Contracts
on an Underlying Fund’s Specified Commodity are applicable, each Underlying
Fund's intention is to invest first in Cleared Swaps based on its Specified
Commodity, to the extent practicable under the position limits or
accountability levels applicable to such Cleared Swaps and appropriate in
light of the liquidity in the market for such Cleared Swaps, and then in
contracts and instruments such as cash-settled options on Futures Contracts
and forward contracts, swaps other than Cleared Swaps, and other
over-the-counter transactions that are based on the price of its Specified
Commodity or Futures Contracts on its Specified Commodity (collectively,
“Other Commodity Interests,” and together with Futures Contracts and Cleared
Swaps, “Commodity Interests”). See “The Offering – Futures Contracts” below.
By utilizing certain or all of these investments, the Sponsor will endeavor
to cause each Underlying Fund's performance to closely track that of its
Benchmark. The Sponsor expects to manage the Fund’s and the Underlying Funds’
investments directly, although it has been authorized by the Trust to retain,
establish the terms of retention for, and terminate third-party commodity
trading advisors to provide such management. The Sponsor is also authorized
to select broker-dealers to execute the Fund’s transactions in the
Underlying Funds and futures commission merchants to execute the Underlying
Funds’ transactions in Futures Contracts.
The Underlying Funds seek to achieve their investment objectives primarily
by investing in Commodity Interests such that daily changes in the Underlying
Fund’s NAV will be expected to closely track the changes in its Benchmark.
Each Underlying Fund’s positions in Commodity Interests will be changed or
“rolled” on a regular basis in order to track the changing nature of its
Benchmark. For example, several times a year (on the dates on which Futures
Contracts on the Underlying Fund’s Specified Commodity expire), a particular
Futures Contract will no longer be a Benchmark Component Futures Contract,
and the Underlying Fund’s investments will have to be changed accordingly.
In order that the Underlying Funds’ trading does not cause unwanted market
movements and to make it more difficult for third parties to profit by
trading based on such expected market movements, the Underlying Funds’
investments typically will not be rolled entirely on that day, but rather
will typically be rolled over a period of several days.
Consistent with achieving each Underlying Fund’s investment objective of
closely tracking its Benchmark, the Sponsor may for certain reasons cause
the Underlying Fund to enter into or hold Futures Contracts other than the
Benchmark Component Futures Contracts, Cleared Swaps and/or Other Commodity
Interests. For example, certain Cleared Swaps have standardized terms
similar to, and are priced by reference to, a corresponding Benchmark
Component Futures Contract. Additionally, Other Commodity Interests that
do not have standardized terms and are not exchange-traded, referred to
as “over-the-counter” Commodity Interests, can generally be structured
as the parties to the Commodity Interest contract desire. Therefore, an
Underlying Fund might enter into multiple Cleared Swaps and/or
over-the-counter Commodity Interests related to its Specified Commodity that
are intended to exactly replicate the performance of Benchmark Component
Futures Contracts of the Underlying Fund, or a single over-the-counter
Commodity Interest designed to replicate the performance of the individual
of its Benchmark as a whole. Assuming that there is no default by
a counterparty to an over-the-counter Commodity Interest, the performance
of the Commodity Interest will necessarily correlate exactly with the
performance of the Underlying Fund’s Benchmark or the applicable Benchmark
Component Futures Contract. The Underlying Funds might also enter into or
hold Commodity Interests other than Benchmark Component Futures Contracts
to facilitate effective trading, consistent with the discussion of an
Underlying Fund’s “roll” strategy in the preceding paragraph. In addition,
an Underlying Fund might enter into or hold Commodity Interests related to
its Specified Commodity that would be expected to alleviate overall
deviation between the Underlying Fund’s performance and that of its 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 each Underlying Fund’s performance to closely
track that of its Benchmark.
While the Fund expects to maintain substantially all of its assets in shares
of the Underlying Funds at all times, the Fund may hold some residual amount
of assets in obligations of the United States government (“Treasury
Securities”) or cash equivalents, and/or merely hold such assets in cash
(generally in interest-bearing accounts). The Underlying Funds invest in
Commodity Interests to the fullest extent possible without being leveraged
or unable to satisfy their expected current or potential margin or collateral
obligations with respect to their investments in Commodity Interests. After
fulfilling such margin and collateral requirements, the Underlying Funds
will invest the remainder of the proceeds from the sale of baskets in
Treasury Securities or cash equivalents, and/or merely hold such assets in
cash. Therefore, the focus of the Sponsor in managing the Underlying Funds
is investing in Commodity Interests and in Treasury Securities, cash and/or
cash equivalents. The Fund and Underlying Funds 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 the Underlying Funds and
otherwise manage the Fund’s investments so that the Fund’s average daily
tracking error against the Underlying Fund Average 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 Underlying Fund Average over the
same period.
The Sponsor believes that market arbitrage opportunities will cause the Fund’s
Share price on the NYSE Arca to closely track the Fund’s NAV per share. The
Sponsor believes that the net effect of this expected relationship and the
expected relationship described above between the Fund’s NAV and the
Underlying Fund Average 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 Underlying Fund Average.
The Sponsor employs a “neutral” investment strategy intended so that the
Fund will track the changes in the Underlying Fund Average and each Underlying
Fund will track the changes in its Benchmark regardless of whether the
Underlying Fund Average or Benchmark goes up or goes down. The Fund’s and
Underlying Funds’ “neutral” investment strategies are designed to permit
investors generally to purchase and sell the Fund’s Shares for the purpose
of investing indirectly in the agricultural commodities market in
a cost-effective manner. Such investors may include participants in
agricultural industries and other industries seeking to hedge the risk of
losses in their commodity-related transactions, as well as investors seeking
exposure to the agricultural commodities market. Accordingly, depending on
the investment objective of an individual investor, the risks generally
associated with investing in the agricultural commodities 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 Underlying Fund Average, that changes
in the price of the shares of the Underlying Funds will not accurately track
the changes in their Benchmarks, and that changes in the Benchmarks will not
closely correlate with changes in the prices of the Specified Commodities on
the spot market. Furthermore, as noted above, the Fund and Underlying Funds
also invest in short-term Treasury Securities, cash and/or cash equivalents.
The Sponsor does not expect there to be any meaningful correlation between
the performance of the Fund’s and Underlying Funds’ investments in Treasury
Securities/cash/cash equivalents and the changes in the prices of the
Specified Commodities or Commodity 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 the Specified Commodities, 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 prices of the Specified Commodities. The Sponsor does not intend to
operate the Fund or an Underlying Fund in a fashion such that its per share
NAV will equal, in dollar terms, the spot price of a unit of a Specified
Commodity or the price of any particular 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 in the publicly-traded shares
of the Underlying Funds in the manner 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. There
is no stated maximum time period for the Fund’s operations and the Fund will
continue to operate until all Shares are redeemed or the Fund is liquidated
pursuant to the terms of the Trust Agreement.
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 of Fund Shares are purchased or redeemed, the Sponsor will
purchase or sell the publicly-traded Underlying Fund shares with an
aggregate market value that approximates the amount of cash received or paid
upon the purchase or redemption of the basket(s).
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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. Our website is at www.teucriumtagsfund.com.