As Filed with the Securities and Exchange Commission on February 9, 2010
Registration No. 333-[______]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Jefferies Commodity Real Return ETF
(Registrant)
(Exact name of registrant as specified in its charter)
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Delaware
(State of Organization)
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6799
(Primary Standard Industrial
Classification Number)
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01-6270570
(I.R.S. Employer
Identification Number) |
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c/o Jefferies Commodity
Investment Services, LLC
One Station Place
Three North
Stamford, CT 06902
(203) 708-6500
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c/o Jefferies Commodity
Investment Services, LLC
One Station Place
Three North
Stamford, CT 06902
(203) 708-6500 |
(Address, including zip code, and
telephone number, including
area code, of registrants principal
executive offices)
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(Name, address, including zip code,
and telephone number,
including area code, of agent for
service) |
Copies to:
Michael J. Schmidtberger, Esq.
James C. Munsell, Esq.
Sidley Austin llp
787 Seventh Avenue
New York, New York 10019
Approximate date of commencement of proposed sale to the public:
As promptly 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 posteffective 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 posteffective 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 12b2 of the
Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting
company) |
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Smaller reporting company þ |
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Proposed Maximum |
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Amount to be |
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Aggregate Offering |
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Aggregate Offering |
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Amount of |
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Title of Securities to be Registered |
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Registered |
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Price Per Share |
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Price1 |
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Registration Fee2 |
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Jefferies Commodity Real Return ETF
Common Units of Beneficial Interest |
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250,000 |
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$25.001 |
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$6,250,000 |
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$445.63 |
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The proposed maximum aggregate offering has been calculated assuming that all
Shares are sold at a price of $25.00 per Share. |
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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. |
The registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
EXPLANATORY STATEMENT
The prospectus contained in this Registration Statement relates to the Common Units of
Beneficial Interest for each of the following registrants:
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Common Units of Beneficial Interest |
Registrant |
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Registration Statement |
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Concurrently Registered |
Jefferies TR/J CRB Commodity Index ETF |
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333-[-] |
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250,000 |
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Jefferies Commodity Real Return ETF |
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333-[-] |
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250,000 |
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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 is not
soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion, dated
February 9, 2010
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Jefferies TR/J CRB Commodity Index ETF
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250,000 Common Units of Beneficial Interest |
Jefferies Commodity Real Return ETF
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250,000 Common Units of Beneficial Interest |
Jefferies TR/J CRB Commodity Index ETF and Jefferies Commodity Real Return ETF, each a
Fund and collectively the Funds, are each organized as Delaware statutory trusts. Each Fund will
issue common units of beneficial interest, or Shares, which represent units of fractional undivided
beneficial interest in and ownership of such Fund only. Shares in each Fund will be separately
offered. Shares may be purchased from each Fund only by certain eligible financial institutions,
called Authorized Participants, and only in one or more blocks of [50,000] Shares, called a
Basket. Each Fund will issue its Shares in Baskets to Authorized Participants continuously as of
noon, New York time, on the business day immediately following the date on which a valid order to
create a Basket is accepted by the applicable Fund, at the net asset value of [50,000] Shares of
the applicable Fund as of the closing time of the NYSE Arca, Inc., or the NYSE Arca, or the last to
close of the exchanges on which the applicable Funds futures contracts are traded, whichever is
latest, on the date that a valid order to create a Basket is accepted by the applicable Fund.
Authorized Participants may sell the Shares they purchase from a Fund to other investors at
prices that are expected to reflect, among other factors, the trading price of such Funds Shares
on the NYSE Arca and the supply of and demand for Shares of such Fund at the time of sale and are
expected to fall between net asset value and the trading price of the Shares of such Fund on the
NYSE Arca at the time of sale.
The Shares of each Fund will trade on the NYSE Arca under the following symbols:
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Jefferies TR/J CRB Commodity Index ETF CRB and |
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Jefferies Commodity Real Return ETF RRET. |
Jefferies
Commodity Investment Services, LLC will serve as the managing owner,
or the Managing Owner, commodity pool
operator and commodity trading advisor of each Fund. The Jefferies TR/J CRB Commodity Index ETF, or
the Jefferies TR/J CRB ETF, establishes long positions in futures contracts on the commodities
comprising the Thomson Reuters/Jefferies CRB Index, or the TR/J CRB Index, with a view to tracking
the changes, whether positive or negative, in the level of the TR/J CRB Index over time. The
Jefferies TR/J CRB ETF is also intended to reflect the excess, if any, of its interest income from
its holdings of 3-month U.S. Treasury bills, over the expenses of such Fund. The Jefferies
Commodity Real Return ETF, or the Jefferies Real Return ETF, establishes long positions in futures
contracts on the commodities comprising the Thomson Reuters / Jefferies CRB 3 Month Forward Index,
or the Forward Index, with a view to tracking the changes, whether positive or negative, in the
level of the Forward Index over time. The Jefferies Real Return ETF is also intended to reflect
the excess, if any, of its interest income from its investment in U.S. government issued Treasury
Inflation Protection Securities, or TIPS, which serve to generally protect against erosion of value
from inflation, and any investments in other high credit quality short-term fixed income
securities, over the expenses of such Fund.
We refer to each of the indexes as an Index and we refer to them collectively, where the
context permits, as the Indexes.
Except when aggregated in Baskets, the Shares are not redeemable securities.
THE SHARES ARE SPECULATIVE SECURITIES AND THEIR PURCHASE INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER ALL
RISK FACTORS BEFORE INVESTING IN A FUND. PLEASE REFER TO THE
RISKS YOU FACE BEGINNING ON PAGE 19.
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Futures trading is volatile and even a small movement in market prices could cause large losses. |
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The success of each Funds trading program will depend upon the skill of the Managing Owner and its trading principals. |
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You could lose all or substantially all of your investment. |
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Investors in each Fund will pay fees in connection with their investment in Shares including asset-based management fees of [0.75]% per annum.
Each Fund will also pay additional fees and expenses up to an aggregate of [0.25]% per annum of the daily net asset value of such Fund, or the Overall Expense Cap.
The Managing Owner has agreed to pay the additional fees and expenses incurred by each Fund to the extent that they exceed the Overall Expense Cap of such Fund.
Investors are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from investor to investor. |
On [], 2010, [ ], as the Initial Purchaser, subject to certain conditions,
agreed to purchase and take delivery of [ ] Shares of each of the Funds, which
comprise the initial Baskets, at a purchase price of $25.00 per Share ($[1,250,000] per Basket),
as described in Plan of Distribution. The Initial Purchaser proposes to offer to the public
these [ ] Shares 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 net asset value per Share and the
supply of and demand for Shares of the applicable Fund 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 Funds, the Managing Owner or any of their affiliates, any fee or other
compensation in connection with their sale of Shares to the public. The Initial Purchaser may
charge a customary brokerage commission.
Authorized Participants may offer to the public, from time-to-time, 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 on, among other factors, the trading price of
the Shares of the applicable Fund on the NYSE Arca, the net asset value per Share 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. Authorized Participants will not receive from the Funds, 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 investors who purchase
Shares through their commission or fee-based brokerage accounts. For more information regarding
these items of compensation paid to FINRA members, please see the Plan of Distribution section
on page 82.
Retail investors may purchase and sell Shares through traditional brokerage accounts.
Investors are expected to be charged a customary commission by their brokers in connection with
purchases of Shares that will vary from investor to investor. Investors are encouraged to review
the terms of their brokerage accounts for applicable charges. Also, the excess, if any, of the
price at which the Initial Purchaser or an Authorized Participant sells a Share over the price
paid by the Initial Purchaser or such Authorized Participant in connection with the creation of
such Share in a Basket may be deemed to be underwriting compensation.
These securities have not been approved or disapproved by the Securities and Exchange
Commission or any state securities commission nor has the Securities and Exchange Commission or
any state securities commission passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense. None of the Funds are a mutual fund or
any other type of investment company within the meaning of the Investment Company Act of 1940,
as amended, and none of them are subject to regulation thereunder.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN
THESE POOLS NOR HAS THE COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE
DOCUMENT. THE SHARES ARE NEITHER INTERESTS IN NOR OBLIGATIONS OF ANY OF THE MANAGING OWNER, THE
INITIAL PURCHASER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
[ ], 2010
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A
COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES 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 TO THESE POOLS AT PAGE 49
AND A STATEMENT OF THE PERCENTAGE RETURNS NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT
OF YOUR INITIAL INVESTMENT, AT PAGE 14.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE
YOUR PARTICIPATION IN ANY OF THESE COMMODITY POOLS. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN
ANY OF THESE COMMODITY POOLS, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A
DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT
PAGES 19 THROUGH 34.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES 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.
THESE POOLS HAVE NOT COMMENCED TRADING AND DO NOT HAVE ANY PERFORMANCE HISTORY.
THE POOL OPERATOR HAS NOT PREVIOUSLY OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS.
THE BOOKS AND RECORDS OF EACH FUND WILL BE MAINTAINED AS FOLLOWS: BASKET CREATION AND
REDEMPTION BOOKS AND RECORDS, ACCOUNTING AND CERTAIN OTHER FINANCIAL BOOKS AND RECORDS (INCLUDING
EACH 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 EACH FUND (INCLUDING MINUTE
BOOKS AND OTHER GENERAL CORPORATE RECORDS, TRADING RECORDS AND RELATED REPORTS AND OTHER ITEMS
RECEIVED FROM EACH FUNDS COMMODITY BROKERS) WILL BE MAINTAINED AT THE FUNDS PRINCIPAL OFFICE, C/O
JEFFERIES COMMODITY INVESTMENT SERVICES, LLC, ONE STATION PLACE, THREE NORTH, STAMFORD, CT 06902;
-i-
TELEPHONE NUMBER (-) [ ]. 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 EACH FUND
CONFORMING TO COMMODITY FUTURES TRADING COMMISSION (THE CFTC) AND THE NATIONAL FUTURES
ASSOCIATION (THE NFA) REQUIREMENTS WILL BE POSTED ON THE MANAGING OWNERS WEBSITE AT
HTTP://WWW.[ ].COM. ADDITIONAL REPORTS WILL BE POSTED ON THE MANAGING OWNERS WEBSITE IN THE
DISCRETION OF THE MANAGING OWNER OR AS REQUIRED BY REGULATORY AUTHORITIES. THERE WILL SIMILARLY BE
DISTRIBUTED TO SHAREHOLDERS OF EACH FUND, NOT MORE THAN 90 DAYS AFTER THE CLOSE OF EACH FUNDS
FISCAL YEAR, CERTIFIED AUDITED FINANCIAL STATEMENTS AND (IN NO EVENT LATER THAN MARCH 15 OF THE
IMMEDIATELY FOLLOWING YEAR) THE TAX INFORMATION RELATING TO SHARES OF EACH FUND NECESSARY FOR THE
PREPARATION OF SHAREHOLDERS ANNUAL FEDERAL INCOME TAX RETURNS.
THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE REGISTRATION
STATEMENT OF THE FUNDS. YOU CAN READ AND COPY THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SEC IN WASHINGTON, D.C.
THE FUNDS 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. PLEASE CALL THE SEC
AT 1-800-SEC-0330 FOR FURTHER INFORMATION.
THE FILINGS OF THE FUNDS WILL BE POSTED AT THE SEC WEBSITE AT HTTP://WWW.SEC.GOV.
REGULATORY NOTICES
NO DEALER, SALESMAN 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 FUNDS, THE MANAGING
OWNER, THE INITIAL PURCHASER, 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.
THE DIVISION OF INVESTMENT MANAGEMENT OF THE SECURITIES AND EXCHANGE COMMISSION REQUIRES THAT
THE FOLLOWING STATEMENT BE PROMINENTLY SET FORTH HEREIN: NEITHER FUND IS A MUTUAL FUND OR ANY
OTHER TYPE OF INVESTMENT COMPANY WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED, AND IS NOT SUBJECT TO REGULATION THEREUNDER.
-ii-
AUTHORIZED PARTICIPANTS MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN TRANSACTING IN SHARES.
SEE PLAN OF DISTRIBUTION.
THOMSON,
THOMSON REUTERS, REUTERS AND CRB ARE SERVICE MARKS OR TRADEMARKS OF
REUTERS AMERICA LLC, A THOMSON REUTERS COMPANY, OR ITS AFFILIATES
(THOMSON REUTERS).
JEFFERIES IS A SERVICE MARK OR TRADEMARK OF THE MANAGING OWNER OR ITS AFFILIATES.
-iii-
Jefferies
TR/J CRB Commodity Index ETF
Jefferies Commodity Real
Return ETF
Table of Contents
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Prospectus Section |
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PART ONE
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DISCLOSURE DOCUMENT
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Table of Contents
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-iv-
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Prospectus Section |
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(13) |
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(14) |
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(15) |
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(16) |
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(17) |
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(18) |
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Index Related Risks |
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Prospectus Section |
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Regulatory Related Risks |
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-v-
SUMMARY
This summary of all material information provided in this Prospectus is intended for quick
reference only. The remainder of this Prospectus contains more detailed information. You should
read the entire Prospectus, including all exhibits to the registration statement of which this
Prospectus is a part, before deciding to invest in Shares of any Fund. This Prospectus is intended
to be used beginning [ ], 2010.
The Funds
Each of the Funds was formed as a Delaware statutory trust on December 28, 2009. Each Fund
will issue common units of beneficial interest, or Shares, which represent units of fractional
undivided beneficial interest in and ownership of such Fund. The term of each Fund is perpetual
(unless terminated earlier in certain circumstances). The principal office of the Funds is located
at c/o Jefferies Commodity Investment Services, LLC, One Station Place, Three North, Stamford, CT
06902, and the telephone number of each of them is (203) 708-6500.
Shares Listed on the NYSE Arca
The Shares of each Fund will be listed on the NYSE Arca under the following symbols:
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Jefferies TR/J CRB Commodity Index ETF, or the Jefferies TR/J CRB ETF: CRB; and |
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Jefferies Commodity Real
Return ETF, or Jefferies Real Return ETF RRET. |
Secondary market purchases and sales of Shares will be subject to ordinary brokerage
commissions and charges.
Purchases and Sales in the Secondary Market, on the NYSE Arca
The Shares of each Fund will trade on the NYSE Arca like any other equity security.
Baskets in each Fund may be created or redeemed only by Authorized Participants, except that
the initial Baskets in each Fund will be created by the Initial Purchaser. It is expected that
Baskets in a Fund will be created when there is sufficient
demand for Shares in such Fund that the
market price per Share is at a premium to the net asset value per Share. Authorized Participants
are expected to sell such Shares, which will be listed on the NYSE Arca, to the public at prices
that are expected to reflect, among other factors, the trading price of the Shares of such Fund on
the NYSE Arca and the supply of and demand for the Shares at the time of sale and are expected to
fall between net asset value and the trading price of the Shares on the NYSE Arca at the time of
sale. Similarly, it is expected that Baskets in a Fund will be redeemed when the market price per
Share of such Fund is at a discount to the net asset value per Share. Retail investors seeking to
purchase or sell Shares on any day are expected to effect such transactions in the secondary
market, on the NYSE Arca, at the market price per Share, rather than in connection with the
creation or redemption of Baskets.
The market price of the Shares of a Fund may not be identical to the net asset value per
Share, but these valuations generally are expected to be very close. Investors will be able to use
the indicative intra-day value per Share to determine if they want to purchase in the secondary
market via the NYSE Arca. The intra-day indicative value per Share of each Fund is based on the
prior days final net asset value, adjusted four times per minute throughout the trading day to
reflect the continuous price changes of such Funds futures contracts to provide a continuously
updated estimated net asset value per Share.
Retail investors may purchase and sell Shares through traditional brokerage accounts.
Purchases and sales of Shares may be subject to customary brokerage commissions. Investors are
encouraged to review the terms of their brokerage accounts for applicable charges.
Pricing Information Available on the NYSE Arca and Other Sources
The following table lists additional NYSE Arca symbols and their meanings with respect to the
Funds and the Indexes:
Jefferies TR/J CRB ETF
|
|
|
|
|
|
|
[ ]
|
|
|
Intra-day indicative value per Share of the Jefferies TR/J CRB ETF |
|
|
[ ]
|
|
|
End of day net asset value of the Jefferies TR/J CRB ETF |
|
|
-1-
SUMMARY (contd)
|
|
|
|
|
|
|
[ ]
|
|
|
Intra-day and TR/J CRB Index closing level as of close of NYSE
Arca from the prior day |
|
|
Jefferies Real Return ETF:
|
|
|
|
|
|
|
[ ]
|
|
|
Intra-day indicative value per Share of the Jefferies Real Return
ETF |
|
|
[ ]
|
|
|
End of day net asset value of the Jefferies Real Return ETF |
|
|
[ ]
|
|
|
Intra-day and Forward Index closing level as of close of NYSE Arca
from the prior day |
|
|
The intra-day data in the above tables will be published once every fifteen seconds throughout
each trading day.
Reuters America LLC, a Thomson Reuters company, which we will refer to as either Thomson
Reuters or the Index Calculation Agent, will publish the daily closing level of the Indexes as of
the close of the NYSE Arca. The Managing Owner will publish the net asset value of each Fund and
the net asset value per Share of each Fund daily. Additionally, the Index Calculation Agent will
publish the intra-day Index level, and the Managing Owner will publish the indicative value per
Share of each Fund (quoted in U.S. dollars) once every fifteen seconds throughout each trading day.
All of the foregoing information will be published as follows:
The intra-day level of the Indexes (symbols: TR/J CRB Index [ ]; Forward Index] [ ]) and the
intra-day indicative value per Share of each Fund (symbols: Jefferies TR/J CRB ETF: CRB; Jefferies
Real Return ETF: RRET) (each quoted in U.S. dollars) will be published once every fifteen seconds
throughout each trading day on the consolidated tape, [Reuters and/or Bloomberg] and on the
Managing Owners website at http://www.[ ].com, or any successor thereto.
The current trading price per Share of each Fund (symbols: Jefferies TR/J CRB ETF: CRB;
Jefferies Real Return ETF: RRET) (quoted in U.S. dollars) will be published continuously as trades
occur throughout each trading day on the consolidated tape, [Reuters and/or Bloomberg] and on the
Managing Owners website at http://www.[ ].com, or any successor thereto.
The most recent end-of-day Index closing level (symbols: TR/J CRB Index:[ ]; Forward Index
[ ])
will be published as of the close of the NYSE Arca each trading day on the consolidated tape,
[Reuters and/or Bloomberg] and on the Managing Owners website at http://www.[ ].com, or any
successor thereto.
The most recent end-of-day net asset value of each Fund (symbols: Jefferies TR/J CRB ETF:
[ ]; Jefferies Real Return ETF: [ ]) will be published as of the close of business on [Reuters
and/or Bloomberg] and on the Managing Owners website at http://www.[ ].com, or any successor
thereto. In addition, the most recent end-of-day net asset value of each Fund will be published
the following morning on the consolidated tape.
All of the foregoing information with respect to the Indexes will also be published at
http://www.[ ].
The Index Calculation Agent obtains information for inclusion in, or for use in the
calculation of, the Indexes from sources the Index Calculation Agent considers reliable. None of
the Index Calculation Agent, the Managing Owner, the Funds or any of their respective affiliates
accepts responsibility for or guarantees the accuracy and/or completeness of the Indexes or any
data included in the Indexes.
CUSIP Numbers
The Jefferies TR/J CRB ETFs CUSIP number is [ ].
The Jefferies Real Return ETFs CUSIP number is [ ].
Risk Factors
An investment in Shares of either Fund is speculative and involves a high degree of risk. The
summary risk factors set forth below are intended merely to highlight certain risks that are common
to each Fund. Each Fund has particular risks that are set forth elsewhere in this Prospectus.
|
|
The Funds have no operating history. Therefore, a potential investor has no performance
history to serve as a factor for evaluating an investment in either Fund. |
-2-
SUMMARY (contd)
|
|
Past performance is not necessarily indicative of future results; all or substantially all of
an investment in either Fund could be lost. |
|
|
|
The trading of each Fund takes place in very volatile markets. |
|
|
|
Each Fund will be subject to the aggregate amount of fees and expenses set forth below (prior
to the amount of any commissions charged by the investors broker in connection with an
investors purchase of Shares) and will be successful only if significant losses are avoided. |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
|
Yield on |
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|
|
|
|
|
|
|
|
United |
|
|
Required Income |
|
|
|
|
|
|
|
|
States |
|
|
to Break Even |
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|
|
Fees and |
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Treasury |
|
|
|
|
|
|
|
|
Fund |
|
|
Expenses |
|
|
Securities |
|
|
% |
|
|
$3 |
|
|
Jefferies TR/J CRB
ETF
|
|
|
(-)%
|
|
|
[-]%1
|
|
|
[-]
|
|
|
[-] |
|
|
Jefferies Real
Return ETF
|
|
|
(-)%
|
|
|
[-]%2
|
|
|
[-]
|
|
|
[-] |
|
|
1 The Jefferies TR/J CRB ETF will invest in cash and 3-month U.S. Treasury bills.
2 The Jefferies Real Return ETF will earn interest income and generally protect
against erosion of value from inflation through an investment in TIPS.
3 The dollar amount as specified in the above table reflects that amount of
required income to break even per annum per Share assuming that the net asset value of each Share
is $25.00.
Each Fund will be subject to the approximate fees and expenses in the aggregate amounts per
annum set forth in the above table and elsewhere in this Prospectus. Each Fund will be successful
only if its annual returns from futures trading, plus its annual interest income from its holdings
of 3-month U.S. Treasury bills, TIPS and other high credit quality short-term fixed income
securities, as applicable, exceed these fees and expenses.
The
Jefferies TR/J CRB ETF is expected to earn interest income equal to [-]% per annum, based
upon the yield of 3-month U.S. Treasury bills, or a dollar amount as specified in the above table
per annum per Share at $25.00 as the net asset value per Share. Therefore, based upon the
difference between the current yield of 3-month U.S. Treasury bills and the annual fees and
expenses, the Jefferies TR/J CRB ETF will be required to earn a net income equal to or greater than
the approximate amount per annum set forth in the above table, assuming that the Jefferies TR/J CRB
ETF does not experience gains or losses from its futures trading, in order for an investor to
break-even on an investment during the first twelve months of an investment. Actual interest
income could be higher or lower than the current yield of 3-month U.S. Treasury bills.
The Jefferies Real Return ETF is expected to earn interest income and generally protect
against erosion of value from inflation through an investment in U.S. government issued Treasury
Inflation Protection Securities, or TIPS, and other high credit quality short-term fixed income
securities. The Fund is expected to earn interest income equal to [-]% per annum, based upon the
yield of TIPS, or a dollar amount as specified in the above table per annum per Share at $25.00 as
the net asset value per Share. Therefore, based upon the difference between the current yield of
TIPS and the annual fees and expenses, the Jefferies Real Return ETF will be required to earn a net
income equal to or greater than the approximate amount per annum set forth in the above table,
assuming that the Jefferies Real Return ETF does not experience gains or losses from its futures
trading, in order for an investor to break-even on an investment during the first twelve months of
an investment. Actual interest income could be higher or lower than the current yield of TIPS.
|
|
As of the date of this Prospectus, the CFTC and commodity exchange rules impose speculative
position limits on market participants trading in the following 17 commodities that may be
included in the Indexes from time-to-time: WTI Crude Oil, Heating Oil, Unleaded Gasoline,
Natural Gas, Corn, Soybeans, Live Cattle, Gold, Copper, Sugar, Cotton, Cocoa, Coffee, Wheat,
Lean Hogs, Orange Juice, and Silver, or the Affected Index Commodities. The Funds are subject
to position limits and, consequently, a Funds ability to issue new Baskets or such Funds
ability to reinvest income in additional futures contracts corresponding to certain
commodities may be limited to the extent that these activities would cause such Fund to exceed
the applicable position limits, unless such Fund trades alternative futures contracts or
over-the counter derivatives in addition to and as a proxy for futures on the Affected Index
Commodities. Speculative position limits may affect the correlation between changes in the
net asset value per Share and changes in the level of the Index, and the correlation between
the price of the Shares, as traded on the NYSE Arca, and the net asset value of such Fund.
That is, the use of alternative futures contracts or over-the-counter |
-3-
SUMMARY (contd)
|
|
derivatives in addition to or as a proxy for futures on the Affected Index Commodities, or the
inability to create additional Baskets, could result in tracking error between changes in the
net asset value per Share and changes in the level of the Index, or could result in the Shares
of a Fund trading at a premium or discount to net asset value per Shares. |
|
|
|
If the Managing Owner determines in its commercially reasonable judgment that it has become
impracticable or inefficient for any reason for the Funds to gain full or partial exposure to
any Index Commodity by investing in a specific futures contract that is a part of the Index,
the Funds may: |
|
|
|
invest in a futures contract referencing the particular Index Commodity other than the
specific contract that is a part of the Indexes, or |
|
|
|
|
invest in a forward agreement, swap, or other OTC derivative referencing the particular
Index Commodity, or |
|
|
|
|
in the alternative, invest in other futures contracts, forward agreements, swaps or OTC
derivatives not based on the particular Index Commodities |
|
|
if, in the commercially reasonable judgment of the Managing Owner, such above instruments tend
to exhibit trading prices that correlate with a futures contract that is a part of the TR/J CRB
Index or the Forward Index. |
|
|
|
There can be no assurance that either Fund will achieve profits or avoid losses, significant
or otherwise. |
|
|
|
Performance of a Fund may not track its Index during particular periods or over the long
term. Such tracking error may cause a Fund to outperform or underperform its Index. |
|
|
|
Certain potential conflicts of interest exist. The commodity brokers may have a conflict of
interest between their execution of trades for the Funds and for their other customers. More
specifically, the commodity brokers will benefit from executing orders for other clients,
whereas the Funds may be harmed to the extent that the commodity brokers have fewer resources
to allocate to the Funds accounts due to the existence of such other clients. Allocation of |
|
|
resources between the Funds adds to the potential conflict. Proprietary trading by the
Managing Owner, its affiliates, and its and their trading principals may create conflicts of
interest from time-to-time because such proprietary trades may take a position that is
opposite of that of the Funds or may compete with the Funds for certain positions within 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. See Conflicts of Interest for a more complete disclosure of
various conflicts. Although the Managing Owner has established procedures designed to resolve
certain of these conflicts equitably, the Managing Owner has not established formal procedures
to resolve all potential conflicts of interest. Consequently, investors 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 these conflicts will not, in fact,
result in adverse consequences to the Funds. |
The Trustee
Wilmington Trust Company, or the Trustee, a Delaware banking corporation, is the sole trustee
of the Funds. The Trustee has only nominal duties and liabilities to the Funds.
Investment Objectives of the Funds; the Indexes
The Jefferies TR/J CRB ETF establishes long positions in futures contracts on the commodities
comprising the TR/J CRB Index with a view to tracking the changes, whether positive or negative, in
the level of the TR/J CRB Index over time. The Jefferies TR/J CRB ETF is also intended to reflect
the excess, if any, of its interest income from its holdings of 3-month U.S. Treasury bills over
the expenses of such Fund. The Jefferies Real Return ETF establishes long positions in futures
contracts on the commodities comprising the Forward Index, with a view to tracking the changes,
whether positive or negative, in the level of the Forward Index over time. The Jefferies Real
Return ETF is also intended to reflect the excess, if any, of its interest income from its
investment in TIPS and other high credit quality short-term fixed income securities, over the
expenses
-4-
SUMMARY (contd)
of such Fund. The Shares are designed for investors who want a cost effective and convenient
way to invest in a diversified index of commodity futures on U.S. and non-U.S. markets.
Advantages of investing in the Shares include:
|
|
Ease and Flexibility of Investment. The Shares of each Fund will trade on the NYSE Arca and
provide institutional and retail investors with indirect access to commodity futures markets.
The Shares may be bought and sold on the NYSE Arca like other exchange-listed securities.
Retail investors may purchase and sell Shares through traditional brokerage accounts. |
|
|
|
Shares May Provide A More Cost Effective Alternative. Investing in the Shares of a Fund can
be easier and less expensive for an investor than constructing and trading a comparable
commodity futures portfolio. |
|
|
|
Margin. Shares are eligible for margin accounts. |
|
|
|
Diversification. The Shares may help to diversify a portfolio because historically the
Indexes have tended to exhibit low to negative correlation with both equities and conventional
bonds. |
|
|
|
Transparency. The Shares provide a more direct investment in commodities than mutual funds
that invest in commodity-linked notes, which have implicit imbedded costs and credit risk. |
|
|
|
Potential Inflation Protection for Investors in the Jefferies Real Return ETF. The Jefferies
Real Return ETF expects to invest a significant amount of its holding of cash in the form of
TIPS, which are backed by the full faith and credit of the U.S. government and generally
provide a degree of protection against inflation. |
Investing in the Shares does not insulate Shareholders from certain risks, including price
volatility.
General
Each Fund will pursue its investment objective by investing substantially all of its assets in
a portfolio of exchange traded futures on the commodities comprising its corresponding Index or
other derivatives. The Jefferies TR/J CRB ETF, establishes long positions in futures contracts on
the
commodities comprising the TR/J CRB Index, with a view to tracking the changes, whether
positive or negative, in the level of the TR/J CRB Index over time. The Jefferies Real Return ETF,
establishes long positions in futures contracts on the commodities comprising the Forward Index,
with a view to tracking the changes, whether positive or negative, in the level of the Forward
Index over time.
We refer to the TR/J CRB Index and the Forward Index collectively as the Indexes. Because
much of the disclosure regarding the TR/J CRB Index and the Forward Index is identical, we have
combined the following disclosure with respect to the Indexes and we have distinguished between the
two Indexes where applicable.
The Indexes are designed to provide timely and accurate representation of a long-only, broadly
diversified investment in commodities through a transparent and disciplined calculation
methodology. The Indexes are currently composed of futures contracts on the following 19 physical
commodities, or each, an Index Commodity: aluminum, cocoa, coffee, copper, corn, cotton, crude oil,
gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans,
sugar, unleaded gasoline, and wheat. The Index Commodities currently trade on United States
futures exchanges, with the exception of aluminum and nickel, which trade on the London Metal
Exchange, or the LME.
The TR/J CRB Index is designed to track the changes in the closing levels of nearby rolling
futures positions, as more specifically shown below. The Forward Index tracks the changes in the
closing levels of the futures positions that would in three months comprise the TR/J CRB Index. A
commodity futures contract is a bilateral agreement that provides for the purchase and sale of a
specified type and quantity of a commodity during a stated delivery month for a fixed price.
The history of the TR/J CRB Index dates back to 1957, when the Commodity Research Bureau
constructed an index comprised of 28 commodities that made its inaugural appearance in the 1958 CRB
Commodity Year Book. Since then, as commodity markets have evolved, the original index has
undergone periodic updates to remain a leading benchmark for the performance of commodities as an
asset class. The original index was renamed the Reuters/Jefferies CRB Index in 2005 when it
underwent its tenth and most recent revision as the collaborative effort of Reuters, the global
information company, and Jefferies Financial Products, LLC, an
-5-
SUMMARY (contd)
affiliate of the Managing Owner to maintain its representation of modern commodity markets.
The original index was renamed the Thomson Reuters/Jefferies CRB Index in 2009 to reflect the 2008
combination of the Thomson Corporation and Reuters Group PLC. The TR/J CRB Index is currently
being calculated in accordance with the methodology adopted in 2005.
The Indexes are calculated daily by the Index Calculation Agent. The Forward Index began
publishing in April 2007.
The methodology for determining the composition and weighting of the Indexes is subject to
modification by Thomson Reuters and Jefferies at any time. The changes in the closing levels of
TR/J CRB Index and the Forward Index are reported on a number of financial information sites,
including Thomson Reuters under the ticker symbols RJCRB01 and RJCRB.ER, respectively. For a more
complete
description of the Indexes, please see the TR/J CRB Index Calculation Supplement and the
Forward Index Calculation Supplement, each of which is available at www.[ ].com.
Weighting Factors: A Tiered Approach
The Indexes use a four-tiered approach to allocate among the Index Commodities included in the
Index. Group I includes only petroleum products; Group II includes seven Index Commodities which
are highly liquid; Group III is comprised of four liquid Index Commodities; Group IV includes Index
Commodities that may provide diversification.
All Index Commodities are equally weighted within Groups II, III and IV, as provided below.
[Remainder of page left blank intentionally.]
-6-
SUMMARY (contd)
THOMSON REUTERS/JEFFERIES CRB INDEX
THOMSON REUTERS / JEFFERIES CRB 3 MONTH FORWARD INDEX
|
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|
|
Group |
|
Index Commodity |
|
Index Weight |
|
Contract Months |
|
Exchange |
|
|
|
WTI Crude Oil |
|
23% |
|
Jan-Dec |
|
NYMEX |
Group I |
|
Heating Oil |
|
5% |
|
Jan-Dec |
|
NYMEX |
|
|
Unleaded Gasoline |
|
5% |
|
Jan-Dec |
|
NYMEX |
|
|
|
Total |
|
33% |
|
|
|
|
|
|
|
Natural Gas |
|
6% |
|
Jan-Dec |
|
NYMEX |
|
|
Corn |
|
6% |
|
Mar, May, Jul, Sep, Dec |
|
CBOT |
|
|
Soybeans |
|
6% |
|
Jan, Mar, May, Jul, Nov |
|
CBOT |
Group II |
|
Live Cattle |
|
6% |
|
Feb, Apr, Jun, Aug, Oct, Dec |
|
CME |
|
|
Gold |
|
6% |
|
Feb, Apr, Jun, Aug, Dec |
|
COMEX |
|
|
Aluminum |
|
6% |
|
Mar, Jun, Sep, Dec |
|
LME |
|
|
Copper |
|
6% |
|
Mar, May, Jul, Sep, Dec |
|
COMEX |
|
|
|
Total |
|
42% |
|
|
|
|
|
|
|
Sugar |
|
5% |
|
Mar, May, Jul, Oct |
|
ICE-US |
|
|
Cotton |
|
5% |
|
Mar, May, Jul, Dec |
|
ICE-US |
Group III |
|
Cocoa |
|
5% |
|
Mar, May, Jul, Sep, Dec |
|
ICE-US |
|
|
Coffee |
|
5% |
|
Mar, May, Jul, Sep, Dec |
|
ICE-US |
|
|
|
Total |
|
20% |
|
|
|
|
|
|
|
Nickel |
|
1% |
|
Mar, Jun, Sep, Dec |
|
LME |
|
|
Wheat |
|
1% |
|
Mar, May, Jul, Sep, Dec |
|
CBOT |
Group IV |
|
Lean Hogs |
|
1% |
|
Feb, Apr, Jun, Jul, Aug, Oct, Dec |
|
CME |
|
|
Orange Juice |
|
1% |
|
Jan, Mar, May, Jul, Sep, Nov |
|
ICE-US |
|
|
Silver |
|
1% |
|
Mar, May, Jul, Sep, Dec |
|
COMEX |
|
|
|
Total |
|
5% |
|
|
|
|
|
Legend:
NYMEX means the New York Mercantile Exchange, or its successor.
CBOT means the Board of Trade of the City of Chicago Inc., or its successor.
CME means the Chicago Mercantile Exchange, Inc., or its successor.
COMEX means the Commodity Exchange Inc., New York, or its successor.
LME means The London Metal Exchange Limited or its successor.
ICE-US means ICE Futures U.S., Inc., or its successor.
-7-
SUMMARY (contd)
Group I Petroleum Sector
Group I of the Indexes include only petroleum products WTI crude oil, heating oil and
unleaded gasoline. These Index Commodities are among the most economically significant and
frequently traded and historically have contributed meaningfully to the return and correlative
characteristics of commodity benchmark indices.
Petroleum-linked futures have experienced tremendous growth over the past several decades.
Crude oil, heating oil, and unleaded gasoline are among the most liquid, widely followed and
economically significant commodities futures contracts traded globally. Global daily production
and consumption of petroleum-linked products is at an all time high.
WTI crude oil, heating oil and unleaded gasoline, which comprise Group I, tend to correlate to
certain major bond and equity benchmarks, due to the strong impact of energy prices on global
economic activity.
Therefore, a representative commodity index, such as the Indexes, cannot ignore the importance
of petroleum to both the asset class and the global economy.
In order to reflect the critical role of petroleum in the global economy and maintain the
diversified nature of the Indexes, the Indexes have assigned an Index Weight of 33% to the Group I
Index Commodities, represented by the crude oil, unleaded gasoline and heating oil contracts traded
on the NYMEX.
Group II Highly Liquid Commodities
Group II is comprised of futures contracts on the Index Commodities that are traded in markets
that are highly liquid. These seven markets represent a diverse cross section across several
commodity sectors. Each Index Commodity is assigned an Index Weight of 6% of each Index. In
turn, Group II constitutes 42% of each Index.
Group III Liquid Commodities
Group III is comprised of futures contracts on Index Commodities that are traded in markets
that are
liquid. These four Index Commodities include a second cross section of diverse and liquid
markets in order to diversify the Indexes. Each Index Commodity in Group III is assigned an Index
Weight of 5% of each Index. In turn, Group III constitutes 20% of each Index.
Group IV Diversifying Commodities
Group IV is comprised of futures contracts on Index Commodities that may provide additional
diversification to the Indexes by increasing the exposure of the Indexes to the Softs, Grains,
Industrial Metals, Meats and Precious Metals markets. Each Index Commodity in Group IV is assigned
an Index Weight of 1% of each Index. In turn, Group IV constitutes 5% of each Index.
Rollover Methodology
A rolling futures position is a position where, on a periodic basis, futures contracts on
physical commodities specifying delivery in a particular month are sold and futures contracts
specifying delivery in a later month are purchased. An investor with a rolling futures position is
able to avoid taking delivery of the underlying physical commodity while maintaining exposure to
those commodities. To maximize liquidity and transparency, this rolling process for the Index
Commodities for the Indexes occurs over the first four Business Days of each month according to the
following fixed schedule as described below. (In the context of the Indexes, Business Day is any
day on which the New York Mercantile Exchange is open for business.)
Rebalancing Methodology
The Indexes employ arithmetic averaging with monthly rebalancing, while maintaining a uniform
exposure to the various Index Commodities over time.
The Index Commodities are rebalanced monthly, generally following the close of business on the
sixth Business Day of each month, to return to the specified dollar weights, referenced as Index
Weight in the table above. This rebalancing is achieved by selling Index Commodities that have
gained in value relative to other Index Commodities and buying Index Commodities that have lost in
value relative to other Index Commodities. This
-8-
SUMMARY (contd)
monthly rebalancing helps to maintain both the stability and consistency of the Indexes and
the consistent exposure to the Index Weights of the underlying Index Commodities over time.
The physical commodities underlying the exchange-traded futures contracts included as Index
Commodities of the Indexes from time-to-time may be heavily concentrated in a limited number of
sectors, particularly energy and agriculture. An investment in the Funds may therefore carry risks
similar to a concentrated securities investment in a limited number of industries or sectors.
The composition of the Indexes may be adjusted in the event that the Index Calculation Agent
is not able to calculate the closing prices of the Index Commodities.
Under
the declarations of trust of the Funds, or the Declarations of Trust, the Managing Owner has the exclusive management
and control of all aspects of the business of each Fund. The Trustee has no duty or liability 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.
There can be no assurance that any Fund will achieve its investment objective or avoid
substantial losses. The Funds have no performance histories. The value of the Shares of each Fund
on the secondary market is expected to fluctuate generally in relation to changes in the net asset
value of the applicable Fund.
Shares of Each Fund Should Track Closely the Value of its Index
The Shares of each of the Jefferies TR/J CRB ETF and the Jefferies Real Return ETF are
intended to provide investment results that generally correspond to the changes, whether positive
or negative, in the levels of the TR/J CRB Index and the Forward Index, respectively, over time.
The value of the Shares of each Fund is expected to fluctuate in relation to changes in the
value of such Funds portfolio. The market price of the Shares of a Fund may not be identical to
the net asset value per Share, but these two valuations generally are expected to be very close.
Each Fund will hold a portfolio of futures contracts on the Index Commodities as well as cash
and 3-month U.S. Treasury bills, in the case of Jefferies TR/J CRB ETF, and TIPS and other high
credit quality short-term fixed income securities, in the case of Jefferies Real Return ETF, for
deposit with the Funds Clearing Broker as margin. Each Funds portfolios will be traded with a
view to tracking the corresponding Index over time, whether the Index is rising, falling or flat
over any particular period. The Funds are not managed by traditional methods, which typically
involve effecting changes in the composition of each Funds portfolio on the basis of judgments
relating to economic, financial and market considerations with a view to obtaining positive results
under all market conditions. To maintain the correspondence between the composition and weightings
of the Index Commodities comprising the Indexes, the Managing Owner adjusts each Funds portfolio
from time-to-time to conform to periodic changes in the identity and/or relative weighting of the
Index Commodities. The Managing Owner will aggregate certain of the adjustments and makes changes
to each Funds portfolio at least monthly or more frequently in the case of significant changes to
the Indexes.
The Managing Owner
Jefferies Commodity Investment Services, LLC, a Delaware limited liability company, will serve
as Managing Owner of each Fund. The Managing Owner was formed on December 2, 2009. The Managing
Owner will serve as the commodity pool operator and commodity trading advisor of each Fund, pending
final approval of its registration with the National Futures Association, or the NFA. The Managing
Owner has no experience in operating commodity pools and managing futures trading accounts. The
Managing Owner will be registered as a commodity pool operator and commodity trading advisor with
the Commodity Futures Trading Commission, or the CFTC, and will be a member of the NFA, pending
final approval of its registration with the NFA. As a registered commodity pool operator and
commodity trading advisor, with respect to each Fund, the Managing Owner must comply with various
regulatory requirements under the Commodity Exchange Act and the rules and regulations of the CFTC
and the NFA, including investor protection requirements, antifraud prohibitions, disclosure
requirements, and reporting and recordkeeping requirements. The Managing Owner also will be
subject to periodic inspections and audits by the CFTC and NFA. The principal office of the
Managing Owner is located at One Station Place, Three North, Stamford, CT 06902.
-9-
SUMMARY (contd)
The telephone number of the Managing Owner is (203) 708-6500.
Each Fund will pay the Managing Owner a Management Fee, monthly in arrears, in an amount equal
to [0.75]% per annum of the daily net asset value of such Fund. The Management Fee will be paid in
consideration of the Managing Owners futures trading advisory services.
[The Commodity Brokers]
A variety of executing brokers will execute futures transactions on behalf of the Funds. Such
executing brokers will give-up all such transactions to [___], which will serve as each Funds
clearing broker, or Clearing Broker. In its capacity as clearing broker, the Clearing Broker will
execute and clear each Funds futures transactions and will perform certain administrative services
for each Fund. [___] is registered with the CFTC as a futures commission merchant and is a
member of the NFA in such capacity.
Each Fund will pay to the Clearing 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. On average, total charges paid to the
Clearing Broker are expected to be less than $[___] per round-turn trade, although the Clearing
Brokers brokerage commissions and trading fees will be determined on a contract-by-contract 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 Administrator]
Each Fund has appointed [___] as the administrator, or Administrator, of each Fund and has
entered into an Administration Agreement in connection therewith. [___] will serve custodian,
or Custodian, of each Fund and has entered into a Global Custody Agreement, or Custody Agreement,
in connection therewith. [___] will serve the transfer agent, or Transfer Agent, of each Fund and
has entered into a Transfer Agency and Service Agreement in connection therewith.
Information regarding the net asset value of each Fund, creation and redemption transaction
fees
and the names of the parties that have executed a Participant Agreement may be obtained from
[___] by calling the following number: (-) [___]. A copy of the Administration Agreement is
available for inspection at [___]s trust office identified above.
Pursuant to the Administration Agreement, the Administrator will perform or supervise the
performance of services necessary for the operation and administration of each Fund (other than
making investment decisions), including receiving and processing orders from Authorized
Participants to create and redeem Baskets, net asset value calculations, accounting and other fund
administrative services. The Administrator will retain, separately for each Fund, 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 Administration 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 foregoing, the Administrator may terminate the Administration
Agreement upon [30] days prior written notice if either Fund has materially failed to perform its
obligations under the Administration Agreement.
The Administration Agreement provides for the exculpation and indemnification of the
Administrator from and against any costs, expenses, damages, liabilities or claims (other than
those resulting from the Administrators own bad faith, negligence or willful misconduct) which may
be imposed on, incurred by or asserted against the Administrator in performing its obligations or
duties under the Administration Agreement. Key terms of the Administration Agreement are
summarized under the heading Material Contracts.
The Funds will pay to the Administrator up to [___] of administration fees, monthly in
arrears. If the monthly administration fees exceed [___], the amount above [___] will be paid to by
the Managing Owner.
The Administrator and any of its affiliates may from time-to-time purchase or sell Shares for
their
-10-
SUMMARY (contd)
own account, as agent for their customers and for accounts over which they exercise investment
discretion.
The Administrator 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.
Each Fund is expected to retain the services of one or more additional service providers to
assist with certain tax reporting requirements of each Fund and its Shareholders.
[THIRD
PARTY PROVIDERS TBD]
Limitation of Liabilities
Your investment in a Fund is part of the assets of that Fund, and it will therefore be subject
to the risks of that Funds trading only. You cannot lose more than your investment in a Fund, and
you will not be subject to the losses or liabilities of a Fund in which you have not invested.
Each Share, when purchased in accordance with the applicable Declaration of Trust, shall, except as
otherwise provided by law, be fully-paid and non-assessable.
The debts, liabilities, obligations, claims and expenses incurred, contracted for or otherwise
existing with respect to a Fund generally will be enforceable only against the assets of such Fund.
Creation and Redemption of Shares
The Funds create and redeem Shares from time-to-time, but only in one or more Baskets. A
Basket is a block of [50,000] Shares of a Fund. Baskets may be created or redeemed only by
Authorized Participants, except that the initial Baskets in each Fund will be created by the
Initial Purchaser. Baskets are created and redeemed continuously as of noon, New York time, on the
business day immediately following the date on which a valid order to create or redeem a Basket is
accepted by a Fund, at the net asset value of [50,000] Shares as of the closing time of the NYSE
Arca or the last to close of the exchanges on which the applicable Funds futures contracts are
traded, whichever is latest, on the date that a valid order to create or redeem a Basket is
accepted by a Fund. For purposes of processing both purchase and redemption orders, a
business
day means any day other than a day when banks in New York City are required or permitted to be
closed. Except when aggregated in Baskets, the Shares are not redeemable securities. Authorized
Participants pay a transaction fee of $[___] in connection with each order to create or redeem a
Basket. Authorized Participants may sell the Shares included in the Baskets they purchase from the
Funds to other investors.
See Creation and Redemption of Shares for more details.
The Offering
On [ ], 2010, [___], as the Initial Purchaser, subject to certain conditions, agreed to
purchase and take delivery of [___] Shares of each Fund, which comprise the initial Baskets,
at a purchase price of $25.00 per Share ($[1,250,000] per Basket), as described in Plan of
Distribution.
Each Fund will issue Shares in Baskets to Authorized Participants continuously as of noon, New
York time, on the business day immediately following the date on which a valid order to create a
Basket is accepted by the applicable Fund, at the net asset value of [50,000] Shares as of the closing time of the NYSE Arca or the last to close of the exchanges on which the
applicable Funds futures contracts are traded, whichever is latest, on the date that a valid order
to create a Basket is accepted by the applicable Fund.
Authorized Participants
Baskets may be created or redeemed only by Authorized Participants, except that the initial
Baskets in each Fund will be created by the Initial Purchaser. Each Authorized Participant must
(1) be 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, (2) be a participant in DTC, and (3) have entered into an agreement with each Fund
and the Managing Owner (a Participant Agreement). The Participant Agreement sets forth the
procedures for the creation and redemption of Baskets and for the delivery of cash required for
such creations or redemptions. A list of the current Authorized Participants may be obtained from
the Administrator. See Creation and Redemption of Shares for more details.
-11-
SUMMARY (contd)
Net Asset Value
Net asset value, in respect of a Fund, means the total assets of the applicable Fund
including, but not limited to, all cash and cash equivalents or other debt securities less total
liabilities of such Fund, each determined on the basis of generally accepted accounting principles
in the United States, consistently applied under the accrual method of accounting.
See Description of the Shares; The Funds; Certain Material Terms of the Declarations of Trust
Net Asset Value for more details.
Clearance and Settlement
The Shares of each Fund are evidenced by global certificates that each Fund issues to DTC.
The Shares of each Fund are available only in book-entry form. Shareholders may hold Shares of a
Fund through DTC, if they are participants in DTC, or indirectly through entities that are
participants in DTC.
Segregated Accounts/Interest Income
The proceeds of the offering of each Fund will be deposited in cash in a segregated account in
the name of the applicable Fund at the Clearing Broker (or another eligible financial institution,
as applicable) in accordance with CFTC investor protection and segregation requirements. Each Fund
will be credited with 100% of the interest earned on its average net assets on deposit with the
Clearing Broker or such other financial institution each [week]. In an attempt to increase
interest income earned, the Managing Owner expects to invest non margin assets of the Jefferies
TR/J CRB ETF in 3-month U.S. Treasury bills. The Managing Owner expects to invest the non margin
assets of the Jefferies Real Return ETF in TIPS, certain cash items such as money market funds,
certificates of deposit (under nine months) and time deposits or other instruments permitted by
applicable rules and regulations and other high credit quality short-term fixed income securities.
Currently, the rate of interest expected to be earned by Jefferies TR/J CRB ETF is estimated to be
[___]% per annum, based upon the yield on 3-month U.S. Treasury bills, and the current interest rate
expected to be earned by Jefferies Real Return ETF is estimated to be [___]% per annum, based upon
the yield on TIPS.
This interest income is used by each Fund to pay its own expenses. See Fees and Expenses
for more details.
-12-
SUMMARY (contd)
Fees and Expenses
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Management Fee
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|
Each Fund will pay the Managing
Owner a Management Fee, monthly in
arrears, in an amount equal to
[0.75]% per annum of the daily net
asset value of such Fund. The
Management Fee will be paid in
consideration of the Managing
Owners futures trading advisory
services. |
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Organization and Offering
Expenses
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|
Each Fund will be responsible for
paying, or for reimbursing the
Managing Owner or its affiliates for
paying, all of the expenses incurred
in connection with organizing such
Fund as well as the expenses
incurred in connection with the
offering of such Funds Shares
(whether incurred prior to or after
the commencement of such Funds
trading operations), subject to the
Overall Expense Cap described below. |
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Brokerage Commissions and
Fees
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Each Fund will pay to the Clearing
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, collectively, Brokerage
Expenses, subject to the Overall
Expense Cap described below. On
average, total charges paid to the
Clearing Broker are expected to be
less than [$___] per round-turn
trade, although the Clearing
Brokers brokerage commissions and
fees will be determined on a
contract-by-contract basis. |
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Routine Operational,
Administrative and Other
Ordinary Expenses
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Each 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 expenses of such
Fund, including, but not limited to,
computer services, the fees and
expenses of the Trustee, legal and
accounting fees and expenses, tax
preparation fees and expenses,
filing fees, and printing, mailing
and duplication costs, subject to
the Overall Expense Cap described
below. |
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Overall Expense Cap
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The Managing Owner has agreed to pay
the expenses incurred in connection
with organizing each Fund as well as
the expenses incurred in connection
with the offering of such Funds
Shares (whether incurred prior to or
after the commencement of such
Funds trading operations), the
Brokerage Expenses, and the routine
operational, administrative and
other ordinary expenses of such
Fund, which we refer to as Covered
Expenses, to the extent that, in the
aggregate, they exceed [0.25]% per
annum of the daily net asset value
of such Fund in any month, or the
Overall Expense Cap. Any such
amounts paid by the Managing Owner
will be subject to reimbursement by
such Fund, without interest. Any
expense reimbursement payment during
any month will be counted toward the
[0.25]% per annum overall expense
cap in respect of such month. If in
any month a Funds Covered Expenses
are lower than the cap, the entire
difference between the Covered
Expenses for such month and the cap
for such month will be available to
reimburse the Managing Owner for
unreimbursed expenses paid by the
Managing Owner. If a Fund
terminates before the Managing Owner
has been fully reimbursed for any of
the foregoing expenses, the Managing
Owner will forfeit the unreimbursed
portion of such expenses outstanding
as of such time. |
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Extraordinary Fees and
Expenses
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Each 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 itself.
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. |
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Management Fee and
Expenses to be Paid First
Out of Interest Income
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The Management Fee, all expenses
incurred in connection with
organizing each Fund as well as the
expenses incurred in connection with
the offering of Shares, Brokerage
Expenses, and the routine
operational, administrative and
other ordinary expenses of each Fund
(including reimbursement payments to
the Managing Owner) will be paid
first out of interest income from
each Funds holdings of 3-month U.S.
Treasury bills, TIPS and other high
credit quality short-term fixed
income securities, as applicable, on
deposit with the Clearing Broker as
margin or otherwise. To the extent
interest income is not sufficient to
cover the fees and expenses of a
Fund during any period, the excess
of such fees and expenses over such
interest income will be paid out of
income from futures trading, if any,
or from sales of the Funds fixed
income securities. |
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Selling Commission
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Retail investors may purchase and
sell Shares through traditional
brokerage accounts. Investors are
expected to be charged a customary
commission by their brokers in
connection with purchases of Shares
that will vary from investor to
investor. Investors are encouraged
to review the terms of their
brokerage accounts for applicable
charges. |
|
|
-13-
SUMMARY (contd)
Breakeven Amounts
The following table estimates the amount of (i) all fees and expenses which are anticipated to
be incurred by a new investor in Shares of each Fund during the first twelve months of investment
expressed as a percentage per annum of the net asset value of each Fund, (ii) the current yield
earned by the Jefferies TR/J CRB ETF on the 3-month U.S. Treasury bills, (iii) the current yield
earned by Jefferies Real Return ETF on the TIPS, and (iv) the required net income that must be
earned, assuming that each Fund does not experience gains or losses from its futures trading, in
order for an investor to break-even on an investment during the first twelve months of an
investment plus the amount of any commissions charged by the investors broker in connection with
an investors purchase of Shares:
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Yield on |
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Required Income |
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United |
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to Break Even |
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States |
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Fees and |
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Treasury |
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Fund |
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Expenses |
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Securities |
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% |
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$3 |
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Jefferies
TR/J CRB
ETF
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(-)%
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[-]%1
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[-]
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[-] |
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Jefferies
Real Return
ETF
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(-)%
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[-]%2
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[-]
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[-] |
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1 The Jefferies TR/J CRB ETF will invest in cash and 3-month U.S. Treasury bills.
2 The Jefferies Real Return ETF will earn interest income and generally protect
against erosion of value from inflation through an investment in TIPS.
3 The dollar amount as specified in the above table reflects that amount of
required income to break even per annum per Share assuming that the net asset value of each Share
is $25.00.
Each Fund will be subject to the approximate fees and expenses in the aggregate amounts per
annum set forth in the above table and elsewhere in this Prospectus. Each Fund will be successful
only if its annual returns from futures trading, plus its annual interest income from its holdings
of 3-month U.S. Treasury bills, TIPS and other high credit quality short-term fixed income
securities, as applicable, exceed these fees and expenses. The Jefferies TR/J CRB ETF is expected
to earn interest income equal to [___]% per annum, based upon the yield of 3-month U.S. Treasury
bills, or $[___] per annum per Share at $25.00 as the net asset value per Share. The Jefferies
Real Return ETF is expected to earn interest income equal to [___]% per annum, based upon the yield
of TIPS, or $[___] per annum per Share at $25.00 as the net asset value per Share. Therefore,
based upon the difference between the current yield of 3-month U.S. Treasury bills or TIPS, as
applicable, and the annual
fees and expenses, each Fund will be required to earn a net income equal
to or greater than the approximate amount per annum set forth in the above table, assuming that
each Fund does not experience gains or losses from its futures trading, in order for an investor to
break-even on an investment during the first twelve months of an investment. Actual interest
income could be higher or lower than the current yield of 3-month U.S. Treasury bills or TIPS, as
applicable.
Distributions
Each Fund will make distributions at the discretion of the Managing Owner. To the extent that
a Funds actual and projected interest income from its holdings of 3-month U.S. Treasury bills,
TIPS and other high credit quality short-term fixed income securities, as applicable, exceeds the
actual and projected fees and expenses of such Fund, the Managing Owner expects periodically to
make distributions of the amount of such excess. The Funds currently do not expect to make
distributions with respect to capital gains. Depending on the applicable 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 such Funds net ordinary income or loss and capital gain or loss
may exceed any distributions you receive with respect to such year.
Fiscal Year
The fiscal year of each Fund ends on December 31 of each year.
Financial Information
The Funds have only recently been organized and have no financial histories.
U.S. Federal Income Tax Considerations
Subject to the discussion below in Material U.S. Federal Income Tax Considerations, each
Fund will be classified as a partnership for U.S. federal income tax purposes. Accordingly,
neither of the Funds will incur U.S. federal income tax liability; rather, each beneficial owner of
Shares will be required to take into account its allocable share of the Funds income, gain, loss,
deduction and other items for the Funds taxable year ending with or within the owners taxable
year.
-14-
SUMMARY (contd)
Additionally, please refer to the Material 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.
Breakeven Table
The Breakeven Table on the following page indicates the approximate percentage and dollar
returns required for the value of an initial $25.00 investment in a Share of each Fund to equal the
amount originally invested twelve months after issuance.
The Breakeven Table, as presented, is an approximation only. The capitalization of each Fund
does not directly affect the level of its charges as a percentage of its net asset value, other
than brokerage commissions.
[Remainder of page left blank intentionally.]
-15-
Breakeven Table
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Dollar Amount and Percentage of Expenses Per Fund |
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Jefferies TR/J CRB Commodity Index ETF9 |
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Jefferies Commodity Real Return ETF10 |
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Expense1 |
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$ |
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% |
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$ |
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% |
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Management Fee |
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$[___] |
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[___]% |
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$[___] |
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[___]% |
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Organization and Offering
Expense2,11
|
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$[___]
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[___]%
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|
$[___]
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[___]% |
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Brokerage Commissions and
Fees3,11
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$[___]
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[___]%
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$[___]
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[___]% |
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Routine Operational, Administrative
and Other Ordinary Expenses4,5,11
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$[___]
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[___]%
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$[___]
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[___]% |
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Interest Income6,7
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$(___)
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(___)%
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$(___)
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(___)% |
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12-Month Breakeven8
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$[___]
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[___]%
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$[___]
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[___]% |
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1. |
|
The breakeven analysis assumes that the Shares have a constant month-end Fund net asset
value and is based on $25.00 as the net asset value per Share. See
Charges on page 49 for an explanation of the expenses included in the Breakeven Table. |
|
2. |
|
Each Fund will pay all of the expenses incurred in connection with organizing such Fund
as well as the expenses incurred in connection with the offering of such Funds Shares
(whether incurred prior to or after the commencement of such Funds trading operations),
subject to the Overall Expense Cap described herein. |
|
3. |
|
The actual amount of brokerage commissions and trading fees to be incurred will vary
based upon the trading frequency of each Fund and the specific futures contracts traded. |
|
4. |
|
Each Fund will be responsible for paying all routine operational, administrative and
other ordinary expenses of each Fund. |
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5. |
|
In connection with orders to create and redeem Baskets, Authorized Participants will pay
a transaction fee in the amount of $[___] per order. Because these transaction fees are
de minimis in amount, are charged on a transaction-by-transaction basis (and not on a
Basket-by-Basket basis), and are borne by the Authorized Participants, they have not been
included in the Breakeven Table. |
|
6. |
|
Interest income currently is estimated to be earned at a rate of [___]%, based upon the
yield on 3-month U.S. Treasury bills. Actual interest income could be higher or lower
than the current yield of 3-month U.S. Treasury bills. |
|
7. |
|
Interest income currently is estimated to be earned at a rate of [___]%, based upon the
yield on TIPS. |
|
8. |
|
You may pay customary brokerage commissions in connection with purchases of the Shares.
Because such brokerage commission rates will vary from investor to investor, such
brokerage commissions have not been included in the Breakeven Table. Investors are
encouraged to review the terms of their brokerage accounts for applicable charges. |
|
9. |
|
The Jefferies TR/J CRB ETF is subject to (i) a Management Fee of [___]% per annum, (ii)
estimated brokerage commissions and fees of [___]% per annum and (iii) estimated routine
Operational, administrative and other ordinary expenses of [___] per annum. The
Jefferies TR/J CRB ETF is subject to fees and expenses in the aggregate amount of
approximately [___]% per annum. Items (ii) and (iii) above are subject to the Overall
Expense Cap described in Footnote 11. The Jefferies TR/J CRB ETF will be successful only
if its annual returns from the underlying futures contracts, plus annual income from
3-month U.S. Treasury bills, exceeds approximately [1.00]% per annum. The Jefferies TR/J
CRB ETF is expected to earn [___]% per annum, based upon the yield of 3-month U.S.
Treasury bills. Therefore, based upon the difference between the current yield of 3-month U.S. Treasury bills and the annual fees and expenses, the Jefferies TR/J CRB ETF
would be required to earn approximately [___]% per annum, assuming that the Jefferies
TR/J CRB ETF has not experienced either gains or losses resulting from investing in the
underlying futures contracts, in order for an investor to break-even on an investment
during the first twelve months of an investment. Actual interest income could be higher
or lower than the current yield of 3-month U.S. Treasury bills. The Jefferies TR/J CRB
ETF is subject to the Overall Expense Cap described in Footnote 11. |
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10. |
|
The Jefferies Real Return ETF is subject to (i) a Management Fee of [___]% per annum,
(ii) estimated brokerage commissions and fees of [___]% per annum and (iii) estimated
routine Operational, administrative and other ordinary expenses of [___] per annum.
Items (ii) and (iii) above are subject to the Overall Expense Cap described in Footnote
11. The Jefferies Real Return ETF is subject to fees and expenses in the aggregate
amount of approximately [1.00]% per annum. The Jefferies Real Return ETF will be
successful only if its annual returns from the underlying futures contracts, including
annual income from TIPS, exceeds approximately [___]% per annum. The Jefferies Real
Return ETF is expected to earn [___]% per annum, based upon the yield of TIPS.
Therefore, based upon the difference between the current yield of TIPS and the annual
fees and expenses, the Jefferies Real Return ETF would be required to earn
approximately [___]% per annum, assuming that the Jefferies Real Return ETF has not
experienced either gains or losses resulting from investing in the underlying futures
contracts, in order for an investor to break-even on an investment during the first
twelve months of an investment. Actual interest income could be higher or lower than the
current yield of TIPS. The Jefferies Real Return ETF is subject to the Overall Expense
Cap described in Footnote 11. |
|
11. |
|
The Managing Owner has agreed to pay the expenses incurred in connection with organizing
each Fund as well as the expenses incurred in connection with the offering of such Funds
Shares (whether incurred prior to or after the commencement of such Funds trading
operations), the Brokerage Expenses, and the routine operational, administrative and
other ordinary expenses of such Fund, which we refer to as Covered Expenses, to the
extent that, in the aggregate, they exceed [0.25]% per annum of the daily net asset value
of such Fund in any month, or the Overall Expense Cap. Any such amounts paid by the
Managing Owner will be subject to reimbursement by such Fund, without interest. Any
expense reimbursement payment during any month will be counted toward the [0.25]% per
annum overall expense cap in respect of such month. If in any month a Funds Covered
Expenses are lower than the cap, the entire difference between the Covered Expenses for
such month and the cap for such month will be available to reimburse the Managing Owner
for unreimbursed expenses paid by the Managing Owner. . If a Fund terminates before the
Managing Owner has been fully reimbursed for any of the foregoing expenses, the Managing
Owner will forfeit the unreimbursed portion of such expenses outstanding as of such time. |
-16-
Reports to Shareholders
The Managing Owner will furnish you with an annual report of each Fund in which you are
invested within 90 calendar days after the end of such Funds fiscal year as required by the rules
and regulations of the SEC as well as with those reports required by the CFTC and the 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 Funds. 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.[___].com. Additional
reports may be posted on the Managing Owners website in the discretion of the Managing Owner or as
required by regulatory authorities.
Cautionary Note Regarding Forward-Looking Statements
This Prospectus includes forward-looking statements that reflect the Managing Owners current
expectations about the future results, performance, prospects and opportunities of the Funds. 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, in The Risks You
Face and elsewhere in this Prospectus, and unknown, that could cause the actual results,
performance, prospects or opportunities of the Funds 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.
THE SHARES ARE SPECULATIVE AND
INVOLVE A HIGH DEGREE OF RISK.
Thomson,
Thomson Reuters, Reuters and CRB are service marks or trademarks of
Reuters America LLC, a Thomson Reuters company, or its affiliates
(Thomson Reuters).
Jefferies is a service mark or trademark of the Managing Owner or its affiliates.
[Remainder of page left blank intentionally.]
-17-
ORGANIZATION CHART
Jefferies TR/J CRB Commodity Index ETF
Jefferies Commodity Real
Return ETF
-18-
THE RISKS YOU FACE
You could lose money investing in Shares. You should consider carefully the risks described
below before making an investment decision. You should also refer to the other information
included in this Prospectus.
Futures and Commodities Market Related Risks
|
(1) |
|
The Value of the Shares of Each Fund Relates Directly to the Value of the Commodity
Futures Contracts and Other Assets Held by Each Fund and Fluctuations in the Price of
These Assets Could Materially Adversely Affect an Investment in the Funds Shares. |
The Shares of each Fund are designed to reflect as closely as possible the changes, whether
positive or negative, in the levels of its corresponding Index, over time, through each Funds
portfolio of exchange traded futures contracts on the Index Commodities. The value of the Shares
relates directly to the changes in market value over time, whether positive or negative, of the
portfolio of exchange traded futures contracts on the Index Commodities, less the liabilities
(including estimated accrued but unpaid expenses) of the Fund. The price of the Index Commodities
may fluctuate widely. Several factors may affect the price of the Index Commodities, including,
but not limited to:
|
|
|
Global supply and demand of each of the Index Commodities, which may be influenced by
such factors as forward selling by the various commodities producers, purchases made by
the commodities producers to unwind their hedge positions and production and cost levels
in the major markets of each of the Index Commodities; |
|
|
|
|
Domestic and foreign inflation rates and investors expectations concerning inflation
rates; |
|
|
|
|
Domestic and foreign interest rates and investors expectations concerning interest
rates; |
|
|
|
|
Investment and trading activities of mutual funds, hedge funds and commodity funds; |
|
|
|
Global or regional political, economic, geographic, ecological or financial events and
situations; and |
|
|
|
|
Expectations among market participants that a commoditys value will soon change. |
|
(2) |
|
Net Asset Value 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. |
The net asset value per share of the Shares of a Fund will change as fluctuations occur in the
market value of its portfolio. Investors should be aware that the public trading price of a Basket
may be different from the net asset value of a Basket (i.e., [50,000] Shares may trade at a premium
over, or a discount to, net asset value of a Basket) and similarly the public trading price per
Share of a Fund may be different from the net asset value per Share of such Fund. Consequently, an
Authorized Participant may be able to create or redeem a Basket at a discount or a premium to the
public trading price per Share of the Fund. This price difference may be due, in large part, to
the fact that supply and demand forces at work in the secondary trading market for Shares of a Fund
are closely related, but not identical, to the same forces influencing the prices of the Index
Commodities comprising the Funds corresponding Index, trading individually or in the aggregate at
any point in time. Investors also should note that the size of each Fund in terms of total assets
held may change substantially over time and from time-to-time as Baskets are created and redeemed.
Authorized Participants or their clients or customers may have an opportunity to realize a
riskless profit if they can purchase a Creation Basket at a discount to the public trading price of
the Shares of a Fund or can redeem a Redemption Basket at a premium over the public trading price
of the Shares of such Fund. The Managing Owner expects that the exploitation of such arbitrage
opportunities by Authorized Participants and their clients and customers will tend to cause the
public trading price to track net asset value per Share of the Funds closely over time.
The value of a Share of a Fund may be influenced by non-concurrent trading hours between the
NYSE Arca and the various futures exchanges on which the Index Commodities are traded. While the
Shares of each Fund trade on the NYSE Arca from 9:30 a.m. to 4:00 p.m. Eastern Standard Time, the
-19-
trading hours for the futures exchanges on which each of the Index Commodities trade may not
necessarily coincide during all of this time.
For example, while the Shares trade on the NYSE Arca until 4:00 p.m. Eastern Standard, the
COMEX division of the New York Mercantile Exchange closes at 1:30 p.m. Eastern Standard Time. As a
result, during periods when the NYSE Arca is open and the futures exchanges on which the Index
Commodities are traded are closed, liquidity in the global gold market will be reduced, thus
trading spreads and the resulting premium or discount on the Shares may widen, increasing the
difference between the price of the Shares and the net asset value of such Shares.
The below table lists the trading hours for each of the Index Commodities which trades on the
futures exchange set forth in the table:
|
|
|
|
|
|
|
|
|
|
|
Index |
|
|
Exchange |
|
|
|
|
|
Commodity |
|
|
(Symbol)1 |
|
|
Trading Hours2 |
|
|
Group I |
|
|
WTI Crude Oil
|
|
|
NYMEX
(CL)
|
|
|
10:00a.m. 3:30p.m.3,6 |
|
|
Heating Oil
|
|
|
NYMEX
(HO)
|
|
|
10:00a.m. 3:30p.m.3,6 |
|
|
Unleaded Gasoline
|
|
|
NYMEX
(RB)
|
|
|
10:00a.m. 3:30p.m.6 |
|
|
Group II |
|
|
Natural Gas
|
|
|
NYMEX
(NG)
|
|
|
10:00a.m. 3:30p.m.3,6 |
|
|
Corn
|
|
|
CBOT
(C)
|
|
|
10:30a.m. 2:15p.m.4 |
|
|
Soybeans
|
|
|
CBOT
(S)
|
|
|
10:30a.m. 2:15p.m.4 |
|
|
Live Cattle
|
|
|
CME
(LC)
|
|
|
10:05a.m. 2:00p.m.5 |
|
|
Gold
|
|
|
COMEX
(GC)
|
|
|
9:20a.m. 2:30p.m.3,6 |
|
|
Aluminum
|
|
|
LME
(AH)
|
|
|
6:55a.m. 7:00a.m.
7:55a.m. 8:00a.m.
8:20a.m. 9:45a.m. (Kerb Trading)
10:15a.m. 10:20a.m.
10:55a.m. 11:00a.m.
11:15a.m. 12:00p.m. (Kerb Trading) |
|
|
Copper
|
|
|
COMEX
(HG)
|
|
|
9:10a.m. 2:00p.m.3,6 |
|
|
Group III |
|
|
Sugar
|
|
|
ICE US
(SB)
|
|
|
Pre-Open: 8:00p.m.
3:30a.m. 2:00p.m. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Index |
|
|
Exchange |
|
|
|
|
|
Commodity |
|
|
(Symbol)1 |
|
|
Trading Hours2 |
|
|
Cotton
|
|
|
ICE US
(CT)
|
|
|
Pre-Open: 7:30p.m.
9:00p.m. 2:30p.m. |
|
|
Cocoa
|
|
|
ICE US
(CC)
|
|
|
Pre-Open: 8:00p.m.
4:00a.m. 2:00p.m. |
|
|
Coffee
|
|
|
ICE US
(KC)
|
|
|
Pre-Open: 8:00p.m.
3:30a.m. 2:00p.m. |
|
|
Group IV |
|
|
Nickel
|
|
|
LME
(NI)
|
|
|
7:15a.m. 7:20a.m.
8:00a.m. 8:05a.m.
8:20a.m. 9:45a.m. (Kerb Trading)
10:25a.m. 10:30a.m.
11:05a.m. 11:10a.m.
11:15a.m. 11:45p.m. (Kerb Trading) |
|
|
Wheat
|
|
|
CBOT
(W)
|
|
|
10:30a.m. 2:15p.m.4 |
|
|
Lean Hogs
|
|
|
CME
(LH)
|
|
|
Open Outry: 10:05a.m. 2:00p.m.5 |
|
|
Orange Juice
|
|
|
ICE US
(OJ)
|
|
|
Pre-Open: 8:00p.m.
8:00a.m. 2:00p.m. |
|
|
Silver
|
|
|
COMEX
(SI)
|
|
|
9:20a.m. 2:30p.m.3,6 |
|
|
|
1 |
|
Legend: |
|
|
|
|
CBOT means the Board of Trade of the City of Chicago Inc., or its successor.
CME means Chicago Mercantile Exchange, Inc. or its successor.
COMEX means the Commodity Exchange Inc., New York or its successor.
ICE US means ICE Futures U.S., Inc. or its successor.
LME means The London Metal Exchange Limited or its successor.
NYMEX means the New York Mercantile Exchange or its successor.
|
|
|
2 |
|
All trading hours are as of Eastern Standard Time. All trading occurs on Monday Friday, unless otherwise specified. |
|
|
3 |
|
Electronic trading: Sunday Friday, 7:00p.m. 6:15p.m.
|
|
|
4 |
|
Electronic Trading: Monday Friday, 7:00p.m. 8:15a.m. and 10:30a.m. 2:15p.m. |
|
|
5 |
|
Electronic Trading: Monday 10:05p.m. Friday 2:55p.m.; (Daily Halts) 5:00p.m. 6:00p.m. |
|
|
6 |
|
CME ClearPort Trading: Monday Friday, 7:00p.m. 6:15p.m. |
|
(3) |
|
The Lack of Active Trading Markets For the Shares of a Fund May Result in Losses on
Your Investment in Such Fund at the Time of Disposition of Your Shares. |
Although the Shares of each Fund will be listed and traded on the NYSE Arca, there can be no
guarantee that an active trading market for the Shares of a Fund will develop or will be
maintained. If you need to sell your Shares at a time when no active market for them exists, the
price you receive for your
-20-
Shares, assuming that you are able to sell them, likely will be lower than the price you would
receive if an active market did exist.
|
(4) |
|
Price Volatility May Possibly Cause the Total Loss of Your Investment. |
Futures contracts have a high degree of price variability and are subject to occasional rapid
and substantial changes. Consequently, you could lose all or substantially all of your investment
in any Fund.
|
(5) |
|
Possible Illiquid Markets, Disruption of Market Trading, and Daily Price Fluctuation
Limits, Among Other Events, May Exacerbate Losses. |
The commodity markets are subject to temporary distortions or other disruptions due to various
factors, including the lack of liquidity in the markets, the participation of speculators,
government intervention and exchange regulation.
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 each Fund may acquire increases the risk of
illiquidity by making its positions more difficult to liquidate while 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 forcing the liquidation of futures contracts at disadvantageous
times or prices.
Furthermore, the above distortions and or disruptions may cause the Funds to liquidate certain
of their holdings of TIPS or 3-month U.S. Treasury bills, as applicable, in order to generate
sufficient cash.
Market illiquidity and price limits may cause losses for each Fund, and in turn, the value of
your Shares.
|
(6) |
|
Because the Futures Contracts Have No Intrinsic Value, the Positive Performance of
Your Investment Is Wholly Dependent Upon an Equal and Offsetting Loss. |
Futures trading is a risk transfer economic activity. For every gain there is an equal and
offsetting loss rather than an opportunity to participate over time in general economic growth.
Unlike most alternative investments, an investment in Shares of a Fund does not involve acquiring
any asset with intrinsic value. Overall stock and bond prices could rise significantly and the
economy as a whole prosper while Shares of a Fund trade unprofitably.
|
(7) |
|
Failure of Commodity Futures Trading to Exhibit Low to Negative Correlation to
General Financial Markets Will Reduce Benefits of Diversification and May Exacerbate
Losses to Your Portfolio. |
Historically, commodity futures returns have tended to exhibit low to negative correlation
with the returns of other assets such as stocks and bonds. Although commodity futures trading can
provide a diversification benefit to investor portfolios because of its low to negative correlation
with other financial assets, the fact that the Indexes are not 100% negatively correlated with
financial assets such as stocks and bonds means that each respective Fund cannot be expected to be
automatically profitable during unfavorable periods for the stock or bond market, or vice-versa.
If the Shares perform in a manner that correlates with the general financial markets or do not
perform successfully, you will obtain no diversification benefits by investing in the Shares and
the Shares may produce no gains to offset your losses from other investments.
|
(8) |
|
An Investment in Shares of the Funds May Be Adversely Affected by Competition From
Other Methods of Investing in Commodities. |
The Funds constitute new, and thus initially untested, type of investment vehicles. They
compete with other financial vehicles, including other commodity pools, hedge funds, traditional
debt and equity securities issued by companies in the commodities industry, other securities backed
by or linked to such commodities, and direct investments in the underlying commodities or commodity
futures
-21-
contracts. Market and financial conditions, and other conditions beyond the Managing Owners
control, may make it more attractive to invest in other financial vehicles or to invest in such
commodities directly, which could limit the market for the Shares of each Fund and reduce the
liquidity of the Shares of each Fund.
|
(9) |
|
Backwardation or Contango in the Market Prices of the Commodities Will Affect the
Value of Your Shares. |
As the futures contracts that underlie the Indexes near expiration, they are replaced by
contracts that have a later expiration. Thus, for example, a contract purchased and held in August
2011 may specify an October 2011 expiration. As that contract nears expiration, it may be replaced
by selling the October 2011 contract and purchasing the contract expiring in December 2011. This
process is referred to as rolling. Historically, the prices of certain Index 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 2011 contract would take place at a price that is higher
than the price at which the December 2011 contract is purchased, thereby creating a gain in
connection with rolling. While certain Index Commodities 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 Commodities will adversely affect the value of the Index
and, accordingly, decrease the value of your Shares.
Conversely, certain Index 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 the costs of long-term storage of
a physical commodity prior to delivery or other factors. Although certain Index Commodities have
historically exhibited consistent periods of contango, contango will likely not exist in these
markets at all times. Contango in certain Index Commodities will adversely affect the value of the
Index and, accordingly, decrease the value of your Shares.
Although the roll method of the enhanced excess return version of the applicable Index
Commodities may minimize the roll losses due to contango and may maximize the roll benefits due to
backwardation, there can be no assurance that this outcome will occur.
Fund Structure and Management Related Risks
|
(10) |
|
The Shares of Each Fund Are a New Securities Product and Their Value Could Decrease
If Unanticipated Operational or Trading Problems Arise. |
The mechanisms and procedures governing the creation, redemption and offering of the Shares
have been developed specifically for these securities products. Consequently, there may be
unanticipated problems or issues with respect to the mechanics of the operations of the Funds and
the trading of the Shares that could have a material adverse effect on an investment in the Shares.
In addition, although the Funds are not actively managed by traditional methods, to the extent
that unanticipated operational or trading problems or issues arise, the Managing Owners past
experience and qualifications may not be suitable for solving these problems or issues.
|
(11) |
|
As the Managing Owner and Its Principals Have No History of Operating Investment
Vehicles Like the Funds, Their Experience May Be Inadequate or Unsuitable to Manage the
Funds. |
The Managing Owner was formed to be the managing owner of investment vehicles such as the
Funds and has no history of past performance. The Managing Owner has not managed any other
commodity pools or other positions, and therefore there is no indication of its ability to manage
investment vehicles such as the Funds. If the experience of the Managing Owner and its principals
is not adequate or suitable to manage investment vehicles such as the Funds, the operations of the
Funds may be adversely affected.
|
(12) |
|
You May Not Rely on Past Performance of the Funds in Deciding Whether to Buy Shares. |
The Funds have not commenced trading and do not have a performance history upon which to
evaluate your investment in any of the Funds. Although past performance is not necessarily
indicative of future results, if each Fund had a performance history, such performance history
might (or might not) provide you with more information on which to evaluate an investment in each
Fund.
-22-
|
(13) |
|
Fees and Commissions are Charged Regardless of Profitability and May Result in
Depletion of Assets. |
Investors in each Fund will pay fees in connection with their investment in Shares including
asset-based management fees of [0.75]% per annum. Each Fund will also pay additional fees and
expenses up to the Overall Expense Cap of such Fund. The Managing Owner has agreed to pay the
additional fees and expenses incurred by each Fund to the extent that such fees and expenses exceed
the Overall Expense Cap of such Fund. Investors are expected to be charged a customary commission
by their brokers in connection with purchases of Shares that will vary from investor to investor.
The Jefferies TR/J CRB ETF is expected to earn interest income equal to [___]% per annum, based
upon the yield of 3-month U.S. Treasury bills. The Jefferies Real Return ETF is expected to earn
interest income equal to [___]% per annum, based upon the yield of TIPS.
Consequently, depending upon the interest rate environment, and inflation in the case of the
Jefferies Real Return ETF, the expenses of the applicable Fund could, over time, result in losses
to your investment therein. You may never achieve profits, significant or otherwise, by investing
in a Fund.
|
(14) |
|
You Cannot Be Assured of the Managing Owners Continued Services, Which
Discontinuance May Be Detrimental to the Funds. |
You cannot be assured that the Managing Owner will be willing or able to continue to service
the Funds for any length of time. If the Managing Owner discontinues its activities on behalf of
the Funds, the Funds may be adversely affected.
|
(15) |
|
You May Be Adversely Affected by Redemption Orders That Are Subject to Postponement,
Suspension or Rejection Under Certain Circumstances. |
Each Fund may, in its discretion, suspend the right of redemption or postpone the redemption
settlement date, (1) for any period during which an emergency exists as a result of which the
redemption distribution is not reasonably practicable, or (2) for such other period as the Managing
Owner determines to be necessary for the protection of the Shareholders of a Fund. In addition, a
Fund will reject a redemption order if the order is not in proper form as
described in the
Participant Agreement or if the fulfillment of the order, in the opinion of its counsel, might be
unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming
Authorized Participant. For example, the resulting delay may adversely affect the value of the
Authorized Participants redemption proceeds if the net asset value of the applicable Fund declines
during the period of delay. The Funds disclaim any liability for any loss or damage that may
result from any such suspension or postponement.
|
(16) |
|
Various Actual and Potential Conflicts of Interest May Be Detrimental to
Shareholders. |
The Funds will be subject to actual and potential conflicts of interest involving the Managing
Owner, various commodity futures brokers and Authorized Participants. The Managing Owner and its
principals, all of whom are engaged in other investment activities, are not required to devote
substantially all of their time to the business of the Funds, which also presents the potential for
numerous conflicts of interest with the Funds. As a result of these and other relationships,
parties involved with the Funds have a financial incentive to act in a manner other than in the
best interests of the Funds and the Shareholders. The Managing Owner has not established any
formal procedure to resolve conflicts of interest. Consequently, investors will 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 these conflicts do not, in fact, result in
adverse consequences to the Shareholders.
The Funds may be subject to certain conflicts with respect to the Clearing 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 Clearing Broker.
|
(17) |
|
Possibility of Termination of the Funds May Adversely Affect Your Portfolio. |
The Managing Owner may withdraw from the Funds upon 120 days notice, which would cause the
Funds to terminate unless a substitute managing owner were obtained. Owners of 50% of the Shares
of either Fund have the power to terminate such Fund. If it is so exercised, investors who may
wish to
-23-
continue to invest in a Funds corresponding Index through a fund vehicle will have to find
another vehicle, and may not be able to find another vehicle that offers the same features as such
Fund. See Description of the Shares; The Funds; Certain Material Terms of the Declarations of
Trust Termination Events for a summary of termination events. Such detrimental developments
could cause you to liquidate your investments and upset the overall maturity and timing of your
investment portfolio. If the registrations with the CFTC or memberships in the NFA of the Managing
Owner or the Clearing Broker were revoked or suspended, such entity would no longer be able to
provide services to the Funds.
|
(18) |
|
Shareholders Do Not Have the Rights Enjoyed by Investors in Certain Other Vehicles. |
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). In addition, the Shares have limited voting and
distribution rights (for example, Shareholders do not have the right to elect directors and the
Funds are not required to pay regular distributions, although the Funds may pay distributions in
the discretion of the Managing Owner).
|
(19) |
|
The Value Of the Shares Will Be Adversely Affected If the Funds Are Required to
Indemnify the Trustee or the Managing Owner. |
Under the Declarations of Trust, the Trustee and the Managing Owner have the right to be
indemnified for any liability or expense either incurs without gross negligence or willful
misconduct. That means the Managing Owner may require the assets of a Fund to be sold in order to
cover losses or liability suffered by it or by the Trustee in connection with such Fund. Any sale
of that kind would reduce the net asset value of a Fund.
|
(20) |
|
The Net Asset Value Calculation of the Funds May Be Overstated or Understated Due to
the Valuation Method Employed When a Settlement Price Is Not Available on the Date of Net
Asset Value Calculation. |
Calculating the net asset value of each Fund includes, in part, any unrealized profits or
losses on
open commodity futures contracts. Under normal circumstances, the net asset value of
each Fund reflects the settlement price of open commodity futures contracts on the date when the
net asset value is being calculated. However, if a commodity futures contract traded on an
exchange (both U.S. and, to the extent it becomes applicable, non-U.S. exchanges) could not be
liquidated on such day (due to the operation of daily limits or other rules of the exchange or
otherwise), the settlement price on the most recent day on which the position could have been
liquidated will be the basis for determining the market value of such position for such day. In
such a situation, there is a risk that the calculation of the net asset value of the applicable
Fund on such day will not accurately reflect the realizable market value of such commodity futures
contract. For example, daily limits are generally triggered in the event of a significant change
in market price of a commodity futures contract. Therefore, as a result of the daily limit, the
current settlement price is unavailable. Because the settlement price on the most recent day on
which the position could have been liquidated would be used in lieu of the actual settlement price
on the date of determination, there is a risk that the resulting calculation of the net asset value
of the applicable Fund could be under or overstated, perhaps to a significant degree.
|
(21) |
|
Although the Shares of Each Fund are Limited Liability Investments, Certain
Circumstances such as Bankruptcy of a Fund or Indemnification of a Fund by the Shareholder
Will Increase a Shareholders Liability. |
The Shares of each Fund are limited liability investments; investors may not lose more than
the amount that they invest plus any profits recognized on their investment. However, Shareholders
could be required, as a matter of bankruptcy law, to return to the estate of a Fund any
distribution they received at a time when such Fund was in fact insolvent or in violation of its
Declaration of Trust. In addition, although the Managing Owner is not aware of this provision ever
having been invoked in the case of any public futures fund, Shareholders agree in the Declaration
of Trust that they will indemnify a Fund for any harm suffered by it as a result of
|
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Shareholders actions unrelated to the business of such Fund, or |
|
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taxes imposed on the Shares by the states or municipalities in which such investors reside. |
-24-
Index Related Risks
|
(22) |
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You May Not Rely on Past Index Results in Deciding Whether to Buy Shares. |
Each Index has a limited history which might (or might not) be indicative of the future Index
results or of the future performance of each applicable Fund. Therefore, you will have to make your
decision to invest in each Fund on the basis of limited information.
|
(23) |
|
A Funds Performance May Not Always Replicate Exactly the Changes in the Level of its
Corresponding Index. |
It is possible that a Funds performance may not fully replicate the changes in the level of
its corresponding Index due to disruptions in the markets for the relevant Index Commodities, the
imposition of speculative position limits (as discussed in The Risks You Face ([___]) Certain
Operations of the Funds, Including the Creation of Baskets, May be Restricted by Regulatory and
Exchange Position Limits and Other Rules), or due to other extraordinary circumstances. As a Fund
approaches or reaches position limits with respect to certain futures contracts comprising the
applicable Index and the Managing Owner determines in its commercially reasonable judgment that it
has become impracticable or inefficient for any reason for a Fund to gain full or partial exposure
to any Index Commodity by investing in a specific futures contract that is a part of the applicable
Index, the Fund may invest in a futures contract referencing the particular Index Commodity other
than the specific contract that is a part of the applicable Index, or invest in a forward
agreement, swap, or OTC derivative referencing the particular Index Commodity, or in the
alternative, invest in other futures contracts, forward agreements, swaps, or OTC derivatives not
based on the particular Index Commodity if, in the commercially reasonable judgment of the Managing
Owner, such replacement instruments tend to exhibit trading prices that correlate with a futures
contract that is a part of the corresponding Index. In addition, the Funds are not able to
replicate exactly the changes in the level of their respective Index because the total return
generated by each Fund is reduced by expenses and transaction costs, including those incurred in
connection with such Funds trading activities, and increased by interest income from the Funds
holdings of short-term high quality fixed income securities. Tracking the applicable Index
requires trading of a Funds portfolio with a view to tracking the Index over time and is dependent
upon the skills
of the Managing Owner and its trading principals, among other factors.
|
(24) |
|
The Funds Are Not Actively Managed and Will Track the Applicable Index During Periods
in Which the Applicable Index Is Flat or Declining as Well as When the Applicable Index Is
Rising. |
The Funds are not actively managed by traditional methods. For example, if the Index
Commodities owned by the Jefferies TR/J CRB ETF are declining in value, such Fund will not close
out such positions, except in connection with a change in the composition or weighting of the TR/J
CRB Index. The Managing Owner will seek to cause the net asset value of a Fund to track the
applicable Index during periods in which the applicable Index is flat or declining as well as when
the applicable Index is rising.
|
(25) |
|
Fewer Representative Commodities Sectors May Result in Greater Index Volatility. |
The nineteen Index Commodities that may be included in the Indexes from time-to-time are WTI
Crude Oil, Heating Oil, Unleaded Gasoline, Natural Gas, Corn, Soybeans, Live Cattle, Gold,
Aluminum, Copper, Sugar, Cotton, Cocoa, Coffee, Nickel, Wheat, Lean Hogs, Orange Juice, and Silver.
The physical commodities underlying the exchange-traded futures contracts included as Index
Commodities of the Indexes from time-to-time may be heavily concentrated in a limited number of
sectors, particularly energy and agriculture. An investment in the Funds may therefore carry risks
similar to a concentrated securities investment in a limited number of industries or sectors.
Concentration in fewer Index Commodities may result in a greater degree of volatility in the
Indexes and the net asset value of the Funds under specific market conditions and over time.
|
(26) |
|
The Index May Be Highly Concentrated in Geographic Regions, Industries or Economic
Sectors, and in Turn May Negatively Impact the Value of Your Shares. |
The Shares are subject to the downside risks associated with the Indexes, including a
potentially high concentration in futures contracts or if applicable alternative instruments
representing a particular geographic region, industry or economic
-25-
sector. These include the risks that the price, value or level of other assets in these
geographic regions, industries or economic sectors or the prices of the Index Commodities may
decline, thereby adversely affecting the market value of the Shares. If any of the Indexes is
concentrated in a geographic region, an industry or group of industries or a particular economic
sector, the Shares also will be concentrated in that geographic region, an industry or group of
industries or a particular economic sector.
|
(27) |
|
The Index May Be Potentially Over-Concentrated in a Particular Index Commodity
Sector, and in Turn, Your Shares May Become More Volatile. |
The commodities underlying the futures contracts included in the Index Commodities will be
from one of the following categories: energy, base metals, precious metals, and agriculture. As a
result, the Index may become concentrated in a specific category. As the Index concentration
increases in a category, the corresponding futures contracts owned by the applicable Fund will
increase accordingly. Additional concentration increases the opportunity for greater potential
losses and gains. Therefore, an increase in the concentration within a category may increase cause
the Shares to magnify their potential losses.
|
(28) |
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Changes in the Value of the Index Commodities May Offset Each Other. |
The performance of the Shares is linked to the aggregate changes in the closing levels of the
Index Commodities of the Indexes. Price movements between the Index Commodities representing
different commodity classes or geographic regions may not correlate with each other. At a time
when the value of an Index Commodity representing a particular commodity class or geographic region
increases, the value of other Index Commodities representing different commodity classes or
geographic regions may not increase as much or may decline. Therefore, in calculating the closing
level of an Index, increases in the value of some of the Index Commodities may be moderated by
lesser increases, or more than offset by declines in the closing levels of other Index Commodities.
|
(29) |
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Shareholders Have No Rights Against the Index Oversight Committee. |
Although the Index Oversight Committee may make certain decisions (such as discontinuing the
Index) that may negatively affect the existence of the
Indexes or the Index levels, Shareholders
will have no rights against the Index Oversight Committee. The Index Oversight Committee has no
obligations relating to this offering or to the Shareholders.
|
(30) |
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The Index Oversight Committee and Index Calculation Agent Have No Obligation to
Consider Your Interests in Calculating or Revising the Indexes. |
The Index Oversight Committee and Index Calculation Agent calculate and maintain the Indexes.
The Index Oversight Committee may add, eliminate or substitute the instruments underlying the
Indexes or make other methodological changes that may change the level of an Index Commodity. You
should realize that changing an underlying instrument included in the Indexes may significantly
affect its results, either negatively or positively. Additionally, the Index Oversight Committee
and or the Index Calculation Agent may alter, discontinue or suspend calculation or dissemination
of an Index Commodity. Any of these actions could adversely affect the value of the Shares. The
Index Oversight Committee and Index Calculation Agent have no obligation to consider your interests
in calculating or revising an Index Commodity.
|
(31) |
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The Index Calculation Agent May Adjust the Index in ways that Affect its Level, and
it Has No Obligation to Consider Your Interests. |
The Index Calculation Agent, calculates and maintains the Index. The Index Calculation Agent
is entitled to exercise limited discretion in relation to the Index, including, but not limited to,
calculating the Index levels should an extraordinary event (as provided by the Index rules) occur.
Although the Index Calculation Agent will act and make all determinations in good faith, it should
be noted that the policies and judgments for which the Index Calculation Agent is responsible may
have an impact, positive or negative, on the Index levels, and in turn, the value of your Shares.
|
(32) |
|
Jefferies Group, Inc. and Its Affiliates May Publish Research That Conflicts With
Each Other and Which May Negatively Impact the Value of the Funds and Your Shares. |
Jefferies Group, Inc. and its affiliates may publish research from time-to-time on commodity
markets and other matters that may influence the value of the Shares, or express opinions or
provide
-26-
recommendations that are inconsistent with purchasing or holding the Shares. Jefferies Group,
Inc. and its affiliates may have published or may publish in the future research or other opinions
that call into question the investment view implicit in an investment in the Shares. Any research,
opinions or recommendations expressed by these entities may not be consistent with each other and
may be modified from time-to-time without notice. Shareholders should make their own independent
investigation of the merits of investing in the Shares.
|
(33) |
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The Investment Strategy Used to Construct the Index Involves Rebalancing and
Weighting Limitations that are Applied to the Index Commodities, Which May Limit the
Potential Results of the Index, and in Turn, the Potential Value of Your Shares. |
The Index Commodities are subject to rebalancing and weighting limits. By contrast, a
synthetic portfolio that does not rebalance and is not subject to any weighting limits could see
greater compounded gains over time through exposure to a consistently and rapidly appreciating
portfolio consisting of the Index Commodities. Therefore, the investment strategy of the Indexes
may constrain the potential results of a particular Index, and in turn, decrease the potential
value of your Shares.
|
(34) |
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Because the Index Commodities of the Indexes May Not Be Equally Weighted, the Index
Commodities With Greater Weight Will Have a Larger Impact on the Aggregate Results of a
Particular Index, and May Increase the Potential Losses to Your Shares. |
The Index Commodities that comprise the Indexes may have different weights at various times.
One consequence of such an unequal weighting of the Index Commodities is that the same percentage
change in two of the Index Commodities may have different effects on the level of the Indexes due
to the unequal weightings. Therefore, as the weighting of an Index Commodity increases, a decrease
in the value of such an Index Commodity would further decrease the value of a particular Index, and
in turn, the value of your Shares.
|
(35) |
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Correlation of Changes in the Closing Levels Among the Index Commodities May Reduce
the Performance of the Shares. |
Changes in the closing levels amongst the Index Commodities may become highly correlated from
time-to-time, including, but not limited to, a period during which there is a substantial decline
in a particular sector represented by the Index Commodities. Furthermore, such Index Commodities
may have a higher weighting in a particular Index relative to any of the other sectors. High
correlation during periods of negative returns among heavily weighted Index Commodities
representing any one sector may adversely impact the closing levels of a particular Index, and in
turn, the value of your Shares.
|
(36) |
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The Results of an Index May Be Lower Than the Results of an Index Based Upon
Different Combinations of the Index Commodities. |
The closing levels of an Index depend on the results of the underlying Index Commodities, as
determined by the index methodology. There can be no assurance that the selection of the Index
Commodities will actually produce higher closing levels than a different combination of index
commodities, methodologies, or strategies.
|
(37) |
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Certain of the Futures Contracts Underlying the Index Commodities Will Be Subject to
Pronounced Risks of Pricing Volatility. |
Certain of the futures contracts underlying the Index Commodities, most notably agricultural
products, tend to have only a few contract months each year that trade with sufficient liquidity.
Thus, the futures contracts corresponding to these Index Commodities tend to expire infrequently,
roll forward less frequently than monthly, and may have further pronounced pricing volatility
during extended periods of low liquidity.
Certain of the Index Commodities, 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 the Index Commodities that
represent energy, it should be noted that, due to the significant level of its continuous and
worldwide consumption, limited reserves, and oil cartel controls, energy
-27-
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 Commodities, the closing levels of the
applicable Index, and in turn the value of your Shares, may also become subject to a corresponding
increase in volatility.
Treasury Security Related Risks
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(38) |
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Certain Interest Rate Environments May Cause TIPS to Experience Greater Losses Than
Other Fixed Income Securities With Similar Duration. |
The Jefferies Real Return ETF will invest in TIPS which are special types of treasury bonds
that were created to offer bond investors protection from inflation. TIPS decline in value when
real interest rates rise. Therefore, in certain interest rate environments, such as when real
interest rates are rising faster than nominal interest rates, TIPS may experience greater losses
than other fixed income securities with similar duration.
The values of the TIPS are automatically adjusted to the inflation rate as measured by the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for all Urban Consumers,
the Consumer Price Index, or CPI, published monthly by the U.S. Department of Labors Bureau of
Labor Statistics. If the CPI goes up by half a percent, the value of the TIPS also goes up by half
a percent. If the CPI falls, the value of the TIPS does not fall because the government guarantees
that the original investment will remain the same. However, the CPI measurement may not be
completely accurate and, as a result, the principal balance of the TIPS may not increase
commensurately with true interest.
|
(39) |
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The Value of TIPS Tends to Decrease When Real Interest Rates Increase. |
The value of TIPS is also subject to the effects of changes in real interest rates that may
change as a result of different factors. The value of TIPS tends to decrease when real interest
rates increase and increase when real interest rates decrease. Real interest rates are tied to the
relationship between nominal interest rates and the rate of inflation. If nominal interest rates
increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in
value of the TIPS. Short term increases in inflation may also lead to a decline in value.
However, because TIPS are backed by the full faith
and credit of the U.S. government, repayment of
the original principal upon maturity (as adjusted for inflation) is guaranteed by the U.S.
government.
|
(40) |
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There Can Be No Assurance That the Inflation Adjustment Made to TIPS Will Be
Accurate. |
TIPS are fixed income securities whose principal value is periodically adjusted according to
the rate of inflation as measured by the CPI. The index for measuring the inflation rate for
inflation-linked U.S. Treasury securities, such as TIPS, is the CPI. Although interest payments on
TIPS will vary along with changes in the CPI, there can be no assurance that the CPI will
accurately measure the change in the general price increase of a certain good or service.
Therefore the inflation adjustment made to TIPS may not be accurate.
|
(41) |
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Deflation Causes the Principal Value of TIPS to Fall, Reducing the Potential Interest
Earned by the Jefferies Real Return ETF Holdings of TIPS. |
Generally, during periods of rising inflation, the value of TIPS will tend to increase, and
during periods of deflation, the value of TIPS will tend to decrease. If the TIPSs principal
value falls due to deflation, the TIPS will be adjusted downward, and consequently the interest
payable on the TIPS (calculated with respect to a smaller principal amount) will be reduced.
While deflation will cause a reduction in the interest payment made on TIPS, the repayment of
principal at the maturity of the TIPS is guaranteed by the U.S. Treasury to be no less than the
original face or par amount of the TIPS at the time of issuance.
THE INFLATION PROTECTION OFFERED BY THE JEFFERIES REAL RETURN ETFS INVESTMENT IN TIPS DOES
NOT GUARANTEE THAT THE FUND WILL BE PROFITABLE.
Regulatory Related Risks
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(42) |
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Shareholders Will Not Have the Protections Associated With Ownership of Shares in an
Investment Company Registered Under the Investment Company Act of 1940. |
None of the Funds is registered as an investment company under the Investment Company Act of
1940, and none of them is required to register
-28-
under such Act. Consequently, Shareholders will not have the regulatory protections provided
to investors in registered and regulated investment companies.
|
(43) |
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Trading on Commodity Exchanges Outside the United States is Not Subject to U.S.
Regulation. |
Some of the Funds trading is expected to be conducted on commodity exchanges outside the
United States. Trading on such exchanges is not regulated by any United States governmental agency
and may involve certain risks not applicable to trading on United States exchanges, including
different or diminished investor protections. In trading contracts denominated in currencies other
than U.S. dollars, Shares will be subject to the risk of adverse exchange-rate movements between
the dollar and the functional currencies of such contracts. Shareholders could incur substantial
losses from trading on commodity exchanges which such Shareholders would not have otherwise been
subject had the Funds trading been limited to U.S. markets.
Based on the historical closing levels of the Index, the Managing Owner estimates that
approximately [7%] of each Funds trading is expected to be conducted on commodity exchanges
outside the United States.
The above estimate is only an approximation. The actual percentage may be either lesser or
greater than above-listed.
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(44) |
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Regulatory Changes or Actions May Alter the Nature of an Investment in the Funds. |
Considerable regulatory attention has been focused on non-traditional investment pools which
are publicly distributed in the United States. There is a possibility of future regulatory changes
altering, perhaps to a material extent, the nature of an investment in the Funds or the ability of
the Funds to continue to implement their investment strategies.
The futures markets are subject to comprehensive statutes, regulations, and margin
requirements. In addition, the CFTC and the exchanges are authorized to take extraordinary actions
in the event of a market emergency, including, for example, the retroactive implementation of
speculative position limits or higher margin requirements, the establishment of daily price limits
and the suspension of trading. The regulation of futures transactions in the United States
is a rapidly changing area of law and is subject to modification by government and judicial action. The
effect of any future regulatory change on the Funds is impossible to predict, but could be
substantial and adverse.
[Remainder of page left blank intentionally.]
-29-
|
(45) |
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Certain Operations of the Funds, Including the Creation of Baskets, May Be
Restricted by Regulatory and Exchange Position Limits and Other Rules. |
CFTC and commodity exchange rules impose speculative position limits on market participants,
including the Funds, trading in certain commodities. These position limits prohibit any person from
holding a position of more than a specific number of such futures contracts.
The Indexes are composed of 19 Index Commodities, of which 17 are subject to speculative
position limits imposed by either the CFTC or the rules of the futures exchanges on which the
futures contracts for the applicable Index Commodities are traded. The purposes of speculative
position limits are to diminish, eliminate or prevent sudden or unreasonable fluctuations or
unwarranted changes in the prices of futures contracts. Currently, speculative position limits (i)
for corn, wheat, soybean and cotton are determined by the CFTC and (ii) for all other commodities
are determined by the futures exchanges. Generally, speculative position limits in the physical
delivery markets are set at a stricter level during the spot month, when the futures contract
matures and becomes deliverable, versus the limits set for all other months. Subject to any
relevant exemptions, traders, such as each of the Funds, may not exceed speculative position
limits, either individually, or in the aggregate with other persons with whom they are under common
control or ownership. If the Managing Owner determines that a Funds trading may be approaching
any of these speculative position limits, such Fund may reduce its trading in that commodity or
trade in other commodities or instruments that the Managing Owner determines comply with the rules
and goals of the particular Index. Below is a chart that sets forth certain relevant information,
including current speculative position limits for each Affected Index Commodity 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. Speculative
position limit levels are subject to change by the CFTC or the relevant exchanges.
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Affected |
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Index |
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Exchange |
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Commodity |
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(Symbol)1 |
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Exchange Position Limits |
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Group I |
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WTI Crude Oil
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NYMEX (CL)
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3,000 Last three days of trading in the Spot Month
10,000 Single Month
20,000 All Months Combined |
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Heating Oil
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NYMEX (HO)
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1,000 Last three days of trading in the Spot Month
5,000 Single Month
7,000 All Months Combined |
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Unleaded Gasoline
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NYMEX (RB)
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1,000 Last three days of trading in the Spot Month
5,000 Single Month
7,000 All Months Combined |
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Group II |
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Natural Gas
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NYMEX (NG)
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1,000 Last three days of trading in the Spot Month
6,000 Single Month
12,000 All Months Combined |
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Corn
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CBOT (C)
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600 Spot Month
13,500 Single Month Additional futures
contracts may be held outside of the spot month as
part of futures/futures spreads within a crop year
provided that the total of such positions, when
combined with outright positions, does not exceed
the all months combined limit.
22,000 All Months Combined |
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Soybeans
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CBOT (S)
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600 Spot Month
6,500 Single Month Additional futures
contracts may be held outside of the spot month as
part of futures/futures spreads within a crop year
provided that the total of such positions, when
combined with outright positions, does not exceed
the all months combined limit.
10,000 All Months Combined |
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-30-
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Affected |
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Index |
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Exchange |
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Commodity |
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(Symbol)1 |
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Exchange Position Limits |
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Live Cattle
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CME (LC)
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450 Spot Month As of the close of business on
the first business day following the first Friday of
the contract month
300 Spot Month As of the close of business on
the business day immediately preceding the last five
business days of the contract month
5,400 Single Month
Not Applicable All Months Combined |
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Gold
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COMEX (GC)
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3,000 Spot Month
6,000 Single Month
6,000 All Months Combined |
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Copper
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COMEX (HG)
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750 Spot Month
5,000 Single Month
5,000 All Months Combined |
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Group III |
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Sugar
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ICE US (SB)
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5,000 Spot Month As of the opening of trading
on the second business day following the expiration
of the regular option traded on the expiring futures
contract
10,000 Single Month
15,000 All Months Combined |
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Cotton
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ICE US (CT)
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300 Spot Month
3,500 Single Month
5,000 All Months Combined |
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Cocoa
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ICE US (CC)
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1,000 Spot Month
6,000 Single Month
6,000 All Months Combined |
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Coffee
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ICE US (KC)
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500 Spot Month
5,000 Single Month
5,000 All Months Combined |
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Group IV |
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Wheat
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CBOT (W)
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600 Spot Month In the last five trading days
of the expiring futures month in May, the
speculative position limit will be 600 contracts if
deliverable supplies are at or above 2,400
contracts, 500 contracts if deliverable supplies are
between 2,000 and 2,399 contracts, 400 contracts if
deliverable supplies are between 1,600 and 1,999
contracts, 300 contracts if deliverable supplies are
between 1,200 and 1,599 contracts, and 220 contracts
if deliverable supplies are below 1,200 contracts.
Deliverable supplies will be determined from the
CBOTs Stocks of Grain report on the Friday
preceding the first notice day for the May contract
month.
5,000 Single Month Additional futures
contracts may be held outside of the spot month as
part of futures/futures spreads within a crop year
provided that the total of such positions, when
combined with outright positions, does not exceed
the all months combined limit.
6,500 All Months Combined |
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Lean Hogs
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CME (LH)
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950 Spot Month As of the close of business on
the fifth business day of the contract month
4,100 Single Month |
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Orange Juice
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ICE US (OJ)
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300 Spot Month
3,200 Single Month
3,200 All Months Combined |
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Silver
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COMEX (SI)
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1,500 Spot Month
6,000 Single Month
6,000 All Months Combined |
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-31-
1 |
|
Legend: CBOT means the Board of Trade of the City of Chicago Inc., or its successor.
ICE US means ICE Futures U.S., Inc. or its successor.
NYMEX means the New York Mercantile Exchange or its successor.
COMEX means the Commodity Exchange Inc., New York or its successor.
CME means Chicago Mercantile Exchange, Inc. or its successor. |
The Funds are subject to position limits and, consequently, a Funds ability to issue new
Baskets or such Funds ability to reinvest income in additional futures contracts corresponding to
certain commodities may be limited to the extent that these activities would cause such Fund to
exceed the applicable position limits, unless such Fund trades alternative futures contracts or
over-the-counter derivatives in addition to and as a proxy for futures on the Affected Index
Commodities. Speculative position limits may affect the correlation between changes in the net
asset value per Share and changes in the level of the Index, and the correlation between the price
of the Shares, as traded on the NYSE Arca, and the net asset value of such Fund. That is, the use
of alternative futures contracts or over-the-counter derivatives in addition to or as a proxy for
futures on the Affected Index Commodities, or the inability to create additional Baskets, could
result in tracking error between changes in the net asset value per Share and changes in the level
of the Index, or could result in the Shares of a Fund trading at a premium or discount to net asset
value per Shares.
It is possible that in the future, the CFTC may propose new rules with respect to position
limits in agricultural, energy and any other commodities for traders engaged in indexed-based
trading, such as the trading engaged in by the Funds. Depending on the outcome of any future CFTC
rulemaking, the rules concerning position limits may be amended in a manner that is either
detrimental or favorable to the Funds. For example, if the amended rules are detrimental to a
Fund, that Funds ability to issue new Baskets, or a its ability to reinvest income in additional
futures contracts corresponding to the Affected Index Commodities, may be limited to the extent
these activities would cause a Fund to exceed the applicable position limits. Limiting the size of
a Fund may affect the correlation between the price of the Shares of the Fund, as traded on the
NYSE Arca, and the net asset value of a Fund. That is, the inability to create additional Baskets
could result in Shares in a Fund trading at a premium or discount to net asset value of such Fund.
[Remainder of page left blank intentionally.]
-32-
|
(46) |
|
The NYSE Arca May Halt Trading in the Shares of a Fund Which Would Adversely Impact
Your Ability to Sell Shares. |
Trading in Shares of a Fund may be halted due to market conditions or, in light of NYSE Arca
rules and procedures, for reasons that, in the view of the NYSE Arca, make trading in Shares of a
Fund inadvisable. In addition, trading is subject to trading halts caused by extraordinary market
volatility pursuant to circuit breaker rules that require trading to be halted for a specified
period based on a specified market decline. There can be no assurance that the requirements
necessary to maintain the listing of the Shares of a Fund will continue to be met or will remain
unchanged. A Fund will be terminated if the Shares are delisted.
Tax Related Risks
|
(47) |
|
Shareholders of Each Fund Will Be Subject to Taxation on Their Allocable Share of the
Funds Taxable Income, Whether or Not They Receive Cash Distributions. |
Shareholders of each Fund will be subject to U.S. federal income taxation and, in some cases,
state, local, or foreign income taxation on their allocable share of the Funds taxable income,
whether or not they receive cash distributions from the Fund. Shareholders of a Fund may not
receive cash distributions equal to their share of the Funds taxable income or even the tax
liability that results from such income.
|
(48) |
|
Items of Income, Gain, Deduction, Loss and Credit with Respect to Shares of a Fund
Could Be Reallocated if the IRS Does Not Accept the Assumptions or Conventions Used by the
Fund in Allocating Fund Tax Items. |
U.S. federal income tax rules applicable to partnerships are complex and often difficult to
apply to publicly traded partnerships. Each Fund will apply certain assumptions and conventions in
an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit
to Shareholders of the Fund in a manner that reflects Shareholders beneficial shares of
partnership items, but these assumptions and conventions may not be in compliance with all aspects
of applicable tax requirements. It is possible that the IRS will successfully assert that the
conventions and
assumptions used by a Fund do not satisfy the technical requirements of the Code
and/or Treasury Regulations and could require that items of income, gain, deduction, loss or credit
be adjusted or reallocated in a manner that adversely affects you.
|
(49) |
|
The Current Treatment of Long-Term Capital Gains Under Current U.S. Federal Income
Tax Law May Be Adversely Affected, Changed or Repealed in the Future. |
Under current law, long-term capital gains are taxed to non-corporate investors at a maximum
U.S. federal income tax rate of 15%. This tax treatment may be adversely affected, changed or
repealed by future changes in tax laws at any time and is currently scheduled to expire for tax
years beginning after December 31, 2010.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH
RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES OF A FUND; SUCH TAX
CONSEQUENCES MAY DIFFER WITH RESPECT TO DIFFERENT INVESTORS.
Other Risks
|
(50) |
|
Failure of Futures Commission Merchants or Commodity Brokers to Segregate Assets May
Increase Losses; Despite Segregation of Assets, a Fund Remains at Risk of Significant
Losses Because a Fund May Only Receive a Pro-Rata Share of the Assets, or No Assets at
All. |
The Commodity Exchange Act requires a clearing broker to segregate all funds received from
customers from such brokers proprietary assets. If the Clearing Broker fails to do so, the assets
of the Funds might not be fully protected in the event of the Clearing Brokers bankruptcy.
Furthermore, in the event of the Clearing Brokers bankruptcy, any Funds could be limited to
recovering either a pro rata share of all available funds segregated on behalf of the Clearing
Brokers combined customer accounts or such Funds may not recover any assets at all, even though
certain property specifically traceable to a particular Fund was held by the Clearing Broker. The
Clearing Broker may, from time-to-time, have been the subject of certain regulatory and private
-33-
causes of action. Such material actions, if any, are described under The Commodity Brokers.
In the event of a bankruptcy or insolvency of any exchange or a clearing house, a Fund could
experience a loss of the funds deposited through its Clearing Broker as margin with the exchange or
clearing house, a loss of any profits on its open positions on the exchange, and the loss of
unrealized profits on its closed positions on the exchange.
|
(51) |
|
Lack of Independent Advisers Representing Investors. |
The Managing Owner has consulted with counsel, accountants and other advisers regarding the
formation and operation of the Funds. No counsel has been appointed to represent you in connection
with the offering of the Shares. Accordingly, you should consult your own legal, tax and financial
advisers regarding the desirability of an investment in the Shares of a Fund.
|
(52) |
|
Competing Claims Over Ownership of Intellectual Property Rights Related to the Funds
Could Adversely Affect the Funds and an Investment in the Shares. |
While the Managing Owner believes that all intellectual property rights needed to operate the
Funds are either owned by or licensed to the Managing Owner or have been obtained, third parties
may allege or assert ownership of intellectual property rights which may be related to the design,
structure and operations of the Funds. To the extent any claims of such ownership are brought or
any proceedings are instituted to assert such claims, the negotiation, litigation or settlement of
such claims, or the ultimate disposition of such claims in a court of law if a suit is brought, may
adversely affect the Funds and an investment in the Shares, for example, resulting in expenses or
damages or the termination of the Funds.
-34-
INVESTMENT OBJECTIVES OF THE FUNDS
Investment Objectives
The Jefferies TR/J CRB Commodity Index ETF, or the Jefferies TR/J CRB ETF, establishes long
positions in futures contracts on the commodities comprising the Thomson Reuters/Jefferies CRB
Index, or the TR/J CRB Index, with a view to tracking the changes, whether positive or negative, in
the level of the TR/J CRB Index over time. The Jefferies TR/J CRB ETF is also intended to reflect
the excess, if any, of its interest income from its holdings of 3-month U.S. Treasury bills over
the expenses of such Fund. The Jefferies Commodity Real Return ETF, or the Jefferies Real Return
ETF, establishes long positions in futures contracts on the commodities comprising the Thomson
Reuters / Jefferies CRB 3 Month Forward Index, or the Forward Index, with a view to tracking the
changes, whether positive or negative, in the level of the Forward Index over time. The Jefferies
Real Return ETF is also intended to reflect the excess, if any, of its interest income from its
investment in U.S. government issued Treasury Inflation Protection Securities, or TIPS, which serve
to generally protect against erosion of value from inflation, and any investments in other high
credit quality short-term fixed income securities, over the expenses of such Fund. The Shares are
designed for investors who want a cost effective and convenient way to invest in a diversified
index of commodity futures on U.S. and non-U.S. markets.
Advantages of investing in the Shares include:
|
|
Ease and Flexibility of Investment. The Shares of each Fund will trade on the NYSE Arca and
provide institutional and retail investors with indirect access to commodity futures markets.
The Shares may be bought and sold on the NYSE Arca like other exchange-listed securities.
Retail investors may purchase and sell Shares through traditional brokerage accounts. |
|
|
|
Shares May Provide A More Cost Effective Alternative. Investing in the Shares of a Fund can
be easier and less expensive for an investor than constructing and trading a comparable
commodity futures portfolio. |
|
|
|
Margin. Shares are eligible for margin accounts. |
|
|
|
Diversification. The Shares may help to diversify a portfolio because historically the |
|
|
Indexes have tended to exhibit low to negative correlation with both equities and conventional
bonds. |
|
|
|
Transparency. The Shares provide a more direct investment in commodities than mutual funds
that invest in commodity-linked notes, which have implicit imbedded costs and credit risk |
|
|
|
Potential Inflation Protection for Investors in the Jefferies Real Return ETF. The Jefferies
Real Return ETF expects to invest a significant amount of its holding of cash in the form of
TIPS, which are backed by the full faith and credit of the U.S. government and generally
provide a degree of protection against inflation. |
Investing in the Shares does not insulate Shareholders from certain risks, including price
volatility.
Each Funds portfolio also holds 3-month U.S. Treasury bills, TIPS and other high credit
quality short-term fixed income securities, as applicable, for deposit with such Funds Clearing
Broker as margin.
The Funds intend to track the following Indexes:
|
|
Jefferies TR/J CRB Commodity Index ETF is designed to track the TR/J CRB Index and |
|
|
|
Jefferies Commodity Real Return ETF is designed to track the Thomson Reuters / Jefferies CRB
3 Month Forward Index, or the Forward Index. |
If the Managing Owner determines in its commercially reasonable judgment that it has become
impracticable or inefficient for any reason for the Funds to gain a full or a partial exposure to
any Index Commodity by investing in a specific futures contract that is a part of the Indexes, the
Funds may:
|
|
invest in a futures contract referencing the particular Index Commodity other than the
specific futures contract that is a part of the Index, or |
|
|
|
invest in a forward agreement, swap or other OTC derivative referencing the particular Index
Commodity, or |
|
|
|
in the alternative, invest in other futures contracts, forward agreements, swaps or OTC |
-35-
|
|
derivatives not based on the particular Index Commodity |
if, in the commercially reasonable judgment of the Managing Owner, such above instruments tend to
exhibit trading prices that correlate with a futures contract that is a part of the Index.
Under the Declarations of Trust of the Funds, Wilmington Trust Company, the Trustee of the
Funds has delegated to the Managing Owner the exclusive management and control of all aspects of
the business of each Fund. The Trustee has no duty or liability 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 Index Calculation Agent will publish the daily closing level of the Index as of the close
of the NYSE Arca. The Managing Owner will publish the net asset value of each Fund and the net
asset value per Share of each Fund daily. Additionally, the Index Calculation Agent will publish
the intra-day level of each Index, and the Managing Owner will publish the indicative value per
Share of each Fund (quoted in U.S. dollars) once every fifteen seconds throughout each trading day.
All of the foregoing information will be published as follows:
The intra-day level of the Indexes (symbols: TR/J CRB Index: [ ]; Forward Index: [ ]) and
the intra-day indicative value per Share of each Fund (symbols: Jefferies TR/J CRB Commodity Index
ETF: [ ]; Jefferies Commodity Real Return ETF: [ ]) (each quoted in U.S. dollars) will be
published once every fifteen seconds throughout each trading day on the consolidated tape, [Reuters
and/or Bloomberg] and on the Managing Owners website at http://www.[ ].com, or any successor
thereto.
The current trading price per Share of each Fund (symbols: Jefferies TR/J CRB Commodity Index
ETF: CRB; Jefferies Commodity Real Return ETF: RRET) (quoted in U.S. dollars) will be published
continuously as trades occur throughout each trading day on the consolidated tape, [Reuters and/or
Bloomberg] and on the Managing Owners website at http://www.[ ].com, or any successor
thereto.
The most recent end-of-day Index closing level (symbols: TR/J CRB Index: [ ]; Forward Index:
[ ]) will be published as of the close of the NYSE Arca each trading day on the consolidated tape,
[Reuters and/or Bloomberg] and on the Managing
Owners website at http://www.[ ].com, or any
successor thereto.
The most recent end-of-day net asset value of each Fund (symbols: Jefferies TR/J CRB Commodity
Index ETF: [ ]; Jefferies Commodity Real Return ETF: [ ]) will be published as of the close of
business on [Reuters and/or Bloomberg] and on the Managing Owners website at
http://www.[ ].com, or any successor thereto. In addition, the most recent end-of-day net
asset value of each Fund will be published the following morning on the consolidated tape.
All of the foregoing information with respect to each Index will also be published at
http://www.[ ].com.
Any adjustments made to the Indexes will be published on the Managing Owners website
http://www.[ ].com and http://www.[ ].com, or any successor thereto.
The Index Calculation Agent obtains information for inclusion in, or for use in the
calculation of, the Indexes from sources the Index Calculation Agent considers reliable. None of
the Index Calculation Agent, the Managing Owner, the Funds or any of their respective affiliates
accepts responsibility for or guarantees the accuracy and/or completeness of the Indexes or any
data included in the Indexes.
The intra-day indicative value per Share of each Fund is based on the prior days final net
asset value, adjusted four times per minute throughout the trading day to reflect the continuous
price changes of the corresponding Funds futures contracts. The final net asset value of each
Fund and the final net asset value per Share is calculated as of the closing time of the NYSE Arca
or the last to close of the exchanges on which the Funds futures contracts are traded, whichever
is latest, and posted in the same manner. Although a time gap may exist between the close of the
NYSE Arca and the close of the exchanges on which the Index Commodities are traded, there is no
effect on the net asset value calculations as a result.
The Shares of the Jefferies TR/J CRB Commodity Index ETF and the Jefferies Commodity Real
Return ETF are intended to provide investment results that generally correspond to the changes,
whether positive or negative, in the levels of either the TR/J CRB Index or the Forward Index, over
time.
-36-
The value of the Shares of each Fund is expected to fluctuate in relation to changes in the
net asset value of the Funds. The market price of the Shares of a Fund may not be identical to
the net asset value per Share, but these two valuations are generally expected to be very close.
See The Risks You Face (2) Net Asset Value 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.
There can be no assurance that each Fund will achieve its investment objective or avoid
substantial losses. The Funds have no performance histories.
Role of Managing Owner
The Managing Owner will serve as the commodity pool operator and commodity trading advisor of
the Funds, pending final approval of its registration with the NFA.
Specifically, the Managing Owner:
|
|
will select the Trustee, administrator, distributor, marketing agent and auditor of the
Funds; |
|
|
|
will negotiate various agreements and fees for the Funds; |
|
|
|
will perform such other services as the Managing Owner believes that the Funds may from
time-to-time require. |
|
|
|
will select the commodity brokers for the Funds; and |
|
|
|
will monitor the performance results of each Funds portfolio and reallocates assets within
the portfolio with a view to causing the performance of such Funds portfolio to track that of
the TR/J CRB Index or the Forward Index, as applicable, over time. |
The Managing Owner will be registered as a commodity pool operator and commodity trading
advisor with the Commodity Futures Trading Commission and is a member of the National Futures
Association, pending final approval of its registration with the NFA.
The principal office of the Managing Owner is located at One Station Place, Three North,
Stamford, CT 06902. The telephone number of the Managing Owner is (203) 708-6500.
Market Diversification
As global markets and investing become more complex, the inclusion of futures may continue to
increase in traditional portfolios of stocks and bonds managed by advisors seeking improved balance
and diversification. The globalization of the worlds economy has the potential to offer
significant investment opportunities, as major political and economic events continue to have an
influence, in some cases a dramatic influence, on the worlds markets, creating risk but also
providing the potential for profitable trading opportunities. By allocating a portion of the risk
segment of their portfolios to a Fund, which invests in futures related to the Indexes, investors
have the potential, if their Fund investments are successful, to reduce the volatility of their
portfolios over time and the dependence of such portfolios on any single nations economy.
[Remainder of page left blank intentionally.]
-37-
DESCRIPTION OF THE THOMSON
REUTERS/JEFFERIES CRB INDEX AND THE
THOMSON REUTERS / JEFFERIES CRB 3
MONTH FORWARD INDEX
Thomson Reuters is a brand licensor for the Indexes and acts as the Index Calculation Agent.
Thomson Reuters does not approve, endorse or recommend the Funds or the Managing Owner.
Thomson, Thomson Reuters, Reuters
and CRB are service marks or trademarks of
Reuters America LLC, a Thomson Reuters company, or its affiliates.
General
We refer to the Thomson Reuters/Jefferies CRB Index as the TR/J CRB Index and the Thomson
Reuters / Jefferies CRB 3 Month Forward Index as the Forward Index. We refer to the TR/J CRB Index
and the Forward Index collectively as the Indexes. Because much of the disclosure regarding the
TR/J CRB Index and the Forward Index is identical, we have combined the following disclosure with
respect to the Indexes and we have distinguished between the two Indexes where applicable.
The Indexes are designed to provide timely and accurate representation of a long-only, broadly
diversified investment in commodities through a transparent and disciplined calculation
methodology. The Indexes are currently composed of futures contracts on the following 19 physical
commodities, or each, an Index Commodity: aluminum, cocoa, coffee, copper, corn, cotton, crude oil,
gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans,
sugar, unleaded gasoline, and wheat. The Index Commodities currently trade on United States
futures exchanges, with the exception of aluminum and nickel, which trade on the London Metal
Exchange, or the LME.
The TR/J CRB Index is designed to track the changes in the closing levels of nearby rolling
futures positions, as more specifically shown below in the Rollover Schedule Thomson
Reuters/Jefferies CRB Index. The Forward Index tracks the changes in the closing levels of the
futures positions that would in three months comprise the TR/J CRB Index. A commodity futures
contract is a bilateral agreement that provides for the purchase and sale of a specified type and
quantity of a commodity during a stated delivery month for a fixed price.
The history of the TR/J CRB Index dates back to 1957, when the Commodity Research Bureau
constructed an index comprised of 28 commodities that made its inaugural appearance in the 1958 CRB
Commodity Year Book. Since then, as commodity markets have evolved, the original index has
undergone periodic updates to remain a leading benchmark for the performance of commodities as an
asset class. The original index was renamed the Reuters/Jefferies CRB Index in 2005 when it
underwent its tenth and most recent revision as the collaborative effort of Reuters, the global
information company, and Jefferies Financial Products, LLC, an affiliate of the Managing Owner
to maintain its representation of modern commodity markets. The original index was renamed the
Thomson Reuters/Jefferies CRB Index in 2009 to reflect the 2008 combination of the Thomson
Corporation and Reuters Group PLC. The TR/J CRB Index is currently being calculated in accordance
with the methodology adopted in 2005.
The Indexes are calculated daily by the Index Calculation Agent. The Forward Index began
publishing in April 2007.
The methodology for determining the composition and weighting of the Indexes is subject to
modification by Thomson Reuters and Jefferies at any time. The changes in the closing levels of
TR/J CRB Index and the Forward Index are reported on a number of financial information sites,
including Thomson Reuters under the ticker symbols RJCRB01 and RJCRB.ER, respectively. For a more
complete description of the Indexes, please see the TR/J CRB Index Calculation Supplement and the
Forward Index Calculation Supplement, each of which is available at www.[___].com.
Weighting Factors: A Tiered Approach
The Indexes use a four-tiered approach to allocate among the Index Commodities included in the
Index. Group I includes only petroleum products; Group II includes seven Index Commodities which
are highly liquid; Group III is comprised of four liquid Index Commodities; Group IV includes Index
Commodities that may provide diversification.
All Index Commodities are equally weighted within Groups II, III and IV, as provided below.
-38-
THOMSON REUTERS/JEFFERIES CRB INDEX
THOMSON REUTERS / JEFFERIES CRB 3 MONTH FORWARD INDEX
|
|
|
|
|
|
|
|
|
|
|
|
Group |
|
Index Commodity |
|
Index Weight |
|
Contract Months |
|
Exchange |
|
|
|
WTI Crude Oil |
|
23% |
|
Jan-Dec |
|
NYMEX |
Group I |
|
Heating Oil |
|
5% |
|
Jan-Dec |
|
NYMEX |
|
|
Unleaded Gasoline |
|
5% |
|
Jan-Dec |
|
NYMEX |
|
|
|
Total |
|
33% |
|
|
|
|
|
|
|
Natural Gas |
|
6% |
|
Jan-Dec |
|
NYMEX |
|
|
Corn |
|
6% |
|
Mar, May, Jul, Sep, Dec |
|
CBOT |
|
|
Soybeans |
|
6% |
|
Jan, Mar, May, Jul, Nov |
|
CBOT |
Group II |
|
Live Cattle |
|
6% |
|
Feb, Apr, Jun, Aug, Oct, Dec |
|
CME |
|
|
Gold |
|
6% |
|
Feb, Apr, Jun, Aug, Dec |
|
COMEX |
|
|
Aluminum |
|
6% |
|
Mar, Jun, Sep, Dec |
|
LME |
|
|
Copper |
|
6% |
|
Mar, May, Jul, Sep, Dec |
|
COMEX |
|
|
|
Total |
|
42% |
|
|
|
|
|
|
|
Sugar |
|
5% |
|
Mar, May, Jul, Oct |
|
ICE-US |
|
|
Cotton |
|
5% |
|
Mar, May, Jul, Dec |
|
ICE-US |
Group III |
|
Cocoa |
|
5% |
|
Mar, May, Jul, Sep, Dec |
|
ICE-US |
|
|
Coffee |
|
5% |
|
Mar, May, Jul, Sep, Dec |
|
ICE-US |
|
|
|
Total |
|
20% |
|
|
|
|
|
|
|
Nickel |
|
1% |
|
Mar, Jun, Sep, Dec |
|
LME |
|
|
Wheat |
|
1% |
|
Mar, May, Jul, Sep, Dec |
|
CBOT |
Group IV |
|
Lean Hogs |
|
1% |
|
Feb, Apr, Jun, Jul, Aug, Oct, Dec |
|
CME |
|
|
Orange Juice |
|
1% |
|
Jan, Mar, May, Jul, Sep, Nov |
|
ICE-US |
|
|
Silver |
|
1% |
|
Mar, May, Jul, Sep, Dec |
|
COMEX |
|
|
|
Total |
|
5% |
|
|
|
|
|
Legend:
NYMEX means the New York Mercantile Exchange, or its successor.
CBOT means the Board of Trade of the City of Chicago Inc., or its successor.
CME means the Chicago Mercantile Exchange, Inc., or its successor.
COMEX means the Commodity Exchange Inc., New York, or its successor.
LME means The London Metal Exchange Limited or its successor.
ICE-US means ICE Futures U.S., Inc., or its successor.
-39-
Group I Petroleum Sector
Group I of the Indexes include only petroleum products WTI crude oil, heating oil and
unleaded gasoline. These Index Commodities are among the most economically significant and
frequently traded and historically have contributed meaningfully to the return and correlative
characteristics of commodity benchmark indices.
Petroleum-linked futures have experienced tremendous growth over the past several decades.
Crude oil, heating oil, and unleaded gasoline are among the most liquid, widely followed and
economically significant commodities futures contracts traded globally. Global daily production
and consumption of petroleum-linked products is at an all time high.
WTI crude oil, heating oil and unleaded gasoline, which comprise Group I, tend to correlate to
certain major bond and equity benchmarks, due to the strong impact of energy prices on global
economic activity.
Therefore, a representative commodity index, such as the Indexes, cannot ignore the importance
of petroleum to both the asset class and the global economy.
In order to reflect the critical role of petroleum in the global economy and maintain the
diversified nature of the Indexes, the Indexes have assigned an Index Weight of 33% to the Group I
Index Commodities, represented by the crude oil, unleaded gasoline and heating oil contracts traded
on the NYMEX.
Group II Highly Liquid Commodities
Group II is comprised of futures contracts on the Index Commodities that are traded in markets
that are highly liquid. These seven markets represent a diverse cross section across several
commodity sectors. Each Index Commodity is assigned an Index Weight of 6% of each Index. In
turn, Group II constitutes 42% of each Index.
Group III Liquid Commodities
Group III is comprised of futures contracts on Index Commodities that are traded in markets
that are liquid. These four Index Commodities include a second cross section of diverse and liquid
markets in order to diversify the Indexes. Each Index Commodity in Group III is assigned an Index
Weight of 5% of each Index. In turn, Group III constitutes 20% of each Index.
Group IV Diversifying Commodities
Group IV is comprised of futures contracts on Index Commodities that may provide additional
diversification to the Indexes by increasing the exposure of the Indexes to the Softs, Grains,
Industrial Metals, Meats and Precious Metals markets. Each Index Commodity in Group IV is assigned
an Index Weight of 1% of each Index. In turn, Group IV constitutes 5% of each Index.
Rollover Methodology
A rolling futures position is a position where, on a periodic basis, futures contracts on
physical commodities specifying delivery in a particular month are sold and futures contracts
specifying delivery in a later month are purchased. An investor with a rolling futures position is
able to avoid taking delivery of the underlying physical commodity while maintaining exposure to
those commodities. To maximize liquidity and transparency, this rolling process for the Index
Commodities for the Indexes occurs over the first four Business Days of each month according to the
following fixed schedule as described below. (In the context of the Indexes, Business Day is any
day on which the New York Mercantile Exchange is open for business.)
All calendar months for every Index Commodity included in this rollover schedule have
historically been relatively liquid as measured by trading volume and open interest. The rollover
methodology assumes a constant dollar investment and rolls a proportionally equal amount of the
active contracts on the Index Commodity to the deferred month contract on the Index Commodity at
the end of each roll Business Day.
-40-
Rollover Schedule Thomson Reuters/Jefferies CRB Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity |
|
Exchange |
|
Jan |
|
Feb |
|
Mar |
|
Apr |
|
May |
|
Jun |
|
Jul |
|
Aug |
|
Sep |
|
Oct |
|
Nov |
|
Dec |
|
WTI Crude Oil
|
|
NYMEX
|
|
Feb
|
|
Mar
|
|
Apr
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan |
|
Heating Oil
|
|
NYMEX
|
|
Feb
|
|
Mar
|
|
Apr
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan |
|
Unleaded Gasoline
|
|
NYMEX
|
|
Feb
|
|
Mar
|
|
Apr
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan |
|
Natural Gas
|
|
NYMEX
|
|
Feb
|
|
Mar
|
|
Apr
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan |
|
Corn
|
|
CBOT
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Soybeans
|
|
CBOT
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Nov
|
|
Nov
|
|
Nov
|
|
Nov
|
|
Jan
|
|
Jan |
|
Live Cattle
|
|
CME
|
|
Feb
|
|
Apr
|
|
Apr
|
|
Jun
|
|
Jun
|
|
Aug
|
|
Aug
|
|
Oct
|
|
Oct
|
|
Dec
|
|
Dec
|
|
Feb |
|
Gold
|
|
COMEX
|
|
Feb
|
|
Apr
|
|
Apr
|
|
Jun
|
|
Jun
|
|
Aug
|
|
Aug
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Feb |
|
Aluminum
|
|
LME
|
|
Mar
|
|
Mar
|
|
Jun
|
|
Jun
|
|
Jun
|
|
Sep
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Copper
|
|
COMEX
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Sugar
|
|
ICE US
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Oct
|
|
Oct
|
|
Oct
|
|
Mar
|
|
Mar
|
|
Mar |
|
Cotton
|
|
ICE US
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Cocoa
|
|
ICE US
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Coffee
|
|
ICE US
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Nickel
|
|
LME
|
|
Mar
|
|
Mar
|
|
Jun
|
|
Jun
|
|
Jun
|
|
Sep
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Wheat
|
|
CBOT
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Lean Hogs
|
|
CME
|
|
Feb
|
|
Apr
|
|
Apr
|
|
Jun
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Oct
|
|
Oct
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|
Dec
|
|
Dec
|
|
Feb |
|
Orange Juice
|
|
ICE US
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Nov
|
|
Nov
|
|
Jan
|
|
Jan |
|
Silver
|
|
COMEX
|
|
Mar
|
|
Mar
|
|
May
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar |
|
Rollover Schedule Thomson Reuters / Jefferies CRB 3 Month Forward Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Commodity |
|
Exchange |
|
Jan |
|
Feb |
|
Mar |
|
Apr |
|
May |
|
Jun |
|
Jul |
|
Aug |
|
Sep |
|
Oct |
|
Nov |
|
Dec |
|
WTI Crude Oil
|
|
NYMEX
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan
|
|
Feb
|
|
Mar
|
|
Apr |
|
Heating Oil
|
|
NYMEX
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan
|
|
Feb
|
|
Mar
|
|
Apr |
|
Unleaded Gasoline
|
|
NYMEX
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan
|
|
Feb
|
|
Mar
|
|
Apr |
|
Natural Gas
|
|
NYMEX
|
|
May
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Sep
|
|
Oct
|
|
Nov
|
|
Dec
|
|
Jan
|
|
Feb
|
|
Mar
|
|
Apr |
|
Corn
|
|
CBOT
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Soybeans
|
|
CBOT
|
|
May
|
|
Jul
|
|
Jul
|
|
Nov
|
|
Nov
|
|
Nov
|
|
Nov
|
|
Jan
|
|
Jan
|
|
Mar
|
|
Mar
|
|
May |
|
Live Cattle
|
|
CME
|
|
Jun
|
|
Jun
|
|
Aug
|
|
Aug
|
|
Oct
|
|
Oct
|
|
Dec
|
|
Dec
|
|
Feb
|
|
Feb
|
|
Apr
|
|
Apr |
|
Gold
|
|
COMEX
|
|
Jun
|
|
Jun
|
|
Aug
|
|
Aug
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Feb
|
|
Feb
|
|
Apr
|
|
Apr |
|
Aluminum
|
|
LME
|
|
Jun
|
|
Jun
|
|
Sep
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
Jun |
|
Copper
|
|
COMEX
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Sugar
|
|
ICE US
|
|
May
|
|
Jul
|
|
Jul
|
|
Oct
|
|
Oct
|
|
Oct
|
|
Mar
|
|
Mar
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Cotton
|
|
ICE US
|
|
May
|
|
Jul
|
|
Jul
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Cocoa
|
|
ICE US
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Coffee
|
|
ICE US
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Nickel
|
|
LME
|
|
Jun
|
|
Jun
|
|
Sep
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
Jun |
|
Wheat
|
|
CBOT
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
Lean Hogs
|
|
CME
|
|
Jun
|
|
Jun
|
|
Jul
|
|
Aug
|
|
Oct
|
|
Oct
|
|
Dec
|
|
Dec
|
|
Feb
|
|
Feb
|
|
Apr
|
|
Apr |
|
Orange Juice
|
|
ICE US
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Nov
|
|
Nov
|
|
Jan
|
|
Jan
|
|
Mar
|
|
Mar
|
|
May |
|
Silver
|
|
COMEX
|
|
May
|
|
Jul
|
|
Jul
|
|
Sep
|
|
Sep
|
|
Dec
|
|
Dec
|
|
Dec
|
|
Mar
|
|
Mar
|
|
Mar
|
|
May |
|
[Remainder of page left blank intentionally.]
-41-
Rebalancing Methodology
The Indexes employ arithmetic averaging with monthly rebalancing, while maintaining a uniform
exposure to the various Index Commodities over time.
The Index Commodities are rebalanced monthly, generally following the close of business on the
sixth Business Day of each month, to return to the specified dollar weights, referenced as Index
Weight in the first table above. This rebalancing is achieved by selling Index Commodities that
have gained in value relative to other Index Commodities and buying Index Commodities that have
lost in value relative to other Index Commodities. This monthly rebalancing helps to maintain both
the stability and consistency of the Indexes and the consistent exposure to the Index Weights of
the underlying Index Commodities over time.
The physical commodities underlying the exchange-traded futures contracts included as Index
Commodities of the Indexes from time-to-time may be heavily concentrated in a limited number of
sectors, particularly energy and agriculture. An investment in the Funds may therefore carry risks
similar to a concentrated securities investment in a limited number of industries or sectors.
The composition of the Indexes may be adjusted in the event that the Index Calculation Agent
is not able to calculate the closing prices of the Index Commodities.
Index Calculation
The Indexes reflect the changes in market value over time, whether positive or negative, of
the Index Commodities relative to the value of the Index Commodities as of a starting date, or the
Base Date. Although the TR/J CRB Index traces its origins to 1957, its current construction and
methodology have been in use since June 17, 2005 and therefore June 17, 2005 is considered to be
its Base Date. The Base Date of the Forward Index is considered to be the date it first began
publishing index values, April 5, 2007, on which date the closing levels of the Forward Index was
100. In the case of the Forward Index, for example, a quote of 125.75 means the Forward Indexs
value has risen 25.75% since the Forward Indexs Base Date.
The Index Calculation Agent calculates the closing level of each Index on both an excess
return
basis and a total return basis. An excess return index reflects the changes in market value
over time, whether positive or negative, of the Index Commodities. A total return is the sum of
the changes in market value over time, whether positive or negative, of the Index Commodities
incorporating the return of 3-month U.S. Treasury bills. Each Fund is designed to track its
respective Index as calculated on an excess return, not a total return, basis.
Change in the Methodology of the Indexes
The Index Calculation Agent employs the methodology described above. While the Index
Calculation Agent currently employs the above described methodology to calculate the Indexes, no
assurance can be given that fiscal, market, regulatory, juridical or financial circumstances
(including, but not limited to, any changes to or any suspension or termination of or any other
events affecting the Indexes, the Index Commodities, or any other exchange instrument, derivative
or otherwise) will not arise that would, in the view of the Index Oversight Committee (as further
described below), necessitate a modification of or change to such methodology and in such
circumstances the Index Oversight Committee may make any such modification or change as it
determines appropriate. The Index Oversight Committee may also make modifications to the terms of
the Indexes in any manner that it may deem necessary or desirable, including (without limitation)
to correct any manifest or proven error or to cure, correct or supplement any defective provision
of the Indexes. The Index Calculation Agent and/or Index Oversight Committee will publish notice
of any such modification or change.
Publication of Closing Levels and Adjustments
In order to calculate the indicative Index levels, the Index Calculation Agent determines the
real time price of each Index Commodity every 15 seconds. The Index Calculation Agent then
applies a set of rules to these values to create the indicative level of the Indexes. These rules
are consistent with the rules which the Index Calculation Agent applies at the end of each trading
day to calculate the closing levels of the Indexes. A similar polling process is applied to the
TIPS to determine the indicative value of the TIPS held by the Funds every 15 seconds throughout
the trading day.
-42-
The intra-day indicative value per Share of each Fund is calculated by adding the intra-day
TIPS level plus the intra-day level of each Index which is then applied to the last published net
asset value of the Fund, less accrued fees.
The Index Calculation Agent will publish the closing level of the Indexes daily. The Managing
Owner will publish the net asset value of each Fund and the net asset value per Share of each Fund
daily. Additionally, the Index Calculation Agent will publish the intra-day level of each Index,
and the Managing Owner will publish the indicative value per Share of each Fund (quoted in U.S.
dollars) once every fifteen seconds throughout each trading day. All of the foregoing information
will be published as follows:
The intra-day level of the Indexes (symbols: TR/J CRB Index: [___]; Forward Index: [___]) and
the intra-day indicative value per Share of each Fund (symbols: Jefferies TR/J CRB Commodity Index
ETF: [___]; Jefferies Commodity Real Return ETF: [___]) (each quoted in U.S. dollars) will be
published once every fifteen seconds throughout each trading day on the consolidated tape, [Reuters
and/or Bloomberg] and on the Managing Owners website at
http://www.[___].com, or any successor
thereto.
The current trading price per Share of each Fund (symbols: Jefferies TR/J CRB Commodity Index
ETF: [___]; Jefferies Commodity Real Return ETF: [___]) (quoted in U.S. dollars) will be published
continuously as trades occur throughout each trading day on the consolidated tape, [Reuters and/or
Bloomberg] and on the Managing Owners website at
http://www.[___].com, or any successor
thereto.
The most recent end-of-day Index closing level (symbols: TR/J CRB Index: [___]; Forward Index:
[___]) will be published as of the close of the NYSE Arca each trading day on the consolidated tape,
[Reuters and/or Bloomberg] and on the Managing Owners website at http://www.[___].com, or any
successor thereto.
The most recent end-of-day net asset value of each Fund (symbols: Jefferies TR/J CRB Commodity
Index ETF: [___]; Jefferies Commodity Real Return ETF: [___]) will be published as of the close of
business on [Reuters and/or Bloomberg] and on the Managing Owners website at
http://www.[___].com, or any successor thereto. In addition, the most recent end-of-day net
asset value of each Fund will be published the following morning on the consolidated tape.
All of the foregoing information with respect to the Indexes will also be published at
http://www.[___].com.
Any adjustments made to the Indexes will be published on the Managing Owners website
http://www.[___].com, or any successor thereto.
Interruption of Index Calculation
Calculation of the Indexes may not be possible or feasible under certain events or
circumstances, including, for example, without limitation, a systems failure, natural or man-made
disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar
intervening circumstance, that is beyond the reasonable control of the Index Calculation Agent and
that the Index Calculation Agent determines affects the Indexes, the Index Commodities, or any
substitute instrument with respect to an Index Commodity, as applicable. Additionally, Index
calculations may be disrupted by Rollover Disruptions, Rebalancing Disruptions and/or Market
Emergencies, as provided below.
Rollover Disruptions
A Rollover Disruption Event, or RDE, is defined as any day, on which an Index Commodity is
scheduled to roll, in which either:
|
|
the front month or back month contracts for the Index Commodity settle at the daily maximum
or minimum price as determined by the rules for the relevant exchange, or |
|
|
|
the exchange fails to publish an official settlement price for the Index Commodity, or |
|
|
|
the exchange on which the Index Commodity trades is not scheduled to be open. |
If a RDE occurs for any Index Commodity, that portion of the rollover for that Index Commodity
only which was scheduled to occur on that day is deferred until the next Business Day upon which no
RDE occurs for that Index Commodity. For example, if a RDE occurred on the first day upon which
corn was scheduled to roll, then the amount to be rolled on the second roll day would increase to
50%. If a second and third consecutive RDE occurred on the next two days upon which corn was
scheduled to roll, then the entire roll would take place at the end of the first Business Day in
which there
-43-
was no RDE. These hypothetical rollover disruptions in corn would have no impact on the
rollover schedule for other Index Commodities in the Indexes.
Rebalancing Disruptions
If, on any date the Indexes are scheduled to rebalance (defined above as the 6th
Business Day of each month), an official settlement price for any one or more of the Index
Commodities in the Indexes is unavailable, then the price used in rebalancing the Indexes for those
Index Commodities is the price on the previous Business Day upon which a price is available. In
the event any one or more individual Index Commodities settle at the daily maximum price or the
daily minimum price, that price will be used for the purpose of rebalancing the Indexes.
Market Emergencies
A Market Emergency is any unscheduled and extraordinary condition in which market liquidity
is interrupted (such as an event resulting in the unscheduled closing of one or more futures
exchanges). Should a Market Emergency occur, the Index Calculation Agent and/or the Index
Oversight Committee may take action with respect to the Indexes, as it deems or they deem
appropriate given the circumstances. The Index Calculation Agent or the Index Oversight Committee
may notify interested parties of any such actions as well in advance as is practicable on
www.[___].com. There is no assurance, however, that a Market Emergency, the actions taken in
response to such Market Emergency, or any other force majeure event, will not have an adverse
effect on the value of the Indexes or the manner in which it is calculated.
Ongoing Index Calculation and the Thomson Reuters/Jefferies CRB Index Oversight Committee
The role of the Thomson Reuters/Jefferies CRB Index Oversight Committee, or the Index
Oversight Committee , is to meet periodically in order to review and/or modify the operation and
calculation of both Indexes and procedures relating thereto, and to review proposals by Jefferies
or Thomson Reuters to modify the Indexes. The Committee is comprised of persons, appointed by
Jefferies, Thomson Reuters and the [Board of Trade of the City of New York, Inc.] The Index
Oversight Committee will have a significant degree of discretion with regard to the
operation and
calculation of the Indexes and may exercise its discretion, as it deems appropriate.
Disclaimers
THE FUNDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY THOMSON REUTERS OR ANY OF ITS
SUBSIDIARIES OR AFFILIATES, TOGETHER WITH JEFFERIES FINANCIAL PRODUCTS, LLC, THE LICENSORS.
LICENSORS MAKE NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE PRODUCT(S)
OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES OR COMMODITIES
GENERALLY OR IN THE FUNDS PARTICULARLY OR THE ABILITY OF EITHER OF THE INDEXES TO TRACK GENERAL
COMMODITY MARKET PERFORMANCE. THOMSON REUTERS ONLY RELATIONSHIP TO THE MANAGING OWNER AND THE
FUNDS, TOGETHER, THE LICENSEE, IS THE LICENSING OF THE INDEXES, WHICH ARE DETERMINED, COMPOSED AND
CALCULATED BY LICENSORS WITHOUT REGARD TO THE LICENSEE OR THE FUNDS. LICENSORS HAVE NO OBLIGATION
TO TAKE THE NEEDS OF THE LICENSEE OR THE OWNERS OF THE FUNDS INTO CONSIDERATION IN DETERMINING,
COMPOSING OR CALCULATING THE INDEXES. LICENSORS ARE NOT RESPONSIBLE FOR AND HAVE NOT PARTICIPATED
IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THE FUNDS TO BE ISSUED OR IN THE
DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE FUND INTERESTS ARE TO BE CONVERTED INTO
CASH. LICENSORS HAVE NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING
OR TRADING OF THE FUNDS.
LICENSORS AND THEIR AFFILIATES AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
MAY BUY OR SELL SECURITIES OR COMMODITIES MENTIONED OR CONTEMPLATED HEREIN AS AGENT OR AS PRINCIPAL
FOR THEIR OWN ACCOUNTS AND MAY HAVE POSITIONS OR ENGAGE IN TRANSACTIONS BASED ON OR INDEXED TO THE
INDEXES. IT IS POSSIBLE THAT LICENSORS TRADING ACTIVITY WILL AFFECT THE VALUE OF INDEXES.
LICENSORS MAY OPERATE AND MARKET
-44-
OTHER INDEXES THAT MAY COMPETE WITH THE INDEXES.
LICENSORS DO NOT GUARANTEE THE QUALITY, ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY
DATA INCLUDED THEREIN. LICENSORS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY LICENSEE, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
THOMSON REUTERS/JEFFERIES CRB INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. LICENSORS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND
HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
USE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL LICENSORS HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF NOTIFIED
OF THE POSSIBILITY OF SUCH DAMAGES.
Past Index levels are not necessarily indicative of future Index levels.
[Remainder of page left blank intentionally.]
-45-
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
Preparation of the financial statements and related disclosures in compliance 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 actual results may differ from the estimates used. Each Fund holds a significant
portion of its assets in futures contracts and treasury securities, both of which are held at fair
value.
Liquidity and Capital Resources
As of the date of this Prospectus, the Funds have not begun trading activities. Once the
Funds begin trading activities, it is anticipated that all of their total net assets will be
allocated to commodities trading. A significant portion of the net asset value of each Fund will
be held in 3-month U.S. Treasury bills, TIPS and cash, as applicable, which will be used as margin
for each Funds trading in commodity futures contracts. The percentage that TIPS bears to the
total net assets of each Fund varies from period to period as the market values of the commodity
futures contracts change. The balance of the net assets of each Fund is held in its commodity
trading account. Interest earned on each Funds interest-bearing funds will be paid to such Fund.
Each Funds futures contracts will be subject to periods of illiquidity because of market
conditions, regulatory considerations and other reasons. For example, commodity exchanges may
limit fluctuations in certain 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 has increased or decreased by an amount equal to the
daily limit, such positions can neither be taken nor liquidated unless the traders are willing to
effect trades at or within the limit. Commodities futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market conditions could prevent
a Fund from promptly liquidating its futures positions.
Because each Fund will trade futures contracts, its capital is at risk due to changes in the
value of these contracts (market risk) or the inability of
counterparties to perform under the
terms of the contracts (credit risk).
Market Risk
Trading in futures contracts involves each Fund entering into contractual commitments to
purchase or sell a particular commodity at a specified date and price. The market risk to be
associated with each Funds commitments to purchase commodities will be limited to the gross or
face amount of the contracts held. However, should a Fund enter into a contractual commitment to
sell commodities, it would be required to make delivery of the underlying commodity at the contract
price and then repurchase the contract at prevailing market prices or settle in cash. Since the
repurchase price to which the commodity can rise is unlimited, entering into commitments to sell
commodity exposes a Fund to theoretically unlimited risk.
Each Funds exposure to market risk is influenced by a number of factors including the
volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in
which the contracts are traded and the relationships among the contracts held. The inherent
uncertainty of each Funds trading as well as the development of drastic market occurrences could
ultimately lead to a loss of all or substantially all of investors capital.
Credit Risk
When a Fund enters into futures contracts, the Fund is exposed to credit risk that the
counterparty to the contract will not meet its obligations. The counterparty for futures contracts
traded on United States and on most foreign futures exchanges is 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 this credit risk. In cases where the clearing
house is not backed by the clearing members (i.e., some foreign exchanges, which may become
applicable in the future), it may be backed by a consortium of banks or other financial
institutions. There can be no assurance that any counterparty, clearing member or clearing house
will meet its obligations to a Fund.
The Managing Owner attempts to minimize these market and credit risks by requiring each Fund
to abide by various trading limitations and policies, which include limiting margin accounts,
trading only
-46-
in liquid markets and permitting the use of stop-loss provisions. The Managing Owner has
implemented procedures which include, but are not be limited to:
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executing and clearing trades with creditworthy counterparties; |
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limiting the amount of margin or premium required for any one commodity contract or all
commodity contracts combined; and |
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generally limiting transactions to contracts which are traded in sufficient volume to permit
the taking and liquidating of positions. |
The Clearing Broker, when acting as a Funds futures commission merchant in accepting orders
for the purchase or sale of domestic futures contracts, is required by CFTC regulations to
separately account for and segregate as belonging to the Fund, all assets of the Fund relating to
domestic futures trading and the Clearing Broker is not allowed to commingle such assets with other
assets of the Clearing Broker. In addition, CFTC regulations also require the Clearing Broker to
hold in a secure account assets of each Fund related to foreign futures trading.
OFF-BALANCE SHEET ARRANGEMENTS
AND CONTRACTUAL OBLIGATIONS
As of the date of this Prospectus, the Funds have not utilized, nor do they 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 Funds. While each Funds exposure under such indemnification provisions
cannot be estimated, these general business indemnifications are not expected to have a material
impact on either a Funds or a Funds financial position.
Each Funds contractual obligations are with the Managing Owner and the Funds services
providers, including the Administrator, the Trustee and the Clearing Broker. Management Fee
payments made to the Managing Owner are calculated as a fixed percentage of each Funds Net Asset
Value, 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 a Funds net asset
value. 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.
INFORMATION BARRIERS BETWEEN THE
INDEX OVERSIGHT COMMITTEE AND
THE MANAGING OWNERS PORTFOLIO
MANAGEMENT TEAM
It is Jefferies Group, Inc.s policy that procedures are implemented to prevent the improper
sharing of information between different departments of the company. Specifically, the procedures
discussed below create an information barrier between the personnel within Jefferies Group, Inc.
who sit on the Index Oversight Committee, or the Committee Group, and other Jefferies Group, Inc.s
personnel of the Managing Owner who are involved in making portfolio management and trading
decisions for the Fund, or Public Personnel, and also are intended to prevent the improper sharing
of certain Index-related information to others who could act on the information to the detriment of
the Fund. Effective information barriers between the Committee Group and Public Personnel will
help ensure that Public Personnel may continue to trade in the futures contracts underlying each
Index (otherwise, restrictions might apply regarding trading on nonpublic information under
applicable law).
As such, the information barriers erected under these procedures require the Committee Group
to adhere to the following procedures:
The Committee Group may not share any non-public, proprietary or confidential information
concerning each Index. In particular, the Committee Group may not release any information
concerning a change in the methodology of calculating each Index or a new composition of the Index
to Public Personnel or others unless and until such information has been previously published by
NYSE Arca, on Reuters, or Bloomberg under the symbols [___] and [___] and on the websites
http://www.[___].com and http://www.[___].com, or any successor thereto.
The Committee Group and Public Personnel may not coordinate or seek to coordinate decision-
-47-
making on the selection of each Indexs constituent instruments.
The Committee Group also may not enter into any trades based on any non-public, proprietary or
confidential information with respect to each Index.
These procedures supplement and do not override policies and procedures concerning information
barriers otherwise adopted by Jefferies Group, Inc. or any of its subsidiaries.
USE OF PROCEEDS
A substantial amount of proceeds of the offering of the Shares of each Fund will be used by
each Fund to engage in the trading of exchange-traded futures on its corresponding Index with a
view to tracking the changes, whether positive or negative, in the level of the corresponding Index
over time, less the expenses of the operations of the respective Fund. Each Funds portfolio also
holds 3-month U.S. Treasury bills, TIPS and other high credit quality short-term fixed income
securities, as applicable, for deposit with such Funds Clearing Broker as margin.
To the extent, if any, that a Fund trades in futures contracts on United States exchanges, the
assets deposited by such Fund with its Clearing 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 principally U.S. government obligations.
To the extent, if any, that a Fund trades in futures on markets other than regulated United
States futures 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, each Fund estimates:
(i) up to approximately [___]% of the net asset value of the Fund is placed in segregated
accounts in the name of such Fund with the Clearing Broker (or another eligible financial
institution, as applicable) in the form of cash, 3-month U.S. Treasury bills or
TIPS, as
applicable, to margin positions of all commodities combined. Such funds are segregated pursuant to
CFTC rules;
(ii) approximately [___]% of the net asset value of the Fund is maintained in segregated
accounts in the name of such Fund in bank deposits or United States Treasury and United States
Government Agencies issues.
The Managing Owner, a registered commodity pool operator and commodity trading advisor, is
responsible for the cash management activities of each Fund, including investing in United States
Treasury and United States Government Agencies issues.
In addition, assets of each Fund not required to margin positions may be maintained in United
States bank accounts opened in the name of such Fund and may be held in United States Treasury
bills (or other securities approved by the CFTC for investment of customer funds).
Each Fund receives 100% of the interest income earned on its fixed income assets.
[Remainder of page left blank intentionally.]
-48-
CHARGES
See Summary Breakeven Amounts and Summary Breakeven Table for additional breakeven
related information.
Management Fee
Each Fund will pay the Managing Owner a Management Fee, monthly in arrears, in an amount equal
to [0.75]% per annum of the daily net asset value of such Fund. The Management Fee will be paid in
consideration of the Managing Owners futures trading advisory services.
Organization and Offering Expenses
Each Fund will be responsible for paying, or for reimbursing the Managing Owner or its
affiliates for paying, all of the expenses incurred in connection with organizing such Fund as well
as the expenses incurred in connection with the offering of such Funds Shares (whether incurred
prior to or after the commencement of such Funds trading operations), subject to the Overall
Expense Cap described below.
Organization and offering expenses relating to the Funds means those expenses incurred in
connection with its formation, the qualification and registration of the Shares and in offering,
distributing and processing the Shares under applicable federal law, and any other expenses
actually incurred and, directly or indirectly, related to the organization of the Funds or the
offering of the Shares, including, but not limited to, expenses such as:
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initial and ongoing registration fees, filing fees, escrow fees and taxes; |
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costs of preparing, printing (including typesetting), amending, supplementing, mailing and
distributing the Registration Statement, the exhibits thereto and the Prospectus; |
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the costs of qualifying, printing, (including typesetting), amending, supplementing, mailing
and distributing sales materials used in connection with the offering and issuance of the
Shares; |
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travel, telegraph, telephone and other expenses in connection with the offering and issuance
of the Shares; |
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accounting, auditing and legal fees (including disbursements related thereto) incurred in
connection therewith; and |
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any extraordinary expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any permitted indemnification associated therewith) related thereto. |
The Managing Owner will not allocate to the Fund the indirect expenses of the Managing Owner.
The Managing Owner currently estimates that the aggregate amount of the organization and
offering expenses will be approximately $[___].
Brokerage Commissions and Fees
Each Fund will pay to the Clearing Broker all brokerage commissions, including applicable
exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction related fees and
expenses charged in connection with its trading activities, collectively, Brokerage Expenses,
subject to the Overall Expense Cap described below. On average, total charges paid to the Clearing
Broker are expected to be less than [$___] per round-turn trade, although the Clearing Brokers
brokerage commissions and fees will be determined on a contract-by-contract basis.
Routine Operational, Administrative and Other Ordinary Expenses
Each 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 expenses
of such Fund, including, but not limited to, computer services, the fees and expenses of the
Trustee, legal and accounting fees and expenses, tax preparation fees and expenses, filing fees,
and printing, mailing and duplication costs, subject to the Overall Expense Cap described below.
The Managing Owner expects that all of the routine operational, administrative and other ordinary
expenses of each Fund will be approximately [___]% per annum of each Funds net asset value.
Overall Expense Cap
The Managing Owner has agreed to pay the expenses incurred in connection with organizing each
Fund as well as the expenses incurred in connection
-49-
with the offering of such Funds Shares (whether incurred prior to or after the commencement
of such Funds trading operations), the Brokerage Expenses, and the routine operational,
administrative and other ordinary expenses of such Fund, which we refer to as Covered Expenses, to
the extent that, in the aggregate, they exceed [0.25]% per annum of the daily net asset value of
such Fund in any month, or the Overall Expense Cap. Any such amounts paid by the Managing Owner
will be subject to reimbursement by such Fund, without interest. Any expense reimbursement payment
during any month will be counted toward the [0.25]% per annum overall expense cap in respect of
such month. If in any month a Funds Covered Expenses are lower than the cap, the entire
difference between the Covered Expenses for such month and the cap for such month will be available
to reimburse the Managing Owner for unreimbursed expenses paid by the Managing Owner. . If a Fund
terminates before the Managing Owner has been fully reimbursed for any of the foregoing expenses,
the Managing Owner will forfeit the unreimbursed portion of such expenses outstanding as of such
time.
Extraordinary Fees and Expenses
Each 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 itself. 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.
Management Fee and Expenses to be Paid First out of Interest Income
The Management Fee, all expenses incurred in connection with organizing each Fund as well as
the expenses incurred in connection with the offering of Shares, Brokerage Expenses, and the
routine operational, administrative and other ordinary expenses of each Fund (including
reimbursement payments to the Managing Owner) will be paid first out of interest income from each
Funds holdings of 3-month U.S. Treasury bills, TIPS and other high credit quality short-term fixed
income securities, as applicable, on deposit with the Clearing Broker as margin or otherwise.
To the extent interest income is not sufficient to cover the fees and expenses of a Fund
during any period, the excess of such fees and expenses over such interest income will be paid out
of income from futures trading, if any, or from sales of the Funds fixed income securities.
Selling Commission
Retail investors may purchase and sell Shares through traditional brokerage accounts.
Investors are expected to be charged a customary commission by their brokers in connection with
purchases of Shares that will vary from investor to investor. Investors are encouraged to review
the terms of their brokerage accounts for applicable charges. Also, the excess, if any, of the
price at which any Initial Purchaser or an Authorized Participant sells a Share over the price paid
by the Initial Purchaser or such Authorized Participant in connection with the creation of such
Share in a Basket will be deemed to be underwriting compensation by the Financial Industry
Regulatory Authority, or FINRA, Corporate Financing Department.
WHO MAY SUBSCRIBE
Baskets may be created or redeemed only by Authorized Participants, except that the initial
Baskets in each Fund will be created by the Initial Purchaser. Each Authorized Participant must
(1) be 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, (2) be a participant in DTC, and (3) have entered into an agreement with the Funds
and the Managing Owner, or a Participant Agreement. Each Participant Agreement sets forth the
procedures for the creation and redemption of Baskets and for the delivery of cash required for
such creations or redemptions. A list of the current Authorized Participants can be obtained from
the Administrator. See Creation and Redemption of Shares for more details.
CREATION AND REDEMPTION OF SHARES
Each Fund creates and redeems Shares from time-to-time, but only in one or more Baskets. A
Basket is a block of [50,000] Shares. Baskets may be created or redeemed only by Authorized
Participants, except that the initial Baskets in each Fund will be created by the Initial
Purchaser. Except when aggregated in Baskets, the Shares are not
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redeemable securities. Authorized Participants pay a transaction fee of $[___] in connection
with each order to create or redeem a Basket. Authorized Participants may sell the Shares included
in the Baskets they purchase from the Funds to other investors.
Authorized Participants are the only persons that may place orders to create and redeem
Baskets. Authorized Participants must be (1) registered broker dealers or other securities market
participants, such as banks and other financial institutions, which are not required to register as
broker dealers to engage in securities transactions, and (2) participants in DTC. To become an
Authorized Participant, a person must enter into a Participant Agreement with the Funds 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
Managing Owner may delegate its duties and obligations under the Participant Agreement to [___]
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. To compensate the
Administrator for services in processing the creation and redemption of Baskets, an Authorized
Participant is required to pay a transaction fee of $[___] per order to create or redeem Baskets.
Authorized Participants who purchase Baskets from a 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 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 of 1933,
or the Securities Act, as described in Plan of Distribution.
Each Authorized Participant must be registered as a broker dealer under the Securities
Exchange Act of 1934, or the Exchange Act, and regulated by the FINRA, or is exempt from being, or
otherwise is not required to be, so regulated or registered, and is qualified to act as a broker
or dealer in the states or other jurisdictions where the nature of its business so requires.
Certain Authorized Participants may be
regulated under federal and state banking laws and
regulations. Each Authorized Participant will have its own set of rules and procedures, internal
controls and information barriers as it determines is appropriate in light of its own regulatory
regime.
Authorized Participants may act for their own accounts or as agents for broker dealers,
custodians and other securities market participants that wish to create or redeem Baskets.
Persons interested in purchasing Baskets should contact the Managing Owner or the
Administrator to obtain the contact information for the Authorized Participants. Shareholders who
are not Authorized Participants will only be able to redeem their Shares through an Authorized
Participant.
Under the Participant Agreements, the Managing Owner has agreed to indemnify the Authorized
Participants against certain liabilities, including liabilities under the Securities Act, and to
contribute to the payments the Authorized Participants may be required to make in respect of those
liabilities. The Managing Owner has agreed to reimburse the Authorized Participants, solely from
and to the extent of the Funds assets, for indemnification and contribution amounts due from the
Managing Owner in respect of such liabilities to the extent the Managing Owner has not paid such
amounts when due.
The following description of the procedures for the creation and redemption of Baskets is only
a summary and an investor should refer to the relevant provisions of the Declaration of Trust and
the form of Participant Agreement for more detail. The Declarations of Trust and the form of
Participant Agreement will be filed as exhibits to the registration statement of which this
Prospectus is a part.
Creation Procedures
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 banks in New York City are required or permitted
to be closed. Purchase orders must be placed by [1:00] p.m., New York time. The day on which the
Managing Owner receives a valid purchase order is the purchase order date. Purchase orders are
irrevocable. By placing a purchase order, and prior to delivery of such Baskets, an Authorized
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Participants DTC account will be charged the non refundable transaction fee due for the
purchase order.
Determination of required payment
The total payment required to create each Basket is the net asset value of [50,000] Shares of
the applicable Fund as of the closing time of the NYSE Arca or the last to close of the exchanges
on which its futures contracts are traded, whichever is latest, on the purchase order date.
Baskets are issued as of noon, New York time, on the Business Day immediately following the
purchase order date at the applicable net asset value per Share as of the closing time of the NYSE
Arca or the last to close of the exchanges on which the corresponding Funds futures contracts are
traded, whichever is latest, on the purchase order date, but only if the required payment has been
timely received.
Because orders to purchase Baskets must be placed by [1:00] p.m., New York time, but the total
payment required to create a Basket will not be determined until 4:00 p.m., New York 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. The net asset value of a 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.
Rejection of purchase orders
The Managing Owner may reject a purchase order if:
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It determines that the purchase order is not in proper form; |
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The Managing Owner believes that the purchase order would have adverse tax consequences to
either Fund or its Shareholders; or |
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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.
Redemption Procedures
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 [1:00] p.m., New York time. The day on which the Managing Owner receives a valid redemption
order is the redemption order date. Redemption orders are irrevocable. The redemption procedures
allow Authorized Participants to redeem Baskets. Individual Shareholders may not redeem directly
from a Fund. Instead, individual Shareholders may only redeem Shares in integral multiples of
[50,000] and only through an Authorized Participant.
By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be
redeemed through DTCs book-entry system to the applicable Fund not later than noon, New York time,
on the business day immediately 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.
Determination of redemption proceeds
The redemption proceeds from a Fund consist of the cash redemption amount. The cash
redemption amount is equal to the net asset value of the number of Baskets of such Fund requested
in the Authorized Participants redemption order as of the closing time of the NYSE Arca or the
last to close of the exchanges on which such Funds corresponding Funds futures contracts are
traded, whichever is latest, on the redemption order date. The Managing Owner will distribute the
cash redemption amount at noon, New York time, on the business day immediately following the
redemption order date through DTC to the account of the Authorized Participant as recorded on DTCs
book-entry system.
Delivery of redemption proceeds
The redemption proceeds due from a Fund are delivered to the Authorized Participant at noon,
New York time, on the business day immediately following the redemption order date if, by such time
on such business day immediately following the redemption order date, the Funds DTC account has
been credited with the Baskets to be redeemed. If the
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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 noon, New York 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 noon, New York time,
on the business day immediately 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.
Suspension or Rejection of Redemption Orders
In respect of either Fund, the Managing Owner may, in its discretion, suspend the right of
redemption, or postpone the redemption settlement date (1) for any period during which an emergency
exists as a result of which the redemption distribution is not reasonably practicable, or (2) 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 the order is not in proper form as
described in the Participant Agreement or if the fulfillment of the order, in the opinion of its
counsel, might be unlawful.
Creation and Redemption Transaction Fee
To compensate the Administrator for services in processing the creation and redemption of
Baskets, an Authorized Participant will be required to pay a transaction fee of $[___] 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. The Managing Owner will notify DTC
of any agreement to change the transaction fee and will not implement any increase in the fee for
the redemption of Baskets until 30 days after the date of the notice.
Monthly account statements conforming to CFTC and NFA requirements will be posted on the
Managing Owners website at
http://www.[___].com. Additional reports may be posted on the
Managing Owners website in the discretion of the Managing Owner or as required by regulatory
authorities.
THE COMMODITY BROKERS
A variety of executing brokers will execute futures transactions on behalf of each Fund. Such
executing brokers give-up all such transactions to [___], a Delaware corporation, which will
serve the clearing broker, or Clearing Broker, for each Fund. In its capacity as clearing broker,
the Clearing Broker will clear (and may execute from time-to-time) each of the futures transactions
of each of the Funds and perform certain administrative services for each of the Funds. [___] is
also registered with the Commodity Futures Trading Commission as a futures commission merchant and
is a member of the National Futures Association in such capacity.
[There is no litigation pending regarding [___] that would materially adversely affect its
ability to carry on its commodity futures, foreign exchange futures and options brokerage
business.]
Additional or replacement Clearing Brokers may be appointed in respect of a Fund in the
future.
CONFLICTS OF INTEREST
General
The Managing Owner has not established formal procedures to resolve all potential conflicts of
interest. Consequently, investors 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 these conflicts
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do not, in fact, result in adverse consequences to the Funds.
Prospective investors should be aware that the Managing Owner presently intends to assert that
Shareholders have, by subscribing for Shares of a 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 investors.
The Managing Owner
The Managing Owner has 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 service 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 Funds, 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 Funds consistent with its or their respective fiduciary duties to the
Funds and others.
The Clearing Broker
The Clearing Broker may act from time-to-time 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 Clearing Broker from such accounts may be more or less than the
compensation received for brokerage services provided to each Fund. In addition, various accounts
traded through the Clearing Broker (and over which their personnel may have discretionary trading
authority) may take positions in the futures markets opposite to those of each Fund or may compete
with each Fund for the same positions. The Clearing 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 a Fund which the Managing Owner has reason to believe would
knowingly or deliberately favor any other customer over a Fund with respect to the execution of
commodity trades.
The Clearing Broker will benefit from executing orders for other clients, whereas each Fund
may be
harmed to the extent that the Clearing Broker has fewer resources to allocate to such Funds
accounts due to the existence of such other clients.
Certain officers or employees of the Clearing Broker may be members of United States
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 a Fund.
Proprietary Trading/Other Clients
The Managing Owner, its affiliates, and its and their 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 a Fund or may compete with a
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 each 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 investors should be aware that as a result of, among other
things, a neutral allocation system, testing a new trading system, trading their proprietary
accounts more aggressively or other activities not constituting a breach of fiduciary duty such
persons may from time-to-time take positions in proprietary accounts or other client accounts which
are opposite, or ahead of, the positions taken for a Fund.
Thomson Reuters/Jefferies CRB Index Oversight Committee
The Thomson Reuters/Jefferies CRB Index Oversight Committee reviews and modifies the operation
and calculation of both Indexes and procedures relating thereto, and reviews proposals by
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Jefferies or Thomson Reuters to modify the Indexes. The Committee is comprised of persons,
appointed by Jefferies, Thomson Reuters and the [Board of Trade of the City of New York, Inc.] The
Index Oversight Committee has a significant degree of discretion with regard to the operation and
calculation of the Indexes and may exercise its discretion, as it deems appropriate. The members
of the Index Oversight Committee that are appointed by Jefferies may have a conflict of interest in
the performance of their duty to the Index Oversight Committee which could compel such individuals
to act in the best interest of Jefferies and Thomson Reuters to the detriment of a Fund.
Transactions by the Managing Owner and its affiliates involving the Index Commodities
The Managing Owners affiliate Jefferies Financial Products, LLC, or JFP, is the designer of
the construction and methodology for each Index, and JFPs personnel serve on the Index Oversight
Committee. The Managing Owner, JFP and their affiliates may from time-to-time engage in long or
short transactions involving the Index Commodities (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 a Fund to the Managing Owner. 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.
Notwithstanding the above, the activities of JFP and its affiliates will be subject to the
information barriers described above See Information Barriers Between the Index Oversight
Committee and the Managing Owners Portfolio Management
Team on page 47.
In implementing a 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 a Fund.
Transactions by the Index Calculation Agent involving the Index Commodities
The Index Calculation Agent and their affiliates may from time-to-time engage in transactions
involving the Index Commodities (and/or sub-
components thereof) for their proprietary accounts and
for accounts under their management. Such transactions may have a positive or negative effect on
the value or level of the Index Commodities (and/or sub-components thereof) and consequently upon
the Index Levels, and in engaging in such transactions, none of the Index Calculation Agent 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.
Index
Calculation Agent Acting in Other Capacities
The Index Calculation Agent 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 the Index Calculation Agent and its affiliates and any users of the
Index and/or parties exposed to products referencing the Index.
Issuing of other derivative instruments in respect of the Index Commodities
JFP and its affiliates may issue derivative instruments in respect of the Index or Index
Commodities (and/or sub-components thereof) and the introduction of such products into the
marketplace may affect the Index Levels.
Market-Making for Futures Contracts Linked to an Index or to the Index Commodities
JFP currently acts as a market maker with respect to the [Thomson] Reuters Jefferies/CRB Index
futures contracts (symbol: CR) that trades on the ICE Futures U.S. JFP and its affiliates may, in
certain cases, act as a market-maker or sponsor for additional futures contracts linked to an Index
or to the Index Commodities (or sub-components thereof). By such sponsoring or market-making, such
entity may, to some extent, determine the price of an Index or the Index Commodities (or
sub-components thereof), and consequently influence the Index Levels. The prices quoted by the JFP
or its affiliates in its sponsoring or market-making function will not always correspond to the
prices which would have prevailed without such sponsoring or market-making and in a liquid market.
Obtaining of non-public information with respect to the Index
The Managing Owner, the Index Calculation Agent and/or its or their respective affiliates may
acquire non-public information with respect to the
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Index Commodities (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 Commodities (or sub-components thereof). Such
activities could present conflicts of interest and may affect the Index Level.
DESCRIPTION OF THE SHARES; THE
FUNDS; CERTAIN MATERIAL TERMS OF
THE DECLARATIONS OF TRUST
The following summary describes in brief the Shares and certain aspects of the operation of
each Fund and the respective responsibilities of the Trustee and the Managing Owner concerning the
Funds and the material terms of the Declarations of Trust, each of which are substantially
identical except as set forth below. Prospective investors should carefully review the Forms of
Declarations of Trust filed as exhibits 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 shall have such meanings assigned to them under the applicable
Declaration of Trust.
Description of the Shares
Each Fund will issue common units of beneficial interest, or Shares, which represent units of
fractional undivided beneficial interest in and ownership of such Fund. The Shares of each Fund
will be listed on the NYSE Arca under the following symbols:
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Jefferies TR/J CRB Commodity Index ETF CRB and |
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Jefferies Commodity Real Return ETF RRET. |
The Shares may be purchased from each Fund or redeemed on a continuous basis, but only by
Authorized Participants and only in blocks of [50,000] Shares, or Baskets. Individual Shares may
not be purchased or redeemed from each Fund. Shareholders that are not Authorized Participants may
not purchase from each Fund or redeem Shares or Baskets.
Principal Office; Location of Records
Each of the Funds is organized as a statutory trust under the Delaware Statutory Trust Act.
The Funds are managed by the Managing Owner, whose office is located at One Station Place, Three
North, Stamford, CT 06902, telephone: (203) 708-6500.
The books and records of each Fund are maintained as follows: 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
are maintained by [___], [___], telephone number (-) [___]. All other marketing materials,
books and records of each Fund (including minute books and other general corporate records, trading
records and related reports and other items received from each Funds Clearing Brokers) are
maintained at each Funds principal office, c/o Jefferies Commodity Investment Services, LLC, One
Station Place, Three North, Stamford, CT 06902; telephone number (203) 708-6500.
The books and records of each Fund are located at the foregoing addresses, and available for
inspection and copying (upon payment of reasonable reproduction costs) by Shareholders of such Fund
or their representatives for any purposes reasonably related to a Shareholders interest as a
beneficial owner of such Fund during regular business hours as provided in the Declarations of
Trust. The Managing Owner will maintain and preserve the books and records of each Fund for a
period of not less than six years.
The Funds
The Funds are organized as statutory trusts under the Delaware Statutory Trust Act, and are
operated in a manner such that each Fund is liable only for obligations attributable to such Fund
and Shareholders of a Fund are not subject to the losses or liabilities of the other Fund. If any
creditor or Shareholder in a Fund asserted against such Fund a valid claim with respect to its
indebtedness or Shares, the creditor or Shareholder would only be able to recover money from that
particular Fund and its assets and from the Managing Owner and its assets. Accordingly, the debts,
liabilities, obligations and expenses, or collectively, Claims, incurred, contracted for or
otherwise existing solely with
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respect to a particular Fund are enforceable only against the assets of that Fund and against
the Managing Owner and its assets, and not against the other Fund generally or any of their
respective assets. The assets of each Fund include only those funds and other assets that are paid
to, held by or distributed to the Fund on account of and for the benefit of that Fund, including,
without limitation, funds delivered to the Funds for the purchase of Shares.
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. 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 principle place of business
in Delaware. The Declaration of Trust provides that the management authority with respect to the
Funds is vested directly in the Managing Owner.
Although Shares in a Fund need not carry any voting rights, the Declaration of Trust of each
Fund gives its Shareholders voting rights in respect of the business and affairs of such Fund
comparable to those typically extended to limited partners in publicly-offered futures funds.
The Trustee
Wilmington Trust Company, a Delaware banking corporation, is the sole Trustee of each Fund.
The Trustees principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001. 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 Funds are limited to its express obligations under the Declarations of Trust.
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 applicable Declaration of Trust.
The Trustee will serve in a passive role as the sole trustee of the Funds in the State of
Delaware. The Trustee will accept service of legal process on the Funds 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 Funds, the Managing
Owner or the Shareholders of
either Fund. The Trustee is permitted to resign upon at least sixty
(60) days notice to the Funds, provided, that any such resignation will not be effective until a
successor Trustee is appointed by the Managing Owner. Each of the Declarations of Trust provides
that the Trustee is compensated by each Fund, as appropriate, and is indemnified by each Fund, as
appropriate, against any expenses it incurs relating to or arising out of the formation, operation
or termination of such Fund, as appropriate, or the performance of its duties pursuant to the
Declarations of Trust, except to the extent that such expenses result from the gross negligence or
willful misconduct of the Trustee. 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 Funds 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 each Declaration of Trust.
Under each Declaration of Trust, the Managing Owner has exclusive management and control of
all aspects of the business of the Funds. 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 Funds, other than certain limited voting rights as set forth in
each Declaration of Trust. In the course of its management of the business and affairs of the
Funds, the Managing Owner may, in its sole and absolute discretion, appoint an affiliate or
affiliates of the Managing Owner as additional managing owners (except where the Managing Owner has
been notified by the Shareholders that it is to be replaced as the managing owner) and retain such
persons, including affiliates of the Managing Owner, as it deems necessary for the efficient
operation of the Funds, as appropriate.
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Because the Trustee has no management authority with respect to the Fund it is not registered
in any capacity with the CFTC.
The Managing Owner
Background and Principals
Jefferies Commodity Investment Services, LLC, a Delaware limited liability company, is the
Managing Owner of each Fund. The Managing Owner will serve as both commodity pool operator and
commodity trading advisor of each Fund. The Managing Owner will be registered as a commodity pool
operator and commodity trading advisor with the Commodity Futures Trading Commission, or the CFTC,
and will be a member of the NFA, pending final approval of its registration with the NFA. Its
principal place of business is One Station Place, Three North, Stamford, CT 06902, telephone number
(203) 708-6500.
In its capacity as a commodity pool operator, the Managing Owner is an organization which
operates or solicits funds for commodity pools; that is, an enterprise in which funds contributed
by a number of persons are combined for the purpose of trading futures contracts. In its capacity
as a commodity trading advisor, the Managing Owner is an organization which, for compensation or
profit, advises others as to the value of or the advisability of buying or selling futures
contracts.
Principals and Key Employees
The following principals serve in the below capacities on behalf of the Managing Owner:
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Adam C. De Chiara
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Co-President
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Bradford L. Klein
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Co-President
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Peregrine C. Broadbent
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Executive Vice President & Chief Financial Officer
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Michael S. Sheehy
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Senior Vice President & Chief Compliance Officer
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Todd Streichler
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Managing Director, Finance
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Michael S. Kaplan
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Managing Director, Operations
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Jefferies Group, Inc. is also a principal of the Managing Owner.
The Managing Owner is managed by a Board of Directors. The Board of Directors is comprised of
Adam C. De Chiara, Bradford L. Klein and Peregrine C. Broadbent.
Satyanarayan
(Satch) R. Chada, Andrew Kaplan and Patricia S. Rube are non-trading principals of the Managing Owner.
Adam C. De Chiara joined the Managing Owner in 2009, and serves as Co-President with
responsibility for supervising the portfolio management team. Mr. De Chiara has been a principal
and associated person of the Managing Owner since December 11, 2009 and December 22, 2009,
respectively, and has been a member of the NFA since December 22, 2009. Since November 2003, Mr.
De Chiara has served as Co-President of two affiliates of the Managing Owner: Jefferies Asset
Management, LLC, or JAM, an investment adviser registered with the SEC, a commodity trading adviser
registered with the CFTC and member of the NFA; and JFP. JFP conducts proprietary commodity
futures trading, and engages in OTC commodity swap, option and OTC foreign exchange transactions
with institutional counterparties and hedges those swaps and OTC foreign exchange transactions by
trading in the OTC and futures markets. Since April 2008, Mr. De Chiara has served as portfolio
manager for JAMs Commodity Division. At JFP, Mr. De Chiara engages in activities such as senior
level product development, marketing and other strategic initiatives; he generally does not play an
active role in JFPs trading activities. He received his A.B. in History and Economics from
Harvard University where he was elected to Phi Beta Kappa and received his J.D. (with honors) from
Harvard Law School. Mr. De Chiara also serves on the Executive Committee, an advisory committee to
senior management of Jefferies Group, Inc. and its affiliates.
Bradford L. Klein joined the Managing Owner in 2009, and serves as Co-President. Mr. Klein
has been a principal of the Managing Owner since December 11, 2009. Since November 2003, Mr. Klein
has served as Co-President of JAM and JFP. Mr. Klein graduated with honors from George Washington
University in Washington, D.C. in 1984 with a Bachelors Degree in finance. Mr. Klein also serves
on the Executive Committee, an advisory committee to senior management of Jefferies Group, Inc. and
its affiliates.
Michael S. Kaplan is the Managing Director of Operations for the Managing Owner. Mr. Kaplan
has been a principal of the Managing Owner since December 11, 2009. Since January 2004, Mr. Kaplan
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has served as Director of Operations of JAM and JFP. He graduated with honors from Lehigh
University in 1978 with a Bachelors Degree in Management.
Todd Streichler is the Managing Director of Finance for the Managing Owner. Mr. Streichler
has been a principal of the Managing Owner since December 11, 2009. Since January 2004, Mr.
Streichler has served as Director of Finance of JAM and JFP. Mr. Streichler is a graduate of the
University of Buffalo and received an MBA from St. Johns University.
Michael S. Sheehy is the Senior Vice President & Chief Compliance Officer for the Managing
Owner. Mr. Sheehy has been a principal of the Managing Owner since December 11, 2009. Since July
2007, Mr. Sheehy has served as Vice President and Chief Compliance Officer of JAM and JFP. From
February 2006 to July 2007, Mr. Sheehy was an associate at Cobb & Associates LLC (formerly Cobb &
Eisenberg LLC) where he counseled investment advisers, broker dealers and private investment funds
on compliance, securities, tax and other legal and regulatory issues. From September 2003 through
February 2006, he was an associate in the business practice group at Wiggin and Dana LLP. Mr.
Sheehy received an A.B. in History from Brown University in 1998, and a J.D. (with honors) from the
University of Connecticut School of Law in 2002 where he was a member of the Connecticut Law
Review.
Peregrine C. Broadbent is the Executive Vice President and Chief Financial Officer for the
Managing Owner. Mr. Broadbent has been a principal of the Managing Owner since December 11, 2009.
Since November 2007, Mr. Broadbent has been Executive Vice President and Chief Financial Officer
for Jefferies & Company, Inc., a registered broker-dealer, and Jefferies Group, Inc. (NYSE: JEF).
Prior to joining Jefferies, Mr. Broadbent was employed by Morgan Stanley for 16 years, including
serving as Managing Director, Head of Institutional Controllers (Fixed Income, Equity and
Investment Banking) of Morgan Stanley since November 2003 and was Morgan Stanleys Managing
Director, Head of Fixed Income Infrastructure (Operations and Controllers) from March 2002 through
November 2003. Mr. Broadbent is a Chartered Accountant in the United Kingdom.
Jefferies Group, Inc., which controls numerous operating companies including the Managing
Owner, Jefferies Commodity Services, LLC, Jefferies & Company, Inc. and various other U.S. and
foreign regulated financial institutions, has been a principal of the Managing Owner since December
15, 2009.
Satyanarayan (Satch) R. Chada will be a principal of the Managing Owner, pending final
approval by the NFA.
Andrew Kaplan is a listed principal of the Managing Owner since December 11, 2009.
Patricia S. Rube will be a principal of the Managing Owner, pending final approval by the NFA.
Fiduciary and Regulatory Duties of the Managing Owner
An investor should be aware that the Managing Owner has a fiduciary responsibility to the
Shareholders to exercise good faith and fairness in all dealings affecting each Fund.
As managing owner of each 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 each Fund, consistent with the terms of the Declarations of Trust. A form of
each of the Declarations of Trust 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 each 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 each Fund, as set forth herein and in the Declarations of Trust
(to which terms all Shareholders, by subscribing to the Shares, are deemed to consent).
The Declarations of Trust provide that the Managing Owner and its affiliates shall have no
liability to the Fund or to any Shareholder for any loss suffered by each Fund arising out of any
action or inaction of the Managing Owner or its affiliates or their respective directors, officers,
shareholders,
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partners, members, managers or employees (the Managing Owner Related Parties) if the
Managing Owner Related Parties, in good faith, determined that such course of conduct was in the
best interests of the Fund, as applicable, and such course of conduct did not constitute gross
negligence or willful misconduct by the Managing Owner Related Parties. Each Fund has agreed to
indemnify the Managing Owner Related Parties against claims, losses or liabilities based on their
conduct relating to 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
Fund, as applicable.
Under Delaware law, a beneficial owner of a statutory trust (such as a Shareholder of each
Fund) may, under certain circumstances, institute legal action on behalf of himself and all other
similarly situated beneficial owners (a class action) to recover damages from a managing owner of
such statutory trust for violations of fiduciary duties, or on behalf of a statutory trust (a
derivative action) to recover damages from a third party where a managing owner has failed or
refused to institute proceedings to recover such damages. In addition, beneficial owners may have
the right, subject to certain legal requirements, to bring class actions in federal court to
enforce their rights under the federal securities laws and the rules and regulations promulgated
thereunder by the Securities and Exchange Commission, or the SEC. Beneficial owners who have
suffered losses in connection with the purchase or sale of their beneficial interests may be able
to recover such losses from a managing owner where the losses result from a violation by the
managing owner of the anti-fraud provisions of the federal securities laws.
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 and
commodity trading advisor), the Clearing Broker (registered futures commission merchant), as well
as those of their respective employees who are required to be registered under the Commodity
Exchange Act, as amended, and the rules and regulations promulgated thereunder. Private rights of
action are conferred by the Commodity Exchange Act, as amended. Investors in futures and in
commodity pools may, therefore, invoke the protections provided thereunder.
There are substantial and inherent conflicts of interest in the structure of each 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 investors informed consent to such conflicts. Prospective investors who are not willing to
consent to the various conflicts of interest described under Conflicts of Interest and elsewhere
should not invest in the Funds. 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 foregoing summary describing in general terms the remedies available to Shareholders under
federal 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.
Ownership or Beneficial Interest in the Funds
The Managing Owner has made and expects to maintain an aggregate investment of $[___] in
each Fund. No principal has an ownership or beneficial interest in either Fund.
Management; Voting by Shareholders
The Shareholders of each Fund take no part in the management or control, and have no voice in
the operations or the business of such Fund. Shareholders, may, however, remove and replace the
Managing Owner as the managing owner of the Funds, and may amend the Declaration of Trust of each
Fund, except in certain limited respects, by the affirmative vote of a majority of the outstanding
Shares then owned by Shareholders (as opposed to by the Managing Owner and its affiliates). The
owners of a majority of the outstanding Shares then owned by Shareholders may also compel
dissolution of the Funds. The owners of [10%] of the outstanding Shares then owned by Shareholders
have the right to bring a matter before a vote of the Shareholders. The Managing Owner has no
power under the Declaration of Trust to restrict any of the Shareholders voting
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rights. Any Shares purchased by the Managing Owner or its affiliates, as well as the Managing
Owners general liability interest in each Fund, are non-voting.
The Managing Owner has the right unilaterally to amend the Declaration of Trust of either Fund
provided that any such amendment is for the benefit of and not adverse to the Shareholders of such
Fund or the Trustee and also in certain unusual circumstances for example, if doing so is
necessary to comply with certain regulatory requirements or in response to regulatory changes
(including, but not limited to, proposals by regulatory bodies, self-regulatory organizations,
legislative bodies or any other applicable lawmaking, rulemaking or similar body), such as, but not
limited to, adverse changes in speculative positions limits applicable to the Funds Index
Commodities.
Recognition of the Funds in Certain States
A number of states do not have statutory trust statutes such as that under which the Funds
have been formed in the State of Delaware. It is possible, although unlikely, that a court in such
a state could hold that, due to the absence of any statutory provision to the contrary in such
jurisdiction, the Shareholders, although entitled under Delaware law to the same limitation 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. To protect Shareholders against any loss
of limited liability, the Declarations of Trust provide that no written obligation may be
undertaken by any Fund unless such obligation is explicitly limited so as not to be enforceable
against any Shareholder personally. Furthermore, each Fund indemnifies all its Shareholders
against any liability that such Shareholders might incur in addition to that of a beneficial owner.
Possible Repayment of Distributions Received by Shareholders; Indemnification by Shareholders
The Shares are limited liability investments; investors may not lose more than the amount that
they invest plus any profits recognized on their investment. However, Shareholders of a Fund could
be required, as a matter of bankruptcy law, to return to the estate of such Fund any distribution
they received at a time when such Fund was in fact insolvent or in violation of the Declaration of
Trust.
In addition, although the Managing Owner is not aware of this provision ever having been
invoked in the case of any public futures fund, Shareholders of each Fund agree in the applicable
Declaration of Trust that they will indemnify such Fund for any harm suffered by it as a result of
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taxes separately imposed on the Fund by any state, local or foreign taxing authority. |
The foregoing repayment of distributions and indemnity provisions (other than the provision
for Shareholders of a Fund indemnifying such Fund for taxes imposed upon it by a state, local or
foreign taxing authority, which is included only as a formality due to the fact that many states do
not have business trust statutes so that the tax status of a Fund in such states might,
theoretically, be challenged although the Managing Owner is unaware of any instance in which
this has actually occurred) are commonplace in statutory trusts and limited partnerships.
Shares Freely Transferable
The
Shares of each Fund will trade on the NYSE Arca and provide institutional and retail investors
with direct access to each Fund. Each Fund trades with a view of tracking either the TR/J CRB
Index or the Forward Index, as applicable, over time, less expenses. Each Funds Shares may be
bought and sold on the NYSE Arca like any other exchange listed security.
Book-Entry Form
Individual certificates will not be issued for the Shares. Instead, global certificates will
be deposited by the Managing Owner with DTC and registered in the name of Cede & Co., as nominee
for DTC. The global certificates evidence all of the Shares outstanding at any time. Under each
Funds Declaration of Trust, Shareholders are limited to (1) participants in DTC such as banks,
brokers, dealers and trust companies, or DTC Participants, (2) those who maintain, either directly
or indirectly, a custodial relationship with a DTC Participant, or Indirect Participants, and (3)
those banks, brokers, dealers, trust companies and others who hold interests in the Shares through
DTC Participants or Indirect Participants. The Shares are only transferable through the book-entry
system of DTC. Shareholders
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who are not DTC Participants may transfer their Shares through DTC by instructing the DTC
Participant holding their Shares (or by instructing the Indirect Participant or other entity
through which their Shares are held) to transfer the Shares. Transfers are made in accordance with
standard securities industry practice.
Reports to Shareholders
The Managing Owner will furnish you with an annual report of each Fund in which you invested
within 90 calendar days after the end of such Funds fiscal year as required by the rules and
regulations of the SEC as well as with those reports required by the CFTC and the 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 each 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.[ ].com. Additional reports may be
posted on the Managing Owners website in the discretion of the Managing Owner or as required by
applicable regulatory authorities.
The Managing Owner will notify Shareholders of any change in the fees paid by the Funds or of
any material changes to either Fund by filing with the SEC a supplement to this Prospectus and a
Form 8-K, which will be publicly available at www.sec.gov and at the Managing Owners website at
http://www.[ ].com. Any such notification will include a description of Shareholders voting
rights.
Net Asset Value
Net asset value, in respect of a Fund, 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 such
Fund, each determined on the basis of generally accepted accounting principles in the United
States, consistently applied under the accrual method of accounting. In particular, net asset
value includes any unrealized profit or loss on open futures contracts, and any other credit or
debit accruing to a Fund but unpaid or not received by a Fund. All open futures contracts traded
on a United States exchange are calculated at their then current
market value, which are based upon
the settlement price for that particular futures contract traded on the applicable United States
exchange on the date with respect to which net asset value is being determined; provided, that if a
futures contract traded on a United States exchange could not be liquidated on such day, due to the
operation of daily limits 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
current market value of all open futures contracts traded on a non-United States exchange, to the
extent applicable, are be based upon the settlement price for that particular futures contract
traded on the applicable non-United States exchange on the date with respect to which net asset
value is being determined; provided further, that if a futures contract traded on a non-United
States exchange, to the extent applicable, 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 a 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 any Funds foreign exchange futures brokerage account will
be accrued at least monthly. The amount of any distribution will be a liability of such Fund from
the day when the distribution is declared until it is paid.
Net asset value per Fund Share, in respect of a Fund is the net asset value of the Fund
divided by the number of its outstanding Fund Shares.
Termination Events
A Fund will dissolve at any time upon the happening of any of the following events:
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The filing of a certificate of dissolution or revocation of the Managing Owners charter |
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(and the expiration of 90 days after the date of notice to the Managing Owner of revocation
without a reinstatement of its charter) or upon the withdrawal, removal, adjudication or
admission of bankruptcy or insolvency of the Managing Owner, or an event of withdrawal unless
(i) at the time there is at least one remaining managing owner and that remaining managing owner
carries on the business of the Fund or (ii) within 90 days of such event of withdrawal all the
remaining Shareholders agree in writing to continue the business of a Fund and to select,
effective as of the date of such event, one or more successor managing owners. If the Fund is
terminated as the result of an event of withdrawal and a failure of all remaining Shareholders
to continue the business of the Fund and to appoint a successor managing owner as provided above
within 120 days of such event of withdrawal, Shareholders holding Shares representing at least a
majority (over 50%) of the net asset value of each Fund (not including Shares held by the
Managing Owner and its affiliates) may elect to continue the business of the Fund by forming a
new statutory trust, or reconstituted trust, on the same terms and provisions as set forth in
the Declaration of Trust. Any such election must also provide for the election of a managing
owner to the reconstituted trust. If such an election is made, all Shareholders of the Funds
shall be bound thereby and continue as Shareholders of series of the reconstituted trust. |
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The occurrence of any event which would make unlawful the continued existence of a Fund, as
the case may be. |
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In the event of the suspension, revocation or termination of the Managing Owners
registration as a commodity pool operator, or membership as a commodity pool operator with the
NFA (if, in either case, such registration is required at such time unless at the time there
is at least one remaining managing owner whose registration or membership has not been
suspended, revoked or terminated. |
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A Fund, as the case may be, becomes insolvent or bankrupt. |
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The Shareholders holding Shares representing at least a majority (over 50%) of the net asset
value (which excludes the Shares of the Managing Owner) vote to dissolve a Fund, notice of
which is sent to the Managing Owner not less than |
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ninety (90) Business Days prior to the
effective date of termination. |
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The determination of the Managing Owner that the aggregate net assets of a Fund in relation
to the operating expenses of such Fund make it unreasonable or imprudent to continue the
business of such Fund, or, in the exercise of its reasonable discretion, the determination by
the Managing Owner to dissolve the Fund because the aggregate net asset value of the Fund as
of the close of business on any business day declines below $10 million. |
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Either Fund is required to be registered as an investment company under the Investment
Company Act of 1940. |
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DTC is unable or unwilling to continue to perform its functions, and a comparable replacement
is unavailable. |
DISTRIBUTIONS
The Managing Owner has discretionary authority over all distributions made by each Fund. To
the extent that a Funds actual and projected interest income from its holdings of 3-month U.S.
Treasury bills, TIPS and other high credit quality short-term fixed income securities, as
applicable, exceeds the actual and projected fees and expenses of the applicable Fund, the Managing
Owner expects periodically to make distributions of the amount of such excess. The Funds currently
do not expect to make distributions with respect to capital gains. Depending on the applicable
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 such Funds net ordinary income or loss
and capital gain or loss may exceed any distributions you receive with respect to such year.
THE ADMINISTRATOR
The Funds have appointed [ ] as the administrator of each Fund and has entered into an
Administration Agreement in connection therewith.
Information regarding the net asset value of each Fund, creation and redemption transaction
fees and the names of the parties that have executed a Participant Agreement may be obtained from
[ ] by calling the following number: (-) [ ]. A
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copy of the Administration Agreement is available for inspection at The [ ]s trust office
identified above.
The Administrator will retain, separately for each Fund, 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 (-) [ ].
A summary of the material terms of the Administration Agreement is disclosed in the Material
Contracts section.
The Funds will pay to the Administrator up to [ ] of administration fees, monthly in
arrears. If the monthly administration fees exceed [ ], the amount above [ ] will be paid to by
the Managing Owner.
The Administrator and any of its affiliates may from time-to-time purchase or sell Shares for
their own account, as agent for their customers and for accounts over which they exercise
investment discretion.
The Administrator and any successor administrator must be a participant in DTC or such other
securities depository as shall then be acting.
The Administrator 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.
Each Fund is expected to retain the services of one or more additional service providers to
assist with certain tax reporting requirements of each Fund and its Shareholders.
[THIRD
PARTY PROVIDERS TBD]
THE SECURITIES DEPOSITORY; BOOK-
ENTRY ONLY SYSTEM; GLOBAL SECURITY
DTC acts as securities depository for the Shares. DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal Reserve System, a
clearing
corporation within the meaning of the New York Uniform Commercial Code, and a clearing
agency registered pursuant to the provisions of section 17A of the Exchange Act. DTC was created
to hold securities of DTC Participants and to facilitate the clearance and settlement of
transactions in such securities among the DTC Participants through electronic book-entry changes.
This eliminates the need for physical movement of securities certificates. DTC Participants
include securities brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations, some of whom (and/or their representatives) own DTC. Access to the DTC system
is also available to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a DTC Participant, either directly or indirectly. DTC has
agreed to administer its book-entry system in accordance with its rules and by laws and the
requirements of law.
Individual certificates will not be issued for the Shares. Instead, global certificates are
signed by the Trustee and the Managing Owner on behalf of each Fund, registered in the name of Cede
& Co., as nominee for DTC, and deposited with the Trustee on behalf of DTC. The global
certificates evidence all of the Shares of each Fund outstanding at any time. The representations,
undertakings and agreements made on the part of each Fund in the global certificates are made and
intended for the purpose of binding only the applicable Fund and not the Trustee or the Managing
Owner individually.
Upon the settlement date of any creation, transfer or redemption of Shares, DTC credits or
debits, on its book-entry registration and transfer system, the amount of the Shares so created,
transferred or redeemed to the accounts of the appropriate DTC Participants. The Managing Owner
and the Authorized Participants designate the accounts to be credited and charged in the case of
creation or redemption of Shares.
Beneficial ownership of the Shares is limited to DTC Participants, Indirect Participants and
persons holding interests through DTC Participants and Indirect Participants. Owners of beneficial
interests in the Shares is shown on, and the transfer of ownership is effected only through,
records maintained by DTC (with respect to DTC Participants), the records of DTC Participants (with
respect to Indirect Participants), and the records of Indirect Participants (with respect to
Shareholders that are not DTC Participants or Indirect Participants). Shareholders are expected to
receive
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from or through the DTC Participant maintaining the account through which the Shareholder has
purchased their Shares a written confirmation relating to such purchase.
Shareholders that are not DTC Participants may transfer the Shares through DTC by instructing
the DTC Participant or Indirect Participant through which the Shareholders hold their Shares to
transfer the Shares. Shareholders that are DTC Participants may transfer the Shares by instructing
DTC in accordance with the rules of DTC. Transfers are made in accordance with standard securities
industry practice.
DTC may decide to discontinue providing its service with respect to Baskets and/or the Shares
of each Fund by giving notice to the Managing Owner. Under such circumstances, the Managing Owner
will either find a replacement for DTC to perform its functions at a comparable cost or, if a
replacement is unavailable, terminate such Fund.
The rights of the Shareholders generally must be exercised by DTC Participants acting on their
behalf in accordance with the rules and procedures of DTC. Because the Shares can only be held in
book-entry form through DTC and DTC Participants, investors must rely on DTC, DTC Participants and
any other financial intermediary through which they hold the Shares to receive the benefits and
exercise the rights described in this section. Investors should consult with their broker or
financial institution to find out about procedures and requirements for securities held in
book-entry form through DTC.
SHARE SPLITS
If the Managing Owner believes that the per Share price of a Fund in the secondary market has
fallen outside a desirable trading price range, the Managing Owner may declare a split or reverse
split in the number of Shares outstanding and to make a corresponding change in the number of
Shares of such Fund constituting a Basket.
MATERIAL CONTRACTS
Brokerage Agreement
The Clearing Broker and each Fund have entered into a brokerage agreement with respect to each
Fund, each a Brokerage Agreement. As a result the Clearing Broker:
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acts as the clearing broker; |
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acts as custodian of each Funds assets; and |
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performs such other services for each Fund as the Managing Owner may from time-to-time
request. |
As clearing broker for each Fund, the Clearing Broker receives orders for trades from the
Managing Owner.
Confirmations of all executed trades are given to each Fund by the Clearing Broker. Each
Brokerage Agreement incorporates the Clearing Brokers standard customer agreements and related
documents, which generally include provisions that:
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all funds, futures and open or cash positions carried for each Fund are held as security for
each respective Funds obligations to the Clearing Broker; |
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the margins required to initiate or maintain open positions are as from time-to-time
established by the Clearing Broker and may exceed exchange minimum levels; and |
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the Clearing Broker may close out positions, purchase futures or cancel orders at any time it
deems necessary for its protection, without the consent of the Fund. |
As custodian of each Funds assets, the Clearing Broker is responsible, among other things,
for providing periodic accountings of all dealings and actions taken by each Fund during the
reporting period, together with an accounting of all securities, cash or other indebtedness or
obligations held by it or its nominees for or on behalf of each Fund.
Administrative functions provided by the Clearing Broker to each Fund include, but are not
limited to, preparing and transmitting daily confirmations of transactions and monthly statements
of account, calculating equity balances and margin requirements.
As long as a Brokerage Agreement between the Clearing Broker and each Fund, is in effect, the
Clearing Broker will not charge any Fund a fee for any of the services it has agreed to perform,
except for the agreed upon brokerage fee.
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Each Brokerage Agreement is not exclusive and runs for successive one year terms to be renewed
automatically each year unless terminated. The Brokerage Agreement is terminable by each Fund, or
the Clearing Broker without penalty upon thirty (30) days prior written notice (unless where
certain events of default occur or there is a material adverse change to a Funds financial
position, in which case only prior written notice is required to terminate the Brokerage
Agreement).
Each Brokerage Agreement provides that neither the Clearing Broker nor any of its managing
directors, officers, employees or affiliates will be liable for any costs, losses, penalties,
fines, taxes and damages sustained or incurred by each Fund other than as a result of the Clearing
Brokers gross negligence or reckless or intentional misconduct or breach of such agreement.
Administration Agreement
Pursuant to the Administration Agreement among each Fund and the Administrator, the
Administrator will perform or supervises the performance of services necessary for the operation
and administration of each Fund (other than making investment decisions), including receiving and
processing orders from Authorized Participants to create and redeem Baskets, net asset value
calculations, accounting and other fund administrative services.
The Administration 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 foregoing, the Administrator may terminate the Administration Agreement
with respect to a Fund upon 30 days prior written notice if the Fund and/or Fund has materially
failed to perform its obligations under the Administration Agreement or upon the termination of the
Global Custody Agreement.
The Administrator is both exculpated and indemnified under the Administration Agreement.
Except as otherwise provided in the Administration Agreement, the Administrator will not be
liable for any costs, expenses, damages, liabilities or claims (including attorneys and
accountants fees) incurred by any Fund, except those costs, expenses, damages, liabilities or
claims arising out of the Administrators own gross negligence or
willful misconduct. In no event
will the Administrator be liable to the Funds or any third party for special, indirect or
consequential damages, or lost profits or loss of business, arising under or in connection with the
Administration Agreement, even if previously informed of the possibility of such damages and
regardless of the form of action. The Administrator will not be liable for any loss, damage or
expense, including counsel fees and other costs and expenses of a defense against any claim or
liability, resulting from, arising out of, or in connection with its performance under the
Administration Agreement, including its actions or omissions, the incompleteness or inaccuracy of
any Proper Instructions (as defined therein), or for delays caused by circumstances beyond the
Administrators control, unless such loss, damage or expense arises out of the gross negligence or
willful misconduct of the Administrator.
Subject to limitations, the Funds will indemnify and hold harmless the Administrator from and
against any and all costs, expenses, damages, liabilities and claims (including claims asserted by
any 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 Administration
Agreement or in reliance upon (i) any law, act, regulation or interpretation of the same even
though the same may thereafter have been altered, changed, amended or repealed, (ii) the
registration statement or Prospectus, (iii) any Proper Instructions, or (iv) any opinion of legal
counsel for any Fund, or arising out of transactions or other activities of any Fund which occurred
prior to the commencement of the Administration Agreement; provided, that neither Fund will
indemnify the Administrator for costs, expenses, damages, liabilities or claims for which the
Administrator is liable under the preceding paragraph. This indemnity will be a continuing
obligation of each of each Fund and their respective successors and assigns, notwithstanding the
termination of the Administration Agreement. Without limiting the generality of the foregoing, each
Fund will indemnify the Administrator against and save the Administrator harmless from any loss,
damage or expense, including 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)
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action or inaction taken or omitted to be taken by the Administrator pursuant to Proper
Instructions of each Fund or otherwise without gross negligence or willful misconduct; (iii) any
action taken or omitted to be taken by the Administrator in good faith in accordance with the
advice or opinion of counsel for any Fund or its own counsel; (iv) any improper use by any Fund or
their respective agents, distributor or investment advisor of any valuations or computations
supplied by the Administrator pursuant to the Administration Agreement; (v) the method of valuation
and the method of computing net asset value; or (vi) any valuations or net asset value provided by
any Fund.
Actions taken or omitted in reliance on Proper Instructions, or upon any information, order,
indenture, stock certificate, power of attorney, assignment, affidavit or other instrument believed
by the Administrator to be genuine or bearing the signature of a person or persons believed to be
authorized to sign, countersign or execute the same, or upon the opinion of legal counsel for the
Funds or its own counsel, will be conclusively presumed to have been taken or omitted in good
faith.
Notwithstanding any other provision contained in the Administration Agreement, the
Administrator will have no duty or obligation with respect to, including, without limitation, any
duty or obligation to determine, or advise or notify any Fund of: (a) the taxable nature of any
distribution or amount received or deemed received by, or payable to any; (b) the taxable nature or
effect on any Fund or their shareholders of any corporate actions, class actions, tax reclaims, tax
refunds, or similar events; (c) the taxable nature or taxable amount of any distribution or
dividend paid, payable or deemed paid by each Fund to their respective shareholders; or (d) the
effect under any federal, state, or foreign income tax laws of each Fund making or not making any
distribution or dividend payment, or any election with respect thereto.
Global Custody Agreement
[ ] will serve each Funds custodian, or Custodian. Pursuant to the Global Custody
Agreement between the Funds, on their own behalf and the Custodian, or Custody Agreement, the
Custodian will serve custodian of all securities and cash at any time delivered to Custodian by
each respective Fund during the term of the Custody Agreement and 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 maintains one or more securities accounts and cash accounts for each Fund pursuant
to the Custody Agreement. The Custodian maintains separate and distinct books and records
segregating the assets of each Fund.
Each Fund, independently, and the Custodian 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 ninety (90) days after the date of such notice. Upon termination thereof, the applicable 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 each 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 each Fund, such securities and cash. Except as otherwise provided herein,
all obligations of the parties to each other hereunder will cease upon termination of the Custody
Agreement.
The Custodian is both exculpated and indemnified under the Custody Agreement.
Except as otherwise expressly provided in the Custody Agreement, the Custodian will not be
liable for any costs, expenses, damages, liabilities or claims, including attorneys and
accountants fees, or losses, incurred by or asserted against any Fund, except those losses arising
out of the gross negligence or willful misconduct of the Custodian. The Custodian will have no
liability whatsoever for the action or inaction of any depository. Subject to the Custodians
delegation of its duties to its affiliates, the Custodians responsibility with respect to any
securities or cash held by a subcustodian is limited to the failure on the part of the Custodian to
exercise reasonable care in the selection or retention of such subcustodian in light of prevailing
settlement and securities handling practices, procedures and controls in the relevant market. With
respect to any losses incurred by any Fund as a result of the acts or the failure to act by any
subcustodian (other than an affiliate of the Custodian), the Custodian will take appropriate action
to recover such losses from such subcustodian; and the Custodians sole responsibility
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and liability to any Fund will be limited to amounts so received from such subcustodian
(exclusive of costs and expenses incurred by the Custodian). In no event will the Custodian be
liable to any Fund or any third party for special, indirect or consequential damages, or lost
profits or loss of business, arising in connection with the Custody Agreement.
Each Fund, as applicable, will indemnify the Custodian and each subcustodian for the amount of
any tax that the Custodian, any such subcustodian or any other withholding agent is required under
applicable laws (whether by assessment or otherwise) to pay on behalf of, or in respect of income
earned by or payments or distributions made to or for the account of each Fund (including any
payment of tax required by reason of an earlier failure to withhold). The Custodian will, or will
instruct the applicable subcustodian or other withholding agent to, withhold the amount of any tax
which is required to be withheld under applicable law upon collection of any dividend, interest or
other distribution made with respect to any security and any proceeds or income from the sale, loan
or other transfer of any security. In the event that the Custodian or any subcustodian is required
under applicable law to pay any tax on behalf of each Fund, the Custodian is hereby authorized to
withdraw cash from any cash account in the amount required to pay such tax and to use such cash, or
to remit such cash to the appropriate subcustodian, for the timely payment of such tax in the
manner required by applicable law.
Each Fund will indemnify the Custodian and hold the Custodian harmless from and against any
and all losses 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 incurred by the Custodian in a
successful defense of claims by any Fund; provided however, that each Fund, as applicable, will not
indemnify the Custodian for those losses arising out of the Custodians gross negligence or willful
misconduct. This indemnity will be a continuing obligation of each Fund, as applicable, their
successors and assigns, notwithstanding the termination of the Custody Agreement.
Transfer Agency and Service Agreement
[ ] will serve each Funds transfer agent, or Transfer Agent. Pursuant to the Transfer
Agency and Service Agreement between each Fund, and the
Transfer Agent, the Transfer Agent will
serve each Funds transfer agent, dividend or distribution disbursing agent, and agent in
connection with certain other activities as provided under the Transfer Agency and Service
Agreement.
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 any party provides written notice of
termination (with respect to a specific Fund) at least ninety (90) days prior to the end of any one
year term or, unless earlier terminated as provided below:
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Either party terminates prior to the expiration of the initial term in the event the other
party breaches any material provision of the Transfer Agency and Service Agreement, including,
without limitation in the case of the Funds, its obligations to compensate the Transfer Agent,
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. |
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Each Fund may terminate the Transfer Agency and Service Agreement prior to the expiration of
the initial term upon ninety (90) days prior written notice in the event that the Managing
Owner determines to liquidate any Fund and terminate its registration with the Securities and
Exchange Commission other than in connection with a merger or acquisition of any of the Funds. |
The Transfer Agent will have no responsibility and will not be liable for any loss or damage
unless such loss or damage is caused by its own gross negligence or willful misconduct or that of
its employees, or its breach of any of its representations. In no event will the Transfer Agent be
liable for special, indirect or consequential damages regardless of the form of action and even if
the same were foreseeable.
Pursuant to the Transfer Agency and Service Agreement, the Transfer Agent will not be
responsible for, and each applicable Fund will indemnify and hold the Transfer Agent harmless from
and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability, or Losses, arising out of or attributable to:
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All actions of the Transfer Agent or its agents or subcontractors required to be taken
pursuant to the Transfer Agency and Service Agreement, |
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provided that such actions are taken without gross negligence, or willful misconduct. |
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The Funds gross negligence or willful misconduct. |
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The breach of any representation or warranty of the Fund thereunder. |
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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, and (ii) have been prepared, maintained or performed by any Fund
or any other person or firm on behalf of a Fund including but not limited to any previous
transfer agent or registrar. |
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The conclusive reliance on, or the carrying out by the Transfer Agent or its agents or
subcontractors of any instructions or requests of each Fund. |
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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. |
Distribution Services Agreement
[ ] provides certain distribution services to each Fund. Pursuant to the Distribution
Services Agreement between the Funds, as amended from time-to-time, with respect to each Fund, and
[ ], [ ] assists the Managing Owner and the Administrator with certain functions and duties
relating to distribution and marketing, including reviewing and approving marketing materials.
The date of the Distribution Services Agreement is the effective date and such Agreement will
continue until two years from such date and thereafter will continue automatically for successive
annual periods, provided that such continuance is specifically approved at least annually (i) by
the Managing Owner with respect to each Fund or otherwise as provided under the Distribution
Services Agreement. The Distribution Services Agreement is terminable without penalty on sixty
days written notice by the Managing Owner of each Fund (with
respect to any individual Fund) or
by [ ]. The Distribution Services Agreement will automatically terminate in the event of its
assignment.
Pursuant to the Distribution Services Agreement, each Fund will indemnify [ ] as follows:
Each Fund indemnifies and holds harmless [ ] and each of its directors and officers and
each person, if any, who controls [ ] within the meaning of Section 15 of the Securities Act,
against any loss, liability, claim, damages or expenses (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damages or expenses and reasonable
counsel fees incurred in connection therewith) arising by reason of any person acquiring any
Shares, based upon the ground that the registration statement, Prospectus, statement of additional
information, Shareholder reports or other information filed or made public by each respective Fund
(as from time-to-time amended) included an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the statements therein
not misleading under the Securities Act or any other statute or the common law. However, the Funds
do not indemnify [ ] or hold it harmless to the extent that the statement or omission was made
in reliance upon, and in conformity with, information furnished to each respective Fund by or on
behalf of [ ]. In no case
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is the indemnity of each Fund in favor of [ ] or any person indemnified to be deemed to
protect [ ] or any person against any liability to each Fund or its security holders to
which [ ] or such person would otherwise be subject by reason of willful misfeasance, bad
faith or negligence in the performance of its duties or by reason of its reckless disregard of
its obligations and duties under the Distribution Services Agreement, or |
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is any Fund to be liable under its indemnity agreement contained in this paragraph with
respect to any claim made against [ ] or any person indemnified unless [ ] or the
person, as the case may be, will have notified the applicable Fund in writing of the claim
promptly after the summons or other first written notification giving information of the
nature of the claims will have been served upon [ ] or any such person (or after [ ] or
such person will have received notice of service on any designated agent). |
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However, failure to notify each Fund of any claim will not relieve each Fund from any
liability which it may have to any person against whom such action is brought otherwise than on
account of its indemnity agreement described herein. Each Fund will be entitled to participate at
its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to
enforce any claims, and if any Fund elects to assume the defense, the defense will be conducted by
counsel chosen by such Fund. In the event any Fund elects to assume the defense of any suit and
retain counsel, [___], officers or directors or controlling person(s), defendant(s) in the suit,
will bear the fees and expenses of any additional counsel retained by them. If no Fund elects to
assume the defense of any suit, it will reimburse [___], officers or directors or controlling
person(s) or defendant(s) in the suit for the reasonable fees and expenses of any counsel retained
by them. Each Fund agrees to notify [___] promptly of the commencement of any litigation or
proceeding against it or any of its officers in connection with the issuance or sale of any of the
Shares.
Marketing Agreement
[___] provides certain marketing services to each Fund. Pursuant to the Marketing
Agreement between the Managing Owner on behalf of each Fund and [___] assists the Managing
Owner and the Administrator with certain functions and duties such as providing various educational
and marketing activities regarding each Fund, primarily in the secondary trading market, which
activities include, but are not limited to, communicating each Funds name, characteristics, uses,
benefits, and risks, consistent with the prospectus. [___] does not open or maintain
customer accounts or handle orders for the Funds. [___] engages in public seminars, road
shows, conferences, media interviews, field incoming telephone 800 number calls and distribute
sales literature and other communications (including electronic media) regarding each Fund.
The effective date of the Marketing Agreement is the effective date of the registration
statement and such Marketing Agreement will continue until terminated. The Marketing Agreement is
terminable upon written notice by the Managing Owner of each Fund (with respect to any individual
Fund) or by [___]. The Marketing Agreement may be terminated upon 30 days prior written notice
for cause as provided under the Marketing Agreement or
upon 90 days prior written notice as
provided under the Marketing Agreement.
The Marketing Agreement may not be assigned without the prior written consent of the parties
to the Marketing Agreement.
Pursuant to the Marketing Agreement, each party to this Agreement will indemnify and hold
harmless the other parties to this Agreement against all losses, claims, damages, liabilities or
expenses (including reasonable fees and disbursements of counsel) from any claim, demand, action or
suit arising out of or in connection with the indemnifying partys failure to comply with
applicable laws, rules and regulations in connection with performing its obligations under the
Marketing Agreement; negligence or willful misconduct in carrying out its duties and
responsibilities under the Marketing Agreement; or material breach of the terms of the Marketing
Agreement. The indemnities granted by the parties in the Marketing Agreement will survive the
termination of the Marketing Agreement. Additionally, the Managing Owner will indemnify [___]
and hold [___] harmless from any losses, claims, damages, liabilities or expenses (including
reasonable fees and disbursements of counsel) from any claim, demand, action or suit arising out of
or in connection with any sales materials relating to each Fund provided by the Managing Owner to
[___].
[___] will not perform any marketing in respect of any Fund prior to [___] receipt of
written notice from the Managing Owner that this registration statement has been declared effective
by the SEC.
MATERIAL U.S. FEDERAL INCOME TAX
CONSIDERATIONS
The following discussion describes the material U.S. federal (and certain state and local)
income tax considerations associated with the purchase, ownership and disposition of Shares as of
the date hereof by U.S. Shareholders (as defined below) and non-U.S. Shareholders (as defined
below). Except where noted, this discussion deals only with Shares held as capital assets by
Shareholders who acquired Shares by purchase and does not address special situations, such as those
of:
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dealers in securities, commodities or currencies; |
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financial institutions; |
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regulated investment companies (RICs), other than the status of the Funds as qualified
publicly traded partnerships (qualified PTPs) within the meaning of the Code; |
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real estate investment trusts; |
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tax-exempt organizations; |
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insurance companies; |
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persons holding Shares as a part of a hedging, integrated or conversion transaction or a
straddle; |
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traders in securities or commodities that elect to use a mark-to-market method of
accounting for their securities or commodities holdings; or |
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persons liable for alternative minimum tax. |
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:
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an individual citizen or resident of the United States; |
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a corporation (or other entity taxable as a corporation) created or organized in or under
the laws of the United States or any state thereof or the District of Columbia; |
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an estate the income of which is subject to U.S. federal income taxation regardless of its
source; or |
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a trust if it (1) is subject to the primary supervision of a court within the United States
and one or more U.S. persons have the authority to control all substantial decisions of such
trust or (2) has a valid election in effect under |
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applicable Regulations to be treated as a
U.S. person. |
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.
Status of the Funds
Under current law and assuming full compliance with the terms of its applicable Declaration of
Trust and applicable law (and other relevant documents), in the opinion of Sidley Austin LLP, each
Fund will be classified as a partnership for U.S. federal income tax purposes. Accordingly,
subject to the discussion below regarding publicly traded partnerships, neither of the Funds will
be a taxable entity for U.S. federal income tax purposes and neither of the Funds will incur U.S.
federal income tax liability.
Special Rules for Publicly Traded Partnerships
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%
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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 each 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. Each 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 Funds should be treated as
publicly traded partnerships taxable as corporations. No ruling has been or will be sought from
the IRS, and the IRS has made no determination as to the status of either Fund for U.S. federal
income tax purposes or whether either Funds operations generate qualifying income under Section
7704(d) of the Code. Whether either Fund will continue to meet the qualifying income exception is
a matter that will be determined by each Funds operations and the facts existing at the time of
future determinations. However, each Funds Managing Owner will use its reasonable efforts to
cause each Fund to operate in such manner as is necessary for each Fund to meet the qualifying
income exception.
If a 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 a 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 a 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 Sidley Austin LLPs opinion that each 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.
U.S. Shareholders
Treatment of Fund Income
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 a 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 a 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. Each Funds taxable year will end on December 31 unless
otherwise required by law. Each Fund will use the accrual method of accounting.
Shareholders in a Fund will take into account their share of ordinary income realized by the
Fund from accruals of interest on TIPS or U.S. Treasury bills held in the Funds portfolio. Each
Fund may hold TIPS, U.S. Treasury bills or other debt instruments, as applicable, 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. Each Fund may also acquire debt instruments with market
discount. Upon disposition of market discount obligations, gain will generally be required to be
treated as interest income to the extent of the market discount and Shareholders in a 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. Shareholders in the Jefferies Real Return ETF will
also be required to include as ordinary income their share of any inflation-adjusted increase in
the principal of TIPS held by the Fund.
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Potential investors should consult their tax advisors regarding the tax consequences of the
Jefferies Real Return ETFs investment in TIPS.
It is expected that a substantial portion of the futures on the Index Commodities will
constitute Section 1256 Contracts (as defined below). The Code generally applies a
mark-to-market system of taxing unrealized gains and losses on and otherwise provides for special
rules of taxation with respect to futures and other contracts that are Section 1256 Contracts. A
Section 1256 Contract includes certain regulated futures contracts. With the exception of futures
traded on certain exchanges, including the LME, discussed below, it is expected that the futures on
the Index Commodities held by the Funds will constitute Section 1256 Contracts. Section 1256
Contracts held by a Fund at the end of a taxable year of the Fund will be treated for U.S. federal
income tax purposes as if they were sold by the Fund at their fair market value on the last
business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales
(known as marking-to-market), together with any gain or loss resulting from any actual sales of
Section 1256 Contracts (or other termination of a Funds obligations under such contracts), must be
taken into account by the Fund in computing its taxable income for the year. If a Section 1256
Contract held by a Fund at the end of a taxable year is sold in the following year, the amount of
any gain or loss realized on the sale will be adjusted to reflect the gain or loss previously taken
into account under the mark-to-market rules.
Capital gains and losses from Section 1256 Contracts generally are 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 a 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 carryback does not increase or
produce a net operating loss for the year.
Any futures on Index Commodities held by a 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 a 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 a 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, a Fund may also invest in other futures
contracts, forward agreements, swaps or other OTC derivatives as described above under Investment
Objectives of the Funds. A Funds investment in these other futures contracts, forward
agreements, swaps or other 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 investors should consult their tax advisors regarding an investment in the Funds.
Allocation of a Funds Profits and Losses
For U.S. federal income tax purposes, a Shareholders distributive share of a Funds income,
gain, loss, deduction and other items will be determined by the applicable Declaration of Trust,
unless an allocation under the Declaration of Trust 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 Declaration of Trust
should be considered to have substantial economic effect or deemed to be made in accordance with
the partners interests in a Fund.
If the allocations provided by the Declaration of Trust were successfully challenged by the
IRS, the amount of income or loss allocated to Shareholders in a Fund for U.S. federal income tax
purposes under the Funds Declaration of Trust could be increased or reduced or the character of
the income or loss could be modified or both.
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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. Each 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 a Fund.
Monthly Allocation and Revaluation Conventions
In general, each 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 a Funds monthly convention for allocating income and
deductions. If
this were to occur, a Funds allocation method might be deemed to violate that
requirement.
In addition, for any month in which a creation or redemption of Shares in a 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 a 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, each Fund generally will use a monthly
convention for purposes of the reverse section 704(c) allocations. More specifically, each 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 corresponding 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 a
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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 each 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.
Section 754 Election
Each 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 a 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 a 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 a 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, each Fund will be required to
obtain information regarding each Shareholders secondary market transactions in Shares as well as
creations and redemptions of Shares. Each 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 any Fund will be
able to obtain such information from record owners or other sources, or that the basis adjustments
that any 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.
Constructive Termination
A 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 a 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 a 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. A 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 a Fund were unable to determine that the termination had occurred.
Treatment of Distributions
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 a 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).
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Creation and Redemption of Baskets
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 a 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 a 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.
Disposition of Shares
If a U.S. Shareholder transfers Shares of a 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.
Tax Basis in Shares
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.
Limitations on Interest Deductions
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 a 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.
Organization, Syndication and Other Expenses
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 (which limitations are reduced through 2010) on the amount of certain itemized
deductions allowable to individuals, by reducing the otherwise allowable portion of such deductions
by an amount equal to the lesser of:
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3% of the individuals adjusted gross income in excess of certain threshold amounts; or |
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80% of the amount of certain itemized deductions otherwise allowable for the taxable year. |
In addition, these expenses are also not deductible in determining the alternative minimum tax
liability of a U.S. Shareholder. Each Fund will report its expenses on a pro rata basis to the
Shareholders, and each U.S. Shareholder will
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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 a Fund that exceeds the amount of cash
actually distributed to the U.S. Shareholder for the year. It is anticipated that management fees
each 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. Each 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.
Passive Activity Income and Loss
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 a Funds investments
generally will not constitute income or losses from a passive activity. Therefore, income or loss
realized by Shareholders in a Fund will not be available to offset a U.S. Shareholders passive
losses or passive income from other sources.
Transferor/Transferee Allocations
In general, a 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 a Funds convention for allocating income and
deductions. In that event, a 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 a 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. Each 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).
Reporting by each Fund to its Shareholders
Each 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 in no event 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 TIPS and 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 a 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
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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 Funds, it is not
certain that the IRS will agree with the manner in which tax reporting by the Funds 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 Funds and any nominee will be
undertaken.
Audits and Adjustments to Tax Liability
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 each Fund for all purposes of the Code. The tax matters partner, which is required by
the Funds Declaration of Trust to notify all U.S. Shareholders of any U.S. federal income tax
audit of the Fund, will have the authority under the Declaration of Trust 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 a 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 a 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 a 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.
Non-U.S. Shareholders
Each 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 a Fund.
A non-U.S. Shareholders share of the interest income realized by a Fund on its holdings of TIPS or
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 a 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 a
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 a Fund.
Regulated Investment Companies
RICs may invest up to 25% of their 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
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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. Each 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 a 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 a Fund as a qualified PTP. In a 2005 revenue
ruling, the IRS clarified that derivative contracts owned by a RIC that provide for a total-return
exposure on a commodity index will not produce qualifying income for purposes of the RIC
qualification rules. The IRS interpretation set forth in such ruling, however, does not adversely
affect a Funds ability to be treated as a qualified PTP for purposes of applying the RIC
qualification rules. RIC investors are urged to monitor their investment in a Fund and consult
with a tax advisor concerning the impact of such an investment on their compliance with the income
source and asset diversification requirements applicable to RICs. Each Fund will make available on
the Managing Owners website periodic tax information designed to enable RIC investors in its
Shares to make a determination as to the Funds status under the qualified PTP rules.
Tax-Exempt Organizations
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 a 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 a 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. Neither Fund will 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 a 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.
Certain State and Local Taxation Matters
Prospective investors 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 a 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. Each 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 investor 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.
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Under current law and assuming full compliance with the terms of its applicable Declaration of
Trust (and other relevant documents), neither Fund should 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 either 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 either 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 each
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 a 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 a 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.
Backup Withholding
Each 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 INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS BEFORE DECIDING WHETHER TO INVEST IN
THE SHARES OF EITHER FUND.
PURCHASES BY EMPLOYEE BENEFIT PLANS
Although there can be no assurance that an investment in the Funds, 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 Considerations Tax-Exempt
Organizations at page 79. In addition, because they are not taxpaying entities, employee
benefit plans are not subject to paying annual tax on profits (if any) of the Funds.
General
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 Funds (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.
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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 Funds, including the role that such an investment in the Funds
would play in the Plans overall investment portfolio. Each Plan Fiduciary, before deciding to
invest in the Funds, must be satisfied that such investment in the Funds is a prudent investment
for the Plan, that the investments of the Plan, including the investment in the Funds, are
diversified so as to minimize the risk of large losses and that an investment in the Funds 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. NEITHER FUND IS INTENDED AS A COMPLETE INVESTMENT PROGRAM.
Plan Assets
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 of 1933 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 Funds 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 of 1933, and the Shares will be timely registered under the Securities
Exchange Act of 1934. Second, it appears that the Shares will be freely transferable because the
Shares of the Funds will be freely tradeable on the 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 Funds and of each other. Therefore, the underlying assets of the Funds should
not be considered to constitute assets of any Plan which purchases Shares.
Ineligible Purchasers
In general, Shares may not be purchased with the assets of a Plan if the Managing Owner, the
Clearing Broker, the Administrator, the Trustee, the Index Calculation Agent, 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
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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 Funds 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.
PLAN OF DISTRIBUTION
Initial Purchaser
[___] is the Initial Purchaser of Shares of each Fund. On [___], the Initial Purchaser
agreed to purchase and take delivery of [___] Shares of each Fund, which comprise the initial
Baskets of each Fund, at a purchase price of $25.00 per Share ($[1,250,000] per Basket), pursuant
to an Initial Purchaser Agreement. The Initial Purchaser proposes to offer to the public these
[___] Shares of each Fund 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 net asset value per Share and
the supply of and demand for the Shares at the time of the offer. Shares of a Fund offered by the
Initial Purchaser at different times may have different offering prices. The excess, if any, of the
price at which the Initial Purchaser sells a Share over the price paid by the Initial Purchaser in
connection with the initial purchase of such Share will be deemed to be underwriting compensation
by the FINRA Corporate Financing Department. The Initial Purchaser will not receive from a Fund,
the Managing Owner or any of their affiliates, any fee or other compensation in connection with the
sale of the Shares to the public.
Neither Fund will bear any expenses in connection with the offering or sales of the Shares
composing the initial Basket.
The Managing Owner has agreed to indemnify the Initial Purchaser against certain liabilities,
including liabilities under the Securities Act of 1933, and to contribute to payments that the
Initial Purchaser may be required to make in respect thereof.
The Initial Purchaser will not act as an Authorized Participant with respect to the initial
Basket of a Fund, and its activities with respect to the initial Basket of a Fund will be distinct
from those of an Authorized Participant.
Authorized Participants
Each Fund will issue Shares in Baskets to Authorized Participants continuously as of noon New
York time on the business day immediately following the date on which a valid order to create a
Basket is accepted by the applicable Fund, at the net asset value of [50,000] Shares as of the
closing time of the NYSE Arca or the last to close of the exchanges on which the applicable Funds
futures contracts are traded, whichever is latest, on the date that a valid order to create a
Basket is accepted by the applicable Fund.
Authorized Participants may offer to the public, from time-to-time, Shares of a Fund from any
Baskets they create. Shares of a 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 trading
price of the Shares of the applicable Fund on the NYSE Arca, the net asset value per Share 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 excess, if any, of the price at which an Authorized Participant sells a Share over the
price paid by such Authorized Participant in connection with the creation of such Share in a Basket
will be deemed to be underwriting compensation by the FINRA Corporate Financing Department.
Authorized Participants will not receive from either Fund, the Managing Owner or any of their
affiliates, any fee or other compensation in connection with their sale of Shares to the public,
although investors are expected to be charged a customary commission by their brokers in connection
with purchases of Shares that will vary from investor to investor. Investors are encouraged to
review the terms of their brokerage accounts for applicable charges.
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As of the date of this Prospectus, each of [___] and [___] have each executed a
Participant Agreement relating to each Fund and are the only Authorized Participants.
Likelihood of Becoming a Statutory Underwriter
Each 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 each 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 each 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.
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For additional details see below.
General
Retail investors may purchase and sell Shares through traditional brokerage accounts.
Investors who purchase Shares through a commission/fee-based brokerage account may pay
commissions/fees charged by the brokerage account. Investors are encouraged to review the terms of
their brokerage accounts for applicable charges.
Investors intending to create or redeem Baskets through Authorized Participants in
transactions not involving a broker-dealer registered in such investors 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.
The Managing Owner has agreed to indemnify certain parties against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments that such parties may
be required to make in respect of those liabilities. The Trustee has agreed to reimburse such
parties, solely from and to the extent of each respective Funds assets, for indemnification and
contribution amounts due from the Managing Owner in respect of such liabilities to the extent the
Managing Owner has not paid such amounts when due.
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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 a Fund will not exceed [10% plus 0.5%] for bona fide due diligence.
The Initial Purchaser will not charge a commission of greater than 1% (which represents a
maximum of $10,000,000 of the amount registered hereby) of the price per Share of each Fund in
offering and selling the Shares comprising the Initial Baskets of each Fund.
Pursuant to the Distribution Services Agreement, [___] will be paid by each Fund in an amount
of approximately $[___] per annum per Fund, plus any fees or disbursements incurred by [___] in
connection with the performance by [___] of its duties on behalf of each Fund.
Pursuant to the Marketing Agreement, [___] will be paid the following fees by each Fund
[___].
The payments to [___] will not, in the aggregate (of the Funds, and not on a Fund-by-Fund
basis), exceed [___]% and [___]%, respectively, of the gross offering proceeds of the offering (or
in an amount equal to $[___] and $[___], respectively, of the $[___] registered on the initial
Registration Statement on Form S-1 in respect of the Funds). The Funds will advise [___] and
[___] will monitor compensation received in connection with the Funds to determine if the
payments described hereunder must be limited, when combined with selling commissions charged and
any price spreads realized by other FINRA members, in order to comply with the 10% limitation on
total underwriters compensation pursuant to FINRA Rule 2310.
The Jefferies TR/J CRB Commodity Index ETFs Shares trade on the NYSE Arca under the symbol
CRB and the Jefferies Commodity Real Return ETFs Shares trade on the NYSE Arca under the symbol
RRET.
LEGAL MATTERS
Sidley Austin llp has advised the Managing Owner in connection with the Shares being
offered hereby. Sidley Austin llp also advises the Managing Owner with respect to its
responsibilities as managing owner of, and with respect to matters relating to each Fund. Sidley
Austin llp has prepared the sections Material 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. Sidley Austin llp has not represented, nor will it represent any Fund
or the Shareholders in matters relating to the Funds or any 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.
Richards, Layton & Finger, P.A., special Delaware counsel to the Funds, has advised the Funds
in connection with the legality of the Shares being offered hereby.
EXPERTS
[TO COME-AUDITORS TO PROVIDE]
ADDITIONAL INFORMATION
This Prospectus constitutes part of the Registration Statement filed by the Funds with the SEC
in Washington, D.C. This Prospectus does not contain all of the information set forth in such
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 and the Customer 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 of such site is http://www.sec.gov.
-84-
RECENT FINANCIAL INFORMATION
AND ANNUAL REPORTS
The Managing Owner will furnish you with an annual report of each Fund in which you invested
within 90 calendar days after the end of such Funds fiscal year as required by the rules and
regulations of the SEC as well as with those reports required by the CFTC and the 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 Funds. You also will be provided with appropriate
information to permit you to file your United States 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.[___].com. Additional
reports may be posted on the Managing Owners website in the discretion of the Managing Owner or as
required by regulatory authorities.
PRIVACY POLICY OF
THE MANAGING OWNER
The Managing Owner collects non-public information about you from the following sources: (i)
information received from you on applications or other forms; and (ii) information about your
transactions with the Managing Owner and others. The Managing Owner does not disclose any
non-public personal information about you to anyone, other than as set forth below, as permitted by
applicable law and regulation. The Managing Owner may disclose non-public personal information
about you to the funds in which you invest. The Managing Owner may disclose non-public personal
information about you to non-affiliated companies that work with the Managing Owner to service your
account(s), or to provide services or process transactions that you have requested. The Managing
Owner may disclose non-public personal information about you to parties representing you, such as
your investment representative, your accountant, your tax adviser, or to other third parties at
your direction/consent. If you decide to close your account(s) or become an inactive customer, the
Managing Owner will adhere to the privacy policies and practices as described in this notice. The
Managing Owner restricts access to your personal and account information to those employees who
need to know that information to provide products and services to you. The Managing Owner
maintains appropriate physical, electronic and
procedural safeguards to guard your non-public
personal information.
[Remainder of page left blank intentionally.]
-85-
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
Page |
Jefferies TR/J CRB Commodity Index ETF |
|
|
|
|
|
|
|
87 |
|
|
|
|
|
88 |
|
|
|
|
|
89 |
|
|
|
Jefferies Commodity Real Return ETF |
|
|
|
|
|
|
|
90 |
|
|
|
|
|
91 |
|
|
|
|
|
92 |
|
|
|
Jefferies Commodity Investment Services, LLC |
|
|
|
|
|
|
|
93 |
|
|
|
|
|
94 |
|
|
|
|
|
95 |
|
|
|
* |
|
To be filed by amendment |
-86-
Report of Independent Registered Public Accounting Firm*
Jefferies TR/J CRB Commodity Index ETF:
|
|
|
* |
|
To be furnished by amendment. |
JEFFERIES TR/J CRB COMMODITY INDEX ETF HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO
ASSETS OR LIABILITIES.
JEFFERIES TR/J CRB COMMODITY INDEX ETF HAS NOT COMMENCED TRADING AND DOES NOT HAVE A PERFORMANCE
HISTORY.
-87-
Jefferies TR/J CRB Commodity Index ETF
Form of Statement of
Financial Condition
dated [___].*
|
|
|
* |
|
To be furnished by amendment |
JEFFERIES TR/J CRB COMMODITY INDEX ETF HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO
ASSETS OR LIABILITIES.
JEFFERIES TR/J CRB COMMODITY INDEX ETF HAS NOT COMMENCED TRADING AND DOES NOT HAVE A PERFORMANCE
HISTORY.
-88-
Jefferies TR/J CRB Commodity Index ETF
Notes to Statement of
Financial Condition*
[___], 20[_]
|
|
|
* |
|
To be furnished by amendment. |
JEFFERIES TR/J CRB COMMODITY INDEX ETF HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO
ASSETS OR LIABILITIES.
JEFFERIES TR/J CRB COMMODITY INDEX ETF HAS NOT COMMENCED TRADING AND DOES NOT HAVE A PERFORMANCE
HISTORY.
-89-
Report of Independent Registered Public Accounting Firm*
Jefferies Commodity Real Return ETF:
|
|
|
* |
|
To be furnished by amendment. |
JEFFERIES COMMODITY REAL RETURN ETF HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO ASSETS
OR LIABILITIES.
JEFFERIES COMMODITY REAL RETURN ETF HAS NOT COMMENCED TRADING AND DOES NOT HAVE A PERFORMANCE
HISTORY.
-90-
Jefferies Commodity Real Return ETF
Form of Statement of
Financial Condition
dated [___].*
|
|
|
* |
|
To be furnished by amendment |
JEFFERIES COMMODITY REAL RETURN ETF HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO ASSETS
OR LIABILITIES.
JEFFERIES COMMODITY REAL RETURN ETF HAS NOT COMMENCED TRADING AND DOES NOT HAVE A PERFORMANCE
HISTORY.
-91-
Jefferies Commodity Real Return ETF
Notes to Statement of
Financial Condition*
[___], 2010
|
|
|
* |
|
To be furnished by amendment. |
JEFFERIES COMMODITY REAL RETURN ETF HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO ASSETS
OR LIABILITIES.
JEFFERIES COMMODITY REAL RETURN ETF HAS NOT COMMENCED TRADING AND DOES NOT HAVE A PERFORMANCE
HISTORY.
-92-
Report of Independent Registered Public Accounting Firm*
Jefferies Commodity Investment Services, LLC:
To be furnished by amendment.
-93-
Jefferies Commodity Investment Services, LLC
Form of Statement of
Financial Condition
dated [___].*
|
|
|
* |
|
To be furnished by amendment |
JEFFERIES COMMODITY INVESTMENT SERVICES, LLC HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO
ASSETS OR LIABILITIES.
-94-
Jefferies Commodity Investment Services, LLC
Notes to Statement of
Financial Condition*
[___], 20[_]
|
|
|
* |
|
To be furnished by amendment. |
JEFFERIES COMMODITY INVESTMENT SERVICES, LLC HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO
ASSETS OR LIABILITIES.
-95-
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
JEFFERIES TR/J CRB COMMODITY INDEX ETF
JEFFERIES COMMODITY REAL RETURN ETF
Shares of Beneficial Interest
The Shares are speculative securities which involve the risk of loss.
Past performance is not necessarily indicative of future results.
See
The Risks You Face beginning at page 19 in Part One.
THIS PROSPECTUS IS IN TWO PARTS:
A DISCLOSURE DOCUMENT AND A STATEMENT OF ADDITIONAL INFORMATION.
THESE PARTS ARE BOUND TOGETHER, AND BOTH CONTAIN
IMPORTANT INFORMATION. YOU MUST READ THE
STATEMENT OF ADDITIONAL INFORMATION
IN CONJUNCTION WITH THE
DISCLOSURE DOCUMENT.
[______], 2010
Jefferies Commodity Investment Services, LLC
Managing Owner
-96-
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
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98 |
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98 |
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98 |
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98 |
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98 |
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99 |
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99 |
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99 |
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|
P1 |
-97-
GENERAL INFORMATION RELATING TO
JEFFERIES GROUP, INC.
Jefferies Group, Inc.
Jefferies Group, Inc. and its subsidiaries operate as a major global securities and investment
banking firm serving companies and their investors. Jefferies Group, Inc. controls numerous
operating companies, together Jefferies Group, including the Managing Owner, Jefferies Commodity
Investment Services, LLC. Jefferies Group offers companies capital markets, merger and
acquisition, restructuring and other financial advisory services. It provides investors fundamental
research and trade execution in equity, equity-linked, and fixed income securities, including
corporate bonds, government and agency securities, repo finance, mortgage- and asset-backed
securities, municipal bonds, whole loans and emerging markets debt, convertible securities as well
as commodities and derivatives. It also provides asset management services and products to
institutions and other investors. Effective June 18, 2009, Jefferies Group, Inc.s principal
operating subsidiary, Jefferies & Company, Inc., was designated as a primary dealer by the Federal
Reserve Bank of New York.
As of September 30, 2009, Jefferies Group had 2,513 employees. It maintained offices in more
than 25 cities throughout the world and has its executive offices located at 520 Madison Avenue,
New York, New York 10022. Its telephone number is (212) 284-2550 and its Internet address is
www.jefferies.com.
THE FUTURES MARKETS
Futures Contracts
Futures contracts are standardized contracts made on United States or foreign exchanges that
call for the future delivery of specified quantities of various agricultural and tropical
commodities, industrial commodities, currencies, financial instruments or metals 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 December 2011 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 December 2011 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 of any physical
commodity.
Hedgers and Speculators
The two broad classes of persons who trade futures interest 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
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 United States 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 United States 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 worry about the solvency of the
party on the opposite side of the trade; their only remaining
-98-
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.
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.
Daily Limits
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 Risks You Face [___].
Regulations
Futures exchanges in the United States are subject to regulation under the Commodity Exchange
Act, or CEAct, by the CFTC, the governmental agency having responsibility for regulation of futures
exchanges and trading on those exchanges. (Investors should be aware that no governmental U.S.
agency regulates the OTC foreign exchange markets.)
The CEAct 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 CEAct 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 Fund. The CEAct gives the
CFTC similar authority with respect to the activities of commodity trading advisors, such as the
Managing Owner. If the registration of a Managing Owner as a commodity trading advisor were to be
terminated, restricted or suspended, the Managing Owner would be unable, until such time (if any)
as such registration were to be reinstated, to render trading advice to the Fund. The Fund and the
Fund themselves are not registered with the CFTC in any capacity.
The CEAct requires all futures commission merchants, such as the Clearing 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 CEAct 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 CEAct. Shareholders may
also be able to maintain a private right of action for certain violations of the CEAct. The CFTC
has adopted rules implementing the reparation provisions of the CEAct which provide that any person
may file a complaint for a reparations award with the CFTC for violation of the CEAct against a
floor broker, futures commission merchant, introducing broker, commodity trading advisor, commodity
pool operator, and their respective associated persons.
Pursuant to authority in the CEAct, the NFA has been formed and registered with the CFTC as a
registered futures association. At the present time, the 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, the 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 the NFA responsibility for the registration of commodity
trading advisors, commodity pool operators, futures commission merchants, introducing brokers and
their respective associated persons and floor brokers. The Clearing Broker and the Managing Owner
are members of the NFA (the Fund and the Fund themselves are not required to become members of the
NFA).
The CFTC has no authority to regulate trading on foreign commodity exchanges and markets.
Margin
Initial or original margin is the minimum amount of funds that must be deposited by a
futures trader with his 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.
A margin deposit is like a cash performance bond. It helps assure the futures traders performance
of the futures interests which contracts he 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
-99-
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 Funds
position. With respect to the Managing Owners trading, only the Managing Owner, and not the Fund
or its Shareholders personally, will be subject to margin calls.
-100-
EXHIBIT A
PRIVACY NOTICE
The importance of protecting the investors privacy is recognized by Jefferies TR/J CRB
Commodity Index ETF and Jefferies Commodity Real Return ETF (the Funds) and Jefferies Commodity
Investment Services, LLC (the Managing Owner). The Funds and the Managing Owner protect personal
information they collect about you by maintaining physical, electronic and procedural safeguards to
maintain the confidentiality and security of such information.
Categories Of Information Collected. In the normal course of business, the Funds and the
Managing Owner may collect the following types of information concerning investors in the Funds who
are natural persons:
|
|
|
Information provided in the Participant Agreements and other forms (including name,
address, social security number, income and other financial-related information); and |
|
|
|
|
Data about investor transactions (such as the types of investments the investors
have made and their account status). |
How the Collected Information is Used. Any and all nonpublic personal information received by
the Funds or the Managing Owner with respect to the investors who are natural persons, including
the information provided to the Funds by such an investor in the Participant Agreement, will not be
shared with nonaffiliated third parties which are not service providers to the any of the Funds or
the Managing Owner without prior notice to such investors. Such service providers include but are
not limited to the Selling Agents, the Clearing Broker, administrators, auditors and the legal
advisers of the Funds. Additionally, the Funds and/or the Managing Owner may disclose such
nonpublic personal information as required by applicable laws, statutes, rules and regulations of
any government, governmental agency or self-regulatory organization or a court order. The same
privacy policy will also apply to the Shareholders who have fully redeemed.
For questions about the privacy policy, please contact the Managing Owner.
-P-1-
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
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).
|
|
|
|
|
|
|
Approximate |
|
|
|
Amount |
|
Securities and Exchange Commission Registration Fee |
|
$ |
445.63 |
|
Financial Industry Regulatory Authority Filing Fee |
|
|
1,125.00 |
|
Printing Expenses |
|
|
[____] |
* |
Fees of Certified Public Accountants |
|
|
[____] |
* |
Fees of Counsel |
|
|
[____] |
* |
|
|
|
|
Total |
|
$ |
[____] |
** |
|
|
|
|
|
|
|
* |
|
To be Provided by amendment. |
|
** |
|
Represents an estimate of the portion of fees and expenses of the Fund that are common to this
Registration Statement and the Registration Statement for Jefferies TR/J CRB Commodity Index ETF
(SEC File No. 333-[-]), which is being filed concurrently with this Registration Statement. |
Item 14. Indemnification of Directors and Officers.
Section 4.7 of the Amended and Restated Declaration of Trust and Trust Agreement of each of
the Funds filed as exhibits to this Registration Statement and, as amended from time-to-time,
provides for the indemnification of the Managing Owner. The Managing Owner (including Covered
Persons as provided under each Amended and Restated Declaration of Trust and Trust Agreement) shall
be indemnified by the Funds, as the case may be, against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by it in connection with its
activities for the Funds, as the case may be, provided that (i) the Managing Owner was acting on
behalf of or performing services for the Funds, as the case may be, and has determined, in good
faith, that such course of conduct was in the best interests of the Funds, as the case may be, and
such liability or loss was not the result of gross negligence or willful misconduct, or a breach of
the Amended and Restated Declaration of Trust and Trust Agreement on the part of the Managing Owner
and (ii) any such indemnification will only be recoverable from the Trust Estate (as such term is
defined in the Amended and Restated Declaration of Trust and Trust Agreement). All rights to
indemnification permitted therein and payment of associated expenses shall not be affected by the
dissolution or other cessation to exist of the Managing Owner, or the withdrawal, adjudication of
bankruptcy or insolvency of the Managing Owner, or the filing of a voluntary or involuntary
petition in bankruptcy under Title 11 of the U.S. Code by or against the Managing Owner. The
source of payments made in respect of indemnification under either Amended and Restated Declaration
of Trust and Trust Agreement shall be from assets of the Funds, as the case may be.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules.
The following documents (unless otherwise indicated) are filed herewith and made a part of
this Registration Statement:
(a) Exhibits. The following exhibits are filed herewith:
|
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|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
1.1 |
|
|
Form of Initial Purchaser Agreement* |
|
|
|
|
|
|
4.1 |
|
|
Form of Amended and Restated Declaration of Trust and Trust Agreement of Jefferies Commodity Real Return ETF* |
|
|
|
|
|
|
4.2 |
|
|
Form of Participant Agreement* |
|
|
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|
|
|
4.3 |
|
|
Form of Privacy Notice (annexed to the Prospectus as Exhibit A) |
|
|
|
|
|
|
5.1 |
|
|
Opinion of Richards, Layton & Finger, P.A., as to legality* |
|
|
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|
|
8.1 |
|
|
Opinion of Sidley Austin llp as to income tax matters* |
|
|
|
|
|
|
10.1 |
|
|
Form of Customer Agreement* |
|
|
|
|
|
|
10.2 |
|
|
Form of Administration Agreement* |
|
|
|
|
|
|
10.3 |
|
|
Form of Global Custody Agreement* |
|
|
|
|
|
|
10.4 |
|
|
Form of Transfer Agency and Service Agreement* |
|
|
|
|
|
|
10.5 |
|
|
Form of Distribution Services Agreement* |
|
|
|
|
|
|
10.6 |
|
|
Form of Marketing Agreement* |
|
|
|
|
|
|
23.1 |
|
|
Form of Consent of Sidley Austin llp is included as part of this Registration Statement* |
|
|
|
|
|
|
23.2 |
|
|
Form of Consent of Richards, Layton & Finger (included in Exhibit 5.1)* |
|
|
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|
|
|
23.3 |
|
|
Form of Consent of Sidley Austin llp as tax counsel is included as part of this Registration Statement* |
|
|
|
|
|
|
23.4 |
|
|
Consent of [Auditors], Independent Registered Public Accounting Firm, is included as part of
this Registration Statement* |
|
|
|
* |
|
To be filed by amendment. |
5
(b) The following financial statements are included in the Prospectus:
(1) Jefferies Commodity Real Return ETF
|
|
|
|
|
(i) Report of Independent Public Accounting Firm dated [______].* |
|
|
[__] |
|
(ii) Statement of Financial Condition dated [_______].* |
|
|
[__] |
|
(iii) Notes to Statement of Financial Condition* |
|
|
[__] |
|
(2) Jefferies Commodity Investment Services, LLC
|
|
|
|
|
(i) Report of Independent Public Accounting Firm dated [______].* |
|
|
[__] |
|
(ii) Statement of Financial Condition dated [_______].* |
|
|
[__] |
|
(iii) Notes to Statement of Financial Condition* |
|
|
[__] |
|
|
|
|
* |
|
To be filed by amendment |
6
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
|
(1) |
|
To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement; |
|
(i) |
|
To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933, as amended; |
|
|
(ii) |
|
To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the
effective registration statement; |
|
|
(iii) |
|
To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; |
(A) Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply
if the registration statement is on Form S8, and the information required
to be included in a post-effective amendment by those paragraphs is
contained in reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement; and
(B) Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section
do not apply if the registration statement is on Form S3 or Form F3 and
the information required to be included in a post-effective amendment by
those paragraphs is contained in reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement, or is contained in a form of prospectus filed
pursuant to Rule 424(b) that is part of the registration statement.
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(2) |
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That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the bona
fide offering
thereof. |
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(3) |
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To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering. |
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(4) |
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That, for the purpose of determining liability under the Securities Act
of 1933 to any purchaser: |
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(i) |
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If the registrant is relying on Rule 430B: |
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the date the
filed prospectus was deemed part of and included in the registration
statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance on Rule
430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section 10(a)
of the Securities Act of 1933 shall be deemed to be part of and included in
the registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the prospectus.
As provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an underwriter, such date shall be deemed to be
a new effective date of the registration statement relating to the
securities in the registration statement to which that prospectus relates,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date; or
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(ii) |
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If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule
430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as
to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use. |
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(5) |
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That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities: |
(a) The undersigned registrant undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned registrant will
be a seller to the purchaser and will be considered to offer or sell such securities to such
purchaser:
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(i) |
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Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be filed
pursuant to Rule 424; |
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(ii) |
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Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used or referred
to by the undersigned registrant; |
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(iii) |
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The portion of any other free writing prospectus
relating to the offering containing material information about the
undersigned registrant or its securities provided by or on behalf of the
undersigned registrant; and |
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(iv) |
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Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser. |
2
(b) The undersigned registrant hereby undertakes that:
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(1) |
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For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective. |
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(2) |
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For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof. |
(c) Insofar as indemnification for liabilities under the Securities Act of 1933 may be
permitted to officers, directors or controlling persons of the registrant pursuant to the
provisions described in Item 14 above, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by the registrant of
expenses incurred or paid by an officer, director, or controlling person of the registrant in the
successful defense of any such action, suit or proceeding) is asserted by such officer, director or
controlling person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of such issue.
3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Managing Owner of the
Registrant has duly caused this Registration Statement on Form S-1 to be signed on their behalf by
the undersigned, thereunto duly authorized, in the city of Stamford, State of Connecticut, on the
9th day of February, 2010.
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Jefferies Commodity Real Return ETF |
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By: |
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Jefferies Commodity Investment Services, LLC,
its Managing Owner |
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By: |
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/s/ Adam C. De Chiara |
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Name:
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Adam C. De Chiara |
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Title:
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Co-President |
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By: |
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/s/ Bradford L. Klein |
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Name:
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Bradford L. Klein |
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Title:
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Co-President |
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Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on
Form S-1 has been signed by the following persons on behalf of the Managing Owner of the Registrant
in the capacities and on the date indicated.
Jefferies Commodity Investment
Services, LLC,
Managing Owner Of the Registrant
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/s/ Adam C. De Chiara
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Co-President
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February 9, 2010 |
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Name: Adam C. De Chiara
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(Co-Principal Executive Officer) |
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/s/ Bradford L. Klein
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Co-President
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February 9, 2010 |
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Name: Bradford L. Klein
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(Co-Principal Executive Officer) |
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/s/ Peregrine C. Broadbent
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Chief Financial Officer
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February 9, 2010 |
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Name: Peregrine C. Broadbent
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(Principal Financial Officer) |
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(Being the principal executive officer, the principal financial and accounting officer and all
of the directors of Jefferies Commodity Investment Services, LLC)
Jefferies Commodity Investment
Services, LLC,
Managing Owner Of the Registrant
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/s/ Adam C. De Chiara
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Co-President
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February 9, 2010 |
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Name: Adam C. De Chiara
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(Co-Principal Executive Officer) |
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/s/ Bradford L. Klein
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Co-President
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February 9, 2010 |
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Name: Bradford L. Klein
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(Co-Principal Executive Officer) |
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/s/ Peregrine C. Broadbent
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Chief Financial Officer
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February 9, 2010 |
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Name: Peregrine C. Broadbent
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(Principal Financial Officer) |
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