Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
The proposed maximum aggregate offering price has been calculated assuming that all
Shares are sold at a price of $25.00 per Share.
2. The amount of the registration fee of the Shares is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering price as described above. 40,000 Shares were registered and the registration fee of $114.60 in respect thereof was paid on February 8, 2012.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this Prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated December 7, 2012
Market Vectors Long/Short Commodity ETF
 Common Units of Beneficial Interest
The Shares of the Fund are expected to be listed for trading, subject to notice of issuance, on NYSE Arca, Inc. (NYSE Arca or the Exchange), under the symbol  (quoted in U.S. dollars).
Except when aggregated in Baskets, the Shares are not redeemable securities.
THE COMMODITY FUTURES TRADING COMMISSION HAS
NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION
PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
THE SHARES ARE SPECULATIVE SECURITIES AND THEIR PURCHASE INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER ALL RISK FACTORS BEFORE INVESTING IN THE FUND. PLEASE REFER TO THE RISKS YOU FACE BEGINNING ON PAGE .
On , 2012, , as the initial Authorized Participant (the Initial Purchaser), subject to certain conditions, agreed to purchase and take delivery of  Shares, which comprise the initial Baskets, at a purchase price of $ per Share ($ per Basket), as described in Plan of Distribution. This price has been arbitrarily determined inasmuch as the Shares will have no inherent value at the Funds inception, and it is not indicative of prices that will prevail in the trading market. The Initial Purchaser proposes to offer the Shares to the public at a per-Share price that will vary depending upon, among other factors, the trading price of the Shares on the NYSE Arca, the NAV per Share and the supply of and demand for the Shares at the time of offer. Shares offered by the Initial Purchaser at different times may have different offering prices. The Initial Purchaser will not receive from the Fund, the Managing Owner or any of their affiliates any fee or other compensation in connection with its sale of Shares to the public.
Authorized Participants may from time-to-time offer to the public Shares from any Baskets they create. Shares offered to the public by Authorized Participants will be offered at a per-Share offering price that will vary depending upon, among other factors, the trading price of the Shares on the NYSE Arca, the NAV per Share and the supply of and demand for the Shares at the time of offer. Shares initially comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices. Authorized Participants will not receive from the Fund, the Managing Owner or any of their affiliates any fee or other compensation in connection with their sale of Shares to the public. An Authorized Participant may receive commissions or fees from Shareholders who purchase Shares through their commission or fee-based brokerage accounts with the Authorized Participant. In
addition, the Marketing Agent (defined below) will be paid a fee for its services. For more information regarding items of compensation paid to Financial Industry Regulatory Authority (FINRA) members, please see the Plan of Distribution section on page .
Shares are neither interests in nor obligations of any of the Managing Owner, the Trustee, the Initial Purchaser, any other Authorized Participant or any of their respective affiliates. Shares are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.
THE BOOKS AND RECORDS OF THE FUND WILL BE MAINTAINED AS FOLLOWS: ACCOUNTING AND CERTAIN OTHER FINANCIAL BOOKS AND RECORDS (INCLUDING THE FUNDS ACCOUNTING RECORDS, LEDGERS WITH RESPECT TO ASSETS, LIABILITIES, CAPITAL, INCOME AND EXPENSES, THE REGISTRAR, TRANSFER JOURNALS AND RELATED DETAILS) AND TRADING AND RELATED DOCUMENTS RECEIVED FROM FUTURES COMMISSION MERCHANTS ARE MAINTAINED BY , [ADDRESS], TELEPHONE NUMBER (-) . ALL OTHER MARKETING MATERIALS, BOOKS AND RECORDS OF THE FUND (INCLUDING MINUTE BOOKS AND OTHER GENERAL CORPORATE RECORDS, TRADING RECORDS AND RELATED REPORTS AND OTHER ITEMS RECEIVED FROM THE FUNDS COMMODITY BROKERS) WILL BE MAINTAINED BY [VAN ECK SECURITIES CORPORATION, 335 MADISON AVENUE, NEW YORK, NEW YORK 10017, TELEPHONE NUMBER (212) 293-2000]. SHAREHOLDERS WILL HAVE THE RIGHT, DURING NORMAL BUSINESS HOURS, TO HAVE ACCESS TO AND COPY (UPON PAYMENT OF REASONABLE REPRODUCTION COSTS) SUCH BOOKS AND RECORDS IN PERSON OR BY THEIR AUTHORIZED ATTORNEY OR AGENT. MONTHLY ACCOUNT STATEMENTS FOR THE FUND CONFORMING TO CFTC AND NATIONAL FUTURES ASSOCIATION (NFA) REQUIREMENTS WILL BE POSTED ON THE MANAGING OWNERS WEBSITE AT HTTP://WWW.VANECK.COM. ADDITIONAL REPORTS MAY BE POSTED ON THE MANAGING OWNERS WEBSITE IN THE DISCRETION OF THE MANAGING OWNER AS REQUIRED BY REGULATORY AUTHORITIES. THERE WILL SIMILARLY BE DISTRIBUTED TO SHAREHOLDERS, NOT MORE THAN 90 DAYS AFTER THE CLOSE OF THE FUNDS FISCAL YEAR, CERTIFIED AUDITED FINANCIAL STATEMENTS AND (IN NO EVENT LATER THAN  OF THE IMMEDIATELY FOLLOWING YEAR) THE TAX INFORMATION RELATING TO SHARES OF THE FUND NECESSARY FOR THE PREPARATION OF SHAREHOLDERS ANNUAL FEDERAL INCOME TAX RETURNS.
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE MANAGING OWNER, THE AUTHORIZED PARTICIPANTS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY OFFER, SOLICITATION OR SALE OF THE SHARES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION, OR SALE IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER, SOLICITATION OR SALE.
AUTHORIZED PARTICIPANTS MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN TRANSACTING IN SHARES. SEE PLAN OF DISTRIBUTION.
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 33 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 9.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE 12.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL RISK.
HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN
PARTICULAR MAY INCREASE LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF
REDEMPTIONS. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR
LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL
OF AN UNDERLYING OR RELATED MARKET FACTOR.
MARKET VECTORS COMMODITY TRUST
Dealer Prospectus Delivery Obligation
Until , all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
The Trust was formed as a Delaware statutory trust on February 1, 2012. The Fund is a series of the Trust that will issue common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Fund. The term of the Trust is perpetual (unless terminated in certain circumstances). The principal office of the Trust is located at 335 Madison Avenue, New York, New York 10017, and the telephone number of the Trust is (212) 293-2000.
Advantages of investing in the Shares include:
Investing in the Shares does not insulate Shareholders from certain risks, including price volatility.
There can be no assurance that the Fund will achieve its investment objective or avoid substantial losses. The Managing Owner has the discretion to change the Funds investment objective or policies at any time without prior notice. The Fund has not commenced trading and does not have any performance history. The market price of the Shares on the secondary market is expected to fluctuate generally in relation to changes in the NAV of the Fund.
The linked price is determined on the basis of price changes and roll yields. Rolling a futures contract means closing out a position on near-dated (i.e., commodity futures contracts that are nearing expiration) commodity futures contracts before they expire and establishing an equivalent position in a longer-dated futures contract (i.e., commodity futures contracts that have an expiration date further in the future) on the same commodity. Roll yield is the amount of return generated (either positive or negative) by rolling a futures contract. Futures contacts can be in backwardation, which means that futures contracts with longer-term expirations are priced lower than those with shorter-term expirations, or can exhibit contango, which means that futures contacts with longer-term expirations are priced higher than those with shorter-term expirations. In backwardation, market roll yields are positive. In contango, market roll yields are negative.
To be considered for inclusion in the Index, a commodity future must be listed on a U.S. exchange, be denominated in U.S. dollars and rank in the top 95% by total U.S. dollar value of the total open interest pool of all eligible commodities. The weight of each individual Index Commodity Contract in the Index is the product of two factors: magnitude and the direction of the momentum signal (i.e., 1 for long, 0 for flat, or -1 for short). On the annual reconstitution date, the magnitude is the open interest weight of the Index Commodity Contract, calculated on the second Friday of December, using data through the last trading day of November. Individual contract weights are capped at 10%. Between reconstitution dates, the weights vary based on the performance of the individual Index Commodity Contract positions. The
Index is reconstituted annually and directions (i.e., whether long, flat or short) of each Index Commodity Contract are determined monthly on the second Friday of each month, which is one week prior to the repositioning day.
The Shares of the Fund are expected to be listed for trading, subject to notice at issuance, on NYSE Arca under the symbol  (quoted in U.S. dollars). Shareholders may purchase and sell Shares through traditional brokerage accounts. Secondary market purchases and sales of Shares are subject to customary brokerage commissions and charges. Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges.
Baskets of Shares may be created and redeemed only by Authorized Participants, except that the initial Baskets will be created by the Initial Purchaser.
The market price of the Shares may not be identical to the NAV per Share. The intra-day indicative value per Share is based on the prior days final NAV per Share, adjusted every 15 seconds throughout the day to reflect the continuous price changes of the Funds futures contracts and Other Instruments, if any, to provide a continuously updated indicative intra-day value per Share. The Fund is not involved in or responsible for the calculation or dissemination of the indicative intra-day value per Share and makes no warranty as to the accuracy of the indicative intra-day value per Share.
The following table lists NYSE Arca symbols and their descriptions with respect to the Shares and the Index:
The intra-day data in the above table is published once every 15 seconds throughout each trading day.
The current market price per Share (symbol: ) (quoted in U.S. dollars) will be published continuously as trades occur throughout each trading day on the consolidated tape by market data vendors.
The intra-day indicative value per Share (symbol: ) (quoted in U.S. dollars) will be published by NYSE Arca once every 15 seconds throughout each trading day on the consolidated tape by market data vendors.
The most recent end-of-day NAV (symbol: ) (quoted in U.S. dollars) will be published by the Managing Owner as of the close of business by market data vendors and on the Managing Owners website at , or any successor thereto, and will be published on the consolidated tape.
The intra-day level and the most recent end-of-day closing level of the Index (symbol: ) will be published by NYSE Arca once every 15 seconds throughout the Exchanges Core Trading Session and as of the close of business for NYSE Arca, respectively, on the consolidated tape by market data vendors.
The number of outstanding Shares (symbol: ) will be published once every 15 seconds throughout the trading day and as of the close of business for NYSE Arca and on the consolidated tape by market data vendors.
Disclosure regarding the components of the Index and the long, short and flat positions therein will be available at http://corporate.morningstar.com/US/asp/subject.aspx?page=2649&filter=Commodity&xmlfile=2738.xml.
The intra-day levels and Index closing levels and the intraday values and closing NAV are published by NYSE Arca. The Fund is not issued, sponsored, endorsed, sold or promoted by NYSE Arca, and NYSE Arca makes no representation regarding the advisability of investing in such product.
NYSE ARCA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE ARCA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
An investment in Shares is speculative and involves a high degree of risk. There is no assurance that the Fund will achieve its investment objective. A potential Shareholder should not invest in the Shares unless he or she can afford to lose the entire investment. Before investing in the Shares, a potential Shareholder should be aware of the various risks of investing in the Fund, including those described below. Additional risks and uncertainties not presently known by the Fund or not presently deemed material by the Fund may also impair the Funds operations and performance. The summary risk factors set forth below are intended to highlight certain risks of investing in the Fund. A more extensive discussion of these risks appears beginning on page  in The Risks You Face.
Van Eck Absolute Return Advisers Corp., a Delaware corporation, is the Managing Owner of the Fund. The Managing Owner is a wholly-owned subsidiary of Van Eck Associates Corporation and was formed in 1995. The Managing Owner and its affiliates advise a family of exchange-traded funds, mutual funds, insurance portfolios, separate accounts and alternative investments. The Managing Owner also serves as the commodity pool operator and commodity trading advisor of the Fund.
The Shares are not deposits or other obligations of the Managing Owner, the Trustee or any of their respective subsidiaries or affiliates or any other bank, are not guaranteed by the Managing Owner, the Trustee or any of their respective subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
Wilmington Trust, National Association, or the Trustee, a national bank with its principal place of business in Delaware, is the sole trustee of the Fund. The Trustee has only nominal duties and liabilities to the Fund.
Under the Amended and Restated Declaration of Trust of the Trust (the Trust Agreement), the Managing Owner has the exclusive management and control of all aspects of the business of the Trust. The Trustee will have no duty to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.
The Fund has appointed The Bank of New York Mellon as the administrator (the Administrator) of the Fund and has entered into a Services Agreement in connection therewith.
The Bank of New York Mellon is the custodian (the Custodian) of the Fund and has entered into a Custody Agreement in connection therewith.
The Bank of New York Mellon is the transfer agent (the Transfer Agent) of the Fund and has entered into a Transfer Agency and Service Agreement in connection therewith.
The Marketing Agent will not open or maintain customer accounts or solicit, receive, execute, clear, settle or otherwise handle any orders to purchase or redeem Shares.
BNY Mellon Clearing, LLC, which will serve as the Funds executing and clearing broker, or commodity broker, of the Fund (the Commodity Broker) will execute and clear the Funds futures transactions and will perform certain administrative services for the Fund. The Commodity Broker is registered with the CFTC as a futures commission merchant and is a member of NFA in such capacity.
The Fund will pay to the Commodity Broker all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction-related fees and expenses charged in connection with its trading activities.
You cannot lose more than your investment in the Shares. Shareholders will be entitled to limitation on liability equivalent to the limitation on liability enjoyed by stockholders of a Delaware business corporation for profit.
On , 2012, the Initial Purchaser, subject to certain conditions, agreed to purchase  Shares, which comprise the initial Baskets, at a purchase price of $ per Share ($ per Basket), as described in the section Plan of Distribution.
The Shares of the Fund are expected to be listed for trading, subject to notice of issuance, on NYSE Arca. If you buy or sell Shares in the secondary market, you will incur customary brokerage commissions and charges and may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round-trip (purchase and sale) transaction. In times of severe market disruption or low trading volume in the Funds Shares, this spread can increase significantly. It is anticipated that the Shares will trade in the secondary market at prices that may differ to varying degrees from the NAV of the Shares.
NAV means the total assets of the Fund including, but not limited to, all cash and cash equivalents or other debt securities less total liabilities of the Fund, each determined on the basis of generally accepted accounting principles.
The Shares are evidenced by a global certificate that the Fund issues to DTC. The Shares are available only in book-entry form. Shareholders may hold their Shares through DTC, if they are participants in DTC, or indirectly through entities that are participants in DTC.
The proceeds of the offering will be deposited in cash in a segregated account in the name of the Fund at either the Commodity Broker in accordance with CFTC investor protection and segregation requirements or with the Custodian. The Fund will be credited with 100% of the interest earned on its average net assets on deposit with the Commodity Broker or the Custodian. The Managing Owner expects to invest in U.S. Treasury bonds, U.S. Treasury bills, U.S. government securities and related securities that are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which have been designated as exempted securities pursuant to Section 3(a)(12) of the Securities Exchange Act of 1934, as amended (the Exchange Act), or any certificate of deposit for any of the foregoing, and certain cash items such as money market funds, certificates of deposit (under nine months), time deposits and other high credit quality short-term fixed income securities (collectively, Cash Instruments), which may increase interest income earned. The Cash Instruments used to track flat positions in the Index will be U.S. Treasury bills.
Subject to the discussion below in U.S. Federal Income Tax Considerations, the Fund will not be classified as an association taxable as a corporation. Instead, the Fund will be classified as a partnership for U.S. federal income tax purposes. Accordingly, the Fund will not incur U.S. federal income tax liability; rather, each Shareholder will be required to take into account its allocable share of the Funds income, gain, loss, deductions and other items for the Funds taxable year ending with or within the Shareholders taxable year.
Additionally, please refer to the U.S. Federal Income Tax Considerations section below for information on the potential U.S. federal income tax consequences of the purchase, ownership and disposition of Shares in the Fund.
The Fund will make distributions at the discretion of the Managing Owner. To the extent that the Funds actual and projected interest income from its Cash Instruments exceeds the actual and projected fees and expenses of the Fund, the Managing Owner expects periodically to make distributions of the amount of such excess. The Fund currently does not expect to make distributions with respect to capital gains. Depending on the Funds performance for the taxable year and your own tax situation for such year, your income tax liability for the taxable year for your allocable share of the Funds net ordinary income or loss and capital gain or loss may exceed any distributions you receive with respect to such year.
The Breakeven Table below indicates the approximate percentage and dollar returns required for the value of an initial $25.00 investment in a Share of the Fund to equal the amount originally invested twelve months after issuance.
The Breakeven Table, as presented, is an approximation only. The capitalization of the Fund does not directly affect the level of its charges as a percentage of its NAV, other than brokerage commissions.
The Fund has not yet commenced operations as of the date of this Prospectus and therefore does not have a financial history.
The Managing Owner will furnish you with an annual report of the Fund within 90 calendar days after the end of the Funds fiscal year as required by the rules and regulations of the SEC as well as with those reports required by the CFTC and NFA, including, but not limited to, an annual audited financial statement certified by independent registered public accountants and any other reports required by any other governmental authority that has jurisdiction over the activities of the Fund. You also will be provided with appropriate information to permit you to file your U.S. federal and state income tax returns (on a timely basis) with respect to your Shares. Monthly account statements conforming to CFTC and NFA requirements will be posted on the Managing Owners website at http://www.vaneck.com. The Fund will file periodic, quarterly and annual reports with the SEC. You can read and copy these reports at the SEC public reference facilities in Washington D.C. The filings will also be posted at the SEC website at http://www.sec.gov. Additional reports may be posted on the Managing Owners website in the discretion of the Managing Owner or as required by regulatory authorities.
This Prospectus includes forward-looking statements that reflect the Managing Owners current expectations about the future results, performance, prospects and opportunities of the Fund. The Managing Owner has tried to identify these forward-looking statements by using words such as may, will, expect, anticipate, believe, intend, should, estimate or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the Managing Owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in Risk Factors in this Summary and in The Risks You Face and elsewhere in this Prospectus, and unknown, that could cause the actual results, performance, prospects or opportunities of the Fund to differ materially from those expressed in, or implied by, these forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, the Managing Owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Prospectus, as a result of new information, future events or changed circumstances or for any other reason after the date of this Prospectus.
An investment in the Fund involves the risk of losing money. Consider the risks below as well as the rest of the information in the Registration Statement before making an investment decision.
The Fund is
Subject to Market Risk.
Investments in futures contracts historically have had a high degree of price variability and may be subject to rapid and substantial changes. Recently, the commodities markets have experienced periods of extreme volatility. General market uncertainty and consequent repricing of risk have led to market imbalances of sellers and buyers, which in turn have resulted in significant reductions in values of a variety of commodities. Similar future market conditions may result in rapid and substantial valuation increases or decreases in the Funds holdings. In addition, volatility in the commodity and securities markets may directly and adversely affect distribution rates on the Shares.
Exposure to the
Commodities Markets May Subject the Fund to Greater Volatility Than Investments
in Traditional Securities.
of commodities can also fluctuate widely due to supply and demand disruptions in major producing or consuming regions. Because certain commodities may be produced in a limited number of countries and may be controlled by a small number of producers, political, economic and supply-related events in such countries could have a disproportionate impact on the prices of such commodities. These factors may affect the value of the Fund in varying ways, and different factors may cause the value and the volatility of the Fund to move in inconsistent directions at inconsistent rates.
Backwardation or Contango in the Market Prices of the Commodities Will Affect the Value of Your Shares. As the futures contracts that underlie the Index get close to their expiration, they are replaced by futures contracts that have a later expiration. Thus, for example, a contract purchased and held in August 2012 may specify an October 2012 expiration. As that contract nears expiration, it may be replaced by selling the October 2012 contract and purchasing the contract expiring in December 2012. This process is referred to as rolling. Historically, the prices of certain commodities have frequently been higher for contracts with shorter-term expirations than for contracts with longer-term expirations, which is referred to as backwardation. In these circumstances, absent other factors, the sale of the October 2012 contract would take place at a price that is higher than the price at which the December 2012 contract is purchased, thereby creating a gain in connection with rolling. While certain commodity futures markets have historically exhibited consistent periods of backwardation, backwardation will likely not exist in these markets at all times. The absence of backwardation in certain Index Commodity Contracts could adversely affect the level of the Index and the NAV of the Fund and, accordingly, decrease the value of your Shares.
Conversely, certain commodities historically exhibit contango markets rather than backwardation. Contango markets are those in which the prices of contracts are higher in the distant delivery months than in the nearer delivery months due to, among other things, the costs of long-term storage of a physical commodity prior to delivery or other factors. In these circumstances, the sale of the October 2012 contract would take place at a price that is lower than the price at which the December 2012 contract is purchased, creating a loss in connection with rolling. Although certain commodity futures markets have historically exhibited consistent periods of contango, contango will likely not exist in these markets at all times. Contango in certain Index Commodity Contracts could adversely affect the level of the Index and the NAV of the Fund and, accordingly, decrease the value of your Shares.
Certain of the
Funds Investments Could Be Illiquid Which Could Cause Large Losses to
Shareholders at Any Time or From Time to Time.
A market disruption, such as a foreign government taking political actions that disrupt the market in its currency, its commodity production or exports, or in another major export, can also make it difficult to liquidate a position. Unexpected market illiquidity may cause major losses to Shareholders at any time. The large size of the positions that the Fund may acquire increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so.
NAV May Not
Always Correspond to Market Price and, as a Result, Baskets May Be Created or
Redeemed at a Value that Differs From the Market Price of the Shares.
Authorized Participants or their clients may have an opportunity to realize a riskless profit if they can purchase a Basket at a discount to the public trading price of the Shares or can redeem a Basket at a premium over the public trading price of the Shares. The Managing Owner believes that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers should cause the public trading price to track NAV closely over time; however, there can be no assurance that this will be the case.
Disruptions of Market Trading May Adversely Affect the Value of Shares.
The Lack of
Active Trading Markets For the Shares of the Fund May Result in Losses on an
Investment in the Fund at the Time of Disposition of Shares.
An Investment in
the Fund May Provide Little or No Diversification Benefits.
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 Funds Short
Positions Theoretically Expose It to Unlimited Losses.
When the Fund has a long position, it profits if the price of a Index Commodity Contract or Other Instrument that provides exposure to a long position in such Index Commodity Contract rises while the position is open and suffers a loss if the price of a Index Commodity Contract or such Other Instrument falls while the position is open. Because the value of an Index Commodity Contract or Other Instrument that provides exposure to a long position in such Index Commodity Contract cannot fall below zero, the Funds exposure to loss is limited to the value of the Index Commodity Contract or such Other Instrument at the time its long position is established.
By contrast, the Fund will profit if the price of a short position in an Index Commodity Contract or Other Instrument that provides exposure to a short position in such Index Commodity Contract falls while the position is open and the Fund will suffer loss if the price of a short position in an Index Commodity Contract or Other Instrument that provides exposure to a short position in such Index Commodity Contract rises while the position is open. Because the value of the Index Commodity Contract or Other Instrument could rise an unlimited amount, a short position in an Index Commodity Contract or Other Instrument that provides exposure to a short position in such Index Commodity Contract theoretically exposes the Fund to unlimited losses. In circumstances where a market has reached its maximum price limits imposed by the exchange, the Fund may be unable to offset its short position unit the next trading day, when prices could expand again in rapid trading.
An Investment in
Shares of the Fund May Be Adversely Affected by Competition From Other Methods
of Investing in Commodities.
Many Factors May
Affect Prices of Index Commodity Contracts and the NAV and Market Price of the
Operations of the Fund, Including the Creation of Baskets, May Be Restricted By
Regulatory and Exchange Position Limits and Other Position Limitation Rules and
Could Result in Tracking Error Between Changes in the NAV Per Share and Changes
in the Level of the Index, Or Could Result in the Market Price of the Shares
Trading at a Premium or Discount to the NAV Per Share.
Pursuant to the statutory mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was signed into law on July 21, 2010, on October 18, 2011, the CFTC adopted regulations that impose new federal position limits on futures and options on a subset of energy, metal, and agricultural commodities (the Referenced Contracts) and economically equivalent swap transactions. In a lawsuit filed against the CFTC by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA), the U.S. District Court for the District of Columbia vacated the new position limit regulations and remanded the matter to the CFTC for further consideration consistent with the courts opinion. The CFTC may appeal the courts decision and seek a stay of the decision pending appeal, and the new position limit regulations, or other regulations with similar effect, could still become effective in the future. The regulations that were the subject of this decision are referred to herein as the proposed regulations. The proposed regulations would apply to the Funds combined positions across these products. The Referenced Contracts subject to the proposed regulations represent approximately % (i.e., 2011 production dollar weight) of the Index Commodity Contracts. The proposed regulations are extremely complex and, if ultimately implemented, whether in their current form or an alternative form, may require further guidance and interpretation by the CFTC to determine in all respect how they apply to the Fund. To the extent all or part of these position limit regulations are implemented or reinstated, or other regulations with similar effect are adopted, these limits could detract from the Funds ability to implement its investment strategy.
Under current regulations, subject to any relevant exemptions, traders, such as the Fund, may not exceed speculative position limits, either individually, or in the aggregate with other persons with whom they are under common control or ownership. Under the proposed regulations, the CFTC requires certain persons to aggregate exchange-listed futures and economically equivalent swap positions owned or controlled by such persons.
In addition, exchanges may establish daily price fluctuation limits on futures contracts. The daily price fluctuation limits establish the maximum amount that the price of futures contracts may vary either up or down from the previous days 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. Futures Exchanges may also establish accountability levels applicable to futures contracts. A Futures Exchange may order a
person who holds or controls aggregate positions in excess of specified position accountability levels not to further increase the positions, to comply with any prospective limit which exceeds the size of the position owned or controlled, or to reduce any open position which exceeds position accountability levels if the exchange determines that such action is necessary to maintain an orderly market. Position limits, accountability levels, and daily price fluctuation limits set by the Futures Exchanges have the potential to cause tracking error, which could cause changes in the NAV per Share to substantially vary from changes in the level of the Index and prevent an investor from being able to effectively use the Fund as a way to indirectly invest in the global commodity markets.
Because the Fund is subject to speculative position limits, accountability levels and other position limitations, as applicable, the Funds ability to issue new Baskets or to reinvest income in additional Index Commodity Contracts may be limited to the extent these activities would cause the Fund to exceed its applicable limits unless the Fund trades Other Instruments (if any) in addition to and as a proxy for Index Commodity Contracts. These limits and the use of Other Instruments in addition to or as a proxy for Index Commodity Contracts may adversely affect the correlation between changes in the NAV per Share and changes in the level of the Index, and the correlation between the market price of the Shares, as traded on NYSE Arca and the NAV per Share.
Are Not Authorized Participants May Only Purchase or Sell Their Shares in
Secondary Trading Markets, and the Conditions Associated With Trading in
Secondary Markets May Adversely Affect Shareholders Investment in the Shares.
Illiquid Markets, Disruption of Market Trading, and Daily Price Fluctuation
Limits, Among Other Events, May Exacerbate Losses of the Fund and, in Turn, the
Value of Your Shares.
Futures positions cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. The large size of the positions which the Fund may acquire increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so. A market disruption, such as when foreign governments may take or be subject to political actions which disrupt the markets in their currency or major exports, can also make it difficult to liquidate a position.
In addition, U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as daily price fluctuation limits and the maximum or minimum price of a futures contract on any given day as a result of these limits is referred to as a limit price. Once the limit price has been reached in a particular futures contract, no trades may be made at a different price. Limit prices
have the effect of precluding trading in a particular futures contract or potentially forcing the liquidation of futures contracts at disadvantageous times or prices.
Furthermore, the above distortions and/or disruptions may cause the Fund to liquidate certain of its holdings of Cash Instruments in order to meet margin requirements or close positions, possibly at inopportune times.
Market illiquidity and price limits may cause losses for the Fund, and in turn, adversely affect the market price of your Shares.
Contracts and Other Derivatives Have No Intrinsic Value, the Positive
Performance of Your Investment Depends on an Equal and Offsetting Loss.
Therefore, While General Financial Market Prices Could Rise Significantly and
the U.S. Economy Could Experience Positive Growth, Your Investment in Shares
Could Be Unprofitable.
Failure of the Clearing
House to Meet Its Obligations with respect to Index Commodity Contracts or
Cleared Swaps May Adversely Impact the NAV of the Fund, and the Value of Your
Instruments that Trade OTC (If Any), Such As Forward Agreements and Swaps, Are
Subject to the Risk of Counterparty Non-Performance Resulting in the Fund Not
Realizing a Trading Gain.
Markets in which the Fund may effect a transaction in certain Other Commodity Instruments are in the OTC private markets. The participants and dealers in such markets are typically not subject to the same level of credit evaluation and regulatory oversight as are members of the exchange-based markets. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a credit or liquidity problem or a dispute over the terms of the contract (whether or not bona fide), thus causing the Fund to suffer a loss. Such counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or in instances where the Fund has concentrated its transactions with a single or small group of counterparties. Recent events surrounding the bankruptcies or similar proceedings of various counterparties and dealers have demonstrated certain risks of the Fund engaging in these OTC transactions. Therefore, the Fund faces the risk of non-performance by the counterparties to the Other Commodity Instruments and such non-
performance may cause some or all of the Funds gain, if any, on these Other Commodity Instruments to be unrealized.
The Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding from a counterparty and the Fund may obtain only limited recovery or may obtain no recovery in such circumstances.
Because certain Other Commodity Instruments:
such Other Commodity Instruments are less marketable than Index Commodity Contracts and Other Commodity Contracts (defined below), if any.
The Value of the
Shares Relates Directly to the Value of the Index Commodity Contracts and Other
Assets Held by The Fund and Fluctuations in the Price of These Assets Could
Materially Adversely Affect an Investment in the Funds Shares.
The Shares of the
Fund are New Securities and Their Value Could Decrease if Unanticipated
Operational or Trading Problems Arise.
Fees and Expenses
are Charged Regardless of Profitability and May Result in Depletion of Assets.
Shareholders are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from Shareholder to Shareholder. Consequently, as the fees described above are charged regardless of whether the Fund has a positive return, the expenses of the Fund could, over time, result in losses to an investment therein, including the loss of all of an investment. A Shareholder may never achieve profits, significant or otherwise, by investing in the Fund.
Possibility of Termination of the Fund May
Adversely Affect a Shareholders Portfolio.
Shareholders May Be Adversely Affected by
Redemption Orders That Are Subject to Postponement, Suspension or Rejection
Under Certain Circumstances.
Various Actual and Potential Conflicts of
Interest May Be Detrimental to Shareholders.
The Managing Owner has sole 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 the best interests of the Shareholders. Shareholders have very limited voting rights, which limits their ability to effect, among other things, amendments of the Trust Agreement, changes to the Funds basic investment policies, dissolution of the Fund or the sale or distribution of the Funds assets.
Brokers acting on behalf of Shareholders in the Funds sale of Shares are also subject to conflicts of interest. The compensation received by brokers gives them an incentive to promote the sale of Shares as well as to discourage redemptions, which may not be in the best interests of Shareholders.
The Fund may be subject to certain conflicts with respect to the Commodity Broker, including, but not limited to, conflicts that result from receiving greater amounts of compensation from other clients, or purchasing opposite or competing positions on behalf of third-party accounts traded through the Commodity Broker.
The Managing Owner has not established formal procedures to resolve all conflicts of interest and, as a result, the Managing Owner could resolve a potential conflict in a manner that is not in the best interest of the Fund or the Shareholders. Consequently, Shareholders may be dependent on the good faith of the respective parties subject to such conflicts to act in the Shareholders best interest. Although the Managing Owner attempts to monitor all of these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that these conflicts do not, in fact, result in adverse consequences to the Shareholders.
The Liability of the Managing Owner and the
Trustee Is Limited, and the Value of the Shares Will Be Adversely Affected If
the Fund Is Required to Indemnify the Trustee or the Managing Owner.
The NAV 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 NAV Calculation.
The Liquidity of the Shares of the Fund May
Be Affected by the Withdrawal from Participation of Authorized Participants,
Potentially Negatively Impacting the Market Price of the Shares.
The Failure of a Commodity Broker to
Segregate the Funds Assets May Increase Losses; Even If Such Assets Are
Segregated, a Risk of Significant Loss to the Fund May Arise As the Fund May be
Limited to a Pro Rata Share or None of its Assets
addition, the Funds rights to its assets held by a commodity broker that has become insolvent could be limited to recovering either a pro rata share of all available funds segregated on behalf of all customer accounts or no assets at all, even though certain property specifically traceable to the Fund was held by the commodity broker. A commodity broker may, from time-to-time, have been the subject of certain regulatory and private causes of action. Any material actions are described under the section Litigation and Claims. If any exchange or a clearing house used by a commodity broker becomes insolvent, the Fund could experience a loss to the extent that all or a portion of the Funds assets was in the possession of the exchange or clearing house.
The Index May Be Highly Concentrated in an
Industry and Have Different Weights in a Particular Commodity Sector, Which May
Increase Volatility and Negatively Impact the Value of the Shares.
The Index Commodity Contracts may have different weights at various times. One consequence of such an unequal weighting of such Index Commodity Contracts is that the same percentage change in two of the Index Commodity Contracts may have different effects on the level of the Index due to the unequal weightings. Therefore, as the weighting of an Index Commodity Contract comprising the Index increases, a decrease in the value of such an Index Commodity Contract would further decrease the value of the Index and, in turn, the value of the Shares.
The Index Methodology May Not Produce the
The Long and Short Positions Represented By the Index Are Not Designed to Provide the Return of Any Single Commodity or to Replicate the Performance of Long-Only Commodity Market Benchmarks.
In any given period, the performance of the Index may differ substantially from any single commodity or long-only commodity market benchmarks. The relative balance of the Funds long/short exposure may vary significantly over time and at certain times the Funds aggregate exposure may be all long, all short and flat, or may consist of various combinations (long, short and flat) thereof. The Fund is not expected to provide a hedge against inflation in market environments when the Funds aggregate exposure is predominantly short and flat.
Positive Correlation of Changes in the
Closing Levels Among the Commodities Comprising the Index May Negatively Impact
the Value of the Shares.
Contracts may have a higher weighting in the Index relative to any of the other sectors. High, positive correlation during periods of negative returns among heavily weighted Index Commodity Contracts representing any one sector may adversely impact the closing levels of the Index, and in turn, the value of the Shares.
Changes in the Values of the Commodities
Comprising the Index May Offset Each Other.
The Fund May Incur Losses on Its Investments
in Cash Instruments.
Shareholders Have No Rights Against
Morningstar Has No Obligation to Consider a
Shareholders Interests in Calculating or Revising the Index.
Morningstar, the Managing Owner and Any of
Their Respective Affiliates May Publish Research That Conflicts and Which May
Negatively Impact the Value of the Fund and the Shares.
recommendations expressed by these entities may not be consistent with one another and may be modified without notice. Shareholders should make their own independent investigation of the merits of investing in the Shares.
Certain Index Commodity Contracts Underlying
the Commodities Comprising the Index Will Be Subject to Pronounced Risks of
Certain Index Commodity Contracts, notably those in the energy and industrial metals sectors, have liquid futures contracts that expire every month. Therefore, these contracts may be rolled forward every month. In respect of the futures contracts underlying such commodities that represent energy, it should be noted that, due to the significant level of its continuous and worldwide consumption, limited reserves, and oil supply controls, energy commodities are subject to rapid price increases in the event of perceived or actual shortages.
As a result of the additional volatility of the Index Commodity Contracts, the closing level of the Index and, in turn, the value of the Shares, may also become subject to a corresponding increase in volatility.
Non-Concurrent Trading Hours Between NYSE
Arca and the Various Futures Exchanges on Which the Commodities Underlying the
Index Are Traded May Impact the Value of Your Investment.
For example, while the Shares trade on NYSE Arca until 4:00 p.m. Eastern Time, the COMEX division of the New York Mercantile Exchange closes at 1:30 p.m. Eastern Time. As a result, during periods when NYSE Arca is open and the futures exchange on which gold is traded are closed, liquidity in the global gold market will be reduced or extremely limited. As a result, trading spreads and the resulting premium or discount on the Shares may widen, increasing the difference between the price of the Shares and the NAV of such Shares.
Historical Performance of the Benchmark Index
Is Not a Guide to the Future Performance of the Fund.
The Funds Performance May Not Always Track
The Fund Is Not Actively Managed and Will Seek to Track the Index During Periods in Which the Index Is Flat or Declining as Well as When the Index Is Rising. Therefore, Shareholders Will Not Be Protected
Against Adverse Movements in the Level of the
Index, Which, in Turn, May Have a Significantly Adverse Impact on the Shares.
Shareholders Have Limited Voting Rights, the
Trustee Has Limited Duties and Powers, and Neither Will Be Able to Affect
Management of the Fund Regardless of Performance.
The Managing Owner may not be removed as manager by Fund Shareholders. Thus, it is extremely unlikely that Shareholders will be able to make any changes in the management of the Fund, even if performance is poor.
As beneficial interests in a Delaware statutory trust, the Shares do not have all of the statutory rights normally associated with the ownership of shares of a corporation (including, for example, the right to bring oppression or derivative actions). In addition, the Shares have limited distribution rights (for example, the Fund is not required to pay regular distributions, although the Fund may pay distributions in the discretion of the Managing Owner) and voting rights (for example, shareholders do not have voting rights required for shareholders of registered investment companies that are described above under Shareholders Have Limited Voting Rights, the Trustee Has Limited Duties and Powers, and Neither Will Be Able to Affect Management of the Fund Regardless of Performance.
The Fund is Not a Registered Investment
Regulation of the Commodities Industry Is
Extensive and Subject to Change; Future Regulatory Developments Are Impossible
to Predict but May Significantly and Adversely Affect the Fund.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act includes provisions altering the regulation of commodity interests. Provisions in the Dodd-Frank Act include, among other things, the requirement that position limits be established by the CFTC on a wide range of commodity interests including energy-based and other commodity futures contracts and certain commodity OTC contracts; new registration, recordkeeping, capital and margin requirements for swap dealers and major swap participants as determined by the Dodd-Frank Act and applicable regulations; and the required use of clearing house mechanisms for standardized OTC transactions. Additionally, the Dodd-Frank Act requires the aggregation, for purposes of position limits, of all positions in commodity futures and certain commodity OTC contracts held by a single entity and its affiliates, whether such positions exist on U.S. futures exchanges or in OTC 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 Dodd-Frank Act and the rules and regulations promulgated thereunder may negatively impact the Funds ability to meet its investment objective either through limits or requirements imposed on the Fund or upon its counterparties. In particular, new position limits imposed on the Fund or its counterparties may impact their ability to invest in a manner that most efficiently meets their respective investment objectives, and new requirements, including capital and mandatory clearing, may increase the cost of the Funds investments and doing business, which could adversely affect its Shareholders.
On October 18, 2011, the CFTC adopted regulations that impose new federal position limits on Referenced Contracts and economically equivalent swap transactions. In a lawsuit filed by ISDA and SIFMA against the CFTC, the U.S. District Court for the District of Columbia vacated the new position limit regulations and remanded the matter to the CFTC for further consideration consistent with the courts opinion. The CFTC may appeal the courts decision and seek a stay of the decision pending appeal, and the new position limit regulations, or other regulations with similar effect, could still become effective in the future. The limits would apply to the Funds combined positions across these products. The Referenced Contracts subject to the proposed regulations represent approximately % (i.e., 2011 production dollar weight) of the Index Commodity Contracts.
Below is a chart that sets forth the speculative position limits established by the relevant exchange as of , 2012, which are applicable to the components representing the Index Commodity Contracts in the Index that any person may hold, separately or in combination, net long or net short, for the purchase or sale of any commodity futures contract or, on a futures-equivalent basis, options thereon or through an economically equivalent OTC derivative transaction. Speculative position limit levels are subject to change by the CFTC or the relevant exchanges.
Disruptions and Resulting Governmental Interventions are Unpredictable and May
Have an Adverse Effect on the Value of Your Shares.
The Fund may incur major losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving. The financing available to market participants from their banks, dealers and other counterparties is typically reduced in disrupted markets. Such a reduction may result in substantial losses to the affected market participants. Market disruptions may from time to time cause dramatic losses, and such events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.
As discussed above, the Dodd-Frank Act seeks to regulate markets, market participants and financial instruments that previously have been unregulated and substantially alters the regulation of many other markets, market participants and financial instruments. Because many provisions of the Dodd-Frank Act require rulemaking by the applicable regulators before becoming fully effective and the Dodd-Frank Act mandates multiple agency reports and studies (which could result in additional legislative or regulatory action), it is difficult to predict the impact of the Dodd-Frank Act on the Fund, the Managing Owner, and the markets in which the Fund invests. The Dodd-Frank Act could result in certain investment strategies in which the Fund engages or may have otherwise engaged becoming non-viable or non-economic to implement. The Dodd-Frank Act and regulations adopted pursuant to the Dodd-Frank Act could have a material adverse impact on the profit potential of the Fund. See also Regulation of the Commodities
Industry Is Extensive and Subject to Change; Future Regulatory Developments Are Impossible to Predict but May Significantly and Adversely Affect the Fund. above.
Commodity Exchanges Outside the United States is Not Subject to U.S.
Regulation, and May Be Less Reliable than U.S. Exchanges.
Some foreign exchanges may be in an earlier developmental stage than U.S. exchanges, 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 contracts on foreign exchanges as do local market participants, and the historical market data on which the Managing Owner bases its strategies may not be as reliable or as accessible as it is in the United States. All of these factors could adversely affect the performance of the Fund.
the Managing Owner Could Disrupt Operations.
of OTC Derivatives Markets May Have a Detrimental Effect On the Value of Your
The SEC or CFTC may also require that a substantial portion of OTC transactions be executed through a regulated securities, futures, or swap exchange or execution facility. Such requirements may make it more difficult and costly for the Fund to engage in tailored or customized transactions. These may also result in certain Other Commodity Instruments (if any) in which the Fund might otherwise invest impossible or uneconomical.
OTC derivative dealers and major OTC derivatives market participants will be required to register with the SEC and/or CFTC. The Fund or the Managing Owner may be required to register as major swap participants in the OTC derivatives markets. Dealers and major swap participants will be subject to minimum capital and margin requirements. These requirements may apply irrespective of whether the OTC derivatives in question are exchange-traded or cleared. OTC derivatives dealers will also be subject to new business conduct standards, disclosure requirements, reporting and recordkeeping requirements, transparency requirements, position limits, limitations on conflicts of interest, and other regulatory burdens. These requirements may further increase the overall costs for OTC derivative dealers, which costs are also likely to be passed along to market participants. The overall impact of the Dodd-Frank Act on the Fund is highly uncertain and it is unclear how the OTC derivatives markets will adapt to this new regulatory regime.
Shares Are Limited Liability Investments, Certain Circumstances Such As
Bankruptcy Of the Trust Will Increase A Shareholders Liability.
a result, the Fund expects to incur additional expenses in the near term that
may negatively impact the Funds financial performance and its ability to make
distributions. This process also will result in a diversion of managements
time and attention. The Fund cannot be certain as to the timing of completion
of its evaluation, testing and remediation actions or the impact of the same on
its operations, and it may not be able to ensure that the process is effective
or that its internal control over financial reporting is or will be effective
in a timely manner. In the event that the Fund is unable to maintain or achieve
compliance with Section 404 of the Sarbanes-Oxley Act and related rules, the
Fund and the value of its Shares may be adversely affected.
Consult Your Own Legal, Tax and Financial Advisers Regarding an Investment in
the Shares Because No Independent Advisers Were Appointed to Represent You in
connection with the Formation and Operation of the Trust or the Fund.
Over Ownership of Intellectual Property Rights Related to the Fund Could
Adversely Affect the Fund and an Investment in the Shares.
Be Subject to Taxation on Their Allocable Shares of the Funds Taxable Income,
Whether or Not They Receive Cash Distributions.
Items Of Income,
Gain, Loss And Deduction With Respect To Shares Could Be Reallocated If The IRS
Does Not Accept The Assumptions Or Conventions Used By The Fund In Allocating
Such Tax Items.
Treatment Of Long-Term Capital Gains Under Current U.S. Federal Income Tax Law
May Be Adversely Affected, Changed Or Repealed In The Future, And In Turn, May
Adversely Affect The Value Of Your Shares.
The Fund will seek to track changes, whether positive or negative, in the performance of the Index over time. The Fund will seek to achieve its investment objective by investing principally in Index Commodity Contracts and U.S. Treasury bills maturing in eight weeks or less to reflect flat positions, as described below, and, in certain circumstances, futures contracts on non-Index commodities traded on U.S. or foreign exchanges (Other Commodity Contracts). In addition, to a limited extent the Fund may also invest in commodity-based swap agreements cleared through an a central clearing house or the clearing houses affiliate (Cleared Swaps) and exchange-traded options on Other Commodity Contracts, forward contracts, exchange-traded cash-settled options, OTC swaps and other OTC transactions that provide economic exposure to the investment returns of the commodities markets, as represented by the Index and its constituents (collectively, Other Commodity Instruments, and, together with Other Commodity Contracts and Cleared Swaps, Other Instruments), as described below. The Fund intends to invest first in Index Commodity Contracts. Thereafter, if the Fund reaches the position limits applicable to one or more Index Commodity Contracts or a Futures Exchange imposes limitations on the Funds ability to maintain or increase its positions in an Index Commodity Contract after reaching accountability levels or a price limit is in effect on an Index Commodity Contract during the last 30 minutes of its regular trading session, the Funds intention is to invest first in Cleared Swaps to the extent permitted under the position limits applicable to Cleared Swaps and appropriate in light of the liquidity in the Cleared Swaps market, and then, using its commercially reasonable judgment, in Other Commodity Contracts or in Other Commodity Instruments. By using certain or all of these investments, the Managing Owner will endeavor to cause the Funds performance to closely track that of the Index over time.
To be considered for inclusion in the Index, a commodity should have futures contracts traded on one of the U.S. exchanges and rank in the top 95% by total dollar value of open interest. The weight of each individual Index Commodity Contract in the Index is the product of two factors: magnitude and the direction of the momentum signal (i.e., 1 for long, 0 for flat or -1 for short). On the annual reconstitution date, the magnitude is the open interest weight of the Index Commodity Contract, calculated on the second Friday of December, using data through the last trading day of November. Individual contract weights are capped at 10%. Between reconstitution dates, the weights vary based on the performance of the individual Index Commodity Contract positions. The Index is reconstituted annually and directions (i.e., whether long, short or flat) of each Index Commodity Contract are determined monthly on the second Friday of each month, which is one week prior to the repositioning day.
The Fund will pay the Managing Owner a Management Fee, monthly in arrears, in an amount equal to 0.50% per annum of the daily NAV of the Fund. The Management Fee will be paid in consideration of the Managing Owners trading advisory services. From time to time, the Managing Owner may waive all or a portion of its Management Fee.
Upon commencement of trading operations (which will occur contemporaneously with the commencement of the offering of the Shares) and thereafter, the Fund will bear the costs of its continuous offering of Shares and continuous offering expenses. Continuous offering fees and expenses include those legal and accounting fees and expenses, filing fees, printing, mailing and duplication costs associated with the continuous offering of the Shares.
The Managing Owner expects that the continuous offering fees and expenses of the Fund will be approximately 0.01% per annum of the Funds NAV, although the actual amount of continuous offering fees and expenses in any year or any part of any year may be greater.
Offering expenses relating to the Fund in connection with the continuous offering of the Shares, include, but are not limited to, expenses such as:
The Fund will pay to the Commodity Broker all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with its trading activities, which are referred to collectively as Brokerage Expenses.
Give-up fees are the fees paid in connection with give-up transactions. A broker gives up a transaction when the broker executes a contract for the client of another broker and the client order is turned over to the second broker. The broker accepting the order from the customer collects a fee from the carrying broker for the use of the facilities. Give-ups are often used to consolidate many small orders or to disperse large ones.
Pit brokerage fees are the fees paid to the pit broker, the person with exchange-trading privileges who, in any pit, ring, post, or other place provided by a futures exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery.
On average, total charges paid to the Commodity Broker are expected to be approximately $8.00 per round-turn trade, although the Commodity Brokers brokerage commissions and fees will be determined on a contract-by-contract, or round-turn basis. A round-turn trade is a completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase. The Managing Owner does not expect brokerage commissions and fees to exceed 0.12% of the NAV of the Fund in any year, although the actual amount of brokerage commissions and fees in any year or any part of any year may be greater.
The Fund will be responsible for paying, or for reimbursing the Managing Owner or its affiliates for paying, all of the routine operational, administrative and other ordinary fees and expenses of the Fund, including, but not limited to, the fees and expenses of the Trustee, custody fees, transfer agency fees, distribution and marketing fees, legal, audit and accounting fees and expenses, filing fees, exchange listing fees and printing, mailing and duplication costs, computer services, Index licensing fees and tax preparation expenses. The Managing Owner expects that all of the routine operational, administrative and other ordinary fees and expenses of the Fund will be approximately 0.44% per annum of the Funds NAV. The Managing Owner has agreed to reimburse the Fund, from its Management Fee, the amount of routine operational, administrative and other ordinary fees and expenses in excess of 0.15% per annum of the Funds NAV.
The Fund will be responsible for paying, or for reimbursing the Managing Owner or its affiliates for paying, all the extraordinary fees and expenses, if any, of the Fund. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount.
Retail Shareholders may purchase and sell Shares through traditional brokerage accounts. Shareholders are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from Shareholder to Shareholder. Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges.
The following is a more complete description of the Index, including, without limitation, information about the composition, weighting and method of calculation.
The Index is a fully collateralized commodity futures index that uses a momentum rule to determine if each Index Commodity Contract is held long or short. The momentum rule establishes whether a position in an Index Commodity Contract will be long or short, as described below. To implement the momentum rule, Morningstar calculates a linked price (described further below), which is used to determine the long or short positions in the Index Commodity Contracts. Whether a position will be long or short is determined by the linked price of each Index Commodity Contract (described below). The direction of each position in the Index is determined monthly and is effective on the third Friday of the month (each, a repositioning). For example, if at a monthly repositioning, the linked price for an Index Commodity Contract exceeds its 12-month moving average, the Index takes the long side in the subsequent month. Conversely, if the linked price for an Index Commodity Contract is below its 12-month moving average, the Index takes a short position. An exception is made for Index Commodity Contracts in the energy sector. If the signal for an Index Commodity Contract in the energy sector is short, the weight of that Index Commodity Contract is moved to cash (i.e., flat). Energy is unique in that its price is extremely sensitive to geopolitical events and not necessarily driven purely by demand-supply imbalances. As of October 31, 2012, the sector weightings of the Index were Agriculture (35.21%), Energy (41.16%), Livestock (9.16%) and Metals (14%). The inception date of the Index was August 1, 2007.
The following are excluded:
1) Financial futures (e.g., securities, currencies, interest rates, etc.).
2) Commodity contracts not denominated in U.S. dollars.
3) Commodity contracts with less than twelve months of pricing.
The following chart provides the composition of the Index as of October 31, 2012.
MORNINGSTAR® LONG/SHORT COMMODITY INDEXSM
The following table reflects the closing levels of the Index based on the selection criteria and methodology described above since the inception date of August 1, 2007. Some of the Index Commodity Contracts currently comprising the Index, however, may not have been continuously included in the Index, either because such Index Commodity Contracts had not yet been introduced or because the futures contracts available for trading did not satisfy the selection criteria. Conversely, some commodity futures contracts previously included in the Index may no longer meet the selection criteria and have been deleted. Information regarding the closing prices of the Index Commodity Contracts was provided by the Commodity Research Bureau. The Index closing levels account for the linked prices of Index Commodity Contracts, the direction of each Index Commodity Contracts momentum signal (long, short or flat) and the weight of each Index Commodity Contract. The closing levels do not reflect the deduction of fees or expenses, such as brokerage and trading commissions and management fees, or taxes.
The following table reflects the closing levels of the Index based on the selection criteria and methodology described above since the base date of December 21, 1979 where the closing level was set to 100. Some of the Index Commodity Contracts currently comprising the Index, however, may not have been continuously included in the Index, either because such Index Commodity Contracts had not yet been introduced or because the futures contracts available for trading did not satisfy the selection criteria. Conversely, some commodity futures contracts previously included in the Index may no longer meet the selection criteria and have been deleted. The inception date of the Index was August 1, 2007. Information regarding the closing prices of the Index Commodity Contracts was provided by the Commodity Research Bureau. The Index closing levels account for the linked prices of Index Commodity Contracts, the direction of each Index Commodity Contracts momentum signal (long, short or flat) and the weight of each Index Commodity Contract. The closing levels do not reflect the deduction of fees or expenses, such as brokerage and trading commissions and management fees, or taxes. The Index calculation methodology and selection of Index Commodity Contracts has been the same before and after August 2007. The Indexs closing levels from December 21, 1979 July 31, 2007 are hypothetical.
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUNDS FUTURE PERFORMANCE.
BECAUSE THE INDEX WAS ESTABLISHED ON AUGUST 1, 2007, CERTAIN INFORMATION RELATING TO THE INDEX CLOSING LEVELS MAY BE CONSIDERED TO BE HYPOTHETICAL. HYPOTHETICAL INFORMATION MAY HAVE CERTAIN INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT THE INDEX WILL OR IS LIKELY TO ACHIEVE ANNUAL OR CUMULATIVE CLOSING LEVELS CONSISTENT WITH OR SIMILAR TO THOSE SET FORTH HEREIN. SIMILARLY, NO REPRESENTATION IS BEING MADE THAT THE FUND WILL GENERATE PROFITS OR LOSSES SIMILAR TO THE FUNDS PAST PERFORMANCE, WHEN AVAILABLE, OR THE HISTORICAL ANNUAL OR CUMULATIVE CHANGES IN INDEX CLOSING LEVELS. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY INVESTMENT METHODOLOGIES, WHETHER ACTIVE OR PASSIVE.
ONE OF THE LIMITATIONS OF HYPOTHETICAL INFORMATION IS THAT IT IS GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. TO THE EXTENT THAT INFORMATION PRESENTED HEREIN RELATES TO THE PERIOD DECEMBER 1979 THROUGH JULY 2007, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEX METHODOLOGY, AND SELECTION OF INDEX COMMODITIES, IN HINDSIGHT.
NO HYPOTHETICAL RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THERE ARE NUMEROUS FACTORS, INCLUDING THOSE DESCRIBED UNDER THE SECTION THE RISKS YOU FACE HEREIN, RELATED TO THE COMMODITIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUNDS EFFORTS TO TRACK THE INDEX OVER TIME WHICH CANNOT BE, AND HAVE NOT BEEN, ACCOUNTED FOR IN THE PREPARATION OF THE INDEX INFORMATION SET FORTH HEREIN, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL PERFORMANCE RESULTS FOR THE FUND. FURTHERMORE, THE INDEX INFORMATION DOES NOT INVOLVE FINANCIAL RISK.
THE MANAGING OWNER HAS HAD NO EXPERIENCE IN TRADING ACTUAL SIMILAR ACCOUNTS FOR ITSELF OR FOR CLIENTS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THE ANNUAL OR CUMULATIVE INDEX RESULTS.
The Managing Owner has entered into a licensing agreement with the Index Provider to use the Index. The Fund is entitled to use the Index pursuant to a sub-licensing arrangement with the Managing Owner.
The Fund is not sponsored, endorsed, sold or promoted by Morningstar. Morningstar makes no representation or warranty, express or implied, to the shareholders of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund in particular or the ability of the Index to track general stock market performance. Morningstars only relationship to the Managing Owner is the licensing of certain service marks and service names of Morningstar and of the Index, which is determined, composed and calculated by Morningstar without regard to the Managing Owner or the Fund. Morningstar has no obligation to take the needs of the Managing Owner or the shareholders of the Fund into consideration in determining, composing or calculating the Index. Morningstar is not responsible for and has not participated in the determination of the prices and amount of the Index or the timing of the issuance or sale of the Index or in the determination or calculation of the equation by which the Index is converted into cash. Morningstar has no obligation or liability in connection with the administration, marketing or trading of the Index.
MORNINGSTAR DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR SHALL HAVE NOT LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. MORNINGSTAR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE MANAGING OWNER, SHAREHOLDERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. MORNINGSTAR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORNINGSTAR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Managing Owner may declare a split or a reverse split in the number of Shares outstanding and make a corresponding change in the number of Shares constituting a Basket. The Trust is not required to distribute any fraction of a Share in connection with a split or reverse split of the Shares. The Managing Owner may sell the aggregated fractions of Shares that would otherwise be distributed in a split or reverse split of the Shares or the amount of Fund property that would be represented by those Shares and distribute the net proceeds of those Shares or that Fund property to the Shareholders entitled to them.
Pursuant to the Services Agreement among the Trust, on behalf of the Fund, and the Administrator, the Administrator will perform certain administrative and valuation and computation services for the Fund, including the maintenance of certain books and records for the Fund, NAV calculations, accounting and other fund administrative services.
The Services Agreement will continue in effect from the commencement of trading operations unless terminated on at least 90 days prior written notice by either party to the other party. Notwithstanding the
The Administrator is both exculpated and indemnified under the Services Agreement.
The Fund will indemnify and hold harmless the Administrator from and
against any and all costs, expenses, damages, liabilities and claims (including
claims asserted by the Fund), and reasonable attorneys and accountants fees
relating thereto, which are sustained or incurred or which may be asserted
against the Administrator by reason of or as a result of any action taken or
omitted to be taken by the Administrator in good faith under the Services
Agreement or in reliance upon (i) any law, act, regulation or interpretation of
the same, issued by a court or governmental agency, (ii) the registration
statement or Prospectus, (iii) any instructions of an officer of the Managing
Owner, or (iv) any opinion of legal counsel for the Fund or the Administrator,
or arising out of transactions or other activities of the Fund which occurred
prior to the commencement of the Services Agreement, provided that the Fund
will not indemnify the Administrator for costs, expenses, damages, liabilities
or claims arising out of the Administrators own negligence, bad faith or
willful misconduct. The Fund will indemnify the Administrator against any loss,
damage or expense, including reasonable counsel fees and other costs and
expenses of a defense against any claim or liability, arising from any one or
more of the following: (i) errors in records or instructions,
explanations, information, specifications or documentation of any kind, as the
case may be, supplied to the Administrator by any third party described above
or by or on behalf of the Fund; (ii) action or inaction taken or omitted to be
taken by the Administrator pursuant to any certificate, instructions or oral
instructions without negligence or willful misconduct; (iii) any action taken
or omitted to be taken by the Administrator in good faith after consultation
with the Fund in accordance with the advice or opinion of counsel for the Fund
or its own counsel; (iv) any improper use by the Fund or its agents or Managing
Owner of any valuations or computations supplied by the Administrator pursuant
to the Services Agreement; (v) the method of valuation of the assets and the
method of computing the Funds NAV; or (vi) any valuations of assets or NAV
provided by the Fund.
The Bank of New York Mellon will serve as the Custodian. Pursuant to the Custody Agreement between the Trust, on behalf of the Fund, and the Custodian, the Custodian serves as custodian of all the Funds securities and cash at any time delivered to Custodian during the term of the Custody Agreement and the Fund has authorized the Custodian to hold its securities in registered form in its name or the name of its nominees. The Custodian has established and will maintain one or more securities accounts and cash
accounts pursuant to the Custody Agreement. The Custodian will maintain books and records segregating the assets.
The Custodian is both exculpated and indemnified under the Custody Agreement.
The Fund will indemnify the Custodian and hold the Custodian harmless
from and against any and all costs, expenses, damages, liabilities or claims,
including reasonable attorneys and accountants fees, sustained or incurred by
or asserted against the Custodian by reason of or as a result of any action or
inaction, or arising out of the Custodians performance under the Custody
Agreement, including reasonable fees and expenses of counsel; provided however,
that the Fund will not indemnify the Custodian for those costs, expenses,
damages, liabilities or claims, including reasonable attorneys and
accountants fees, arising out of the Custodians negligence, bad faith or
Either party may terminate the Custody Agreement by giving to the other party a notice in writing specifying the date of such termination, which will be not less than 90 days after the date of such notice. Upon termination thereof, the Fund will pay to the Custodian such compensation as may be due to the Custodian, and will likewise reimburse the Custodian for other amounts payable or reimbursable to the Custodian thereunder. The Custodian will follow such reasonable oral or written instructions concerning the transfer of custody of records, securities and other items as the Fund gives; provided, that (a) the Custodian will have no liability for shipping and insurance costs associated therewith, and (b) full payment will have been made to the Custodian of its compensation, costs, expenses and other amounts to which it is entitled thereunder. If any securities or cash remain in any account, the Custodian may deliver to the Fund such securities and cash.
The term of the Transfer Agency and Service Agreement is one year from the effective date and will automatically renew for additional one year terms unless either party provides written notice of termination at least 90 days prior to the end of any one year term or unless earlier terminated. The Fund may terminate the Transfer Agency and Service Agreement at any time upon 90 days prior written notice. Either party may terminate in the event the other party breaches any material provision of the Transfer Agency and Service Agreement, provided that the non-breaching party gives written notice of such breach to the breaching party and the breaching party does not cure such violation within 90 days of receipt of such notice.
The Transfer Agent is both exculpated and indemnified under the Transfer Agency and Service Agreement.
The Transfer Agent will have no responsibility and will not be liable for any and all losses, damages, costs, charges, counsel fees, payments, expenses or liability, except that the Transfer Agent will be liable to the Fund for direct money damages caused by its own negligence, bad faith or willful misconduct or that of its employees or agents, or its breach of any of its representations. In no event will the Transfer Agent or the Fund be liable for special, indirect or consequential damages.
The Transfer Agent will not be responsible for, and the Trust will
indemnify and hold the Transfer Agent harmless from and against, any and all
losses, damages, costs, charges, counsel fees, payments, expenses and liability
arising out of or attributable to: (a) actions of the Transfer Agent or
its agents or subcontractors required to be taken, provided that such actions
are taken without negligence, bad faith or willful misconduct; (b) the
Funds negligence, bad faith or willful misconduct; (c) the breach of any
representation or warranty of the Fund; (d) the conclusive reliance on or
use by the Transfer Agent or its agents or subcontractors of information,
records, documents or services which (i) are received by the Transfer
Agent or its agents or subcontractors, (ii) have been prepared, maintained
or performed by the Trust or any other person or firm on behalf of the Trust
including but not limited to any previous transfer agent or registrar and
(iii) do not contain manifest error(s); (e) the conclusive reliance
on, or the carrying out by the Transfer Agent or its agents or subcontractors
of, any instructions or requests of the Trust on behalf of the Trust reasonably
believed in good faith by the Transfer Agent or its agents or subcontractors to
be authorized; (f) or the offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state
or in violation of any stop order or other determination or ruling by any
federal agency or any state with respect to the offer or sale of such Shares in
such state, except where such offer or sale arises out of or is attributable to
an authorized Share limit that has been exceeded.
BNY Mellon Clearing, LLC will serve as the Commodity Broker and as such arranges for the execution and clearing of the Funds futures transactions pursuant to a Futures Customer Agreement between the Trust, on behalf of the Fund, and the Commodity Broker.
The Commodity Broker is both exculpated and indemnified under the Futures Customer Agreement.
Under the Futures Customer Agreement, the Fund agrees to indemnify and hold harmless the Commodity Broker, its officers, directors, employees, agents and affiliated persons for any Loss when and as incurred by, or asserted against, the Commodity Broker and such persons arising directly out of or in connection with: (i) the Futures Customer Agreement; (ii) the Funds acts or omissions; (iii) any material breach by the Fund of its obligations; (iv) the exercise or pursuit by the Commodity Broker and its affiliates of its rights or remedies; (v) the performance by the Commodity Broker of its duties; (v) any Event of Default (as defined in the Futures Customer Agreement); (vi) any Contracts; or (vii) pursuant to authorized instructions received by the Commodity Broker from Fund or its authorized agent, and to fully reimburse the Commodity Broker and such persons for any reasonable and documented legal or other fees and expenses, including the cost of any investigation and preparation, when and as incurred by them in connection with any claim, action, proceeding or activities of the Commodity Broker and such persons in connection with the Futures Customer Agreement or Contracts contemplated thereunder, except where such Loss arises from the Commodity Brokers gross negligence, fraud, willful misconduct, breach of the Futures Customer Agreement or violation of Applicable Law.
The Futures Customer Agreement may be terminated at any time by the
Fund or the Commodity Broker by written notice to the other party, provided
that the Commodity Broker may terminate no sooner than 60 days from the date
such notice is given.
The Marketing Agent will provide certain marketing services to the Fund. Pursuant to the Marketing Agent Agreement among the Trust, on behalf of the Fund, the Managing Owner and the Marketing Agent, the Marketing Agent will assist the Managing Owner with certain functions and duties relating to marketing, including reviewing and approving marketing materials.
The Marketing Agent Agreement will continue in effect for an initial term of [●] year[s] from the effective date and thereafter will continue automatically for successive [●] year periods.
Upon and after completion of its initial term, the Marketing Agent Agreement is terminable by any party at any time without penalty on [●] days prior written notice to the other parties. Notwithstanding the foregoing, the Marketing Agent Agreement may be terminated by any party upon written notice to the other parties if [(a) the Trust is terminated, (b) any other party becomes insolvent or bankrupt or files a voluntary petition, or is subject to an involuntary petition, in bankruptcy or attempts to or makes an assignment for the benefit of its creditors or consents to the appointment of a trustee or receiver or (c) any other party willfully and materially breaches its obligations under the Marketing Agent Agreement and such breach has not been cured to the reasonable satisfaction of the non-breaching party prior to the expiration of [●] days after written notice by the nonbreaching party to the breach party of such breach].
The Fund will indemnify, defend and hold harmless the Marketing Agent and its partners, stockholders, members, directors, officers and employees of the foregoing, and the successors and assigns of all the foregoing, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which the Marketing Agent or any such person may incur under the Securities Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon: (i) any untrue statement of a material fact contained in the registration statement (or in the registration statement as amended or supplemented) or in the prospectus (or in the prospectus as amended or supplemented), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such registration statement or such prospectus or necessary to make the statements made therein not misleading, except for any statements provided in writing, directly or indirectly by the Marketing Agent to the Fund or the Managing Owner for inclusion in such registration statement or such prospectus or any material omissions therefrom; (ii) any untrue statement of a material fact or breach by the Trust or the Managing Owner of any representation or warranty contained in the Marketing Agent Agreement; (iii) the failure by the Trust or the Managing Owner to perform when and as required any agreement or covenant contained herein; (iv) any untrue statement of any material fact contained in any audio or visual materials provided by the Trust or the Managing Owner or based upon written information furnished by or on behalf of the Trust or the Managing Owner including, without limitation, slides, videos, films or tape recordings used in connection with the marketing of the Trust; or (v) the Marketing Agents performance of its duties under the Marketing Agent Agreement except in the case of this bullet point, for any loss, damage, expense, liability or claim resulting from the gross negligence or willful misconduct of the Marketing Agent. In no case is the indemnity of the Trust in favor of the Marketing Agent deemed to protect the Marketing Agent against any liability to the Trust or the Managing Owner to which the Marketing Agent would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under the Marketing Agent Agreement.
Van Eck Associates Corporation (VEAC), the parent of the Managing Owner, has entered into an Index Product License Agreement with the Index Provider relating to the Index. The Index Product License Agreement provides that, in exchange for the payment of quarterly fees to the Index Provider, the Fund is
entitled to refer to the Index in this Prospectus and other documents, and to receive and utilize information concerning the Index, including the constituents thereof. The Index Provider or its agents are obligated to calculate and publicly disseminate to market data vendors the value of the Index in the manner and as frequently may be required by NYSE Arca.
The Index Product License Agreement has an initial term of three years, and will renew automatically for subsequent one year periods unless either party gives notice of its intent to not renew the agreement. VEAC or the Index Provider may terminate the Index Product License Agreement if the other party becomes insolvent, makes a general assignment for the benefit of creditors, files a voluntary petition of bankruptcy, suffers or permits the appointment of a receiver for its business or assets, becomes subject to any proceedings under any insolvency law or has wound up or liquidated. In the event of any change of control (Change of Control) by either party, whether through a sale of more than fifty percent (50%) of that partys assets, stock or any other ownership interest, or through a merger or otherwise to or with a competitor to the other party, the party affected by such Change of Control, after providing notice to the other party within ten business days of the closing date of the Change of Control, can terminate the agreement within ninety days of the date of the notice. In addition, the Index Provider may terminate the agreement upon ninety days (or upon such lesser period of time if required pursuant to a court order) prior written notice to VEAC if (i) the Index Provider is informed of the adoption or issuance of any legislation, regulation or interpretation that in the Index Providers reasonable judgment materially impairs the Index Providers ability to license and provide the Index; or (ii) any litigation or regulatory proceeding regarding the use of the Fund or the Index in connection with the Fund is commenced by a third party and, in the Index Providers reasonable, good faith opinion, such litigation or proceeding would have a material and adverse effect upon the Index or upon the ability of the Index Provider to perform under the agreement.
The Index Product License Agreement provides that VEAC will indemnify the Index Provider for third party claims, actions or proceedings arising out of or relating to the Fund.
The Managing Owner is a wholly-owned subsidiary of VEAC. VEAC is a
principal of the Managing Owner. The principal owner of VEAC is Jan F. van Eck.
The Fund has agreed to indemnify the Managing Owner for certain liabilities, including [certain liabilities arising under the federal securities laws, unless such loss or liability results from willful misfeasance, bad faith or gross negligence or reckless disregard of its obligations and duties to the Fund].
The Fund has not commenced operations as of the date of this Prospectus. Accordingly, no management fees have been paid to the Managing Owner as of the date of this Prospectus.
The Managing Owner serves as the commodity pool operator and commodity trading advisor of the Fund. Specifically, the Managing Owner:
Messrs. Charles T. Cameron, Joseph M. Foster and Shawn Reynolds will serve as the trading principals of the Managing Owner.
Joseph M. Foster joined the Managing Owner in July 1996 as precious metals mining analyst and currently serves as lead investment team member of funds managed by VEAC. Mr. Foster has published articles in mining journals, including Mining Engineering, Society of Economic Geology, Geological Society of Nevada. He has been a principal of the Managing Owner since March 2004. Mr. Foster received an MS in Geology from Mackey School of Mines in 1988, an MBA from University of Nevada-Reno in 1988 and a BS (Magna Cum Laude) in Geology from Tennessee Technological University in 1982.
Shawn Reynolds joined the Managing Owner in January 2005
and serves as senior analyst focusing on energy. He is also investment team
member of funds managed by VEAC. He has been a principal of the Managing Owner
since September 2010 and an associated person of the Managing Owner since July
Reynolds received an MBA (Beta Gamma Sigma National Honor Society), Finance
Columbia Business School in 1991, an MA (Phi Kappa Phi) in Petroleum Geology from the University of Texas, Austin in 1987 and a BS in Engineering, from Cornell University in 1985.
The Board of Directors has concluded that, based on each Directors experience, qualifications, attributes or skills, on an individual basis and in combination with those of the other Director, each Director should serve as a Director of the Managing Owner. Set forth below is a brief discussion of the specific experience, qualifications, attributes or skills of each Director.
From 1994 to 1998, he worked on international business development and spearheaded a fund management joint venture between VEAC and Shenyin Wanguo Securities, one of the largest securities firms in China. He then focused on originating and distributing several alternative investment strategies.
In March 2006, he founded the firms ETF business
which operates under the Market Vectors brand. Market Vectors has become one
of the worlds ten largest ETF sponsors, currently offering over 35 ETFs in
international equities, hard asset equities, and international and domestic
fixed income. He serves as President, Chief Executive Officer and a Trustee of
Market Vectors ETF Trust. He has been a principal and an associated person of
the Managing Owner since August 1997.
He has a J.D. from Stanford University and was graduated Phi Beta Kappa from Williams College with a major in Economics. Mr. van Eck is a Director of the National Committee on US-China Relations. He has registrations with NFA and the Financial Industry Regulatory Authority. He has appeared on CNBC and Bloomberg Television.
A Shareholder should be aware that the Managing Owner has a fiduciary responsibility to the Shareholders to exercise good faith and fairness in all dealings affecting the Fund.
As Managing Owner of the Fund, the Managing Owner effectively is subject to the duties and restrictions imposed on fiduciaries under both statutory and common law. The Managing Owner has a fiduciary responsibility to the Shareholders to exercise good faith, fairness and loyalty in all dealings affecting the Fund, consistent with the terms of the Trust Agreement. The Trust Agreement is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The general fiduciary duties which would otherwise be imposed on the Managing Owner (which would make the operation of the Fund as described herein impracticable due to the strict prohibition imposed by such duties on, for example, conflicts of interest on behalf of a fiduciary in its dealings with its beneficiaries), are defined and limited in scope by the disclosure of the business terms of the Fund and in the Trust Agreement (to which terms all Shareholders, by subscribing to the Shares, are deemed to consent).
The Trust Agreement provides that the Managing Owner and its affiliates, or Covered Person, will have no liability to the Trust and each Fund or to any Shareholder for any loss suffered by the Trust and each Fund arising out of any action or inaction of the Covered Person if the Covered Person, in good faith, determined that such course of conduct was in the best interests of the Trust or the applicable Fund and such course of conduct did not constitute gross negligence or willful misconduct by the Covered Person. The Trust and each Fund have agreed to indemnify the Covered Person against any claims, losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with the Covered Persons activities for the Trust and each Fund, provided that the conduct resulting in the claims, losses or liabilities for which indemnity is sought did not constitute gross negligence or willful misconduct and was done in good faith and in a manner reasonably believed to be in the best interests of the Funds.
There are substantial and inherent conflicts of interest in the structure of the Fund which are, on their face, inconsistent with the Managing Owners fiduciary duties. One of the purposes underlying the disclosures set forth in this Prospectus is to disclose to all prospective Shareholders these conflicts of interest so that the Managing Owner may have the opportunity to obtain Shareholders informed consent to such conflicts. Prospective Shareholders who are not willing to consent to the various conflicts of interest described under Conflicts of Interest below and elsewhere should not invest in the Fund. The Managing Owner currently intends to raise such disclosures and consent as a defense in any proceeding brought seeking relief based on the existence of such conflicts of interest.
The Managing Owner has made and expects to maintain an aggregate investment of $ in the Fund.
The Trustee, a national bank with its principal place of business in Delaware, is the sole Trustee of the Fund. The Trustees principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890. The Trustee is unaffiliated with the Managing Owner. The Trustees duties and liabilities with respect to the offering of the Shares and the management of the Fund are limited to its express obligations under the Trust Agreement.
The rights and duties of the Trustee, the Managing Owner and the Shareholders are governed by the provisions of the Delaware Statutory Trust Act and by the Trust Agreement. The Trustees only duties are to satisfy the requirements of the Delaware Statutory Trust Act that a Delaware statutory trust have at least one trustee with its principal place of business in Delaware.
The Trustee will serve in a passive role as the sole trustee of the Fund in the State of Delaware. The Trustee will accept service of legal process on the Fund in the State of Delaware and will make certain
filings under the Delaware Statutory Trust Act. To the fullest extent permitted by applicable law, the Trustee does not owe any other duties to the Fund, the Managing Owner or the Shareholders of the Fund. The Trustee is permitted to resign upon at least sixty (60) days advance written notice to the Trust, provided, that any such resignation will not be effective until a successor Trustee is appointed by the Managing Owner. The Managing Owner has the discretion to replace the Trustee.
Only the Managing Owner has signed the Registration Statement of which this Prospectus is a part, and only the assets of the Fund and the Managing Owner are 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. The Trustees liability in connection with the issuance and sale of the Shares is limited solely to the express obligations of the Trustee set forth in the Trust Agreement.
Under the Trust Agreement, the Managing Owner has exclusive management and control of all aspects of the business of the Fund. The Trustee has no duty or liability to supervise or monitor the performance of the Managing Owner, nor does the Trustee have any liability for the acts or omissions of the Managing Owner. The Shareholders have no voice in the day to day management of the business and operations of the Fund, other than certain limited voting rights as set forth in the Trust Agreement. In the course of its management of the business and affairs of the Fund, the Managing Owner may, in its sole and absolute discretion, appoint an affiliate or affiliates of the Managing Owner as additional Managing Owners and retain such persons, including affiliates of the Managing Owner, as it deems necessary for the efficient operation of the Fund, as appropriate.
Because the Trustee has no management authority with respect to the Fund, it is not registered in any capacity with the CFTC.
The Bank of New York Mellon performs accounting and administrative services for the Fund pursuant to a written agreement. For these accounting and administrative services a fee is calculated daily and paid monthly to the Administrator by the Fund at an annual rate of 0.030% of average daily net assets.
The Administrator will retain certain financial books and records, including: Basket creation and redemption books and records, Fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details and trading and related documents received from futures commission merchants, c/o , , telephone number () -.
The Administrator and any of its affiliates may purchase or sell Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
The Bank of New York Mellon, 2 Hanson Place, 12th Floor, Brooklyn, NY 11217, is the Custodian of the Funds assets.
The Bank of New York Mellon, 2 Hanson Place, 12th Floor, Brooklyn, NY 11217, serves as Transfer Agent for the Fund.
The Transfer Agent also will receive a transaction processing fee in connection with orders from Authorized Participants to create or redeem Baskets in the amount of $ per order. These transaction processing fees are paid by the Authorized Participants and not by any Fund.
The Marketing Agent will not open or maintain customer accounts or solicit, receive, execute, clear, settle or otherwise handle any orders to purchase or redeem Shares.
BNY Mellon Clearing, LLC, One Wall Street, New York, New York, will serve the Commodity Broker for the Fund. In its capacity as Commodity Broker, the Commodity Broker will clear (and may execute) the futures transactions of the Fund and perform certain administrative services for the Fund. The Commodity Broker is also registered with the CFTC as a futures commission merchant and is a member of NFA in such capacity.
The Commodity Broker is a subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). In the ordinary course of business BNY Mellon and its subsidiaries are routinely named as defendants in or made parties to pending and potential legal actions and regulatory matters. As of June 30, 2012, BNY Mellons management did not believe that judgments or settlements, if any, arising from these matters (either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage) will have a material adverse effect on the consolidated financial position or liquidity of BNY Mellon, although they could have a material effect on net income in a given period. Further information is available in the periodic public filings by BNY Mellon as periodically filed with the SEC.
In November 2009, the Division of Enforcement of the CFTC indicated that it is considering a recommendation to the CFTC that it file a civil enforcement action against The Bank of New York Mellon for possible violations of the Commodity Exchange Act and CFTC regulations in connection with its relationship to Sentinel. The Bank of New York Mellon responded in writing to the CFTC on Jan. 29, 2010 and provided an explanation as to why an enforcement action is unwarranted.
On Oct. 25, 2012, the court entered final approval of a previously
announced settlement of the Oklahoma class action lawsuit concerning Sigma
losses. Under the terms of the settlement, The Bank of New York Mellon agreed
to pay $280 million in exchange for a complete release of claims in the class
On May 11, 2010, the New York State Attorney General commenced a civil lawsuit against Ivy Asset Management LLC (Ivy), a subsidiary of BNY Mellon that manages primarily funds-of-hedge-funds, and two of its former officers in New York state court. The lawsuit alleges that Ivy, in connection with its role as sub-advisor to investment managers whose clients invested with Madoff, did not disclose certain material facts about Madoff. The complaint seeks an accounting of compensation received from January 1997 to the present by the Ivy defendants in connection with the Madoff investments, and unspecified damages, including restitution, disgorgement, costs and attorneys fees.
On Oct. 21, 2010, the U.S. Department of Labor commenced a civil lawsuit against Ivy, two of its former officers, and others in federal court in the Southern District of New York. The lawsuit alleges that Ivy violated the Employee Retirement Income Security Act (ERISA) by failing to disclose certain material facts about Madoff to investment managers subadvised by Ivy whose clients included employee benefit plan investors. The complaint seeks disgorgement and damages. On Dec. 8, 2010, the Trustee overseeing the Madoff liquidation sued many of the same defendants in bankruptcy court in New York, seeking to avoid withdrawals from Madoff investments made by various funds-of-funds (including six funds-of-funds managed by Ivy).
Ivy or its affiliates have been named in a number of civil lawsuits filed beginning Jan. 27, 2009 relating to certain investment funds that allege losses due to the Madoff investments. Ivy acted as a sub-advisor to the investment managers of some of those funds. Plaintiffs assert various causes of action including securities and common-law fraud. Certain of the cases have been certified as class actions and/or assert derivative claims on behalf of the funds. Most of the cases have been consolidated in two actions in federal court in the Southern District of New York, with certain cases filed in New York State Supreme Court for New York and Nassau counties.
Beginning in December 2009, government authorities have been conducting inquiries seeking information relating primarily to standing instruction foreign exchange transactions in connection with custody services BNY Mellon provides to public pension plans and certain other custody clients. BNY Mellon is cooperating with these inquiries.
BNY Mellon has also been named as a defendant in several putative class action federal lawsuits filed on various dates in 2011. The complaints, which assert varying claims, including breach of contract, and violations of ERISA, state and federal law, all allege that the prices BNY Mellon charged and reported for standing instruction foreign exchange transactions executed in connection with custody services provided by BNY Mellon were improper. In addition, BNY Mellon has been named as a nominal defendant in several derivative lawsuits filed on various dates in 2011 and 2012 in state and federal court in New York. BNY Mellon has also been named as a defendant in a lawsuit filed on March 12, 2012 in Ohio state court, and subsequently removed to federal district court in Ohio, asserting claims including breach of contract and fraud. BNY Mellon was also named in a qui tam lawsuit originally filed under seal in October 2009 in Massachusetts state court, but the plaintiff voluntarily dismissed the lawsuit on May 16, 2012. To the extent these lawsuits are pending in federal court, they have been consolidated for pre-trial purposes in federal court in New York.
In an action filed in New York State Supreme Court for New York County, on Sept. 14, 2010, plaintiffs as holders of debt issued by Basell AF in 2005 allege that The Bank of New York Mellon, as indenture trustee, breached its contractual and fiduciary obligations by executing an intercreditor agreement in 2007 in connection with Basells acquisition of Lyondell Chemical Company. Plaintiffs are seeking damages for their alleged losses resulting from the execution of the 2007 intercreditor agreement that allowed the company to increase the amount of its senior debt.
The Bank of New York Mellon as trustee is the petitioner in a legal proceeding filed in New York State Supreme Court, New York County on June 29, 2011, seeking approval of a proposed settlement involving Bank of America Corporation and bondholders in certain Countrywide residential mortgage-securitization trusts. The New York and Delaware Attorneys General have intervened in this proceeding.
The Managing Owner has not established formal procedures to resolve all conflicts of interest and, as a result, the Managing Owner could resolve a potential conflict in a manner that is not in the best interest of the Fund or the Shareholders. Consequently, Shareholders may be dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. Although the Managing Owner attempts to monitor these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that all of these conflicts will not, in fact, result in adverse consequences to the Fund, the NAV of the Shares and ultimately the market price of the Shares.
Prospective Shareholders should be aware that the Managing Owner presently intends to assert that Shareholders have, by subscribing for Shares of the Fund, consented to the following conflicts of interest in the event of any proceeding alleging that such conflicts violated any duty owed by the Managing Owner to Shareholders.
The Managing Owner may have a conflict of interest in allocating its own limited resources among different clients and potential future business ventures, to each of which it owes fiduciary duties. Additionally, the professional staff of the Managing Owner also services other affiliates of the Managing Owner and their respective clients. Although the Managing Owner and its professional staff cannot and
will not devote all of its or their respective time or resources to the management of the business and affairs of the Fund, the Managing Owner intends to devote, and to cause its professional staff to devote, sufficient time and resources to manage properly the business and affairs of the Fund consistent with its or their respective fiduciary duties to the Fund and others.
Unless otherwise expressly provided in the Trust Agreement, (i) whenever a conflict of interest exists or arises between the Managing Owner or any of its Affiliates, as defined in the Trust Agreement, on the one hand, and the Trust, the Trustee or any Shareholder or any other natural person or legal entity, on the other hand; or (ii) whenever the Trust Agreement or any other agreement contemplated therein or therein provides that the Managing Owner shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust, any Shareholder or any other natural person or legal entity, the Managing Owner will resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Managing Owner, the resolution, action or terms so made, taken or provided by the Managing Owner will not constitute a breach of the Trust Agreement or any other agreement contemplated therein or of any duty or obligation of the Managing Owner at law or in equity or otherwise.
The Commodity Broker may act as a commodity broker for other accounts with which it is affiliated or in which it or one of its affiliates has a financial interest. The compensation received by the Commodity Broker from such accounts may be more or less than the compensation received for brokerage services provided to the Fund. In addition, various accounts traded through the Commodity Broker (and over which their personnel may have discretionary trading authority) may take positions in the futures markets opposite to those of the Fund or may compete with the Fund for the same positions. The Commodity Broker may have a conflict of interest in its execution of trades for each Fund and for other customers. The Managing Owner will, however, not retain any commodity broker for the Fund which the Managing Owner has reason to believe would knowingly or deliberately favor any other customer over the Fund with respect to the execution of commodity trades.
The Commodity Broker will benefit from executing orders for other clients, whereas the Fund may be harmed to the extent that the Commodity Broker has fewer resources to allocate to the Funds accounts due to the existence of such other clients.
Certain officers or employees of the Commodity Broker may be members of U.S. commodities exchanges and/or serve on the governing bodies and standing committees of such exchanges, their clearing houses and/or various other industry organizations. In such capacities, these officers or employees may have a fiduciary duty to the exchanges, their clearing houses and/or such various other industry organizations which could compel such employees to act in the best interests of these entities, perhaps to the detriment of the Fund.
The Managing Owner, its affiliates and their respective trading principals may trade in the commodity and foreign exchange markets for their own accounts and for the accounts of their clients, and in doing so may take positions opposite to those held by the Fund or may compete with the Fund for positions in the marketplace. Among other things, the Managing Owners trading principals may trade in the commodity or foreign exchange markets on behalf of affiliates of the Managing Owner and for the accounts of other clients. Such trading may create conflicts of interest on behalf of one or more such persons in respect of
their obligations to the Fund. Records of proprietary trading and trading on behalf of other clients will not be available for inspection by Shareholders.
Because the Managing Owner, its affiliates, and its and their trading principals and affiliates may trade for their own or other client accounts at the same time that they are managing the account of each Fund, prospective Shareholders should be aware that such persons may take positions in proprietary accounts or other client accounts which are opposite, or ahead of, the positions taken for the Fund.
The Managing Owner and its affiliates may engage in long or short transactions involving the commodities underlying the Index (and/or sub-components thereof) for their proprietary accounts and for accounts under their management, and they also may enter into certain instruments with customers, such as long or short swaps and options, based on the value of the Index or its components. These activities may involve fees that are the same as, higher than or lower than the fees payable by the Fund to the Managing Owner. Such transactions may have a positive or negative effect on the value or level of the Index Commodity Contracts (and/or sub-components thereof) and consequently upon the Index levels, and in engaging in such transactions, none of the Managing Owner and its affiliates nor any of their affiliates will be under any obligation to act in the interests of users of the Index and/or parties exposed to products referencing the Index. There can be no assurance that any of the foregoing will not have an adverse effect on the performance of the Index and/or the Fund.
In implementing the Funds investment strategy, the Managing Owner may use certain techniques or methodologies used by the Managing Owners affiliates. The Managing Owners affiliates may change or discontinue operation of their trading techniques and methodologies at any time without regard for any effect on the Fund.
Morningstar and its affiliates may from time-to-time act in multiple capacities with regard to the Index or any products referencing the Index. Potential conflicts of interest may exist between Morningstar and its affiliates and any users of the Index and/or parties exposed to products referencing the Index.
The Managing Owner and its affiliates may issue derivative instruments in respect of the Index or its underlying Index Commodity Contracts (and/or sub-components thereof) and the introduction of such products into the marketplace may affect the Index levels.
The Managing Owner, Morningstar and/or their respective affiliates may acquire non-public information with respect to the Index Commodity Contracts (or sub-components thereof), and none of them undertakes to disclose any such information to any user of the Index. In addition, one or more of such parties may publish research reports with respect to the Index Commodity Contracts (or sub-components thereof). Such activities could present conflicts of interest and may affect the Index level.
Within the past five years of the date of this prospectus, there have been no material administrative, civil or criminal actions against the Managing Owner, 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.
The following principals serve in the below capacities on behalf of the Managing Owner:
As of the date of this Registration Statement, no person owned of record or beneficially 5% or more of the outstanding Shares of the Fund because the Fund had not yet commenced operations.
As of the date of this Registration Statement, the Trustee and the executive officers of the Registrant, as a group, did not own any of the Shares of the Fund because the Fund had not yet commenced operations.
the last fiscal year, the Fund had no executive officers and therefore did not
have any unexercised options, stock that had not vested, or equity inventive
plan awards to any such persons from the Fund.
During the last fiscal year, the Trustee of the Fund did not receive any compensation from the Fund.
The Fund was formed as a series of a Delaware statutory trust on February 1, 2012.
The following summary describes in brief the Shares and certain aspects of the operation of the Trust and the Fund and the respective responsibilities of the Trustee and the Managing Owner concerning the Trust and the Fund and the material terms of the Trust Agreement. Prospective Shareholders should carefully
review the Trust Agreement filed as an exhibit to the registration statement of which this Prospectus is a part and consult with their own advisers concerning the implications to such prospective subscribers of investing in a series of a Delaware statutory trust. Capitalized terms used in this section and not otherwise defined will have such meanings assigned to them under the Trust Agreement.
The Fund will issue common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Fund. The Shares of the Fund are expected to be listed for trading, subject to notice of issuance, on NYSE Arca under the symbol . The Funds Shares may be bought and sold on NYSE Arca like any other exchange-listed security.
If the Managing Owner determines that there is more cash being held in the Fund than is reasonably expected to be needed to pay the Funds expenses in the near future, the Managing Owner at its discretion can either distribute the extra cash to the Shareholders or use it to acquire additional Index Commodity Contracts, Other Instruments or Cash Instruments. The Fund has no obligation to make periodic distributions to Shareholders.
If the Trust receives any proceeds in respect of its property other than those it is permitted to hold, the Trustee, at the direction of the Managing Owner, will distribute that property to the Shareholders by any means lawful, equitable and feasible. If the Trustee cannot distribute the property proportionately among the Shareholders, the Trustee, at the direction of the Managing Owner, will adopt any other method that it deems to be lawful, equitable and feasible, including public or private sale.
Registered holders of Shares will receive these distributions in proportion to the number of Shares owned. Before making a distribution, the Trustee will deduct any applicable withholding taxes and any fees and expenses of the Trust that have not been paid. It will distribute only whole U.S. dollars and cents and will round fractional cents down to the nearest whole cent. Neither the Managing Owner nor the Trustee will be responsible if the Managing Owner determines that it is unlawful or impractical to make a distribution available to registered holders.
The books and records of the Fund will be maintained as follows: all
marketing materials will be maintained at the offices of the Marketing Agent,
Van Eck Securities Corporation, 335 Madison Avenue, New York, New York 10017;
telephone number (212) 293-2000; Basket creation and redemption books and
records, certain financial books and records (including Fund accounting
records, ledgers with respect to assets, liabilities, capital, income and
expenses, the registrar, transfer journals and related details) and trading and
related documents received from futures commission merchants will be maintained
at the offices of , [Address]; telephone number () -. All
other books and records of the Fund (including minute books and other general
corporate records, trading records and related reports and other
items received from the Funds Commodity Brokers) will be maintained at the Funds principal office, c/o Van Eck Absolute Return Advisers Corp., 335 Madison Avenue, New York, New York 10017, telephone: (212) 293-2000.
Trust books and records are located at the foregoing addresses, and available for inspection and copying (upon payment of reasonable reproduction costs) by Shareholders or their representatives for any purposes reasonably related to a Shareholders interest as a beneficial owner of such Shares during regular business hours as provided in the Trust Agreement. The Managing Owner will maintain and preserve the books and records of the Fund for a period of not less than six years.
The Funds fiscal year ends on December 31 of each year.
In furtherance of the Inter-Series Limitation on Liability, every party providing services to the Trust, the Fund or the Managing Owner on behalf of the Trust or the Fund, has acknowledged and consented in writing to:
No special custody arrangements are applicable to a Fund, and the existence of a trustee should not be taken as an indication of any additional level of management or supervision over a Fund.
Regulatory Duties of the Managing Owner; Limitation of Liability and
Under certain circumstances, Shareholders also have the right to institute a reparations proceeding before the CFTC against the Managing Owner (a registered commodity pool operator), the Commodity Broker (a registered futures commission merchant), as well as those of their respective employees who are required to be registered under the Commodity Exchange Act and the rules and regulations promulgated thereunder. Private rights of action are conferred by the Commodity Exchange Act. Investors in commodities and in commodity pools may, therefore, invoke the protections provided thereunder.
The foregoing summary describing in general terms the remedies available to Shareholders under federal and Delaware law is based on statutes, rules and decisions as of the date of this Prospectus. This is a rapidly developing and changing area of the law. Therefore, Shareholders who believe that they may have a legal cause of action against any of the foregoing parties should consult their own counsel as to their evaluation of the status of the applicable law at such time.
Voting by Shareholders
The Managing Owner has the right unilaterally to amend the Trust Agreement as it applies to the Fund provided that the Shareholders have the right to vote only (i) if expressly required under Delaware or U.S. federal law or regulations or rules of any exchange, or (ii) if submitted to Shareholders by the Managing Owner in its sole discretion. No amendment affecting the Trustee shall be binding upon or effective against the Trustee unless consented to by the Trustee in writing.
the Trust and the Fund in Certain States
although entitled under Delaware law to similar limitations on personal liability as stockholders in a private corporation for profit organized under the laws of the State of Delaware, are not so entitled in such state.
Repayment of Distributions Received by Shareholders; Indemnification by
NAV means the total assets of the Fund including, but not limited to, all cash and cash equivalents or other debt securities less total liabilities of the Fund, each determined on the basis of generally accepted accounting principles. In particular, NAV includes any unrealized profit or loss on open Index Commodity Contracts, Other Instruments and any Cash Instruments or other credit or debit accruing to the Fund but unpaid or not received by the Fund. All open commodity futures contracts traded on a U.S. or non-U.S. exchange will be calculated at their then current market value, which will be based upon the settlement price for that particular commodity futures contract traded on the applicable U.S. or non-U.S. exchange on the date with respect to which NAV is being determined; provided, that if a commodity futures contract traded on a U.S. or on a non-U.S. exchange could not be liquidated on such day, due to the operation of daily limits (if applicable) or other rules of the exchange upon which that position is traded or otherwise, the settlement price on the most recent day on which the position could have been liquidated will be the basis for determining the market value of such position for such day. The Managing Owner may in its discretion (and under extraordinary circumstances, including, but not limited to, periods during which a settlement price of a futures contract is not available due to exchange limit orders or force majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance) value any asset of the Fund pursuant to such other principles as the Managing Owner deems fair and equitable so long as such principles are consistent with normal industry standards. Interest earned on the Funds commodity brokerage accounts is expected to accrue at least monthly. The amount of any distribution will be a liability of the Fund from the day when the distribution is declared until it is paid.
The value of Cleared Swaps is determined based on the value of the Index Commodity Contract in connection with each specific Cleared Swap.
In calculating the NAV of the Fund, the settlement value of a Cleared Swap (if any) and an OTC Other Commodity Instrument (if any) is determined by either applying the then-current disseminated value for the related Index Commodity Contracts or the terms as provided under the applicable Cleared Swap or OTC Other Commodity Instrument, as applicable. However, in the event that one or more of the related Index Commodity Contracts are not trading due to the operation of daily limits or otherwise, the Managing Owner may in its sole discretion choose to value the Funds Cleared Swaps or OTC Other Commodity Instruments (if any) on a fair value basis in order to calculate the Funds NAV. These fair value prices would be generally determined based on available inputs about the current value of the Index Commodity Contract to which the Cleared Swap or OTC Other Commodity Instrument relates and would be based on principles that the Managing Owner deems fair and equitable so long as such principles are consistent with normal industry standards.
NAV per Share is the NAV of the Fund divided by the number of its outstanding Shares.
The Participant Agreement sets forth the procedures for the creation and redemption of Baskets and for the payment of cash required for such creations and redemptions. The Managing Owner may assign or delegate its rights, duties or obligations under the Participant Agreement to the Marketing Agent or the Administrator without consent from any Shareholder or Authorized Participant. The Participant Agreement and the related procedures attached thereto may be amended by the Managing Owner without the consent of any Shareholder or Authorized Participant.
On any business day, an Authorized Participant may place an order with the Managing Owner to create one or more Baskets. For purposes of processing both purchase and redemption orders, a business day means any day other than a day when the NYSE Arca or a Futures Exchange is closed for regular trading. Purchase orders must be placed by  .m., Eastern time. The day on which the Managing Owner timely receives a valid purchase order is the purchase order date. If the purchase order is received after the applicable cut-off time, the purchase order date will be the next day. Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Baskets, an Authorized Participants DTC account will be charged the non-refundable transaction fee due for the purchase order. The Managing Owner may reject a previously placed purchase order at any time prior to the applicable cut-off time, if in the sole discretion of the Managing Owner, the execution of such an order would not be in the best interest of the Fund or its Shareholders.
Because orders to purchase Baskets must be placed by  .m., but the total payment required to create a Basket will not be determined until  .m., Eastern time, on the date the purchase order is received, Authorized Participants 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. Valid orders to purchase Baskets received after  .m. are considered received on the following day. The NAV of the Fund 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.
The Managing Owner may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date: (i) for any period during which any of NYSE Arca, a Futures Exchange or other exchange material to the valuation or operation of the Fund is closed other than for customary holidays or weekend closings or when trading is suspended or restricted on such exchanges in any of the Index Commodity Contracts; (ii) for any period during which an emergency exists as a result of which the fulfillment of a purchase order is not reasonably practicable; or (iii) for such other period as the Managing Owner determines to be necessary for the protection of the Shareholders. The Managing Owner will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The Managing Owner may also reject a purchase order if: (i) it determines that, due to position limits or otherwise, investment alternatives that will enable the Fund to meet its investment objective are not available to the Fund at that time; (ii) it determines that the purchase order is not in proper form; (iii) the acceptance of the purchase order may, in the opinion of the Managing Owners counsel, be unlawful; (iv) it believes that the purchase order would have adverse tax consequences to the Fund or the Shareholders; or (v) circumstances outside the control of the Managing Owner make it, for all practical purposes, not feasible to process creations of Baskets. The Managing Owner will not be liable for the rejection of any purchase order.
The procedures by which an Authorized Participant can redeem one or more Baskets mirror the procedures for the creation of Baskets. On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption orders must be placed by  .m., Eastern time. The day on which the Managing Owner timely receives a valid redemption order is the redemption order date. If the redemption order is received after the applicable cut-off time, the redemption order date will be the next day. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Baskets. Individual Shareholders may not redeem directly from the Fund. The Managing Owner may reject a previously placed redemption order at any time prior to the applicable cut-off time, if in the sole discretion of the Managing Owner, the execution of such an order would not be in the best interest of the Fund or its shareholders.
By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTCs book-entry system to the Fund not later than  .m., Eastern time, on the business day immediately following the redemption order date. The Managing Owner reserves the right to extend the deadline for the Fund to receive the Creation Units required for settlement up to the third business day following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants DTC account will be charged the non-refundable transaction fee due for the redemption order.
The redemption proceeds from the Fund consist of the cash redemption amount. The cash redemption amount is equal to the NAV of the number of Baskets of the Fund requested in the Authorized Participants redemption order as of the closing time of NYSE Arca or the last to close of the exchanges on which the Index Commodity Contracts are traded, whichever is latest, on the redemption order date. The Managing Owner will distribute the cash redemption amount at  .m., Eastern time, on the  business day following the redemption order date through DTC to the account of the Authorized Participant as recorded on DTCs book-entry system.
The redemption proceeds due from the Fund are delivered to the Authorized Participant at  .m., Eastern time, on the  business day following the redemption order date if, by such time on such business day following the redemption order date, the Funds DTC account has been credited with the Baskets to be redeemed. If the Funds DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption distribution is delivered to the extent of whole Baskets received. Any remainder of the redemption distribution is delivered on the next business day to the extent of remaining whole Baskets received if the Managing Owner receives the fee applicable to the extension of the redemption distribution date which the Managing Owner may, from time to time, determine and the remaining Baskets to be redeemed are credited to the Funds DTC account by  .m., Eastern time, on such next business day. Any further outstanding amount of the redemption order shall be cancelled. The Managing Owner will also be authorized to deliver the redemption distribution notwithstanding that the Baskets to be redeemed are not credited to the Funds DTC account by  .m., Eastern time, on the  business day following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Baskets through DTCs book-entry system on such terms as the Managing Owner may determine from time to time.
The Managing Owner may, in its discretion, suspend the right of redemption or postpone the redemption settlement date: (i) for any period during which NYSE Arca, a Futures Exchange or any other exchange material to the valuation or operation of the Fund is closed other than for customary holidays or weekend closings or trading is suspended or restricted in any of the Index Commodity Contracts; (ii) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable; or (iii) for such other period as the Managing Owner determines to be necessary for the protection of the Shareholders. The Managing Owner will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The Managing Owner will reject a redemption order if: (i) the order is not in proper form as described in the Participant Agreement; (ii) the fulfillment of the order, in the opinion of its counsel, might be unlawful; or (iii) as a result of the order, the number of remaining outstanding Shares would be reduced to fewer than the number of Shares required to remain outstanding for the Fund under applicable exchange rules.
To compensate the Transfer Agent for services in processing the creation and redemption of Baskets, an Authorized Participant will be required to pay a transaction fee of $500 per order to create or redeem Baskets. An order may include multiple Baskets. The transaction fee may be reduced, increased or otherwise changed by the Managing Owner.
On , the Initial Purchaser, subject to certain terms and conditions, agreed to purchase and take delivery of  Shares of the Fund, which comprise the Initial Baskets of the Fund, at a purchase price of $ per Share ($ per Basket), pursuant to an Initial Purchaser Agreement. The Initial Purchaser proposes to offer to the public these  Shares of the Fund at a per-Share offering price that will vary depending upon, among other factors, the market price of the Shares on NYSE Arca, the Funds NAV and the supply of and demand for the Shares at the time of the offer. Shares of the Fund offered by the Initial Purchaser at different times may have different offering prices.
[The Managing Owner has agreed to indemnify the Initial Purchaser against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the Securities Act), and to contribute to payments that the Initial Purchaser may be required to make in respect thereof.]
The Initial Purchaser will only act in such a capacity with respect to the initial Baskets of the Fund. The Initial Purchaser will create Shares of the initial Baskets at a price of $ per Share. The price of $ per Share has been arbitrarily determined inasmuch as the Shares have no inherent value at the Funds inception. In contrast, Authorized Participants will create Shares of each Basket at the NAV per Share. The Initial Purchasers activities in connection with its role as the Initial Purchaser will cease after it has fully transacted with respect to the initial Baskets of the Fund. No Authorized Participants (except with respect to the Initial Purchaser, which is an Authorized Participant) will be involved with the purchase and sale of the initial Baskets of the Fund. Therefore, the Initial Purchasers activities will be distinct from those of an Authorized Participant.
Most Shareholders buy and sell Shares in secondary market transactions through brokers. Shares of the Fund will trade, subject to notice of issuance, on the NYSE Arca under the ticker symbol listed in this Prospectus. Shares are bought and sold throughout the trading day like other publicly traded securities. When buying or selling Shares through a broker, most Shareholders incur customary brokerage commissions and charges.
Authorized Participants are the only persons that may place orders to create and redeem Baskets. An Authorized Participant must be: (1) a registered broker-dealer or other securities market participant, such as a bank or other financial institution, which is not required to register as a broker-dealer to engage in securities transactions; and (2) a participant in DTC. To become an Authorized Participant, a person must enter into a Participant Agreement with the Fund and the Managing Owner. The Participant Agreement sets forth the procedures for the creation and redemption of Baskets and for the payment of cash required for such creations and redemptions. The Participant Agreement and the related procedures attached thereto may be amended by the Managing Owner without the consent of any Shareholder or Authorized Participant. To compensate the Transfer Agent for services in processing the creation and redemption of Baskets, an Authorized Participant is required to pay a transaction fee of $500 per order to create or redeem Baskets. Authorized Participants who purchase Baskets from the Fund receive no fees, commissions or other form of compensation or inducement of any kind from either the Managing Owner or the Fund, and no such person has any obligation or responsibility to the Managing Owner or the Fund to effect any sale or resale of Shares.
Authorized Participants may offer to the public, from time to time, Shares of the Fund from any Baskets they create. Shares of the Fund offered to the public by Authorized Participants will be offered at a per Share offering price that will vary depending on, among other factors, the market price of the Shares of the Fund on NYSE Arca, the Funds NAV and the supply of and demand for the Shares at the time of the offer. Shares initially comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices.
The Fund will issue the initial Baskets to the Initial Purchaser and will issue Shares in Baskets to Authorized Participants from time to time in exchange for cash. 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 Securities Act, will be occurring. An Authorized Participant, other broker-dealer firm or its client will be deemed a statutory underwriter, and thus will be subject to the prospectus delivery and liability provisions of the Securities Act, 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. Similarly, the Initial Purchaser will be deemed a statutory underwriter. A determination of whether one 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 categorization as an underwriter. Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities will result in their being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
Dealers who are neither Authorized Participants nor underwriters but are 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 Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act.
Prospective Shareholders may purchase and sell Shares through traditional brokerage accounts. Shareholders who purchase Shares through a commission/fee-based brokerage account may pay commissions/fees charged by the brokerage account. Prospective Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges.
Prospective Shareholders intending to create or redeem Baskets through Authorized Participants in transactions not involving a broker-dealer registered in such Shareholders state of domicile or residence should consult their legal advisor regarding applicable broker-dealer or securities regulatory requirements under the state securities laws prior to such creation or redemption.
Under the Participant Agreements, the Managing Owner has agreed to indemnify the Authorized Participants and certain parties related to the Authorized Participants against certain liabilities as a result of: (i) any breach by the Managing Owner of any provision of the applicable Participant Agreement that relates to the Managing Owner; (ii) any failure on the part of the Managing Owner to perform any obligation of the Managing Owner set forth in the applicable Participant Agreement; (iii) any failure by the Managing Owner to comply with applicable laws; or (iv) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally declared effective by the SEC or in any amendment thereof, or in this Prospectus, or in any amendment thereof or supplement thereto, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except those statements in the Registration Statement or this Prospectus based on information furnished in writing by or on behalf of the Authorized Participant expressly for use in the Registration Statement or this Prospectus.
The offering of Baskets is being made in compliance with FINRA Rule 2310. Accordingly, neither the Initial Purchaser nor the Authorized Participants will make any sales to any account over which they have discretionary authority without the prior written approval of a purchaser of Shares. The maximum amount of items of value to be paid to FINRA members in connection with the offering of the Shares by the Fund will not exceed 10% of the gross offering proceeds of such Shares.
The payments to the Marketing Agent will not, in the aggregate, exceed
% of the aggregate dollar amount of the offering (or in an aggregate amount
equal to $) of the aggregate $ registered on the initial Registration
Statement on Form S-1, SEC Registration Number 333-179432 on which,  common
units of beneficial interest were registered in respect of the Fund. The
Marketing Agent will advise the Fund if the payments described hereunder must
be limited in order to comply with the 10% limitation on total underwriters
compensation pursuant to FINRA Rule 2310.
The Funds Shares are expected to be listed for trading, subject to notice of issuance, on NYSE Arca, under the symbol .
A substantial amount of proceeds of the offering of the Shares of the Fund will be used by the Fund to engage in the trading of Index Commodity Contracts with a view to tracking the changes, whether positive or negative, in the level of the Index over time, less the expenses of the operations of the Fund. The Funds portfolio will also hold Cash Instruments.
To the extent that the Fund trades in futures on U.S. exchanges, the assets deposited by the Fund with the Commodity Broker as margin must be segregated pursuant to the regulations of the CFTC. Such segregated funds may be invested only in a limited range of instruments.
To the extent, if any, that the Fund trades in futures on markets other than regulated U.S. exchanges, funds deposited to margin positions held on such exchanges will be invested in bank deposits or in instruments of a credit standing generally comparable to those authorized by the CFTC for investment of customer segregated funds, although applicable CFTC rules prohibit funds employed in trading on foreign exchanges from being deposited in customer segregated fund accounts.
Although the percentages set forth below may vary substantially over time, as of the date of this Prospectus, the Fund estimates:
The Managing Owner, a registered commodity pool operator and commodity trading advisor, is responsible for the cash management activities of the Fund, including investing in Cash Instruments. In addition, assets of the Fund not required to margin positions may be maintained in U.S. bank accounts opened in the name of the Fund and may be held in Cash Instruments.
The percentage that the Funds Cash Instruments will bear to the total net assets will vary from period to period as the market values of the futures contracts change.
The Fund receives all of the interest earned on Cash Instruments on deposit with the Commodity Broker or the Custodian.
Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the Code), the Treasury Regulations promulgated thereunder (the Regulations), and administrative and judicial interpretations thereof, all as of the date hereof, and such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those described below.
A U.S. Shareholder means a beneficial owner of Shares that is for U.S. federal income tax purposes:
A non-U.S. Shareholder means a beneficial owner of Shares that is not a U.S. Shareholder.
If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership holding Shares, we urge you to consult your own tax adviser.
No statutory, administrative or judicial authority directly addresses the treatment of Shares or instruments similar to Shares for U.S. federal income tax purposes. As a result, we cannot assure you that the United States Internal Revenue Service (the IRS) or the courts will agree with the tax consequences described herein. A different treatment from that described below could adversely affect the amount, timing and character of income, gain, loss or deduction in respect of an investment in the Shares. If you are considering the purchase of Shares, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of Shares, as well as any consequences to you arising under the laws of any other taxing jurisdiction.
Generally, a partnership is not a taxable entity and incurs no U.S. federal income tax liability. Section 7704 of the Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception exists with respect to publicly traded partnerships of which 90% or more of the gross income during each taxable year consists of qualifying income within the meaning of Section 7704(d) of the Code (the qualifying income exception). Qualifying income includes dividends, interest, capital gains from the sale or other disposition of stocks and debt instruments and, in the case of a partnership (such as the Fund) a principal activity of which is the buying and selling of commodities or futures contracts with respect to commodities, income and gains derived from commodities or futures contracts with respect to commodities. The Fund anticipates that at least 90% of its gross income for each taxable year will constitute qualifying income within the meaning of Section 7704(d) of the Code.
There can be no assurance that the IRS will not assert that the Fund should be treated as a publicly traded partnership taxable as a corporation. No ruling has been or will be sought from the IRS, and the IRS has made no determination as to the status of Fund for U.S. federal income tax purposes or whether the Funds operations generate qualifying income under Section 7704(d) of the Code. Whether the Fund will continue to meet the qualifying income exception is a matter that will be determined by the Funds operations and the facts existing at the time of future determinations. However, the Funds Managing Owner will use its reasonable efforts to cause the Fund to operate in such manner as is necessary for the Fund to meet the qualifying income exception.
If the Fund were taxable as a corporation in any taxable year, either as a result of a failure to meet the qualifying income exception described above or otherwise, the Funds items of income, gain, loss and deduction would be reflected only on its tax return rather than being passed through to the Shareholders in the Fund, and the Funds net income would be taxed to it at the income tax rates applicable to domestic corporations. In addition, if the Fund were taxable as a corporation, any distribution made by the Fund to a Shareholder would be treated as taxable dividend income, to the extent of the Funds current or accumulated earnings and profits, or, in the absence of current and accumulated earnings and profits, as a nontaxable return of capital to the extent of the Shareholders tax basis in its Shares of the Fund, or as taxable capital gain, after the Shareholders tax basis in its Shares is reduced to zero. Taxation of the Fund as a corporation could result in a material reduction in a Shareholders cash flow and after-tax return and thus could result in a substantial reduction of the value of the Shares in the Fund.
The discussion below is based on Dechert LLPs opinion that the Fund will be classified as a partnership for U.S. federal income tax purposes that is not subject to corporate income tax for U.S. federal income tax purposes.
A partnership does not incur U.S. federal income tax liability. Instead, each partner of a partnership is required to take into account its share of items of income, gain, loss, deduction and other items of the
partnership. Accordingly, each Shareholder in the Fund will be required to include in income its allocable share of the Funds income, gain, loss, deduction and other items for the Funds taxable year ending with or within its taxable year. In computing a partners U.S. federal income tax liability, the items must be included, regardless of whether cash distributions are made by the partnership. Thus, Shareholders in the Fund may be required to take into account taxable income without a corresponding current receipt of cash if the Fund generates taxable income but does not make cash distributions in an amount equal to the taxable income, or if the Shareholder is not able to deduct, in whole or in part, the Shareholders allocable share of the Funds expenses or capital losses. The Funds taxable year will end on December 31 unless otherwise required by law. The Fund will use the accrual method of accounting.
Shareholders in the Fund will take into account their share of ordinary income realized by the Fund from accruals of interest on Cash Instruments held in the Funds portfolio. The Fund may hold Cash Instruments with acquisition discount or original issue discount, in which case Shareholders in the Fund will be required to include accrued amounts in taxable income on a current basis even though receipt of those amounts may occur in a subsequent year. The Fund may also acquire Cash Instruments with market discount. Upon disposition of market discount Cash Instruments, gain will generally be required to be treated as interest income to the extent of the market discount and Shareholders in the Fund will be required to include as ordinary income their share of the market discount that accrued during the period the obligations were held by the Fund.
Capital gains and losses from Section 1256 Contracts generally are currently characterized as short-term capital gains or losses to the extent of 40% of the gains or losses and as long-term capital gains or losses to the extent of 60% of the gains or losses. Thus, Shareholders in the Fund will generally take into account their pro rata share of the long-term capital gains and losses and short-term capital gains and losses from Section 1256 Contracts held by the Fund and taken into account by the Fund in computing its taxable income. If a non-corporate taxpayer incurs a net capital loss for a year, the portion of the loss, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. A loss carried back to a year by a non-corporate taxpayer may be deducted only to the extent (1) the loss does not exceed the net gain on Section 1256 Contracts for the year and (2) the allowance of the carry back does not increase or produce a net operating loss for the year. It should be noted that legislation has been introduced in the United States Senate, which, if enacted, would treat gains from Section 1256 Contracts as short-term capital gains.
Any futures on Index commodities held by the Fund which are not classified as Section 1256 Contracts (e.g., futures on aluminum and nickel which trade on the LME) will not be subject to the special tax rules
discussed above. Since such futures are not subject to the year end mark-to-market rules of Section 1256 described above, long-term or short-term capital gains and losses with respect to such futures will only be recognized by the Fund when such futures positions are assigned or closed (by offset or otherwise). The applicable holding period for qualification for long-term capital gain or loss treatment for the commodity futures held by the Fund which are not Section 1256 Contracts is more than six months (rather than the more than one year holding period applicable to other capital assets).
In addition to the futures on the Index commodities, the Fund may also invest in other futures contracts, forward agreements, swaps, options or OTC derivatives. The Funds investment in these other futures contracts, forward agreements, swaps, options or OTC derivatives may have various tax consequences, requiring Shareholders in the Fund to recognize ordinary income or loss or capital gain or loss. In addition, the proper tax treatment of certain investments may not be entirely free from doubt. Potential Shareholders should consult their tax advisors regarding an investment in the Fund.
For U.S. federal income tax purposes, a Shareholders distributive share of the Funds income, gain, loss, deduction and other items will be determined by the Trust Agreement, unless an allocation under the Trust Agreement does not have substantial economic effect, in which case the allocations will be determined in accordance with the partners interests in the partnership. Subject to the discussion below under Monthly Allocation and Revaluation Conventions and Section 754 Election, the allocations pursuant to the Trust Agreement should be considered to have substantial economic effect or deemed to be made in accordance with the partners interests in the Fund.
If the allocations provided by the Trust Agreement were successfully challenged by the IRS, the amount of income or loss allocated to Shareholders for U.S. federal income tax purposes under the Trust Agreement could be increased or reduced or the character of the income or loss could be modified or both.
As described in more detail below, the U.S. federal income tax rules that apply to partnerships are complex and their application is not always clear. Additionally, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded partnerships. The Fund will apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to Shareholders in the Fund in a manner that reflects the economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Regulations. It is possible therefore that the IRS will successfully assert that assumptions made and/or conventions used do not satisfy the technical requirements of the Code or the Regulations and will require that tax items be adjusted or reallocated in a manner that could adversely impact Shareholders in the Fund.
In general, the Funds taxable income and losses will be determined monthly and will be apportioned among the Shareholders in the Fund in proportion to the number of Shares owned by each of them as of the close of the last trading day of the preceding month. By investing in Shares, a U.S. Shareholder agrees that, in the absence of an administrative determination or judicial ruling to the contrary, it will report income and loss under the monthly allocation and revaluation conventions described below.
Under the monthly allocation convention, whomever is treated for U.S. federal income tax purposes as holding Shares as of the close of the last trading day of the preceding month will be treated as continuing to hold the Shares until immediately before the close of the last trading day of the following month. As a result, a Shareholder who has disposed of Shares prior to the close of the last trading day of a month may be allocated income, gain, loss and deduction realized after the date of transfer.
The Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to the Funds monthly convention for allocating income and deductions. If this were to occur, the Funds allocation method might be deemed to violate that requirement.
In addition, for any month in which a creation or redemption of Shares in the Fund takes place, the Fund generally will credit or debit, respectively, the book capital accounts of the existing Shareholders in the Fund with any unrealized gain or loss in the Funds assets. This will result in the allocation of items of the Funds income, gain, loss, deduction and credit to existing Shareholders in the Fund to account for the difference between the tax basis and fair market value of property owned by the Fund at the time new Shares are issued or old Shares are redeemed (reverse section 704(c) allocations). The intended effect of these allocations is to allocate any built-in gain or loss in the Funds assets at the time of a creation or redemption of Shares to the Shareholders that economically have earned such gain or loss.
As with the other allocations described above, the Fund generally will use a monthly convention for purposes of the reverse section 704(c) allocations. More specifically, the Fund generally will credit or debit, respectively, the book capital accounts of the existing Shareholders with any unrealized gain or loss in the Funds assets based on a calculation utilizing the average price of the Funds Shares during the month in which the creation or redemption transaction takes place, rather than the fair market value of its assets at the time of such creation or redemption (the revaluation convention). As a result, it is possible that, for U.S. federal income tax purposes, (i) a purchaser of newly issued Shares will be allocated some or all of the unrealized gain in the Funds assets at the time it acquires the Shares or (ii) an existing Shareholder will not be allocated its entire share in the unrealized loss in the Funds assets at the time of such acquisition. Furthermore, the applicable Regulations generally require that the book capital accounts be adjusted based on the fair market value of partnership property on the date of adjustment and do not explicitly allow the adoption of a monthly revaluation convention.
The Code and applicable Regulations generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that adjustments to book capital accounts be made based on the fair market value of partnership property on the date of adjustment. The Code and Regulations do not contemplate monthly allocation or revaluation conventions. If the IRS does not accept the Funds monthly allocation or revaluation convention, the IRS may contend that taxable income or losses of the Fund must be reallocated among the Shareholders in the Fund. If such a contention were sustained, the Shareholders respective tax liabilities would be adjusted to the possible detriment of certain Shareholders in the Fund. The Managing Owner of the Fund is authorized to revise the Funds allocation and revaluation methods in order to comply with applicable law or to allocate items of partnership income and deductions in a manner that reflects more accurately the Shareholders interests in the Fund.
The Fund intends to make the election permitted by Section 754 of the Code. Such an election, once made, is irrevocable without the consent of the IRS. The making of the Section 754 election by the Fund will generally have the effect of requiring a purchaser of Shares in the Fund to adjust its proportionate share of the basis in the Funds assets, or the inside basis, pursuant to Section 743(b) of the Code to fair market value (as reflected in the purchase price for the purchasers Shares), as if it had acquired a direct interest in the Funds assets. The Section 743(b) adjustment is attributed solely to a purchaser of Shares and is not added to the bases of the Funds assets associated with all of the other Shareholders in the Fund. Depending on the relationship between a Shareholders purchase price for Shares and its unadjusted share of the Funds inside basis at the time of the purchase, the Section 754 election may be either
advantageous or disadvantageous to the Shareholder as compared to the amount of gain or loss a Shareholder would be allocated absent the Section 754 election.
The calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the calculations, particularly in the context of publicly traded partnerships. Therefore, assuming the Fund makes the election under Section 754 of the Code, it is expected that the Fund will apply certain conventions in determining and allocating the Section 743 basis adjustments to help reduce the complexity of those calculations and the resulting administrative costs. It is possible that the IRS will successfully assert that some or all of such conventions utilized by the Fund do not satisfy the technical requirements of the Code or the Regulations and, thus, will require different basis adjustments to be made.
In order to make the basis adjustments permitted by Section 754, the Fund will be required to obtain information regarding each Shareholders secondary market transactions in Shares as well as creations and redemptions of Shares. The Fund will seek the requested information from the record Shareholders, and, by purchasing Shares, each beneficial owner of Shares will be deemed to have consented to the provision of the information by the record owner of such beneficial owners Shares. Notwithstanding the foregoing, however, there can be no guarantee that the Fund will be able to obtain such information from record owners or other sources, or that the basis adjustments that the Fund makes based on the information it is able to obtain will be effective in eliminating disparity between a Shareholders outside basis in its Shares.
The Fund will experience a constructive termination for tax purposes if there is a sale or exchange of 50 percent or more of the total Shares in the Fund within a 12-month period. A constructive termination results in the closing of the Funds taxable year for all Shareholders in the Fund. In the case of a Shareholder reporting on a taxable year other than the taxable year used by the Fund (which is a fiscal year ending December 31), the early closing of the Funds taxable year may result in more than 12 months of its taxable income or loss being includable in the Shareholders taxable income for the year of termination. The Fund would be required to make new tax elections after a termination, including a new election under Section 754. A termination could also result in penalties if the Fund were unable to determine that the termination had occurred.
Distributions of cash by a partnership are generally not taxable to the distributee to the extent the amount of cash does not exceed the distributees tax basis in its partnership interest. Thus, any cash distributions made by the Fund will be taxable to a Shareholder in the Fund only to the extent the distributions exceed the Shareholders tax basis in the Shares it is treated as owning (see Tax Basis in Fund Shares below). Any cash distributions in excess of a Shareholders tax basis generally will be considered to be gain from the sale or exchange of the Shares (see Disposition of Shares below).
Shareholders, other than Authorized Participants (or holders for which an Authorized Participant is acting), generally will not recognize gain or loss as a result of an Authorized Participants creation or redemption of a Basket. If the Fund disposes of assets in connection with the redemption of a Basket, however, the disposition may give rise to gain or loss that will be allocated in part to Shareholders in the Fund. An Authorized Participants creation or redemption of a Basket also may affect a Shareholders share of the Funds tax basis in its assets, which could affect the amount of gain or loss allocated to the Shareholder on the sale or disposition of portfolio assets by the Fund.
If a U.S. Shareholder transfers Shares of the Fund and the transfer is a sale or other taxable disposition, the U.S. Shareholder will generally be required to recognize gain or loss measured by the difference between the amount realized on the sale and the U.S. Shareholders adjusted tax basis in the Shares sold. The amount realized will include an amount equal to the U.S. Shareholders share of the Funds liabilities, as well as any proceeds from the sale. The gain or loss recognized will generally be taxable as capital gain or loss. Capital gain of non-corporate U.S. Shareholders is eligible to be taxed at reduced rates where the Shares sold are considered held for more than one year. Capital gain of corporate U.S. Shareholders is taxed at the same rate as ordinary income. Any capital loss recognized by a U.S. Shareholder on a sale of Shares will generally be deductible only against capital gains, except that a non-corporate U.S. Shareholder may also offset up to $3,000 per year of ordinary income with capital losses.
A U.S. Shareholders initial tax basis in its Shares will equal the sum of (a) the amount of cash paid by the U.S. Shareholder for its Shares and (b) the U.S. Shareholders share of the Funds liabilities. A U.S. Shareholders tax basis in its Shares will be increased by (a) the U.S. Shareholders share of the Funds taxable income, including capital gain, (b) the U.S. Shareholders share of the Funds income, if any, that is exempt from tax and (c) any increase in the U.S. Shareholders share of the Funds liabilities. A U.S. Shareholders tax basis in its Shares will be decreased (but not below zero) by (a) the amount of any cash distributed (or deemed distributed) to the U.S. Shareholder, (b) the U.S. Shareholders share of the Funds losses and deductions, (c) the U.S. Shareholders share of the Funds expenditures that are neither deductible nor properly chargeable to its capital account and (d) any decrease in the U.S. Shareholders share of the Funds liabilities.
The deductibility of a non-corporate U.S. Shareholders investment interest expense is generally limited to the amount of the Shareholders net investment income. Investment interest expense will generally include interest expense incurred by the Fund, if any, and investment interest expense incurred by the U.S. Shareholder on any margin account borrowing or other loan incurred to purchase or carry Shares. Net investment income includes gross income from property held for investment and amounts treated as portfolio income, such as dividends and interest, less deductible expenses, other than interest, directly connected with the production of investment income. For this purpose, any long-term capital gain or qualifying dividend income that is taxable at long-term capital gains rates is excluded from net investment income unless the U.S. Shareholder elects to pay tax on such capital gain or dividend income at ordinary income rates.
In general, expenses incurred that are considered miscellaneous itemized deductions may be deducted by a U.S. Shareholder that is an individual, estate or trust only to the extent that they exceed 2% of the adjusted gross income of the U.S. Shareholder. The Code imposes additional limitations on the amount of certain itemized deductions allowable to individuals.
In addition, certain expenses are also not deductible in determining the alternative minimum tax liability of a U.S. Shareholder. The Fund will report its expenses on a pro rata basis to the Shareholders, and each U.S. Shareholder will determine separately to what extent they are deductible on the U.S. Shareholders tax return. A U.S. Shareholders inability to deduct all or a portion of the expenses could result in an amount of taxable income to such U.S. Shareholder with respect to the Fund that exceeds the amount of
cash actually distributed to the U.S. Shareholder for the year. It is anticipated that Management Fees the Fund will pay will constitute miscellaneous itemized deductions.
Under Section 709(b) of the Code, amounts paid or incurred to organize a partnership may, at the election of the partnership, be treated as deferred expenses, which are allowed as a deduction ratably over a period of 180 months. The Fund intends to make a 709(b) election. A non-corporate U.S. Shareholders allocable share of the organizational expenses will constitute miscellaneous itemized deductions. Expenditures in connection with the issuance and marketing of Shares (so called syndication fees) are not eligible for the 180-month amortization provision and are not deductible.
Individuals are subject to certain passive activity loss rules under Section 469 of the Code. Under these rules, losses from a passive activity generally may not be used to offset income derived from any source other than passive activities. Losses that cannot be currently used under this rule may generally be carried forward. Upon an individuals disposition of an interest in the passive activity, the individuals unused passive losses may generally be used to offset other (i.e., non-passive) income. Under current Regulations, income or loss from the Funds investments generally will not constitute income or losses from a passive activity. Therefore, income or loss realized by Shareholders in the Fund will not be available to offset a U.S. Shareholders passive losses or passive income from other sources.
In general, the Funds taxable income and losses will be determined monthly and will be apportioned among the Funds Shareholders in proportion to the number of Shares owned by each of them as of the close of the last trading day of the preceding month. With respect to any Shares that were not treated as outstanding as of the close of the last trading day of the preceding month, the first person that is treated as holding such Shares (other than an underwriter or other person holding in a similar capacity) for U.S. federal income tax purposes will be treated as holding such Shares for this purpose as of the close of the last trading day of the preceding month. As a result, a Shareholder transferring its Shares may be allocated income, gain, loss and deduction realized after the date of transfer.
Section 706 of the Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to the Funds convention for allocating income and deductions. In that event, the Funds allocation method might be considered a monthly convention that does not literally comply with that requirement.
If the IRS treats transfers of Shares as occurring throughout each month and a monthly convention is not allowed by the Regulations (or only applies to transfers of less than all of a Shareholders Shares) or if the IRS otherwise does not accept the Funds convention, the IRS may contend that taxable income or losses of the Fund must be reallocated among the Shareholders in the Fund. If such a contention were sustained, the Shareholders respective tax liabilities would be adjusted to the possible detriment of certain Shareholders. The Funds Managing Owner is authorized to revise the Funds methods of allocation between transferors and transferees (as well as among Shareholders whose interests otherwise vary during a taxable period).
The Fund will file a partnership tax return. Accordingly, tax information will be provided to Shareholders on Schedule K-1 for each calendar year as soon as practicable after the end of such taxable year but generally no later than March 15. Each Schedule K-1 provided to a Shareholder will set forth the Shareholders share of the Funds tax items (i.e., interest income from U.S. Treasury bills, short-term and long-term capital gain or loss with respect to the futures contracts, and investment expenses for the year) in a manner sufficient for a U.S. Shareholder to complete its tax return with respect to its investment in the Shares.
Each Shareholder, by its acquisition of Shares of the Fund, will be deemed to agree to allow brokers and nominees to provide to the Fund its name and address and the other information and forms as may be reasonably requested by the Fund for purposes of complying with its tax reporting and withholding obligations (and to waive any confidentiality rights with respect to the information and forms for this purpose) and to provide information or forms upon request.
Given the lack of authority addressing structures similar to that of the Fund, it is not certain that the IRS will agree with the manner in which tax reporting by the Fund will be undertaken. Therefore, Shareholders should be aware that future IRS interpretations or revisions to Regulations could alter the manner in which tax reporting by the Fund and any nominee will be undertaken.
Any challenge by the IRS to the tax treatment by a partnership of any item must be conducted at the partnership, rather than at the partner, level. A partnership ordinarily designates a tax matters partner (as defined under Section 6231 of the Code) as the person to receive notices and to act on its behalf in the conduct of such a challenge or audit by the IRS.
Pursuant to the governing documents, the Managing Owner will be appointed the tax matters partner of the Fund for all purposes of the Code. The tax matters partner, which is required by the Funds Trust Agreement to notify all U.S. Shareholders of any U.S. federal income tax audit of the Fund, will have the authority under the Trust Agreement to conduct any IRS audits of the Funds tax returns or other tax related administrative or judicial proceedings and to settle or further contest any issues in such proceedings. The decision in any proceeding initiated by the tax matters partner will be binding on all U.S. Shareholders in the Fund. As the tax matters partner, the Managing Owner will have the right on behalf of all Shareholders in the Fund to extend the statute of limitations relating to the Shareholders U.S. federal income tax liabilities with respect to Fund items.
A U.S. federal income tax audit of the Funds partnership tax return may result in an audit of the returns of the U.S. Shareholders, which, in turn, could result in adjustments of items of a Shareholder that are unrelated to the Fund as well as to the Funds related items. In particular, there can be no assurance that the IRS, upon an audit of a partnership tax return of the Fund or of an income tax return of a U.S. Shareholder, might not take a position that differs from the treatment thereof by the Fund. A U.S. Shareholder would be liable for interest on any deficiencies that resulted from any adjustments.
Prospective U.S. Shareholders should also recognize that they might be forced to incur substantial legal and accounting costs in resisting any challenge by the IRS to items in their individual returns, even if the challenge by the IRS should prove unsuccessful.
The Fund will conduct its activities in a manner that a non-U.S. Shareholder who is not otherwise carrying on a trade or business in the United States will not be considered to be engaged in a trade or business in the United States as a result of an investment in the Shares of the Fund. A non-U.S. Shareholders share of the interest income realized by the Fund on its holdings of U.S. Treasury bills will be exempt from U.S. withholding tax provided the non-U.S. Shareholder certifies on IRS Form W-8BEN (or other applicable form) that the Shareholder is not a U.S. person, provides name and address information and otherwise satisfies applicable documentation requirements.
Non-U.S. Shareholders will not be subject to U.S. federal income tax on gains realized on the sale of Shares of the Fund or on the Shareholders share of the Funds gains. However, in the case of an individual non-U.S. Shareholder, the Shareholder will be subject to U.S. federal income tax on gains on the sale of Shares or the Shareholders distributive share of gains if the Shareholder is present in the United States for 183 days or more during a taxable year and certain other conditions are met.
Non-U.S. Shareholders that are individuals will be subject to U.S. federal estate tax on the value of U.S. situs property owned at the time of their death (unless a statutory exemption or tax treaty exemption applies). It is unclear whether partnership interests (such as the Shares of the Fund) will be considered U.S. situs property. Accordingly, non-U.S. Shareholders may be subject to U.S. federal estate tax on all or part of the value of the Shares owned at the time of their death.
Non-U.S. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Shares of the Fund.
An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to taxation with respect to its unrelated business taxable income (UBTI). Except as noted below with respect to certain categories of exempt income, UBTI generally includes income or gain derived (either directly or through a partnership) from a trade or business, the conduct of which is substantially unrelated to the exercise or performance of the organizations exempt purpose or function.
UBTI generally does not include passive investment income, such as dividends, interest and capital gains, whether realized by the organization directly or indirectly through a partnership (such as the Fund) in which it is a partner. This type of income is exempt, subject to the discussion of unrelated debt-financed income below, even if it is realized from securities trading activity that constitutes a trade or business.
UBTI includes not only trade or business income or gain as described above, but also unrelated debt-financed income. This latter type of income generally consists of (1) income derived by an exempt organization (directly or through a partnership) from income producing property with respect to which there is acquisition indebtedness at any time during the taxable year and (2) gains derived by an exempt organization (directly or through a partnership) from the disposition of property with respect to which there is acquisition indebtedness at any time during the twelve-month period ending with the date of the disposition.
All of the income realized by the Fund is expected to be short-term or long-term capital gain income, interest income or other passive investment income of the type specifically exempt from UBTI as discussed above. The Fund will not borrow funds for the purpose of acquiring or holding any investments or otherwise incur acquisition indebtedness with respect to such investments. Therefore, a tax-exempt entity purchasing Shares of the Fund will not incur any UBTI by reason of its investment in the Shares or
upon sale of such Shares provided that such tax-exempt entity does not borrow funds for the purpose of investing in the Shares.
The treatment of a regulated investment companys (RIC) investment in the Fund will depend, in part, on whether the Fund is classified as a qualified publicly trade partnership, or qualified PTP, for purposes of the RIC rules. A RIC may invest up to 25% of its assets in qualified PTPs and net income derived from such investments is qualifying income under the income source test applicable to entities seeking to qualify for the special tax treatment available to RICs under the Code. In addition, interests in a qualified PTP are treated as issued by such PTP and a RIC is not required to look through to the underlying partnership assets when testing compliance with the asset diversification tests applicable to RICs under the Code.
The Fund anticipates that it will qualify as a qualified PTP for any taxable year in which the Fund realizes sufficient gross income from its commodities futures transactions. However, qualification of the Fund as a qualified PTP depends on performance of the Fund for the particular tax year and there is no assurance that it will qualify in a given year or that future results of the Fund will conform to prior experience. Additionally, there is, to date, no regulatory guidance on the application of these rules, and it is possible that future guidance may adversely affect qualification of the Fund as a qualified PTP.
Effective January 1, 2014, the Fund will be required to withhold U.S. tax (at a 30% rate) with respect to certain U.S. source income (including dividends and interest) and (effective January 1, 2015) gross proceeds from the sale or other disposal of property that can produce U.S. source income made (or deemed to be made) to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Although the application of these rules to a sale or other disposal of an interest in a partnership is unclear, it is possible that the gross proceeds of the sale or other disposal of your Shares will be subject to the rules described above if such proceeds are treated as an indirect disposal of your interest in assets that can produce U.S. source interest or dividends. Shareholders may be requested to provide additional information to the Fund to enable the Fund to determine whether withholding is required. Non-U.S. Shareholders are encouraged to consult with their own tax advisors regarding the possible implications of this legislation on an investment in the Fund.
Other recently enacted legislation will impose a 3.8% tax on the net investment income (as defined in the Code) of certain individuals, trusts and estates, for taxable years beginning after December 31, 2013. U.S. Shareholders are encouraged to consult with their own advisors regarding the possible implications of this legislation on an investment in the Fund.
Prospective Shareholders should consider, in addition to the U.S. federal income tax consequences described, potential state and local tax considerations in investing in the Shares.
State and local laws often differ from U.S. federal income tax laws with respect to the treatment of specific items of income, gain, loss, deduction and credit. A Shareholders distributive share of the taxable income or loss of the Fund generally will be required to be included in determining its reportable income for state and local tax purposes in the jurisdiction in which the Shareholder is a resident. The Fund may have income in one or more jurisdictions that will subject a Shareholder to tax (and require a
Shareholder to file an income tax return with the jurisdiction in respect to the Shareholders share of the income derived from that business). A prospective Shareholder should consult its tax adviser with respect to the availability of a credit for such tax in the jurisdiction in which the Shareholder is resident.
Under current law and assuming full compliance with the terms of its Trust Agreement (and other relevant documents), the Fund should not be subject to the New York City unincorporated business tax because the tax is not imposed on an entity that is primarily engaged in the purchase and sale of financial instruments and securities for its own account. By reason of a similar own account exemption, it is also expected that a nonresident individual U.S. Shareholder should not be subject to New York State personal income tax with respect to his or her share of income or gain recognized by the Fund. A nonresident individual U.S. Shareholder will not be subject to New York City earnings tax on nonresidents with respect to his or her investment in the Fund. New York State and New York City residents will be subject to New York State and New York City personal income tax on their income recognized in respect of Shares. Because the Fund may conduct its business, in part, in New York City, corporate U.S. Shareholders generally will be subject to the New York franchise tax and the New York City general corporation tax by reason of their investment in the Fund, unless certain exemptions apply. However, pursuant to applicable regulations, non-New York corporate U.S. Shareholders not otherwise subject to New York State franchise tax or New York City general corporation tax should not be subject to these taxes solely by reason of investing in Shares based on qualification of the Fund as a portfolio investment partnership under applicable rules. No ruling from the New York State Department of Taxation and Finance or the New York City Department of Finance has been, or will be, requested regarding such matters.
The Fund is required in certain circumstances to backup withhold on certain payments paid to non-corporate Shareholders that do not furnish the Fund with their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to a Shareholder may be refunded or credited against the Shareholders U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner.
Shareholders should be aware that certain aspects of the U.S. federal, state and local income tax treatment regarding the purchase, ownership and disposition of Shares are not clear under existing law. Thus, Shareholders are urged to consult their own tax advisers to determine the tax consequences of ownership of the Shares in their particular circumstances, including the application of U.S. federal, state, local and foreign tax laws.
PROSPECTIVE SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS BEFORE DECIDING WHETHER TO INVEST IN THE SHARES OF THE FUND.
The Fund will make distributions at the discretion of the Managing Owner. To the extent that the Funds actual and projected interest income from its Cash Instruments exceeds the actual and projected fees and expenses of the Fund, the Managing Owner expects periodically to make distributions of the amount of such excess. The Fund currently does not expect to make distributions with respect to capital gains. Depending on the Funds performance for the taxable year and your own tax situation for such year, your
income tax liability for the taxable year for your allocable share of the Funds net ordinary income or loss and capital gain or loss may exceed any distributions you receive with respect to such year.
Although there can be no assurance that an investment in the Fund, or any other managed futures product, will achieve the investment objectives of an employee benefit plan in making such investment, futures investments have certain features which may be of interest to such a plan. For example, the futures markets are one of the few investment fields in which employee benefit plans can participate in leveraged strategies without being required to pay tax on unrelated business taxable income. See Material U.S. Federal Income Tax ConsiderationsTax-Exempt Organizations on page . In addition, because they are not taxpaying entities, employee benefit plans are not subject to paying annual tax on profits (if any) of the Fund.
The following section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Code, which a fiduciary of an employee benefit plan as defined in, and subject to the fiduciary responsibility provisions of, ERISA or of a plan as defined in and subject to Section 4975 of the Code who has investment discretion should consider before deciding to invest the plans assets in the Fund (such employee benefit plans and plans being referred to herein as Plans, and such fiduciaries with investment discretion being referred to herein as Plan Fiduciaries). The following summary is not intended to be complete, but only to address certain questions under ERISA and the Code which are likely to be raised by the Plan Fiduciarys own counsel.
In general, the terms employee benefit plan as defined in ERISA and plan as defined in Section 4975 of the Code together refer to any plan or account of various types which provide retirement benefits or welfare benefits to an individual or to an employers employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate pension and profit sharing plans, simplified employee pension plans, Keogh plans for self-employed individuals (including partners), individual retirement accounts described in Section 408 of the Code and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Fund, including the role that such an investment in the Fund would play in the Plans overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be satisfied that such investment in the Fund is a prudent investment for the Plan, that the investments of the Plan, including the investment in the Fund, are diversified so as to minimize the risk of large losses and that an investment in the Fund complies with the documents of the Plan and related trust.
EACH PLAN FIDUCIARY CONSIDERING ACQUIRING SHARES MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE FUND IS NOT INTENDED AS A COMPLETE INVESTMENT PROGRAM.
ERISA and a regulation issued thereunder (the Plan Asset Rules) contain rules for determining when an investment by a Plan in an entity will result in the underlying assets of such entity being assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., plan assets). Those rules provide that assets of an entity will not be plan assets of a Plan which purchases an interest therein if certain exceptions apply, including (i) an exception applicable if the equity interest purchased is a publicly-offered security
(the Publicly-Offered Security Exception) and (ii) an exception applicable if the investment by all benefit plan investors is not significant or certain other exceptions apply (the Insignificant Participation Exception).
The Publicly-Offered Security Exception applies if the equity interest is a security that is (1) freely transferable, (2) part of a class of securities that is widely held 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 Securities 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 Rules state that the determination of whether a security is freely transferable is to be made based on all relevant facts and circumstances. Under the Plan Asset Rules, a class of securities is widely held only if it is of a class of securities owned by 100 or more investors independent of the issuer and of each other.
The Shares of the Fund should be considered to be publicly-offered securities. First, the Shares will be sold as part of a public offering pursuant to an effective Registration Statement under the Securities Act, and the Shares will be timely registered under the Securities Exchange Act. Second, it appears that the Shares will be freely transferable because the Shares of the Fund will be freely tradable on NYSE Arca like any other exchange-listed security. Finally, it is anticipated that the Shares will be owned by at least 100 investors independent of the Fund. Therefore, the underlying assets of the Fund should not be considered to constitute assets of any Plan which purchases Shares.
In general, Shares may not be purchased with the assets of a Plan if the Managing Owner, the Commodity Broker, the Administrator, the Marketing Agent, [the Trustee], Morningstar, or any of their respective affiliates or any of their respective employees either: (a) has investment discretion with respect to the investment of such plan assets; (b) has authority or responsibility to give or regularly gives investment advice with respect to such plan assets, for a fee, and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such advice will be based on the particular investment needs of the Plan; or (c) is an employer maintaining or contributing to such Plan. A party that is described in clause (a) or (b) of the preceding sentence is a fiduciary under ERISA and the Code with respect to the Plan, and any such purchase might result in a prohibited transaction under ERISA and the Code.
Except as otherwise set forth, the foregoing statements regarding the consequences under ERISA and the Code of an investment in the Fund are based on the provisions of the Code and ERISA as currently in effect, and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that will not make the foregoing statements incorrect or incomplete.
THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN SHARES IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND CURRENT TAX LAW.
Preparation of the financial statements and related disclosures in accordance with U.S. generally accepted accounting principles requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Funds application of these policies involves judgments and the use of estimates. Actual results may differ from the estimates used and such differences could be material. The Fund Portfolio will hold a significant portion of its assets in futures contracts and Cash Instruments, each of which, as applicable, will be held at fair value. The Fund may also invest in Cleared Swaps and/or Other Commodity Instruments.
The Fund will calculate its NAV as described under the section Net Asset Value for more details.
If the Fund invests in one or more Cleared Swaps, the value of the Cleared Swaps will be based on the value of the contract underlying the applicable Index commodity in connection with such Cleared Swap, except that a fair value may be determined if the Managing Owner believes that the Fund is subject to significant credit risk relating to the counterparty to such Cleared Swap.
If the Fund invests in Other Commodity Instruments traded OTC, they would be recorded on a trade date basis and at fair value in the financial statements, with changes in fair value reported in the Statements of Operations.
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). In determining fair value, the Fund maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the financial instrument based on market data obtained from independent sources. Unobservable inputs reflect the Managing Owners assumptions that market participants would use in pricing the financial instrument developed based on the best information available in the circumstances. Greater use of management judgment is required in determining fair value when inputs are less observable or unobservable in the marketplace.
At the inception of trading, the Managing Owner expects that the majority of the Funds investments will be exchange-traded futures contracts, which will be valued daily at settlement prices published by the exchanges. U.S. Treasury bills are measured based on quoted market prices. Thus, the Managing Owner expects that a substantial portion of the Funds assets will be valued on a daily basis at fair value using objective measures.
As of the date of this Prospectus, the Fund has not begun trading activities. Once the Fund begins trading activities, it is anticipated that all of its total net assets will be allocated to Index Commodity Contracts and Cash Instruments, unless the Fund invests in one or more Cleared Swaps or Other Commodity Instruments (if any).
If the Fund invests in Cleared Swaps or Other Commodity Instruments, a portion of its proceeds of the offering may be used to collateralize the Cleared Swaps or Other Commodity Instruments, as applicable, in accordance with normal market practices.
A significant portion of the NAV is likely to be held in Cash Instruments. Although the following percentages may vary substantially over time, as of the date of this Prospectus, the Fund estimates that up to approximately % of its NAV will be placed in segregated accounts (pursuant to the rules of the CFTC) in the name of the Fund with the Commodity Broker (or another eligible financial institution, as applicable) in the form of Cash Instruments to margin positions of all futures contracts combined. The Fund maintains approximately % of its NAV in Cash Instruments over and above that which is needed to post as collateral for trading. The percentage that the Funds Cash Instruments will bear to the total net assets will vary from period to period as the market values of commodity interests change. The balance of the net assets will be held in the Funds segregated and custodial account with the Custodian or Commodity Broker. Interest earned on the Funds interest-bearing funds will be paid to the Fund.
Initial or original margin is the minimum amount of funds that must be deposited by a futures trader with his or her commodity broker in order to initiate futures trading or to maintain an open position in futures contracts. Maintenance margin is the amount (generally less than initial margin) to which a traders account may decline before he must deliver additional margin. Margin requirements are computed each day by a commodity broker. When the market value of a particular open futures interests contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. The Fund will meet a margin call by either liquidating an appropriate amount of Cash Instruments, as applicable, or satisfy the margin call with cash. If the Fund does not have a sufficient amount of Cash Instruments to satisfy the margin call, the Fund will be required to liquidate its holdings of Index Commodity Contracts and Cash Instruments, Cleared Swaps or Other Commodity Instruments (if any). If the margin call is not met within a reasonable time, the broker may close out all or a portion of the Funds positions.
The amount of margin that is required to establish and maintain a Cleared Swap is determined by the exchange which clears the applicable Cleared Swap. Additionally, the requirements and the logistics related to margin with respect to Cleared Swaps is substantially similar to futures contracts.
The Funds commodity futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as daily limits. During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity futures contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Fund from promptly liquidating its commodity futures positions.
The Funds Cleared Swaps and Other Commodity Instruments, if any, may also be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, certain Other Commodity Instruments are not traded on an exchange, do not have uniform terms and conditions, and in general are not transferable without the consent of the counterparty. Entry into certain Other Commodity Instruments (if any) may further impact liquidity because these contractual agreements are executed off-exchange between private parties and, therefore, the time required to offset or unwind these positions may be greater than that for exchange-traded instruments. This potential delay could be exacerbated to the extent a counterparty is not a U.S. person.
Because the Fund will trade futures contracts, its capital will be at risk due to changes in the market price of these contracts. The Funds capital would also be at risk in connection with its Cleared Swaps due to changes in the value of these Cleared Swaps. Additionally, if the Fund invested in Other Commodity Instruments traded OTC, its capital would be at risk due to changes in the value of these Other Commodity Instruments (market risk) or the inability of counterparties to perform under the terms of the Other Commodity Instruments (credit risk).
Trading in futures contracts, such as Index Commodity Contracts and Other Commodity Contracts will involve the Fund entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The market risk associated with the Funds commitments to purchase commodities will be limited to the gross or face amount of the futures contracts held. The Funds capital would also be at risk in connection with its Cleared Swaps or Other Commodity Interests due to changes in the value of these Cleared Swaps or Other Commodity Interests, respectively.
The Funds exposure to market risk will be influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets associated with the contracts and the relationships among the contracts held. The inherent uncertainty of the Funds trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of Shareholders capital.
When the Fund enters into OTC Other Commodity Instruments (if any), the Fund will be exposed to credit risk that the counterparty to the contract will not meet its obligations. Futures contracts traded on U.S. and on most foreign futures exchanges will settle through the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce the risk that a given futures contract will not be performed. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges), it may be backed by a consortium of banks or other financial institutions.
When the Fund enters into Cleared Swaps, the Fund will be exposed to credit risk that the clearing house for the Cleared Swaps will not meet its obligations. However, the Fund will not be subject to individual dealer counterparty risk that exists in OTC swaps that are not cleared through a clearing house.
OTC Other Commodity Instruments (if any) will be subject to the risks as described under the sections Certain Operations of the Fund, Including the Creation of Baskets, May Be Restricted By Regulatory and Exchange Position Limits and Other Position Limitation Rules and Could Result in Tracking Error Between Changes in the NAV Per Share and Changes in the Level of the Index, Or Could Result in the Market Price of the Shares Trading at a Premium or Discount to the NAV Per Share.; Failure of the
Clearing House to Meet Its Obligations with respect to Index Commodity Contracts or Cleared Swaps May Adversely Impact the NAV of the Fund, and the Value of Your Shares.; Other Commodity Instruments that Trade OTC (If Any), Such As Forward Agreements and Swaps, Are Subject to the Risk of Counterparty Non-Performance Resulting in the Fund Not Realizing a Trading Gain.; and Future Regulation of OTC Derivatives Markets May Have a Detrimental Effect On the Value of Your Shares.
Swap agreements do not generally involve the delivery of the underlying assets either at the outset of a transaction or upon settlement. Accordingly, if the counterparty to a swap agreement defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. Swap counterparty risk is generally limited to the amount of any unrealized gains, although in the event of a counterparty bankruptcy, there could be delays and costs associated with recovery of collateral posted in segregated tri-party accounts at the Funds custodian bank.
Forward agreements do not involve the delivery of the underlying assets at the onset of a transaction, but may be settled physically in the underlying asset if such contracts are held to expiration. Thus, prior to settlement, if the counterparty to a forward contract defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. However, if physically settled forwards are held until expiration, at the time of settlement, the Fund may be at risk for the full notional value of the forward contracts depending on the type of settlement procedures used.
There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to the Fund.
The Managing Owner will attempt to minimize these market and credit risks by requiring the Fund to abide by various trading limitations and policies, which will include limiting margin accounts and trading only in liquid markets. The Managing Owner will implement procedures which will include, but will not be limited to:
The Fund will enter into Other Commodity Instruments traded OTC (if any) with counterparties selected by the Managing Owner. The Managing Owner will select such Other Commodity Instrument (if any) counterparties giving due consideration to such factors as it deems appropriate, including, without limitation, creditworthiness, familiarity with the Index, and price. Under no circumstances will the Fund enter into an Other Commodity Instrument traded OTC (if any) with any counterparty whose credit rating is lower than investment-grade at the time a contract is entered into. The Fund expects that investments in OTC Other Commodity Instruments (if any) will be made on terms that are standard in the market for such OTC Other Commodity Instruments. In connection with such OTC Other Commodity Instruments, the Fund may post or receive collateral in the form of Cash Instruments, which will be marked to market daily.
The Commodity Broker, when acting as the Funds futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, will be required by CFTC regulations to separately account for and segregate as belonging to the Fund all assets of the Fund held at the Commodity Broker relating to domestic futures trading and the Commodity Broker will not be allowed to commingle such
assets with the Commodity Brokers assets. In addition, CFTC regulations will also require the Commodity Broker to hold in a secure account assets of the Fund related to foreign futures trading.
Under the JOBS Act, the Fund is exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that the Funds independent registered public accounting firm provide an attestation report on the effectiveness of the Funds internal controls over financial reporting. This may increase the risk that material weaknesses or other deficiencies in the Funds internal controls over financial reporting go undetected.
Under the JOBS Act, emerging growth companies are permitted to include only two years of audited financial statements in the registration statements for their initial public offerings, rather than the three years otherwise required, and to cover only two years of financial information in the Managements Discussion and Analysis of Financial Condition and Results of Operations disclosures. In addition, for the presentation of selected financial data, which ordinarily covers five years, an emerging growth company may omit selected financial data for any period prior to the earliest audited period presented in its initial registration statement.
Because the Fund has not commenced operations, this relief under the JOBS Act has not impacted the disclosures the Fund makes in this registration statement.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Fund intends to make an irrevocable election not to take advantage of this exemption from new or revised accounting standards. The Fund will therefore be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
As an emerging growth company, the JOBS Act permits the Fund to engage in oral and written communications with potential investors that are qualified institutional buyers or institutional accredited investors to determine whether those investors might have an interest in this offering prior to the effectiveness of this registration statement.
As of the date of this Prospectus, the Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund. While the Funds exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Funds financial position.
The Funds contractual obligations are with the Managing Owner and the Funds service providers, including the Administrator, the Transfer Agent, the Custodian, the Trustee and the Commodity Broker. Management Fee payments made to the Managing Owner are calculated as a fixed percentage of the Funds NAV, as are fees paid to certain other service providers. However, the fees and expenses of certain service providers are not calculated based on a fixed percentage of the Funds NAV. As such, the Managing Owner cannot anticipate with certainty the payments that will be required to be paid under these arrangements. These agreements generally are effective for one year terms, renewable automatically for additional one year terms unless terminated. However, these contracts may be terminated earlier by either party for various reasons.
Dechert LLP has advised the Managing Owner in connection with the Shares being offered hereby. Dechert LLP also advised the Managing Owner with respect to its responsibilities as Managing Owner of the Fund and with respect to matters relating to the Fund. Dechert LLP has prepared the sections U.S. Federal Income Tax Considerations with respect to U.S. federal income tax matters and Purchases By Employee Benefit Plans with respect to ERISA. Richards, Layton & Finger, P.A., special Delaware counsel to the Trust, has advised the Trust in connection with the legality of the Shares being offered hereby. Dechert LLP has not represented, nor will it represent the Fund or the Shareholders in matters relating to the Fund and no other counsel has been engaged to act on their behalf. Certain opinions of counsel have been filed with the SEC as exhibits to the Registration Statement of which this Prospectus is a part.
This Prospectus constitutes part of the Registration Statement filed by the Fund with the SEC in Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits thereto (for example, the forms of the Participant Agreement). The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries; the exhibits themselves may be inspected without charge at the public reference facilities maintained by the SEC in Washington, D.C., and copies of all or part thereof may be obtained from the SEC upon payment of the prescribed fees. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address is http://www.sec.gov.
The Managing Owner will furnish you with an annual report of the Fund in which you invested within 90 calendar days after the end of the Funds fiscal year as required by the rules and regulations of the SEC as well as with those reports required by the CFTC and NFA, including, but not limited to, an annual audited financial statement certified by independent registered public accountants and any other reports required by any other governmental authority that has jurisdiction over the activities of the Fund. You also will be provided with appropriate information to permit you to file your U.S. federal and state income tax returns (on a timely basis) with respect to your Shares. Monthly account statements conforming to CFTC and NFA requirements will be posted on the Managing Owners website at http://www.vaneck.com. The Fund will file periodic, quarterly and annual reports with the SEC. Shareholders can read and copy these reports at the SEC public reference facilities in Washington D.C. The filings will also be posted at http://www.sec.gov. Additional reports may be posted on the Managing Owners website in the discretion of the Managing Owner or as required by regulatory authorities.
At Van Eck Global, we respect our clients right to privacy. In order for us to provide efficient service for our customers, we collect and maintain certain personal information about you (including transaction history, name, social security number, address, etc.). This information is collected via investment applications, written and oral communications between you or your representatives and us, trades through financial institutions, website requests, or other forms you may have provided in order to receive information from us or process a transaction.
Please be assured that we do not share this information with any third parties, with the exception of our service providers, certain government agencies, and other non-affiliated parties as permitted by law.
Service providers may include but are not limited to transfer agents, custodians and mailing services that are authorized to use this information to carry out services for which we hire them; they are not permitted to share this information for other purposes.
Information may be shared with our affiliates (other Van Eck Companies) as permitted by law. However, we limit access to your information to authorized employees only. Be assured that we maintain physical, electronic and procedural safeguards to protect your non-public personal information.
By law, we are required to notify you of any plans to disclose your non-public personal information to a non-affiliated third party. We have no current plans to make any such disclosure; however, at any time this might occur in the future, you would be given the opportunity to opt out.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
The Commodity Exchange Act provides for the federal regulation of all commodity interest transactions, markets and intermediaries. Regulatory oversight encompasses all commodity futures trading activities and requires all commodity futures and commodity options to be traded on organized exchanges. The CFTC was created in 1974 as a result of the Commodity Exchange Act, pursuant to which NFA was also created in 1982. NFA is an independent self-regulatory organization and oversees participants in the commodities and futures industry in the United States. NFAs oversight is conducted with the goal of, among other things, protecting investors from fraudulent commodities and futures activities. Pursuant to authority in the Commodity Exchange Act, NFA has been formed and registered with the CFTC as a registered futures association. At the present time, NFA is the only non-exchange self-regulatory organization for commodities professionals. NFA members are subject to NFA standards relating to fair trade practices, financial condition, and consumer protection. As the self-regulatory body of the commodities industry, NFA promulgates rules governing the conduct of commodity professionals and disciplines those professionals who do not comply with such standards. The CFTC has delegated to NFA responsibility for the registration of commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers, retail foreign exchange dealers, and their respective associated persons and floor brokers. The Commodity Broker and the Managing Owner are members of NFA, but neither the Trust nor the Fund is required to become a member of NFA.
In December 2000, the Commodity Exchange Act was amended by the Commodity Futures Modernization Act of 2000 (CFMA) which substantially revised the regulatory framework governing certain commodity interest transactions and the markets on which they trade. The Commodity Exchange Act, 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 (i) the type of instrument being traded (e.g., contracts for future delivery or options contracts), (ii) the type of commodity underlying the instrument (distinguishing between instruments based upon real assets that are the focus of the Fund and include energy, agriculture, metalsincluding precious metalsand livestock commodities, and those instruments based upon financial assets such as stocks, bonds, currencies and interest rates), (iii) the nature of the parties to the transaction (retail, eligible contract participant or eligible commercial entity), (iv) whether the transaction is entered into on a principal-to-principal or intermediated basis, (v) the type of market on which the transaction occurs and (vi) whether the transaction is subject to clearing through a clearing organization. Information regarding commodity interest transactions, markets and intermediaries, and their associated regulatory environment, is provided below.
Futures contracts are standardized contracts trading on U.S. or foreign exchanges that call for the future delivery of specified quantities of certain types of commodities at a specified time and place. The contractual obligations, depending upon whether one is a buyer or a seller, may be satisfied either by taking or making, as the case may be, physical delivery of an approved grade of commodity or by making an offsetting sale or purchase of an equivalent but opposite futures contract on the same, or mutually off-setting, exchange prior to the designated date of delivery. As an example of an offsetting transaction where the physical commodity is not delivered, the contractual obligation arising from the sale of one contract of January 2012 wheat on a commodity exchange may be fulfilled at any time before delivery of the commodity is required by the purchase of one contract of January 2012 wheat on the same exchange. The difference between the price at which the futures contract is sold or purchased and the price paid for the offsetting purchase or sale, after allowance for brokerage commissions, constitutes the profit or loss to
the trader. Certain futures contracts, such as those for stock or other financial or economic indices approved by the CFTC or Eurodollar contracts, settle in cash (irrespective of whether any attempt is made to offset such contracts) rather than delivery.
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 the traders 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 commodity futures contracts are standardized contracts traded on an exchange. An option on a futures contract gives the buyer of the option the right, but not the obligation, to take a position at a specified price (the exercise price) in the underlying futures contract on or before a specified date. The buyer of a call option acquires the right, but not the obligation, to purchase or take a long position in the underlying futures contract, and the buyer of a put option acquires the right, but not the obligation, to sell or take a short position in the underlying futures contract.
The seller of an option is obligated to take a position in the underlying contract at a specified price on or before a specified date 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 contract at the exercise 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 contract at the exercise price.
A call option is said to be in-the-money if the exercise price is below current market levels, out-of-the-money if the exercise price is above current market levels and at-the-money if the exercise price is at current market levels. Conversely, a put option is said to be in-the-money if the exercise price is above the current market levels and out-of-the-money if the exercise price is below current market levels.
Options have limited life spans, usually tied to the delivery or settlement date of the underlying contract. The purchase price of an option is referred to as its premium, which consists of its intrinsic 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 at the time it expires becomes worthless. On certain exchanges, in-the-money options are automatically exercised on their expiration date, but on others, 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 on futures 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.
Commodity prices fluctuate based on the supply and demand of any commodity. If there is excess supply, then inventories build up until there is downward pressure on prices and producers reduce supplies in response to that price signal. Conversely, in the case of excess demand, inventories will be
drawn down until the shortage causes prices to rise and equilibrium is restored. However, it can take a significant time period for inventories to be regulated through price changes due to production and storage situations, leading to sustained trends in commodity spot prices. These trends in commodity spot prices are reflected in futures prices.
Large fluctuations in spot prices can lead to the risk of operating losses for both commercial commodity producers (e.g., wheat farmers) and consumers (e.g., cereal manufacturers), so they both have incentives to hedge against the risk of future price fluctuations. The commodity futures markets provide one of the most common and effective ways of hedging price risk. When there are more producers than consumers who need to hedge, speculators (including investors pursuing commodity futures strategies) enter the market and provide insurance against falling spot prices by taking the long side. Speculators receive a premium for this insurance in the form of a futures price that is less than the expected future spot price. Hence, they expect the futures price to trend upward as it approaches the actual future spot price over the life of the contract. Conversely, net hedging pressure can be greater on the long side. That is, when there are more consumer hedgers than producer hedgers, speculators provide insurance against rising futures prices by taking the short side, leading to a futures price that is higher than the expected future spot price. Hence, they expect the futures price to trend downward as it approaches the spot price over the life of the contract.
Producers of stable commodities use inventories to fill gaps between production and sales. Similarly, consumers use inventories to fill gaps between consumption and purchases. This creates a market for storage. Storage is costly, however, besides the direct cost of physical storage, there is also an opportunity cost because the money tied up in the commodity could be earning interest. On the margin then, an extra unit is only worth storing if the benefits of storage are at least equal to the costs (including the opportunity to earn interest). If this benefit is high enough (so that it makes sense to store the commodity for later use or sale rather than using or selling it now), the futures price will be lower than the spot price, causing time to expiration and the futures price to be inversely related so that the further out the futures contract, the lower the price, thus compensating for the cost of storage. If this is the case, we say that there is backwardation in the futures market. In a backwardated market, owners of a commodity in storage are being more than compensated for the costs of storage, but the compensation is not in monetary payments. Rather, it is in less-tangible benefits such as securing a supply of fuel as insurance against an energy crunch. However, investors who are taking long positions in futures contracts can realize this compensation monetarily by replacing the contracts that they are holding with longer-term ones, thus locking in profits. As shown below, Chart A illustrates the relationship between the price and the term of a futures contract when the market is in backwardation. The price curve slopes downward from left to right and the buy transaction of a longer term contract is at a lower price. Roll yields are positive. The market condition in which this takes place is called backwardation.
Likewise, when the marginal benefits of storage are low, the relationship between time to expiration and the futures price is positive, a market condition known as contango. In contangoed markets, roll yields are negative because replacing contracts results in locking in a loss. The benefit of storage tends to be high when inventories are low. For example, when a commodity is scarce, having it in storage will improve commercial consumers readiness to meet their needs in the near future, leading to backwardation and positive roll yields. Conversely, the benefits of storage are low when inventories are plentiful, leading to contango. Chart B illustrates the futures price curve in a contango market. The price curve slopes upward from left to right and the buy transaction of a longer term contract is at a higher price. Roll yields are negative. Since inventory conditions in some commodities are slow to adjust due to the
time it takes to increase their production, backwardation or contango could persist for a period of time, causing investors to consistently experience positive or negative roll yield over the period. The persistence of backwardated markets over time does not necessarily imply that contract rolls will consistently be positive or profitable. This is because both the slope and the relative position of the futures price curve could change or move up or down. Similarly, the persistence of contango markets over time does not necessarily imply that contract rolls will be negative or unprofitable. The slope and position of the futures price curves are dynamic and reflect a broad range of global economic and supply and demand factors which affect the prices of the specific commodities underlying the futures contracts.
Source: Morningstar, Inc.
The two broad classes of persons who trade commodity futures contracts are hedgers and speculators. Commercial interests, including farmers, that market or process commodities, and financial institutions that market or deal in commodities, including interest rate sensitive instruments, foreign currencies and stocks, and which are exposed to currency, interest rate and stock market risks, may use the futures markets for hedging. Hedging is a protective procedure designed to minimize losses that may occur because of price fluctuations occurring, for example, between the time a processor makes a contract to buy or sell a raw or processed commodity at a certain price and the time he must perform the contract. The futures markets enable the hedger to shift the risk of price fluctuations to the speculator. The speculator risks his capital with the hope of making profits from price fluctuations in futures interests contracts. Speculators rarely take delivery of commodities, but rather close out their positions by entering into offsetting purchases or sales of futures interests contracts. Since the speculator may take either a long or short position in the futures markets, it is possible for him to make profits or incur losses regardless of whether prices go up or down.
Futures exchanges provide centralized market facilities for trading futures contracts and options (but not forward contracts). Members of, and trades executed on, a particular exchange are subject to the rules of that exchange. Among the principal exchanges in the U.S. are the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, and ICE Futures U.S.
Each futures exchange in the U.S. has an associated clearing house. Once trades between members of an exchange have been confirmed, the clearing house becomes substituted for each buyer and each seller of contracts traded on the exchange and, in effect, becomes the other party to each traders
open position in the market. Thereafter, each party to a trade looks only to the clearing house for performance. The clearing house 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 enables the clearing house, at least to a large degree, to meet its obligations with regard to the other side of an insolvent clearing members contracts. Furthermore, clearing houses require margin deposits and continuously mark positions to market to provide some assurance that their members will be able to fulfill their contractual obligations. Thus, a central function of the clearing houses is to ensure the integrity of trades, and members effecting futures transactions on an organized exchange need not be concerned with the solvency of each party on the opposite side of each trade; their concerns are the respective solvencies of their commodity broker and the clearing house. The clearing house guarantee of performance on open positions does not run to customers. If a member firm goes bankrupt, customers could lose money.
Futures exchanges in the U.S. are subject to designation and regulation by the CFTC as a designated contract market. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) authorized the CFTC to designate swap transaction facilities for the centralized trading and processing of swaps if they comply with core principles similar to those required for designation as a contract market. An electronic trading facility is a form of an exchange operated by electronic means that is not subject to regulation under the Commodity Exchange Act.
A designated contract market is a highly regulated exchange. Designated contract markets may offer products to retail customers on an unrestricted basis. To be designated as a contract market, the exchange must demonstrate that it satisfies specified general criteria for designation, such as having the ability to prevent market manipulation, rules and procedures to ensure fair and equitable trading, position limits, dispute resolution procedures, minimization of conflicts of interest and protection of market participants. Among the principal designated contract markets in the U.S. are the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), the New York Mercantile Exchange (NYMEX), the New York Commodities Exchange (COMEX) and the Kansas City Board of Trade (KBOT). Each of the designated contract markets in the U.S. must provide for the clearance and settlement of transactions with a CFTC-registered derivatives clearing organization.
Title VII of the Dodd-Frank Act established a new regulatory regime for the trading and clearing of swap contracts that is broad and far-reaching. Among other things, it provides the CFTC with jurisdiction and regulatory authority over a wide variety of swap contracts and a comprehensive regulatory structure affecting the clearing and trading of swaps, swap dealers and major swap participants, including the establishment of swap execution facilities and derivatives clearing organizations for the centralized trading and clearing of swaps. The CFTC has proposed various rules mandated by the Dodd-Frank Act to implement this new regulatory regime, the final assessment of which must await the adoption of the proposed regulations.
An electronic trading facility is a form of exchange 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 Commodity Exchange Act 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.
Foreign futures exchanges differ in certain respects from their U.S. counterparts. In contrast to U.S. exchanges, certain foreign exchanges are principals markets, where trades remain the liability of the traders involved, and the exchange clearing house does not become substituted for any party. See the section The Risks You Face Trading on Commodity Exchanges Outside the United States is Not Subject to U.S. Regulation, and May Be Less Reliable than U.S. Exchanges.
In addition, the CFTC requires each U.S. exchange to submit position limits for all commodities traded on such exchange for approval by the CFTC. Position limits do not apply to forward contract trading or generally to trading on foreign exchanges. See the section The Risks You Face Certain Operations of the Fund, Including the Creation of Baskets, May Be Restricted By Regulatory and Exchange Position Limits and Other Position Limitation Rules and Could Result in Tracking Error Between Changes in the NAV Per Share and Changes in the Level of the Index, Or Could Result in the Market Price of the Shares Trading at a Premium or Discount to the NAV Per Shares.
Most U.S. futures exchanges (but generally not foreign exchanges or banks or dealers in the case of forward contracts) limit the amount of fluctuation in futures interests contract prices during a single trading day by regulation. 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 interests contract may vary either up or down from the previous days settlement price. Once the daily limit has been reached in a particular futures interest, no trades may be made at a price beyond the limit. See the section The Risks You Face Potentially Illiquid Markets, Disruption of Market Trading, and Daily Price Fluctuation Limits, Among Other Events, May Exacerbate Losses of the Fund and, In Turn, the Value of Your Shares.
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 reliably predict commodity prices.
Futures exchanges in the U.S. are subject to regulation under the Commodity Exchange Act, by the CFTC, the governmental agency having responsibility for regulation of futures exchanges and trading on those exchanges. The CFTC does not regulate OTC foreign exchange markets and has no authority to regulate trading on foreign commodity exchanges and markets.
The Commodity Exchange Act and the CFTC also regulate the activities of commodity trading advisors and commodity pool operators and the CFTC has adopted regulations with respect to certain of such persons activities. Pursuant to its authority, the CFTC requires a commodity pool operator (such as the Managing Owner) to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend the registration of a commodity pool operator if the CFTC finds that the operator has violated the Commodity Exchange Act or regulations thereunder and in certain other circumstances. Suspension, restriction or termination of the Managing Owners registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and might result in the termination of, the Trust. Neither the Trust nor the Fund is required to be registered with the CFTC in any capacity.
The Commodity Exchange Act requires all futures commission merchants, such as the Commodity Broker, to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary funds and account separately for all customers funds and positions, and to maintain specified book and records open to inspection by the staff of the CFTC.
The Commodity Exchange Act also gives the states certain powers to enforce its provisions and the regulations of the CFTC.
Shareholders are afforded certain rights for reparations under the Commodity Exchange Act. Shareholders may also be able to maintain a private right of action for certain violations of the Commodity Exchange Act. The CFTC has adopted rules implementing the reparation provisions of the Commodity Exchange Act which provide that any person may file a complaint for a reparations award with the CFTC for violation of the Commodity Exchange Act against a floor broker, futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, and their respective associated persons.
Initial or original margin is the minimum amount of funds that must be deposited by futures traders with their commodity brokers in order to initiate futures trading or to maintain an open position in futures contracts. Maintenance margin is the amount (generally less than initial margin) to which a traders account may decline before the trader must deliver additional margin. A margin deposit is like a cash performance bond. It helps assure the futures traders performance of the futures interests which contracts the trader purchases or sells. Futures interests are customarily bought and sold on margins that
represent a very small percentage (ranging upward from less than 2%) of the purchase price of the underlying commodity being traded. Because of such low margins, price fluctuations occurring in the futures markets may create profits and losses that are greater, in relation to the amount invested, than are customary in other forms of investments. The minimum amount of margin required in connection with a particular futures interests contract is set from time-to-time by the exchange on which such contract is traded, and may be modified from time-to-time by the exchange during the term of the contract.
Brokerage firms carrying accounts for traders in futures interests contracts may not accept lower, and generally require higher, amounts of margin as a matter of policy in order to afford further protection for themselves.
Margin requirements are computed each day by a commodity broker. When the market value of a particular open futures interests contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. If the margin call is not met within a reasonable time, the broker may close out the Trusts position. With respect to the Managing Owners trading, for its own account, if any, only the Managing Owner, and not the Trust or the Funds Shareholders personally, will be subject to margin calls.
The following expenses reflect the estimated amounts required to prepare and file this Registration Statement and complete the offering of the Shares (other than selling commissions).
The amended and restated Trust Agreement of the Registrant provides for, and as amended from time to time, will provide for, the indemnification of the Managing Owner. The Managing Owner (including Covered Persons as provided under the Trust Agreement) shall be indemnified by the Trust (or any Fund separately to the extent the matter in question relates to a single Fund or is otherwise disproportionate) against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which the Managing Owner may be or may have been involved as a party or otherwise or with which the Managing Owner may be or may have been threatened, while in office or thereafter, by reason of any alleged act or omission as the Managing Owner or by reason of its being or having been the Managing Owner except with respect to any matter as to which such Managing Owner shall have been finally adjudicated in any such action, suit or other proceeding not to have acted in good faith in the reasonable belief that such Managing Owners action was in the best interests of the Trust and except that the Managing Owner shall not be indemnified against any liability to the Trust or its shareholders by reason of willful misconduct or gross negligence of such Managing Owner.
The following financial statements are included in the Prospectus: [To come.].
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.