Item 1. Business.
What is the Trust and the Trust Series?
The USCF Funds Trust (the “Trust”)
is a Delaware statutory trust formed on March 2, 2016. The Trust is a series trust formed pursuant to the Delaware Statutory
Trust Act. United States 3x Oil Fund (“USOU”) and United States 3x Short Oil Fund (“USOD”) are both series
of the Trust. Two other series: REX S&P MLP Fund (“RMLP”), and REX S&P MLP Inverse Fund (“MLPD”,
together with RMLP, the “REX Funds”)) never commenced operations and filed to withdraw from registration on March 30,
2018. USOU and USOD are commodity pools that continuously issue common shares of beneficial interest that may be purchased and
sold on NYSE Arca Equities, Inc. stock exchange (“NYSE Arca”). USOU and USOD each referred to as the “Fund”
and collectively referred to herein as the “Funds” or the “Trust Series.” The Trust and the Funds operate
pursuant to the Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”),
dated as of June 23, 2017. The sole trustee of the Trust is Wilmington Trust Company, National Association, a national banking
association, with its principal place of business in the State of Delaware (the “Trustee”). The Trust and the Funds
are managed and operated by the United States Commodity Funds, LLC (“USCF” or the “Sponsor”). USCF is a
limited liability company formed in Delaware on May 10, 2005, that is registered as a commodity pool operator (“CPO”)
with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).
The Trust and Trust Series maintain
their main business offices at 1850 Mt. Diablo Boulevard, Suite 640, Walnut Creek, California 94596.
On November 20, 2019, the Board of
Directors of USCF authorized and approved the closing and liquidation for each of USOU and USOD together with a plan of liquidation
for each of USOU and USOD. The USCF Funds Trust, including each of its series USOU and USOD filed a current report on Form 8-K
dated November 20, 2019 with the U.S. Securities and Exchange Commission (“SEC”) that included, as an exhibit,
the press release, and the applicable plan of liquidation. In addition, each of USOU and USOD filed a prospectus supplement with
the SEC dated November 19, 2019.
The liquidation date for each of USOU and
USOD was December 18, 2019 and the proceeds of the liquidation were sent to all remaining shareholders of USOU and USOD, respectively,
on or about December 19, 2019. Each of USOU and USOD also filed a post-effective amendment to the registration statement with
the SEC to terminate the offering of registered and unsold shares of USOU and USOD, respectively, and the NYSE Arca filed Forms
25 to effect the withdrawal of the listings for shares of each of USOU and USOD.
Given the closing and liquidation of USOU
and USOD as described above, all of the forward-looking statements, strategy, trading, risk factors, marketing, operational and
other information set forth in this Annual Report on Form 10-K (the “Annual Report”), to the extent that such
information refers to future operations, is no longer effective. USOU and USOD have ceased doing business and dissolved, except
to the extent necessary to wind down USOU and USOD.
Investment Objective of the Funds
United States 3x Oil Fund
The investment objective of USOU was for
the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect three times
(3x) the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil (the
“Benchmark Oil Futures Contract”) less USOU’s expenses. To achieve this objective, USCF endeavored to have the
notional value of USOU’s aggregate exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately
equal to 300% of its NAV. USOU sought a return that is 300% of the return of the Benchmark Oil Futures Contract for a single day
and did not seek to achieve its stated investment objective over a period of time greater than one day. The pursuit of daily
leveraged investment goals means that the return of USOU for a period longer than a full trading day may have no resemblance to
300% of the return of the Benchmark Oil Futures Contract for a period of longer than a full trading day because the aggregate return
of USOU is the product of the series of each trading day’s daily returns.
USCF believes that market arbitrage opportunities
will cause daily changes in USOU’s share price on NYSE Arca on a percentage basis, to closely track the daily changes in
USOU’s per share NAV on a percentage basis. USOU will not seek to achieve its stated investment objective over a period of
time greater than one day. During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may affect
USOU’s return as much as or more than the return of the Benchmark Oil Futures Contract. Further, the return for investors
that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the
return of USOU’s stated investment objective and the performance of the Benchmark Oil Futures Contract for the full trading
day. Additionally, investors should be aware that USOU’s investment objective is not for its NAV or market price of shares
to equal, in dollar terms, the spot price of light, sweet crude oil. Natural market forces called contango and backwardation can
impact the total return on an investment in USOU’s shares relative to a hypothetical direct investment in crude oil and,
in the future, it is likely that the relationship between the market price of USOU’s shares and changes in the spot prices
of light, sweet crude oil will continue to be so impacted by contango and backwardation. (It is important to note that the disclosure
above ignores the potential costs associated with physically owning and storing crude oil, which could be substantial.)
USOU’s shares began trading on July 20,
2017 and ceased trading on December 12, 2019. As of December 31, 2019, USOU had liquidated all its assets and distributed
cash pro rata to all remaining shareholders.
United States 3x Short Oil Fund
The investment objective of USOD was for
the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect three times
the inverse (-3x) of the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet
crude oil (the “Benchmark Oil Futures Contract”) less USOD’s expenses. To achieve this objective, USCF endeavored
to have the notional value of USOD’s aggregate short exposure to the Benchmark Oil Futures Contract at the close of each
trading day approximately equal to 300% of its NAV. USOD sought a return that is -300% of the return of the Benchmark Oil Futures
Contract for a single day and did not seek to achieve its stated investment objective over a period of time greater than one
day. The pursuit of daily inverse leveraged investment goals means that the return of USOD for a period longer than a full
trading day may have no resemblance to -300% of the return of the Benchmark Oil Futures Contract for a period of longer than a
full trading day because the aggregate return of USOD is the product of the series of each trading day’s daily returns.
USCF believes that market arbitrage opportunities
will cause daily changes in USOD’s share price on NYSE Arca on a percentage basis, to closely track the daily changes in
USOD’s per share NAV on a percentage basis. USOD will not seek to achieve its stated investment objective over a period of
time greater than one day. During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may
affect USOD’s return as much as or more than the return of the Benchmark Oil Futures Contract. Further, the return for investors
that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the
return of USOD’s stated investment objective and the performance of the Benchmark Oil Futures Contract for the full trading
day. Additionally, investors should be aware that USOD’s investment objective is not for its NAV or market price of shares
to equal, in dollar terms, the spot price of light, sweet crude oil or to track the inverse performance thereof. Natural market
forces called contango and backwardation can impact the total return on an investment in USOD’s shares relative to a hypothetical
direct investment in crude oil and, in the future, it is likely that the relationship between the market price of USOD’s
shares and changes in the spot prices of light, sweet crude oil will continue to be so impacted by contango and backwardation.
(It is important to note that the disclosure above ignores the potential costs associated with physically owning and storing crude
oil, which could be substantial.)
USOD’s shares began trading on July 20,
2017 and ceased trading on December 12, 2019. As of December 31, 2019, USOD had liquidated all its assets and distributed
cash pro rata to all remaining shareholders.
Who is USCF?
USCF is a single member limited liability
company that was formed in the state of Delaware on May 10, 2005. USCF maintains its main business office at 1850 Mt. Diablo
Boulevard, Suite 640, Walnut Creek, California 94596. USCF is a wholly-owned subsidiary of Wainwright Holdings, Inc.,
a Delaware corporation (“Wainwright”) which is a wholly owned subsidiary of Concierge Technologies, Inc. (publicly
traded under the ticker CNCG) (“Concierge”). Mr. Nicholas D. Gerber (discussed below), along with certain family
members and certain other shareholders, owns the majority of the shares of Concierge. Wainwright is a holding company that currently
holds both USCF, as well as USCF Advisers LLC, an investment adviser registered under the Investment Advisers Act of 1940, as amended.
USCF Advisers LLC serves as the investment adviser for the USCF SummerHaven SHPEN Index Fund (“BUYN”), the USCF SummerHaven
SHPEI Index Fund (“BUY”) and USCF SummerHaven Dynamic Commodity Index Total ReturnSM (“SDCI”),
each a series of the USCF ETF Trust. USCF Advisers LLC also served as the investment adviser to the USCF Commodity Strategy Fund,
a series of the USCF Mutual Funds Trust, which liquidated all of its assets and distributed cash pro rata to all remaining shareholders
in March 2019. USCF ETF Trust and USCF Mutual Funds Trust are registered under the Investment Company Act of 1940, as amended
(the “1940 Act”). The Board of Trustees for the USCF ETF Trust and USCF Mutual Funds Trust consist of different independent
trustees than those independent directors who serve on the Board of Directors of USCF. USCF is a member of the National Futures
Association (the “NFA”) and registered as a commodity pool operator (“CPO”) with the Commodity Futures
Trading Commission (the “CFTC”) on December 1, 2005 and as a swaps firm on August 8, 2013.
USCF serves as general partner of the United
States Oil Fund, LP (“USO”), the United States Natural Gas Fund, LP (“UNG”), the United States 12 Month
Oil Fund, LP (“USL”), the United States Gasoline Fund, LP (“UGA”), the United States 12 Month Natural Gas
Fund, LP (“UNL”), and the United States Brent Oil Fund, LP (“BNO”). USCF previously served as the general
partner for the United States Short Oil Fund, LP (“DNO”) and the United States Diesel-Heating Oil Fund, LP (“UHN”),
both of which were liquidated in 2018. USCF is also the sponsor of the United States Commodity Index Fund (“USCI”),
the United States Copper Index Fund (“CPER”), and the USCF Crescent Crypto Index Fund (“XBET”), each a
series of the United States Commodity Index Funds Trust. (“USCIFT”). XBET is currently in registration and has not
commenced operations. USCF previously served as the sponsor for the United States Agriculture Index Fund (“USAG”),
which was liquidated in 2018.
On October 3, 2019, after the close
of trading on the NYSE Arca, USOD effected a 1-for-2 reverse share split and post-split shares of USOD began trading on October 4,
2019. As a result of the reverse share split, every two pre-split shares of USOD were automatically exchanged for one post-split
share. Immediately prior to the reverse split, there were 1,650,040 shares of USOD issued and outstanding, representing a per share
NAV of $4.33. Immediately after the reverse share split, the number of issued and outstanding shares of USOD decreased to 825,040,
not accounting for fractional shares, and the per share NAV increased to $8.66. In connection with the reverse share split, the
CUSIP number for USOD’s shares changed to 91733T505. USOD’s ticker symbol, “USOD,” remains the same.
As noted above, on November 20, 2019,
the Board of Directors of USCF authorized and approved the closing and liquidation for each of USOU and USOD together with a plan
of liquidation for each of USOU and USOD. The USCF Funds Trust, including each of its series USOU and USOD filed a current report
on Form 8-K dated November 20, 2019 with the U.S. Securities and Exchange Commission (“SEC”) that included,
as an exhibit, the press release and the applicable plan of liquidation. In addition, each of USOU and USOD filed a prospectus
supplement with the SEC dated November 19, 2019.
The liquidation date for each of USOU and
USOD was December 18, 2019 and the proceeds of the liquidation were sent to all remaining shareholders of USOU and USOD, respectively,
on or about December 19, 2019. Each of USOU and USOD also filed a post-effective amendment to the registration statement with
the SEC to terminate the offering of registered and unsold shares of USOU and USOD, respectively, and the NYSE Arca filed Forms
25 to effect the withdrawal of the listings for shares of each of USOU and USOD.
USO, UNG, UGA, UNL, USL, BNO, USCI and
CPER are referred to collectively herein as the “Related Public Funds.”
The Related Public Funds are subject to
reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For more information
about each of the Related Public Funds, investors in USOU or USOD may call 1-800-920-0259 or visit www.uscfinvestments.com or the
SEC’s website at www.sec.gov.
USCF was required to evaluate the credit
risk of each Trust Series to the futures commission merchant (“FCM”), oversee the purchase and sale of each Trust
Series’ shares by certain authorized purchasers (“Authorized Participants”), review daily positions and margin
requirements of each Trust Series and manage each Trust Series’ investments. USCF also paid the fees of ALPS Distributors, Inc.
(“ALPS Distributors”), which serves as the marketing agent for each Trust Series (the “Marketing Agent”),
and Brown Brothers Harriman & Co. (“BBH&Co.”), which serves as the administrator (the “Administrator”)
and the custodian (the “Custodian”) for each Trust Series.
There are no executive officers or employees
of the Trust or any series thereof. Pursuant to the terms of the Trust Agreement, the affairs of the Trust and each series thereof
are managed by USCF.
The business and affairs of USCF are managed
by a board of directors (the “Board”), which is comprised of four management directors (the “Management Directors”),
each of whom are also executive officers or employees of USCF, and three independent directors who meet the independent director
requirements established by the NYSE Arca Equities Rules and the Sarbanes-Oxley Act of 2002. The Management Directors have
the authority to manage USCF pursuant to the terms of the Sixth Amended and Restated Limited Liability Company Agreement of USCF,
dated as of May 15, 2015 (as amended from time to time, the “LLC Agreement”). Through its Management Directors,
USCF manages the day-to-day operations of each Trust Series. The Board has an audit committee which is made up of the three independent
directors (Gordon L. Ellis, Malcolm R. Fobes III and Peter M. Robinson). For additional information relating to the audit committee,
please see “Item 10. Directors, Executive Officers and Corporate Governance – Audit Committee” in this
annual report on Form 10-K.
How Does Each Trust Series Operate?
An investment in the shares provided a
means for diversifying an investor’s portfolio or hedging exposure to changes in oil prices. An investment in the shares
allowed both retail and institutional investors to easily gain this exposure to the crude oil market in a transparent, cost-effective
manner. However, each Trust Series was not appropriate for all investors and presents many different risks than other types
of funds, including risks associated with the use of leverage. Each Trust Series was intended to be a daily trading tool for
sophisticated investors to manage daily trading risks. Each Trust Series used leverage and should produce returns for a single
day that are more volatile than that of the Benchmark Oil Futures Contract. Additionally, each Trust Series was designed to
achieve its stated investment objective on a daily basis, but its performance over different periods of time can differ significantly
from its stated daily objective. Each Trust Series was riskier than securities that have intermediate or long-term investment
objectives, and may not be suitable for investors who plan to hold shares of each Trust Series for a period other than one
day. The return of a Trust Series for a period longer than a single day was the result of its return for each day compounded
over the period and usually will differ from the -300% of the performance of the Benchmark Oil Futures Contract for the same period.
Daily compounding of each Trust Series investment returns could dramatically and adversely affect its longer-term performance
during periods of high volatility. Volatility may be at least as important to each Trust Series return for a period as the
return of the Benchmark Oil Futures Contract. Accordingly, each Trust Series should be purchased only by knowledgeable investors
who understand the potential consequences of seeking daily compounding leveraged short investment results. Investors should actively
and frequently monitor their investments in each Trust Series, even intra-day. It is possible that you will suffer significant
losses in each Trust Series even if the long-term performance of the Benchmark Oil Futures Contract is negative. As noted
above, as of the filing of this annual report on Form 10-K, USOU and USOD are no longer issuing shares and terminated the
offering of registered and unsold shares.
How USOU Seeks to Achieve Its Investment
Objective. The Fund sought, on a daily basis, to provide investment results that correspond (before fees and expenses) to three
times (3x) the performance of the Benchmark Oil Futures Contract. The Fund did not seek to achieve its stated objective over a
period greater than a single day. Because the Fund sought investment results for a single day only (as measured from the time the
Fund calculates its NAV to the time of the Fund’s next NAV calculation) and on a leveraged basis, the Fund was different
from most exchange-traded funds.
As of the NAV calculation time each trading
day, the Fund will seek to position its portfolio so that its exposure to the Benchmark Oil Futures Contract is consistent with
its investment objective. The impact of a Benchmark Oil Futures Contract’s movements during the day will affect whether the
Fund’s portfolio needs to be rebalanced. For example, the Fund’s long exposure will need to be increased on days when
the Benchmark Oil Futures Contract rises and decreased on days the Benchmark Oil Futures Contract falls. Daily rebalancing and
the compounding of each day’s return over time means that the return of the Fund for a period longer than a single day will
be the result of each day’s returns compounded over the period, which will very likely differ from three times (3x) the return
of the Benchmark Oil Futures Contract for the period. The Fund may lose money if the Benchmark Oil Futures Contract’s performance
is flat overtime, and it is possible for a Fund to lose money over time regardless of the performance of the Benchmark Oil Futures
Contract, as a result of daily rebalancing, the Benchmark Oil Futures Contract’s volatility and compounding.
In managing the Fund’s assets, USCF
does not use a technical trading system that issues buy and sell orders. USCF instead employs a quantitative methodology whereby
each time a Creation Basket is sold, USCF purchases Oil Interests, such as the Benchmark Oil Futures Contract, that have an aggregate
market value that approximates three times (3x) the amount of Treasuries and/or cash received upon the issuance of the Creation
Basket. As of the NAV calculation time each trading day, the Fund will also seek to position its portfolio so that its exposure
to the Benchmark Oil Futures Contract is consistent with its investment objective to provide investment results that correspond
(before fees and expenses) to three times (3x) the performance of the Benchmark Oil Futures Contract.
The specific Oil Futures Contracts purchased
depend on various factors, including a judgment by USCF as to the appropriate diversification of the Fund’s investments in
futures contracts with respect to the month of expiration, and the prevailing price volatility of particular contracts. While USCF
has made significant investments in NYMEX Oil Futures Contracts, for various reasons, including the ability to enter into the precise
amount of exposure to the crude oil market, position limits or other regulatory requirements limiting the Fund’s holdings,
and market conditions, it may invest in Oil Futures Contracts traded on other exchanges or invest in Other Oil- Related Investments.
To the extent that the Fund invests in Other Oil-Related Investments, it would prioritize investments in contracts and instruments
that are economically equivalent to the Benchmark Oil Futures Contract, including cleared swaps that satisfy such criteria, and
then, to a lesser extent, it would invest in other types of cleared swaps and other contracts, instruments and non-cleared swaps,
such as swaps in the over-the-counter market (or commonly referred to as the “OTC market”). If the Fund is required
by law or regulation, or by one of its regulators, including a futures exchange, to reduce its position in the Benchmark Oil Futures
Contracts to the applicable position limit or to a specified accountability level or if market conditions dictate it would be more
appropriate to invest in Other Oil-Related Investments, a substantial portion of the Fund’s assets could be invested in accordance
with such priority in Other Oil-Related Investments that are intended to replicate the return on the Benchmark Oil Futures Contract.
As the Fund’s assets reach higher levels, it is more likely to exceed position limits, accountability levels or other regulatory
limits and, as a result, it is more likely that it will invest in accordance with such priority in Other Oil-Related Investments
at such higher levels. In addition, market conditions that USCF currently anticipates could cause the Fund to invest in Other Oil-Related
Investments include those allowing the Fund to obtain greater liquidity or to execute transactions with more favorable pricing.
See “Item 1A. Risk Factors” in this annual report on Form 10-K for a discussion of the potential impact
of regulation on the Fund’s ability to invest in OTC transactions and cleared swaps.
USCF may not be able to fully invest the
Fund’s assets in Benchmark Oil Futures Contracts having an aggregate notional amount exactly equal to three times (3x) the
Fund’s NAV. For example, as standardized contracts, the Benchmark Oil Futures Contracts are for a specified amount of a particular
commodity, and the Fund’s NAV and the proceeds from the sale of a Creation Basket are unlikely to be an exact multiple of
the amounts of those contracts. As a result, in such circumstances, the Fund may be better able to achieve the exact amount of
exposure to changes in price of the Benchmark Oil Futures Contract through the use of Other Oil-Related Investments, such as OTC
contracts that have better correlation with changes in price of the Benchmark Oil Futures Contract.
The Fund anticipates that to the extent
it invests in Oil Futures Contracts other than contracts on light, sweet crude oil (such as futures contracts for diesel-heating
oil, natural gas, and other petroleum-based fuels) and Other Oil-Related Investments, it will enter into various non-exchange-traded
derivative contracts to hedge the short-term price movements of such Oil Futures Contracts and Other Oil-Related Investments against
the current Benchmark Oil Futures Contract.
USCF does not anticipate letting the
Fund’s Oil Futures Contracts expire and taking, or making, delivery of the underlying commodity. Instead, USCF will
close existing positions, e.g., when it changes the Benchmark Oil Futures Contracts or Other Oil-Related Investments or it
otherwise determines it would be appropriate to do so and reinvests the proceeds in new Oil Futures Contracts or Other
Oil-Related Investments. Positions may also be closed out to meet orders for Redemption Baskets and in such case proceeds for
such baskets will not be reinvested. The Benchmark Oil Futures Contract is changed from the near month contract to the next
month contract over a four-day period. Each month, the Benchmark Oil Futures Contract changes starting at the end of the day
on the date two weeks prior to expiration of the near month contract for that month. During the first three days of the
period, the applicable value of the Benchmark Oil Futures Contract is based on a combination of the near month contract and
the next month contract as follows: (1) day 1 consists of 75% of the then near month contract’s price plus 25% of
the price of the next month contract, divided by 75% of the near month contract’s prior day’s price plus 25% of
the price of the next month contract, (2) day 2 consists of 50% of the then near month contract’s price plus 50%
of the price of the next month contract, divided by 50% of the near month contract’s prior day’s price plus 50%
of the price of the next month contract and (3) day 3 consists of 25% of the then near month contract’s price plus
75% of the price of the next month contract, divided by 25% of the near month contract’s prior day’s price plus
75% of the price of the next month contract. On day 4, the Benchmark Oil Futures Contract is the next month contract to
expire at that time and that contract remains the Benchmark Oil Futures Contract until the beginning of the following
month’s change in the Benchmark Oil Futures Contract over a four-day period. On each day during the four-day period,
USCF anticipates it will “roll” the Fund’s positions in Oil Interests by closing, or selling, a percentage
of the Fund’s positions in Oil Interests and reinvesting the proceeds from closing those positions in new Oil Interests
that reflect the change in the Benchmark Oil Futures Contract.
The anticipated dates that the monthly
four-day roll period will commence are posted on the Fund’s website at www.uscfinvestments.com and are subject to change
without notice.
By remaining invested as fully as possible
in Oil Futures Contracts or Other Oil-Related Investments, USCF believes that the daily changes in percentage terms of the Fund’s
NAV will continue to closely track, on a leveraged basis, the daily changes in percentage terms in the price of the Benchmark Oil
Futures Contract. USCF believes that certain arbitrage opportunities result in the price of the shares traded on the NYSE Arca
closely tracking the NAV of the Fund. Additionally, Oil Futures Contracts traded on the NYMEX have closely tracked the spot price
of light, sweet crude oil. Based on these expected interrelationships, USCF believes that the changes in the price of the Fund’s
shares as traded on the NYSE Arca will closely track on a daily basis, the changes in the spot price of light, sweet crude oil
on a percentage basis.
How USOD Seeks to Achieve Its Investment
Objective. The Fund sought, on a daily basis, to provide investment results that correspond (before fees and expenses) to three
times the inverse (-3x) of the performance of the Benchmark Oil Futures Contract. The Fund did not seek to achieve its stated objective
over a period greater than a single day. Because the Fund sought investment results for a single day only (as measured from the
time the Fund calculates its NAV to the time of the Fund’s next NAV calculation) and on an inverse leveraged basis, the Fund
was different from most exchange-traded funds.
As of the NAV calculation time each trading
day, the Fund will seek to position its portfolio so that its exposure to the Benchmark Oil Futures Contract is consistent with
its investment objective. The impact of a Benchmark Oil Futures Contract’s movements during the day will affect whether the
Fund’s portfolio needs to be rebalanced. For example, the Fund’s short exposure will need to be increased on days when
the Benchmark Oil Futures Contract falls and decreased on days the Benchmark Oil Futures Contract rises. Daily rebalancing and
the compounding of each day’s return over time means that the return of the Fund for a period longer than a single day will
be the result of each day’s returns compounded over the period, which will very likely differ from three times the inverse
(-3x) of the return of the Benchmark Oil Futures Contract for the period. The Fund may lose money if the Benchmark Oil Futures
Contract’s performance is flat over time, and it is possible for a Fund to lose money over time regardless of the performance
of the Benchmark Oil Futures Contract, as a result of daily rebalancing, the Benchmark Oil Futures Contract’s volatility
and compounding.
In managing the Fund’s assets, USCF
does not use a technical trading system that issues buy and sell orders. USCF instead employs a quantitative methodology whereby
each time a Creation Basket is sold, USCF takes corresponding short positions in Oil Interests, such as the Benchmark Oil Futures
Contract, that have an aggregate market value that approximates three times (3x) the amount of Treasuries and/or cash received
upon the issuance of the Creation Basket. As of the NAV calculation time each trading day, the Fund will also seek to position
its portfolio so that its exposure to the Benchmark Oil Futures Contract is consistent with its investment objective to provide
investment results that correspond (before fees and expenses) to three times the inverse (-3x) of the performance of the Benchmark
Oil Futures Contract.
The specific Oil Futures Contracts sold
depend on various factors, including a judgment by USCF as to the appropriate diversification of the Fund’s investments in
futures contracts with respect to the month of expiration, and the prevailing price volatility of particular contracts. While USCF
has made significant investments in NYMEX Oil Futures Contracts, for various reasons, including the ability to enter into the precise
amount of exposure to the crude oil market, position limits or other regulatory requirements limiting the Fund’s holdings,
and market conditions, it may invest in Oil Futures Contracts traded on other exchanges or invest in Other Oil- Related Investments.
To the extent that the Fund invests in Other Oil-Related Investments, it would prioritize investments in contracts and instruments
that are economically equivalent to the Benchmark Oil Futures Contract, including cleared swaps that satisfy such criteria, and
then, to a lesser extent, it would invest in other types of cleared swaps and other contracts, instruments and non-cleared swaps,
such as swaps in the over-the-counter market (or commonly referred to as the “OTC market”). If the Fund is required
by law or regulation, or by one of its regulators, including a futures exchange, to reduce its position in the Benchmark Oil Futures
Contracts to the applicable position limit or to a specified accountability level or if market conditions dictate it would be more
appropriate to invest in Other Oil-Related Investments, a substantial portion of the Fund’s assets could be invested in accordance
with such priority in Other Oil-Related Investments that are intended to replicate the return on the Benchmark Oil Futures Contract.
As the Fund’s assets reach higher levels, it is more likely to exceed position limits, accountability levels or other regulatory
limits and, as a result, it is more likely that it will invest in accordance with such priority in Other Oil-Related Investments
at such higher levels. In addition, market conditions that USCF currently anticipates could cause the Fund to invest in Other Oil-Related
Investments include those allowing the Fund to obtain greater liquidity or to execute transactions with more favorable pricing.
See “Item 1A. Risk Factors” in this annual report on Form 10-K for a discussion of the potential impact
of regulation on the Fund’s ability to invest in OTC transactions and cleared swaps.
USCF may not be able to fully invest the
Fund’s assets in Benchmark Oil Futures Contracts having an aggregate short notional amount exactly equal to three times (3x)
the Fund’s NAV. For example, as standardized contracts, the Benchmark Oil Futures Contracts are for a specified amount of
a particular commodity, and the Fund’s NAV and the proceeds from the sale of a Creation Basket are unlikely to be an exact
multiple of the amounts of those contracts. As a result, in such circumstances, the Fund may be better able to achieve the exact
amount of exposure to changes in price of the Benchmark Oil Futures Contract through the use of Other Oil-Related Investments,
such as OTC contracts that have better correlation with changes in price of the Benchmark Oil Futures Contract.
The Fund anticipates that to the extent
it invests in Oil Futures Contracts other than contracts on light, sweet crude oil (such as futures contracts for diesel-heating
oil, natural gas, and other petroleum-based fuels) and Other Oil-Related Investments, it will enter into various non-exchange-traded
derivative contracts to hedge the short-term price movements of such Oil Futures Contracts and Other Oil-Related Investments against
the current Benchmark Oil Futures Contract.
USCF does not anticipate letting the Fund’s
Oil Futures Contracts expire and taking, or making, delivery of the underlying commodity. Instead, USCF will close existing positions,
e.g., when it changes the Benchmark Oil Futures Contracts or Other Oil-Related Investments or it otherwise determines it
would be appropriate to do so and reinvests the proceeds in new Oil Futures Contracts or Other Oil-Related Investments. Positions
may also be closed out to meet orders for Redemption Baskets and in such case proceeds for such baskets will not be reinvested.
The Benchmark Oil Futures Contract is changed
from the near month contract to the next month contract over a four-day period. Each month, the Benchmark Oil Futures Contract
changes starting at the end of the day on the date two weeks prior to expiration of the near month contract for that month. During
the first three days of the period, the applicable value of the Benchmark Oil Futures Contract is based on a combination of the
near month contract and the next month contract as follows: (1) day 1 consists of 75% of the then near month contract’s
price plus 25% of the price of the next month contract, divided by 75% of the near month contract’s prior day’s price
plus 25% of the price of the next month contract, (2) day 2 consists of 50% of the then near month contract’s price
plus 50% of the price of the next month contract, divided by 50% of the near month contract’s prior day’s price plus
50% of the price of the next month contract and (3) day 3 consists of 25% of the then near month contract’s price plus
75% of the price of the next month contract, divided by 25% of the near month contract’s prior day’s price plus 75%
of the price of the next month contract. On day 4, the Benchmark Oil Futures Contract is the next month contract to expire at that
time and that contract remains the Benchmark Oil Futures Contract until the beginning of the following month’s change in
the Benchmark Oil Futures Contract over a four-day period. On each day during the four-day period, USCF anticipates it will “roll”
the Fund’s positions in Oil Interests by closing, or buying, a percentage of the Fund’s short positions in Oil Interests
and reinvesting the proceeds from closing those positions in new short positions in Oil Interests that reflect the change in the
Benchmark Oil Futures Contract.
The anticipated dates that the monthly
four-day roll period will commence are posted on the Fund’s website at www.uscfinvestments.com, and are subject to change
without notice.
By remaining invested as fully as possible
in Oil Futures Contracts or Other Oil-Related Investments, USCF believes that the daily changes in percentage terms of the Fund’s
NAV will continue to closely track, on an inverse leveraged basis, the daily changes in percentage terms in the price of the Benchmark
Oil Futures Contract. USCF believes that certain arbitrage opportunities result in the price of the shares traded on the NYSE Arca
closely tracking the NAV of the Fund. Additionally, Oil Futures Contracts traded on the NYMEX have closely tracked the spot price
of light, sweet crude oil. Based on these expected interrelationships, USCF believes that the changes in the price of the Fund’s
shares as traded on the NYSE Arca will closely track, on a daily leveraged inverse basis, the changes in the spot price of light,
sweet crude oil on a percentage basis.
The total portfolio composition of each
Trust Series is disclosed on the applicable Trust Series’ website each business day that the NYSE Arca is open for trading.
For a list of each of USOU and USOD current holdings, please see www.uscfinvestments.com. The website disclosure of portfolio holdings
for each Trust Series is made daily and includes, as applicable, the name and value of each Oil Interest, the specific types
of Other Oil-Related Investments and characteristics of such Other Oil-Related Investments, the name and value of each Treasury
and cash equivalent, and the amount of cash held in each Trust Series, as applicable. The website is publicly accessible at no
charge. The assets used for margin and collateral for each Trust Series are held in segregated accounts pursuant to the Commodity
Exchange Act (the “CEA”) and CFTC regulations.
“Authorized Participants,”
institutional firms that can purchase or redeem shares in blocks of 50,000 shares called “baskets” through each Trust
Series marketing agent, may purchase or redeem baskets only in blocks of 50,000 shares at a price equal to the NAV of the
shares calculated shortly after the close of the core trading session on the NYSE Arca on the day the order is placed.
Each Trust Series receives or pays
the proceeds from shares sold or redeemed within two business days after the trade date of the purchase or redemption. The amounts
due from Authorized Participants are reflected in the statements of financial condition for each Trust Series as receivable
for shares sold, and amounts payable to Authorized Participants upon redemption are reflected as payable for shares redeemed.
Authorized Participants pay a transaction
fee equal to 0.04% of total NAV of baskets to USOU and USOD for each order placed to create or redeem one or more baskets. The
transaction fee may be waived, reduced, increased or otherwise changed by USCF.
Most investors will buy and sell shares
of each Trust Series in secondary market transactions through brokers. Shares will trade on NYSE Arca under the ticker symbols
“USOU” and “USOD.” Shares are bought and sold throughout the trading day like other publicly traded securities.
When buying or selling shares through a broker, most investors will incur customary brokerage commissions and charges. Investors
are encouraged to review the terms of their brokerage account for details on applicable charges.
What is the Investment Strategy of each
Trust Series?
United States 3x Oil Fund
USOU will seek to achieve its investment
objective by primarily investing in futures contracts for light, sweet crude oil that are traded on the NYMEX, ICE Futures
or other U.S. and foreign exchanges (collectively, “Oil Futures Contracts”).
USOU will, to a lesser extent and in view
of regulatory requirements and/or market conditions:
|
(i)
|
next invest in (a) cleared swap transactions based on the Benchmark Oil Futures Contract,
(b) non-exchange traded (“over-the-counter” or “OTC”), negotiated swap contracts that are based on
the Benchmark Oil Futures Contract, and (c) forward contracts for oil;
|
|
(ii)
|
followed by investments in futures contracts for other types of crude oil, diesel-heating oil,
gasoline, natural gas, and other petroleum-based fuels, each of which are traded on the NYMEX, ICE Futures or other U.S. and
foreign exchanges as well as cleared swap transactions and OTC swap contracts valued based on the foregoing; and
|
|
(iii)
|
finally, invest in exchange-traded cash settled options on Oil Futures Contracts.
|
All such other investments are referred
to as “Other Oil-Related Investments” and, together with Oil Futures Contracts, are “Oil Interests.”
For USOU to maintain a consistent 300%
return versus the Benchmark Oil Futures Contract, the Fund’s holdings must be rebalanced on a daily basis by buying additional
Oil Interests or selling Oil Interests that it holds. Such rebalancing will occur generally before or at the close of trading of
the shares on the Exchange, at or as near as possible to that day’s settlement price, and will be disclosed on the Fund’s
website as pending trades before the opening of trading on the Exchange the next business day and will be taken into account in
USOU’s intra-day Indicative Fund Value and reflected in USOU’s end of day NAV on that business day.
USOU anticipates that, to the extent it
invests in Oil Futures Contracts other than the Benchmark Oil Futures Contract or Other Oil-Related Investments, it will invest
in futures, cleared and non-cleared swaps, and call and put options to hedge the short-term price movements of such Oil Futures
Contracts and Other Oil-Related Investments against the price movements of the current Benchmark Oil Futures Contract. For example,
if USOU invested in diesel-heating oil futures contracts, it may also enter into a swap or forward contract that is valued based
on the difference between the diesel-heating oil futures contract and the Benchmark Oil Futures Contract so that the investment
in the diesel-heating oil futures contracts together with such swap would provide a return that more closely matches the movements
in the price of the Benchmark Oil Futures Contract.
USCF currently anticipates that regulatory
requirements such as accountability levels set by exchanges or position limits set by exchanges or by other regulators, such as
the CFTC, and market conditions including those allowing the Fund to obtain greater liquidity or to execute transactions with more
favorable pricing, could cause the Fund to invest in Other Oil-Related Investments.
USOU will support its investments by holding
the amounts of its margin, collateral and other requirements relating to these obligations in short-term obligations of the United
States of two years or less (“Treasuries”), cash and cash equivalents. Cash equivalents are short-term instruments
with maturities of less than three months and shall include the following: (i) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (ii) bankers’ acceptances, which are short-term credit instruments
used to finance commercial transactions; (iii) repurchase agreements and reverse repurchase agreements; (iv) bank time
deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate
of interest; (v) commercial paper, which are short-term unsecured promissory notes; and (vi) money market funds.
USOU may invest in money market funds,
as well as Treasuries with a maturity date of two years or less, as an investment for assets not used for margin or collateral
in the Oil Interests. The majority of the Fund’s assets will be held in Treasuries, cash and/or cash equivalents with the
Custodian.
USOU will seek to invest in a combination
of Oil Interests such that the daily changes in its NAV, measured in percentage terms, less USOU’s expenses, will track three
times (3x) the daily changes in the price of the Benchmark Oil Futures Contract, also measured in percentage terms. As a specific
benchmark, USCF will endeavor to place USOU’s trades in Oil Interests and otherwise manage USOU’s investments so that
the difference between “A” and “B” will be plus/minus 0.30 percent (0.30%) of “B”, where:
|
·
|
A is the average daily percentage change in USOU’s per share NAV for any period of thirty
(30) successive valuation days, i.e., any NYSE Arca trading day as of which USOU calculates its per share NAV, less USOU’s
expenses; and
|
|
·
|
B is three times the average daily percentage change in the price of the Benchmark Oil Futures
Contract over the same period.
|
The design of USOU’s Benchmark Oil
Futures Contract is such that every month it begins by using the near month contract to expire until the near month contract is
within two weeks of expiration, when, over a four day period, it transitions to the next month contract to expire as its benchmark
contract and keeps that contract as its benchmark until it becomes the near month contract and close to expiration. In the event
of a crude oil futures market where near month contracts trade at a higher price than next month to expire contracts (“backwardation”),
then, absent the impact of the overall movement in crude oil prices, the value of the benchmark contract would tend to rise as
it approaches expiration. Conversely, in the event of a crude oil futures market where near month contracts trade at a lower price
than next month contracts (“contango”), then, absent the impact of the overall movement in crude oil prices, the value
of the benchmark contract would tend to decline as it approaches expiration.
USCF believes that market arbitrage opportunities
will cause daily changes in USOU’s share price on NYSE Arca on a percentage basis, to closely track the daily changes in
USOU’s per share NAV on a percentage basis. USOU will not seek to achieve its stated investment objective over a period of
time greater than one day. The pursuit of daily leveraged investment goals means that the return of USOU for a period longer
than a full trading day may have no resemblance to 300% of the return of the Benchmark Oil Futures Contract for a period of longer
than a full trading day because the aggregate return of USOU is the product of the series of each trading day’s daily returns.
During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may affect USOU’s return as much
as or more than the return of the Benchmark Oil Futures Contract. Further, the return for investors that invest for periods less
than a full trading day or for a period different than a trading day will not be the product of the return of USOU’s stated
investment objective and the performance of the Benchmark Oil Futures Contract for the full trading day. Additionally, investors
should be aware that USOU’s investment objective is not for its NAV or market price of shares to equal, in dollar terms,
the spot price of light, sweet crude oil. Natural market forces called contango and backwardation can impact the total return on
an investment in USOU’s shares relative to a hypothetical direct investment in crude oil and, in the future, it is likely
that the relationship between the market price of USOU’s shares and changes in the spot prices of light, sweet crude oil
will continue to be so impacted by contango and backwardation. (It is important to note that the disclosure above ignores the potential
costs associated with physically owning and storing crude oil, which could be substantial.) For a more in-depth discussion of the
impact of contango and backwardation, see “Item 1A. Risk Factors” in this annual report on Form 10-K.
United States 3x Short Oil Fund
USOD will seek to achieve its investment
objective by primarily investing in short positions in futures contracts for light, sweet crude oil that are traded on the NYMEX, ICE
Futures or other U.S. and foreign exchanges (collectively, “Oil Futures Contracts”).
USOD will, to a lesser extent and in view
of regulatory requirements and/or market conditions:
|
(i)
|
next invest in (a) cleared swap transactions based on short positions in the Benchmark Oil
Futures Contract, (b) non-exchange traded (“over-the-counter” or “OTC”), negotiated swap contracts
that are based on short positions in the Benchmark Oil Futures Contract, and (c) forward contracts for oil;
|
|
(ii)
|
followed by investments in short positions in futures contracts for other types of crude oil, diesel-heating
oil, gasoline, natural gas, and other petroleum-based fuels, each of which are traded on the NYMEX, ICE Futures or other U.S.
and foreign exchanges as well as cleared swap transactions and OTC swap contracts valued based on the foregoing; and
|
|
(iii)
|
finally, invest in exchange-traded cash settled options on Oil Futures Contracts.
|
All such other investments are referred
to as “Other Oil-Related Investments” and, together with Oil Futures Contracts, are “Oil Interests.”
For USOD to maintain a consistent 300%
return versus short positions in the Benchmark Oil Futures Contract, USOD’s holdings must be rebalanced on a daily basis
by selling additional Oil Interests or buying Oil Interests for which it holds short positions. Such rebalancing will occur generally
before or at the close of trading of the shares on the Exchange, at or as near as possible to that day’s settlement price,
and will be disclosed on USOD’s website as pending trades before the opening of trading on the Exchange the next business
day and will be taken into account in USOD’s intra-day Indicative Fund Value and reflected in USOD’s end of day NAV
on that business day.
USOD anticipates that, to the extent it
invests in Oil Futures Contracts other than the Benchmark Oil Futures Contract or Other Oil-Related Investments, it will invest
in futures, cleared and non-cleared swaps, and call and put options to hedge the short-term price movements of such Oil Futures
Contracts and Other Oil-Related Investments against the price movements of the current Benchmark Oil Futures Contract. For example,
if USOD invested in diesel-heating oil futures contracts, it may also enter into a swap or forward contract that is valued based
on the difference between the short positions in the diesel-heating oil futures contract and short positions in the Benchmark Oil
Futures Contract so that the investment in the diesel-heating oil futures contracts together with such swap would provide a return
that more closely matches the movements in the price of the Benchmark Oil Futures Contract.
USCF currently anticipates that regulatory
requirements such as accountability levels set by exchanges or position limits set by exchanges or by other regulators, such as
the CFTC, and market conditions including those allowing USOD to obtain greater liquidity or to execute transactions with more
favorable pricing, could cause USOD to invest in Other Oil-Related Investments.
USOD will support its investments by holding
the amounts of its margin, collateral and other requirements relating to these obligations in short-term obligations of the United
States of two years or less (“Treasuries”), cash and cash equivalents. Cash equivalents are short-term instruments
with maturities of less than three months and shall include the following: (i) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (ii) bankers’ acceptances, which are short-term credit instruments
used to finance commercial transactions; (iii) repurchase agreements and reverse repurchase agreements; (iv) bank time
deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate
of interest; (v) commercial paper, which are short-term unsecured promissory notes; and (vi) money market funds.
USOD may invest in money market funds,
as well as Treasuries with a maturity date of two years or less, as an investment for assets not used for margin or collateral
in the Oil Interests. The majority of USOD’s assets will be held in Treasuries, cash and/or cash equivalents with the Custodian.
USOD will seek to invest in a combination
of Oil Interests such that the daily changes in its NAV, measured in percentage terms, less USOD’s expenses, will track three
times the inverse (-3x) of the daily changes in the price of the Benchmark Oil Futures Contract, also measured in percentage terms.
As a specific benchmark, USCF will endeavor to place USOD’s trades in Oil Interests and otherwise manage USOD’s investments
so that the difference between “A” and “B” will be plus/minus 0.30 percent (0.30%) of “B”,
where:
|
·
|
A is the average daily percentage change in USOD’s per share NAV for any period of thirty
(30) successive valuation days, i.e., any NYSE Arca trading day as of which USOD calculates its per share NAV, less USOD’s
expenses; and
|
|
·
|
B is three times the inverse of the average daily percentage change in the price of the Benchmark
Oil Futures Contract over the same period.
|
The design of USOD’s Benchmark Oil
Futures Contract is such that every month it begins by using the near month contract to expire until the near month contract is
within two weeks of expiration, when, over a four day period, it transitions to the next month contract to expire as its benchmark
contract and keeps that contract as its benchmark until it becomes the near month contract and close to expiration. In the event
of a crude oil futures market where near month contracts trade at a higher price than next month to expire contracts (“backwardation”),
then, absent the impact of the overall movement in crude oil prices, the value of the benchmark contract would tend to rise as
it approaches expiration. Conversely, in the event of a crude oil futures market where near month contracts trade at a lower price
than next month contracts (“contango”), then, absent the impact of the overall movement in crude oil prices, the value
of the benchmark contract would tend to decline as it approaches expiration.
USCF believes that market arbitrage opportunities
will cause daily changes in USOD’s share price on NYSE Arca on a percentage basis, to closely track the daily changes in
USOD’s per share NAV on a percentage basis. USOD will not seek to achieve its stated investment objective over a period of
time greater than one day. The pursuit of daily inverse leveraged investment goals means that the return of USOD for a period
longer than a full trading day may have no resemblance to -300% of the return of the Benchmark Oil Futures Contract for a period
of longer than a full trading day because the aggregate return of USOD is the product of the series of each trading day’s
daily returns. During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may affect USOD’s
return as much as or more than the return of the Benchmark Oil Futures Contract. Further, the return for investors that invest
for periods less than a full trading day or for a period different than a trading day will not be the product of the return of
USOD’s stated investment objective and the performance of the Benchmark Oil Futures Contract for the full trading day. Additionally,
investors should be aware that USOD’s investment objective is not for its NAV or market price of shares to equal, in dollar
terms, the spot price of light, sweet crude oil or to track the inverse performance thereof. Natural market forces called contango
and backwardation can impact the total return on an investment in USOD’s shares relative to a hypothetical direct investment
in crude oil and, in the future, it is likely that the relationship between the market price of USOD’s shares and changes
in the spot prices of light, sweet crude oil will continue to be so impacted by contango and backwardation. (It is important to
note that the disclosure above ignores the potential costs associated with physically owning and storing crude oil, which could
be substantial.) For a more in-depth discussion of the impact of contango and backwardation, see “Item 1A. Risk Factors”
in this annual report on Form 10-K.
What Is the “Benchmark Oil Futures
Contract”?
The Benchmark Oil Futures Contract is the
futures contract on light, sweet crude oil as traded on the New York Mercantile Exchange (the “NYMEX”), traded under
the trading symbol “CL” (for WTI Crude Oil futures), that is the near month contract to expire, except when the near
month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month
contract to expire.
What is the Crude Oil Market?
USOU and USOD may purchase Oil Futures
Contracts traded on the NYMEX that are based on light, sweet crude oil. It may also purchase contracts on the ICE Futures or other
U.S. and foreign exchanges. The NYMEX contracts provide for delivery of several grades of domestic and internationally traded foreign
crudes, and, among other things, serves the diverse needs of the physical market. In Europe, Brent crude oil is the standard for
futures contracts and is primarily traded on the ICE Futures. Brent crude oil is the price reference for two-thirds of the world’s
traded oil. The ICE Brent Futures is a deliverable contract with an option to cash settle which trades in units of 1,000 barrels
(42,000 U.S. gallons). The ICE Futures also offers a West Texas Intermediate (“WTI”) crude oil futures contract which
trades in units of 1,000 barrels. The WTI crude oil futures contract is cash settled against the prevailing market price for U.S.
light sweet crude oil.
Light, Sweet Crude Oil. Light, sweet
crudes are preferred by refiners because of their low sulfur content and relatively high yields of high-value products such as
gasoline, diesel fuel, diesel-heating oil, and jet fuel. The price of light, sweet crude oil has historically exhibited periods
of significant volatility.
Demand for petroleum products by consumers,
as well as agricultural, manufacturing and transportation industries, determines demand for crude oil by refiners. Since the precursors
of product demand are linked to economic activity, crude oil demand will tend to reflect economic conditions. However, other factors
such as weather also influence product and crude oil demand.
Crude oil supply is determined by both
economic and political factors. Oil prices (along with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development spending, which influence output capacity with a lag.
In the short run, production decisions by the Organization of Petroleum Exporting Countries (“OPEC”) also affect supply
and prices. Oil export embargoes and the current conflicts in the Middle East represent other routes through which political developments
move the market. It is not possible to predict the aggregate effect of all or any combination of these factors.
What are Oil Futures Contracts?
Futures contracts are agreements between
two parties. One party agrees to buy a commodity such as crude oil from the other party at a later date at a price and quantity
agreed upon when the contract is made. Oil Futures Contracts are traded on futures exchanges, including the NYMEX. For example,
the Benchmark Oil Futures Contract is traded on the NYMEX in units of 1,000 barrels. Oil Futures Contracts traded on the NYMEX
are priced by floor brokers and other exchange members both through an “open outcry” of offers to purchase or sell
the contracts and through an electronic, screen-based system that determines the price by matching electronically offers to purchase
and sell. Additional risks of investing in Oil Futures Contracts are included in “Item 1A. Risk Factors” in
this annual report on Form 10-K.
Accountability Levels, Position Limits
and Price Fluctuation Limits. Designated contract markets (“DCMs”), such as the NYMEX and ICE Futures, have established
accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any
person or group of persons under common trading control (other than as a hedge, which is not currently applicable to the Trust
Series’ investments) may hold, own or control. These levels and position limits apply to the futures contracts that each
of the Trust Series invests in to meet its respective investment objective. In addition to accountability levels and position
limits, the NYMEX and ICE Futures also set daily price fluctuation limits on futures contracts. The daily price fluctuation limit
establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement
price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price
beyond that limit.
The accountability levels for the Benchmark
Oil Futures Contract and other Oil Futures Contracts traded on U.S.-based futures exchanges, such as the NYMEX, are not a fixed
ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor’s positions.
The current accountability level for investments for any one month in the Benchmark Oil Futures Contract is 10,000 contracts.
In addition, the NYMEX imposes an accountability level for all months of 20,000 net futures contracts for light, sweet crude oil.
In addition, the ICE Futures maintains the same accountability levels, position limits and monitoring authority for its light,
sweet crude oil contracts as the NYMEX. If the Trust Series and the Related Public Funds exceed these accountability levels
for investments in the futures contracts for light, sweet crude oil, the NYMEX and ICE Futures will monitor such exposure and
may ask for further information on their activities including the total size of all positions, investment and trading strategy,
and the extent of liquidity resources of the Trust Series and the Related Public Funds. If deemed necessary by the NYMEX
and/or ICE Futures, each of the Trust Series could be ordered to reduce its Crude Oil Futures CL contracts to below the 10,000
single month and/or 20,000 all month accountability level. As noted above, USOU and USOD ceased trading on the NYSE Arca on December 12,
2019 and the Funds’ liquidation date was December 18, 2019. Therefore, as of December 31, 2019, USOU and USOD
did not hold NYMEX WTI Crude Oil Futures CL contracts, and did not hold ICE WTI Crude Oil Futures contracts. USOU and USOD did
not exceed accountability levels of the NYMEX or ICE Futures during the year ended December 31, 2019, however, the aggregated
total of certain of the Related Public Funds did exceed the accountability levels. No action was taken by NYMEX.
Position limits differ from accountability
levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow
such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that
may apply at any time, the NYMEX and ICE Futures impose position limits on contracts held in the last few days of trading in the
near month contract to expire. It is unlikely that the Trust Series will run up against such position limits because each
of the Trust Series’ investment strategy is to close out its positions and “roll” from the near month contract
to expire to the next month contract during a four-day period beginning two weeks from expiration of the contract. For the year
ended December 31, 2019, the Trust Series did not exceed any position limits imposed by the NYMEX and ICE Futures.
The CFTC has proposed to adopt limits on
speculative positions in 25 physical commodity futures and option contracts as well as swaps that are economically equivalent to
such contracts in the agriculture, energy and metals markets (the “Position Limit Rules”). The Position Limit Rules would,
among other things: identify which contracts are subject to speculative position limits; set thresholds that restrict the size
of speculative positions that a person may hold in the spot month, other individual months, and all months combined; create an
exemption for positions that constitute bona fide hedging transactions; impose responsibilities on DCMs and swap execution facilities
(“SEFs”) to establish position limits or, in some cases, position accountability rules; and apply to both futures and
swaps across four relevant venues: OTC, DCMs, SEFs as well as certain non-U.S. located platforms. The CFTC’s first attempt
at finalizing the Position Limit Rules, in 2011, was successfully challenged by market participants in 2012 and, since then, the
CFTC has re-proposed them and solicited comments from market participants multiple times. At this time, it is unclear how the Position
Limit Rules may affect a Trust Series, but the effect may be substantial and adverse. By way of example, the Position Limit
Rules may negatively impact the ability of a Trust Series to meet its investment objectives through limits that
may inhibit USCF’s ability to sell additional Creation Baskets of a Trust Series. See "The Commodity Interest Markets-Commodities
Regulation" in this annual report on Form 10-K for additional information.
Until such time as the Position Limit Rules are
adopted, the regulatory architecture in effect prior to the adoption of the Position Limit Rules will govern transactions
in commodities and related derivatives. Under that system, the CFTC enforces federal limits on speculation in nine agricultural
products (e.g., corn, wheat and soy), while futures exchanges establish and enforce position limits and accountability levels for
other agricultural products and certain energy products (e.g., oil and natural gas). As a result, a Trust Series may
be limited with respect to the size of its investments in any commodities subject to these limits.
Under existing and recently adopted CFTC
regulations, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions,
to aggregate all positions for which that participant controls the trading decisions with all positions for which that participant
has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting
pursuant to an express or implied agreement or understanding with that participant (the “Aggregation Rules”). The Aggregation
Rules will also apply with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.
Price Volatility. The price volatility
of Oil Futures Contracts generally has been historically greater than that for traditional securities such as stocks and bonds.
Price volatility often is greater day-to-day as opposed to intra-day. Oil Futures Contracts tend to be more volatile than stocks
and bonds because price movements for crude oil are more currently and directly influenced by economic factors for which current
data is available and are traded by crude oil futures traders throughout the day. Because USOU and USOD invest a significant portion
of their assets in Oil Futures Contracts, the assets of USOU and USOD, and therefore the prices of USOU and USOD shares, may be
subject to greater volatility than traditional securities.
Marking-to-Market Futures Positions.
Oil Futures Contracts are marked to market at the end of each trading day and the margin required with respect to such contracts
is adjusted accordingly. This process of marking-to-market is designed to prevent losses from accumulating in any futures account.
Therefore, if USOU’s or USOD’s futures positions have declined in value, USOU or USOD may be required to post “variation
margin” to cover this decline. Alternatively, if USOU’s or USOD’s futures positions have increased in value,
this increase will be credited to USOU’s or USOD account.
What are the Trading Policies of USOU
and USOD?
Liquidity
Each Trust Series invests only in
Oil Futures Contracts and Other Oil-Related Investments that, in the opinion of USCF, are traded in sufficient volume to permit
the ready taking and liquidation of positions in these financial interests and in Other Oil-Related Investments that, in the opinion
of USCF, may be readily liquidated with the original counterparty or through a third party assuming the position of the Trust Series.
Spot Commodities
While the crude Oil Futures Contracts traded
can be physically settled, each Trust Series does not intend to take or make physical delivery. Each Trust Series may
from time to time trade in Other Oil-Related Investments, including contracts based on the spot price of crude oil.
Leverage
With respect to USOU, USCF endeavors to
have the aggregate market value of its obligations under its Oil Futures Contracts and Other Oil-Related Investments equal to three
times (3x) the Fund’s total net assets. Commodity pools’ trading positions in futures contracts or other related investments
are typically required to be secured by the deposit of margin funds that represent only a small percentage of a futures contract’s
(or other commodity interest’s) entire market value.
With respect to USOD, USCF endeavors to
have the aggregate short market value of its obligations under its Oil Futures Contracts and Other Oil-Related Investments equal
to three times (3x) the value of the Fund’s Treasuries, cash and cash equivalents, whether held by the Fund or posted as
margin or other collateral, at the close of each trading day (as measured at the time the Fund calculates its NAV). Commodity pools’
trading positions in futures contracts or other related investments are typically required to be secured by the deposit of margin
funds that represent only a small percentage of a futures contract’s (or other commodity interest’s) entire market
value.
Borrowings
Borrowings are not expected to be used
by USOU and USOD unless USOU or USOD is required to borrow money in the event of physical delivery, if USOU or USOD trades in cash
commodities, or for short-term needs created by unexpected redemptions.
OTC Derivatives (Including Spreads
and Straddles)
In addition to Oil Futures Contracts, there
are also a number of listed options on the Oil Futures Contracts on the principal futures exchanges. These contracts offer investors
and hedgers another set of financial vehicles to use in managing exposure to the crude oil market. Consequently, each Trust Series may
purchase options on crude Oil Futures Contracts on these exchanges in pursuing its investment objective.
In addition to the Oil Futures Contracts
and options on the Oil Futures Contracts, there also exists an active non-exchange-traded market in derivatives tied to crude oil.
These derivatives transactions (also known as OTC contracts) are usually entered into between two parties in private contracts.
Unlike most of the exchange-traded Oil Futures Contracts or exchange-traded options on the Oil Futures Contracts, each party to
such contract bears the credit risk of the other party, i.e., the risk that the other party may not be able to perform its obligations
under its contract. To reduce the credit risk that arises in connection with such contracts, the Fund will generally enter into
an agreement with each counterparty based on the Master Agreement published by the International Swaps and Derivatives Association, Inc.
(“ISDA”) that provides for the netting of its overall exposure to its counterparty.
USCF assesses or reviews, as appropriate,
the creditworthiness of each potential or existing counterparty to an OTC contract pursuant to guidelines approved by USCF’s
Board.
Each Trust Series may enter into certain
transactions where an OTC component is exchanged for a corresponding futures contract (an “Exchange for Related Position”
or “EFRP transaction”). In the most common type of EFRP transaction entered into by each Trust Series, the OTC component
is the purchase or sale of one or more baskets of the Fund shares. These EFRP transactions may expose the Fund to counterparty
risk during the interim period between the execution of the OTC component and the exchange for a corresponding futures contract.
Generally, the counterparty risk from the EFRP transaction will exist only on the day of execution.
Each Trust Series may employ spreads
or straddles in its trading to mitigate the differences in its investment portfolio and its goal of tracking, on a leveraged basis,
the price of the Benchmark Oil Futures Contract. Each Trust Series would use a spread when it chooses to take simultaneous
long and short positions in futures written on the same underlying asset, but with different delivery months.
Each Trust Series does not anticipate
engaging in trading in futures contracts listed on a foreign exchange, forward contracts or options on such contracts, but it may
do so as outlined in the Fund’s listing exemptive order or as permitted under current regulations.
During the reporting period of this annual
report on Form 10-K, each Trust Series limited its derivatives activities to Oil Futures Contracts and EFRP transactions.
Pyramiding
USCF has not employed, and will not employ,
the technique, commonly known as pyramiding, in which the speculator uses unrealized profits on existing positions as variation
margin for the purchase or sale of additional positions in the same or another commodity interest.
Who are the Service Providers?
REX MLPshares, LLC (“REX”)
is a single member limited liability company that was formed in the state of Delaware on December 3, 2015. It maintains its
main business office at 44 Post Road West, Westport, CT 06880. REX is a wholly-owned subsidiary of REX Shares, LLC, a Delaware
limited liability company (“REX Shares”). REX Shares creates and delivers intelligently engineered investment products
and is based in Westport, Connecticut.
Pursuant to its agreement with USCF, REX
provides services to USCF in connection with the development and launch of the Fund, the investment methodology, the appropriate
benchmarks, and assisting with the strategy for satisfying the investment methodology.
USCF will pay a monthly fee to REX for
services provided to the Fund that will be calculated according to the following formula (the “Monthly Fee”):
Monthly Fee = (A-B)
x C
For purposes of calculating
the Monthly Fee:
“A” equals
the Management Fee payable by the Fund to USCF during the applicable calendar month; and,
“B” equals the amount
of the Manager Expenses payable during the applicable calendar month where (i) “Manager Expenses” means: (a) all
direct expenses incurred by USCF in connection with formation and operation of the Trust and the Fund, as set forth in the trust
agreement for the Trust, (b) all expenses, including Fund Expenses, reimbursed by USCF to the Fund, and (c) such other
expenses as REX and USCF may agree from time to time to designate as “Manager Expenses” provided that, for the avoidance
of doubt, “Manager Expenses” shall specifically exclude Management Fees, and (ii) “Fund Expenses”
means (a) the Management Fee payable to USCF, (b) brokerage fees, futures commission merchant fees and other fees and
commissions incurred in connection with the trading activities of the Fund, (c) any costs and expenses related to registration
of additional shares of the Fund, and (d) all other expenses allocated to the Fund by USCF in consultation with REX; and
“C” equals
40%.
In any month where “A” minus
“B” equals zero (0) or a number less than zero (0), then the amount of the Monthly Fee paid to REX for such month shall
be zero. USCF will pay the Monthly Fee on behalf of the Fund to REX on a monthly basis within thirty business days of the end of
each calendar month.
Custodian, Registrar, Transfer Agent,
and Administrator
In its capacity as the Custodian for each
Trust Series, BBH&Co. (in such capacity, the “Custodian”) may hold each Trust Series Treasuries, cash and/or
cash equivalents pursuant to a custodial agreement. BBH&Co. is also the registrar and transfer agent for the shares. In addition,
in its capacity as Administrator for the Fund, BBH&Co. (in such capacity, the “Administrator”) performs certain
administrative and accounting services for the Fund and prepares certain SEC, NFA and CFTC reports on behalf of the Fund.
Currently, USCF pays BBH&Co. for its
services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration
services rendered to each series of the Trust and each of the Related Public Funds, as well as a $20,000 annual fee for its transfer
agency services. In addition, USCF pays BBH&Co. an asset-based charge of: (a) 0.06% for the first $500 million of the
Related Public Funds’ combined net assets, (b) 0.0465% for the Related Public Funds’ combined net assets greater
than $500 million but less than $1 billion, and (c) 0.035% once the Related Public Funds’ combined net assets exceed
$1 billion. The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000.
USCF also pays transaction fees ranging from $7 to $15 per transaction.
BBH&Co.’s principal business
address is 50 Post Office Square, Boston, MA 02110-1548. BBH&Co., a private bank founded in 1818, is neither a publicly held
company nor insured by the Federal Deposit Insurance Corporation. BBH&Co. is authorized to conduct a commercial banking business
in accordance with the provisions of Article IV of the New York State Banking Law, New York Banking Law §§160–181,
and is subject to regulation, supervision, and examination by the New York State Department of Financial Services. BBH&Co.
is also licensed to conduct a commercial banking business by the Commonwealths of Massachusetts and Pennsylvania and is subject
to supervision and examination by the banking supervisors of those states.
Delaware Trustee
Wilmington Trust, National Association,
a national banking association, with its principal place of business in the State of Delaware, as Delaware trustee (the “Trustee”)
serves as the Trust’s corporate trustee as required under the Delaware Statutory Trust Act (“DSTA”). USCF pays
the Trustee $3,000 annually for its services to the Trust.
The Trustee is the sole trustee of the
Trust. The rights and duties of the Trustee and USCF with respect to the offering of the shares and the Fund management and the
shareholders are governed by the provisions of the DSTA and by the Trust Agreement. The Trustee will accept service of legal process
on the Trust in the State of Delaware and will make certain filings under the DSTA. The Trustee does not owe any other duties to
the Trust, USCF or the shareholders of the Fund. The Trustee’s principal offices are located at 1100 North Market Street,
Wilmington, Delaware, 19890. The Trustee is unaffiliated with USCF.
The Trustee is permitted to resign upon
at least sixty (60) days’ notice to the Trust, provided, that any such resignation will not be effective until a successor
Trustee is appointed by USCF. USCF has the discretion to replace the Trustee.
Only the assets of the Trust and USCF 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 Trustee’s liability in connection
with the issuance and sale of the shares is limited solely to the express obligations of the Trustee set forth in the Trust Agreement.
Under the Trust Agreement, USCF has exclusive
management and control of all aspects of the Trust’s business. The Trustee has no duty or liability to supervise the performance
of USCF, nor will the Trustee have any liability for the acts or omissions of USCF. The shareholders have no voice in the day to
day management of the business and operations of the Fund and the Trust, other than certain limited voting rights as set forth
in the Trust Agreement. In the course of its management of the business and affairs of the Fund and the Trust, USCF may, in its
sole and absolute discretion, appoint an affiliate or affiliates of USCF as additional sponsors and retain such persons, including
affiliates of USCF, as it deems necessary to effectuate and carry out the purposes, business and objectives of the Trust.
Because the Trustee has no authority over
the Trust’s operations, the Trustee itself is not registered in any capacity with the CFTC.
Marketing Agent
Each Trust Series also employs ALPS
Distributors, Inc. (“ALPS Distributors”) as the Marketing Agent, which is further discussed under “What
is the Plan of Distribution?” USCF pays the Marketing Agent a fee for its services as marketing agent to each Trust Series equal
to 0.06% on Fund assets up to the first $3 billion; and 0.04% on Fund assets in excess of $3 billion. In no event may the aggregate
compensation paid to the Marketing Agent and any affiliate of USCF for marketing and/or distribution-related services in connection
with the offering of shares exceed ten percent (10%) of the gross proceeds of the offering.
ALPS Distributors’ principal
business address is 1290 Broadway, Suite 1100, Denver, CO 80203. ALPS Distributors is a broker-dealer registered with
the SEC and is a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investor
Protection Corporation.
Futures Commission Merchant
On July 6, 2017, USCF entered into
a Futures and Cleared Derivatives Transactions Customer Account Agreement with RBC Capital Markets, LLC (“RBC Capital”
or “RBC”) to serve as FCM for USOU and USOD. This agreement requires RBC Capital to provide services to USOU and USOD
in connection with the purchase and sale of Oil Futures Contracts and Other Oil-Related Investments that may be purchased or sold
by or through RBC Capital for the account of USOU and USOD. USOU and USOD each pay RBC Capital commissions for executing and clearing
trades on behalf of USOU or USOD, as applicable.
RBC Capital’s primary address is
500 West Madison Street, Suite 2500, Chicago, Illinois 60661. RBC Capital is the futures clearing broker for USOU and
USOD. RBC Capital is registered in the United States with FINRA as a broker-dealer and with the CFTC as an FCM. RBC Capital is
a member of various U.S. futures and securities exchanges.
RBC Capital is a large broker dealer subject
to many different complex legal and regulatory requirements. As a result, certain of RBC Capital’s regulators may from time
to time conduct investigations, initiate enforcement proceedings and/or enter into settlements with RBC Capital with respect to
issues raised in various investigations. RBC Capital complies fully with its regulators in all investigations being conducted and
in all settlements it reaches. In addition, RBC Capital is and has been subject to a variety of civil legal claims in various jurisdictions,
a variety of settlement agreements and a variety of orders, awards and judgments made against it by courts and tribunals, both
in regard to such claims and investigations. RBC Capital complies fully with all settlements it reaches and all orders, awards
and judgments made against it.
RBC Capital has been named as a defendant
in various legal actions, including arbitrations, class actions and other litigation including those described below, arising in
connection with its activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or
punitive damages or claims for indeterminate amounts of damages. RBC Capital is also involved, in other reviews, investigations
and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding RBC Capital’s business,
including among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements,
fines, penalties, injunctions or other relief.
RBC Capital contests liability and/or the
amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in
the early stages, RBC Capital cannot predict the loss or range of loss, if any, related to such matters; how or if such matters
will be resolved; when they will ultimately be resolved; or what the eventual settlement, fine, penalty or other relief, if any,
might be. Subject to the foregoing, RBC Capital believes, based on current knowledge and after consultation with counsel, that
the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of RBC Capital.
On April 27, 2017, pursuant to an
offer of settlement, a Panel of the Chicago Board of Trade Business Conduct Committee (“Panel”) found that RBC Capital
engaged in EFRP transactions which failed to satisfy the Rules of the Chicago Board of Trade (the “Chicago Board of
Trade”) in one or more ways. Specifically, the Panel found that RBC Capital traders entered into EFRP trades in which RBC
Capital accounts were on both sides of the transactions. While the purpose of the transactions was to transfer positions between
the RBC Capital accounts, the Panel found that the manner in which the trades occurred violated the Chicago Board of Trade’s
prohibition on wash trades. The Panel found that RBC Capital thereby violated CBOT Rules 534 and (legacy) 538.B. and C. In
accordance with the settlement offer, the Panel ordered RBC Capital to pay a $175,000 fine. On October 1, 2019, the CFTC issued
an order filing and settling charges against RBCCM for the above activity, as well as related charges. The order required that
RBCCM cease and desist from violating the applicable regulations, pay a $5 million civil monetary penalty, and comply with various
conditions, including conditions regarding public statements and future cooperation with the CFTC.
On June 18, 2015, in connection with
the Municipalities Continuing Disclosure Cooperation initiative of the SEC, the SEC commenced and settled an administrative proceeding
against RBC Capital for willful violations of Sections 17(a)(2) of the Securities Act of 1933, as amended (“1933 Act”)
after the firm self-reported instances in which it conducted inadequate due diligence in certain municipal securities offerings
and as a result, failed to form a reasonable basis for believing the truthfulness of certain material representations in official
statements issued in connection with those offerings. RBC Capital paid a fine of $500,000.
RBC Capital and certain affiliates were
named as defendants in a lawsuit relating to their role in transactions involving investments made by a number of Wisconsin school
districts in certain collateralized debt obligations. These transactions were also the subject of a regulatory investigation, which
was resolved in 2011. RBC Capital reached a final settlement with all parties in the civil litigation, and the civil action against
RBC Capital was dismissed with prejudice on December 6, 2016.
Beginning in 2015, putative class actions
were brought against RBC Capital and/or Royal Bank of Canada in the U.S., Canada and Israel. These actions were each brought against
multiple foreign exchange dealers and allege, among other things, collusive behavior in foreign exchange trading. Various regulators
are also conducting inquiries regarding potential violations of law by a number of banks and other entities, including RBC Capital,
regarding foreign exchange trading. In August 2018, the U.S. District Court entered a final order approving RBC Capital’s
pending settlement with class plaintiffs. Certain institutional plaintiffs opted out of participating in the settlement and have
brought their own claims. The Canadian class actions and one other U.S. action that is purportedly brought on behalf of different
classes of plaintiffs also remain pending. Based on the facts currently known, it is not possible at this time for us to predict
the ultimate outcome of these investigations or proceedings or the timing of their resolution.
On April 13, 2015, RBC Capital’s
affiliate, Royal Bank of Canada Trust Company (Bahamas) Limited (“RBC Bahamas”), was charged in France with complicity
in tax fraud. RBC Bahamas believes that its actions did not violate French law and contested the charge in the French court. The
trial of this matter has concluded and a verdict was delivered on January 12, 2017, acquitting the company and the other defendants
and on June 29, 2018, the French appellate court affirmed the acquittals. The acquittals are being appealed.
Various regulators and competition and
enforcement authorities around the world, including in Canada, the United Kingdom, and the U.S., are conducting investigations
related to certain past submissions made by panel banks in connection with the setting of the U.S. dollar London interbank offered
rate (“LIBOR”). These investigations focus on allegations of collusion between the banks that were on the panel to
make submissions for certain LIBOR rates. Royal Bank of Canada, RBC Capital’s indirect parent, is a member of certain LIBOR
panels, including the U.S. dollar LIBOR panel, and has in the past been the subject of regulatory requests for information. In
addition, Royal Bank of Canada and other U.S. dollar panel banks have been named as defendants in private lawsuits filed in the
U.S. with respect to the setting of LIBOR including a number of class action lawsuits which have been consolidated before the U.S.
District Court for the Southern District of New York. The complaints in those private lawsuits assert claims against us and other
panel banks under various U.S. laws, including U.S. antitrust laws, the U.S. Commodity Exchange Act, and state law. On February 28,
2018, the motion by the plaintiffs in the class action lawsuits to have the class certified was denied in relation to Royal Bank
of Canada. As such, unless that ruling is reversed on appeal, Royal Bank of Canada is no longer a defendant in any pending class
action. Royal Bank of Canada is still a party to the various individual LIBOR actions. Based on the facts currently known, it is
not possible at this time for us to predict the ultimate outcome of these investigations or proceedings or the timing of their
resolution.
Thornburg Mortgage Inc. (“TMST”)
and RBC Capital were parties to a master repurchase agreement executed in September 2003 whereby TMST financed its purchase
of residential mortgage-backed securities. Upon TMST’s default during the financial crisis, RBC Capital valued TMST’s
collateral at allegedly deflated prices. After TMST’s bankruptcy filing, TMST’s trustee brought suit against RBC Capital
in 2011 for breach of contract. In 2015, TMST was awarded more than $45 million in damages. RBC Capital has appealed. The appeals
court set a briefing schedule and simultaneously ordered the parties to participate in a mediation. The parties subsequently reached
an agreement to settle the matter; a motion to approve the settlement was filed with the bankruptcy court on January 10, 2016
and granted on February 27, 2017.
On October 14, 2014, the Delaware
Court of Chancery (the “Court of Chancery”) in a class action brought by former shareholders of Rural/Metro Corporation,
held RBC Capital liable for aiding and abetting a breach of fiduciary duty by three Rural/Metro directors, but did not make an
additional award for attorney’s fees. A final judgment was entered on February 19, 2015 in the amount of US$93 million
plus post judgment interest. RBC Capital appealed the Court of Chancery’s determination of liability and quantum of damages,
and the plaintiffs cross-appealed the ruling on additional attorneys’ fees. On November 30, 2015, the Delaware Supreme
Court affirmed the Court of Chancery with respect to both the appeal and cross-appeal. RBC Capital is cooperating with an investigation
by the SEC relating to this matter. In particular, the SEC contended that RBC Capital caused materially false and misleading information
to be included in the proxy statement that Rural filed to solicit shareholder approval for the sale in violation of section 14(A) of
the Exchange Act and Rule 14A-9 thereunder. On August 31, 2016, RBC Capital was ordered by the SEC to cease and desist
and paid $500,000 in disgorgement, plus interest of $77,759 and a civil penalty of $2 million.
Please see RBC Capital’s Form BD,
which is available on the FINRA BrokerCheck program, for more details.
RBC will act only as clearing broker for
each Trust Series and as such will be paid commissions for executing and clearing trades on behalf of the Trust Series. RBC
has not passed upon the adequacy or accuracy of this annual report on Form 10-K. RBC will not act in any supervisory capacity
with respect to USCF or participate in the management of USCF or the Trust Series.
RBC is not affiliated with the Trust Series or
USCF. Therefore, neither USCF nor the Trust Series believes that there are any conflicts of interest with RBC or its trading
principals arising from its acting as the FCM for each Trust Series.
Currently, USCF does not employ commodity
trading advisors for the trading of the contracts for each Trust Series. USCF currently does, however, employ SummerHaven Investment
Management, LLC as a trading advisor for USCI and CPER. If, in the future, USCF does employ commodity trading advisors for the
Fund, it will choose each advisor based on arm’s-length negotiations and will consider the advisor’s experience, fees
and reputation.
Fees of USOU and USOD
Fees and Compensation Arrangements
with USCF, Non-Affiliated Service Providers and the Trustee
Service Provider
|
|
Compensation Paid by Each Trust Series and USCF
|
|
|
|
United States Commodity Funds LLC, Sponsor
|
|
Each Trust Series pays USCF a management fee based on its average daily net assets and paid monthly at an annual rate of 0.95%.(1)
|
|
|
|
BBH&Co., Custodian, Transfer Agent and Administrator
|
|
Minimum amount of $75,000 annually for its custody, fund accounting and fund administration services rendered to the Trust Series and the Related Public Funds, as well as a $20,000 annual fee for its transfer agency services. In addition, an asset-based charge of (a) 0.06% for the first $500 million of the Trust Series’ and the Related Public Funds’ combined net assets, (b) 0.0465% for the Trust Series’ and the Related Public Funds’ combined net assets greater than $500 million but less than $1 billion, and (c) 0.035% once the Trust Series’ and the Related Public Funds’ combined net assets exceed $1 billion.(2)
|
|
|
|
ALPS Distributors, Marketing Agent
|
|
Each Trust Series pays 0.06% on assets up to $3 billion and 0.04% on assets in excess of $3 billion.(2)
|
|
|
|
Wilmington Trust Company, Trustee
|
|
On behalf of the Trust, USCF pays $3,000 annually.(2)
|
|
(1)
|
Each Trust Series is contractually obligated to pay USCF a management fee based on daily net
assets and paid monthly of 0.95%. Average daily net assets are calculated daily by taking the average of the total net assets of
the Fund over the calendar year, i.e., the sum of daily total net assets divided by the number of calendar days in the year. On
days when markets are closed, the total net assets are the total net assets from the last day when the market was open.
|
|
(2)
|
The Funds pay USCF a unitary management fee. As a result, USCF is responsible for paying this compensation.
|
Asset-based fees are calculated on a daily
basis (accrued at 1/365 of the applicable percentage of total net assets on that day) and paid on a monthly basis. Total net assets
are calculated by taking the current market value of each Trust Series’ total assets and subtracting any liabilities.
Compensation to USCF
USOU and USOD are contractually obligated
to pay USCF a management fee based on 0.95%, per annum on its average daily total net assets. Fees are calculated on a daily basis
(accrued at 1/365 of the applicable percentage of total net assets on that day) and paid on a monthly basis. Total net assets are
calculated by taking the current market value of each Trust Series’ total assets and subtracting any liabilities.
Fees and Compensation Arrangements
between USOU or USOD and Non-Affiliated Service Providers(3)
Service Provider
|
|
Compensation Paid by USOU and USOD
|
RBC Capital Futures Commission Merchant
|
|
Approximately $3.50 per buy or sell; charges may vary
|
(3) USOU
and USOD pay this compensation.
Expenses Paid or Accrued by USOU
from Inception through December 31, 2019* in dollar terms:
Expenses:
|
|
Amount in Dollar Terms
|
|
Amount Paid or Accrued to USCF:
|
|
$
|
273,171
|
|
Amount Paid or Accrued in Portfolio Brokerage Commissions:
|
|
$
|
169,259
|
|
Other Amounts Paid or Accrued(4):
|
|
$
|
—
|
|
Total Expenses Paid or Accrued:
|
|
$
|
442,430
|
|
|
(4)
|
Includes expenses relating to the registration of additional shares, legal fees, auditing fees,
printing expenses, licensing fees, tax reporting fees, prepaid insurance expenses and miscellaneous expenses and fees and expenses
paid to the independent directors of USCF.
|
Expenses
Paid or Accrued by USOU from Inception through December 31, 2019* as a Percentage of Average Daily Net Assets:
Expenses:
|
|
Amount as a Percentage
of Average Daily Net Assets
|
Amount Paid or Accrued to USCF:
|
|
0.96% annualized
|
Amount Paid or Accrued in Portfolio Brokerage Commissions:
|
|
0.60% annualized
|
Other Amounts Paid or Accrued(5):
|
|
—% annualized
|
Total Expenses Paid or Accrued:
|
|
1.56% annualized
|
|
(5)
|
Includes expenses relating to the registration of additional shares, legal fees, auditing fees,
printing expenses, licensing fees, tax reporting fees, prepaid insurance expenses and miscellaneous expenses and fees and expenses
paid to the independent directors of USCF.
|
* USOU ceased trading on the NYSE Arca
on December 12, 2019 and the Fund's liquidation date was December 18, 2019, and the proceeds of the liquidation were
sent to all remaining shareholders of USOU as of December 19, 2019.
Expenses Paid or Accrued by USOD
from Inception through December 31, 2019* in dollar terms:
Expenses:
|
|
Amount in Dollar Terms
|
|
Amount Paid or Accrued to USCF:
|
|
$
|
52,504
|
|
Amount Paid or Accrued in Portfolio Brokerage Commissions:
|
|
$
|
37,534
|
|
Other Amounts Paid or Accrued(6):
|
|
$
|
—
|
|
Total Expenses Paid or Accrued:
|
|
$
|
90,038
|
|
|
(6)
|
Includes expenses relating to the registration of additional shares, legal fees, auditing fees,
printing expenses, licensing fees, tax reporting fees, prepaid insurance expenses and miscellaneous expenses and fees and expenses
paid to the independent directors of USCF.
|
Expenses Paid or Accrued by USOD
from Inception through December 31, 2019* as a Percentage of Average Daily Net Assets:
Expenses:
|
|
Amount as a Percentage
of Average Daily Net Assets
|
Amount Paid or Accrued to USCF:
|
|
1.04% annualized
|
Amount Paid or Accrued in Portfolio Brokerage Commissions:
|
|
0.75% annualized
|
Other Amounts Paid or Accrued(7):
|
|
—% annualized
|
Total Expenses Paid or Accrued:
|
|
1.79% annualized
|
|
(7)
|
Includes expenses relating to the registration of additional shares, legal fees, auditing fees,
printing expenses, licensing fees, tax reporting fees, prepaid insurance expenses and miscellaneous expenses and fees and expenses
paid to the independent directors of USCF.
|
* USOD ceased trading on the NYSE Arca
on December 12, 2019 and the Fund's liquidation date was December 18, 2019, and the proceeds of the liquidation were
sent to all remaining shareholders of USOD as of December 19, 2019.
Form of Shares
Registered Form. Shares are
issued in registered form in accordance with the Trust Agreement. The Administrator has been appointed registrar and transfer agent
for the purpose of transferring shares in certificated form. The Administrator keeps a record of all Shareholders and holders of
the shares in certificated form in the registry (“Register”). USCF recognizes transfer of shares in certified form
only if done in accordance with the Trust Agreement. The beneficial interests in such shares are held in book-entry form through
participants and/or accountholders in the Depository Trust Company (“DTC”).
Book Entry. Individual certificates
are not issued for the shares. Instead, shares are represented by one or more global certificates, which are deposited by the Administrator
with DTC and registered in the name of Cede & Co., as nominee for DTC. The global certificates evidence all of the shares
outstanding at any time. Shareholders are limited to (1) participants in DTC such as banks, brokers, dealers and trust companies
(“DTC Participants”), (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those who hold interests in the shares through DTC Participants
or Indirect Participants, in each case who satisfy the requirements for transfers of shares. DTC Participants acting on behalf
of investors holding shares through such participants’ accounts in DTC will follow the delivery practice applicable to securities
eligible for DTC’s Same-Day Funds Settlement System. Shares are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
DTC. DTC has advised us as
follows: It is a limited purpose trust company organized under the laws of the State of New York and is a member of the Federal
Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities for DTC Participants
and facilitates the clearance and settlement of transactions between DTC Participants through electronic book-entry changes in
accounts of DTC Participants.
Transfer of Shares
The shares are only transferable through
the book-entry system of DTC. Shareholders who are not DTC Participants may transfer their shares through DTC by instructing the
DTC Participant holding their shares (or by instructing the Indirect Participant or other entity through which their shares are
held) to transfer the shares. Transfers are made in accordance with standard securities industry practice.
Transfers of interests in shares with DTC
are made in accordance with the usual rules and operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders of DTC. Because DTC can only act on behalf of DTC
Participants, who in turn act on behalf of Indirect Participants, the ability of a person or entity having an interest in a global
certificate to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect
of such interest, may be affected by the lack of a certificate or other definitive document representing such interest.
DTC has advised us that it will take any
action permitted to be taken by a shareholder (including, without limitation, the presentation of a global certificate for exchange)
only at the direction of one or more DTC Participants in whose account with DTC interests in global certificates are credited and
only in respect of such portion of the aggregate principal amount of the global certificate as to which such DTC Participant or
Participants has or have given such direction.
Calculating Per Share NAV
Each Trust Series per share NAV will
be calculated by:
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Taking the current market value of its total assets;
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Subtracting any liabilities; and
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Dividing that total by the total number of outstanding shares.
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The Administrator will calculate the NAV
of each Fund once each NYSE Arca trading day. The NAV for a normal trading day will be released after 4:00 p.m. Eastern time
(“E.T.”). Trading during the Exchange’s Core Trading Session typically closes at 4:00 p.m. E.T. For futures
contracts and options traded on exchanges the Administrator will use the closing or settlement price published by the applicable
exchange or, in the case of a market disruption, the last traded price before settlement. In the case of the Benchmark Oil Futures
Contract, the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. E.T.) for the contracts
traded on the NYMEX will be used. Other investments’ values for purposes of determining the NAV for each Fund, including
Treasuries, cash equivalents (other than money market funds), cleared and non-cleared swaps, forwards, options and swaps will be
calculated by the Administrator using market quotations and market data, if available, or other information customarily used to
determine the fair value of such investments as of the earlier of the close of the NYSE Arca or 4:00 p.m. E.T. Money market
funds will be valued at their end of day NAV. The Funds may hold cash in the form of U.S. dollars.
Third parties supplying quotations or market
data may include, without limitation, information vendors, dealers in the relevant markets, end-users of the relevant product,
brokers and other sources of market information. Other information customarily used in determining fair value includes information
consisting of market data in the relevant market supplied by one or more third parties including, without limitation, relevant
rates, prices, yields, yield curves, volatilities, spreads, correlations or other market data in the relevant market; or information
of the types described above from internal sources if that information is of the same type used by a Fund in the regular course
of business for the valuation of similar transactions. The information may include costs of funding, to the extent costs of funding
are not and would not be a component of the other information being utilized.
In addition, in order to provide updated
information relating to the Fund for use by investors and market professionals, NYSE Arca will calculate and disseminate throughout
the core trading session on each trading day an updated indicative fund value. The indicative fund value will be calculated by
using the prior day’s closing NAV per share of the Fund as a base and updating that value throughout the trading day to reflect
changes in the most recently reported trade price for the active light, sweet Oil Futures Contract on the NYMEX. The prices reported
for the active Oil Futures Contract month are adjusted based on the prior day’s spread differential between settlement values
for that contract and the spot month contract. In the event that the spot month contract is also the Benchmark Oil Futures Contract,
the last sale price for the Benchmark Oil Futures Contract is not adjusted. The indicative fund value share basis disseminated
during NYSE Arca core trading session hours should not be viewed as an actual real time update of the NAV, because the per share
NAV is calculated only once at the end of each trading day based upon the relevant end of day values of the Fund’s investments.
The indicative fund value share basis disseminated during NYSE Arca core trading session hours should not be viewed as an actual
real time update of the NAV, because NAV is calculated only once at the end of each trading day based upon the relevant end of
day values of the Fund’s investments.
The indicative fund value will be disseminated
on a per share basis every 15 seconds during regular NYSE core trading session hours of 9:30 a.m. New York time to 4:00 p.m. New
York time. The normal trading hours of the NYMEX are 9:00 a.m. New York time to 2:30 p.m. New York time. This means that
there will be a gap in time at the end of each day during which the Fund’s shares are traded on the NYSE Arca, but real-time
NYMEX trading prices for oil futures contracts traded on the NYMEX are not available. During such gaps in time the indicative fund
value will be calculated based on the end of day price of such Oil Futures Contracts from the NYMEX’s immediately preceding
trading session. In addition, other Oil Futures Contracts, Other Oil-Related Investments and Treasuries held by the Fund will be
valued by the Administrator, using rates and points received from client-approved third party vendors (such as Reuters and WM Company)
and advisor quotes. These investments will not be included in the indicative fund value.
NYSE Arca will disseminate the indicative
fund value through the facilities of CTA/CQ High Speed Lines. In addition, the indicative fund value will be published on NYSE
Arca’ website and will be available through on-line information services such as Bloomberg and Reuters.
Dissemination of the indicative fund value
provides additional information that is not otherwise available to the public and is useful to investors and market professionals
in connection with the trading of the shares of the Fund on NYSE Arca. Investors and market professionals will be able throughout
the trading day to compare the market price of the Fund and the indicative fund value. If the market price of the shares of the
Fund diverges significantly from the indicative fund value, market professionals will have an incentive to execute arbitrage trades.
For example, if the Fund appears to be trading at a discount compared to the indicative fund value, a market professional could
buy shares of the Fund on NYSE Arca and sell short oil futures contracts. Such arbitrage trades can tighten the tracking between
the market price of the Fund and the indicative fund value and thus can be beneficial to all market participants.
Creation and Redemption of Shares
Each Trust Series intends to create
and redeem shares from time to time, but only in one or more Creation Baskets or Redemption Baskets. The creation and redemption
of baskets will be made only in exchange for delivery to the Fund or the distribution by the Fund of the amount of Treasuries and/or
cash represented by the baskets being created or redeemed, the amount of which will be equal to the combined NAV of the number
of shares included in the baskets being created or redeemed determined as of 4:00 p.m. New York time on the day the order
to create or redeem baskets is properly received.
Authorized Participants will be 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, that are not required to register as broker-dealers
to engage in securities transactions described below, and (2) DTC Participants. To become an Authorized Participant, a person
must enter into an Authorized Participant Agreement with USCF. The Authorized Participant Agreement will provide the procedures
for the creation and redemption of baskets and for the delivery of the Treasuries and any cash required for such creation and redemptions.
The Authorized Participant Agreement and the related procedures attached thereto may be amended by each Trust Series, without the
consent of any limited partner or Shareholder or Authorized Participant. Authorized Participants pay a transaction fee equal to
0.04% of total NAV of the Creation Baskets to each Trust Series for each order they place to create one or more Creation Baskets
or to redeem one or more Redemption Baskets. The transaction fee may be waived, reduced, increased or otherwise changed by USCF.
Authorized Participants who make deposits with a Trust Series in exchange for baskets receive no fees, commission or other
form of compensation or inducement of any kind from either the Trust Series or USCF, and no such person will have any obligation
or responsibility to USCF or the Trust Series to effect any sale or resale of shares. As of December 31, 2019, 2 Authorized
Participants had entered into agreements with USCF on behalf of USOU and USOD. During the year ended December 31, 2019, USOU
issued 29 Creation Baskets and redeemed 49 Redemption Baskets. During the year ended December 31, 2019, USOD issued 36 Creation
Baskets and redeemed 38 Redemption Basket.
Certain Authorized Participants are expected
to be capable of participating directly in the physical crude oil market and the crude oil futures market. In some cases, Authorized
Participants or their affiliates may from time to time buy or sell crude oil or Oil Interests and may profit in these instances.
USCF believes that the size and operation of the crude oil market make it unlikely that an Authorized Participant’s direct
activities in the crude oil or securities markets will significantly affect the price of crude oil, Oil Interests or the price
of the shares.
Each Authorized Participant will be required
to be registered as a broker-dealer under the Exchange Act and a member in good standing with FINRA, or exempt from being or otherwise
not required to be registered as a broker-dealer or a member of FINRA, and will be qualified to act as a broker or dealer in the
states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may also be regulated
under federal and state banking laws and regulations. Each Authorized Participant has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.
Under the Authorized Participant Agreement,
USCF, and the Trust under limited circumstances, agree to indemnify the Authorized Participants against certain liabilities, including
liabilities under the 1933 Act, and to contribute to the payments the Authorized Participants may be required to make in respect
of those liabilities.
The following description of the procedures
for the creation and redemption of baskets is only a summary and an investor should refer to the relevant provisions of the Trust
Agreement and the form of Authorized Participant Agreement for more detail, each of which is incorporated by reference into this
annual report on Form 10-K.
Creation Procedures
On any business day, an Authorized Participant
may place an order with the Marketing Agent to create one or more baskets. For purposes of processing purchase and redemption orders,
a “business day” means any day other than a day when NYSE Arca or any futures exchange upon which a Benchmark Oil Futures
Contract is traded is closed for regular trading. Purchase orders must be placed by 12:00 p.m. New York time or the close
of regular trading on NYSE Arca, whichever is earlier. The day on which the Marketing Agent accepts a purchase order in satisfactory
form and approves such order in accordance with the procedures set forth in the Authorized Participant Agreement is referred to
as the purchase order date.
By placing a purchase order, an Authorized
Participant agrees to deposit Treasuries, cash or a combination of Treasuries and cash with the Trust, as described below. Prior
to the delivery of baskets for a purchase order, the Authorized Participant must also have wired to the Custodian the non-refundable
transaction fee due for the purchase order. Authorized Participants may not withdraw a creation request.
The manner by which creations are made
is dictated by the terms of the Authorized Participant Agreement. By placing a purchase order, an Authorized Participant agrees
to (1) deposit Treasuries, cash, or a combination of Treasuries and cash with the Custodian of the Fund, and (2) if required
by USCF in its sole discretion, enter into or arrange for a block trade, an exchange for physical or exchange for swap, or any
other OTC transaction (through itself or a designated acceptable broker) with the Fund for the purchase of a number and type of
futures contracts at the closing settlement price for such contracts on the purchase order date. If an Authorized Participant fails
to consummate (1) and (2), the order shall be cancelled. The number and types of contracts specified shall be determined by
USCF, in its sole discretion, to meet the Fund’s investment objective and shall be purchased as a result of the Authorized
Participant’s purchase of shares.
Determination of Required Deposits
The total deposit required to create each
basket (“Creation Basket Deposit”) is the amount of Treasuries and/or cash that is in the same proportion to the total
assets of the Fund (net of estimated accrued but unpaid fees, expenses and other liabilities) on the purchase order date as the
number of shares to be created under the purchase order is in proportion to the total number of shares outstanding on the purchase
order date. USCF intends to determine, directly in its sole discretion or in consultation with the Administrator, the requirements
for Treasuries and cash, including the remaining maturities of the Treasuries and proportions of Treasuries and cash that may be
included in deposits to create baskets. The Marketing Agent will publish an estimate of the Creation Basket Deposit requirements
at the beginning of each business day. The amount of cash deposit required is the difference between the aggregate market value
of the Treasuries required to be included in a Creation Basket Deposit as of 4:00 p.m. New York time on the date the order
to purchase is properly received and the total required deposit.
Delivery of Required Deposits
An Authorized Participant who places a
purchase order will be responsible for transferring to the Trust Series’ account with the Custodian the required amount of
Treasuries and/or cash by noon New York time on the second business day following the purchase order date. Upon receipt of the
deposit amount, the Administrator will direct DTC to credit the number of baskets ordered to the Authorized Participant’s
DTC account on the second business day following the purchase order date. The expense and risk of delivery and ownership of Treasuries
until such Treasuries have been received by the Custodian on behalf of the Trust Series shall be borne solely by the Authorized
Participant.
Because orders to purchase baskets must
be placed by 12:00 p.m., New York time, but the total payment required to create a basket during the continuous offering period
will not be determined until 4:00 p.m., New York time, on the date the purchase order is received, Authorized 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. A Trust Series’ per share NAV and the total amount of the payment required to create a basket could rise or fall
substantially between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect
thereof is determined.
Rejection of Purchase Orders
USCF acting by itself or through the Marketing
Agent shall have the absolute right, but shall have no obligation, to reject any purchase order or Creation Basket Deposit if USCF
determines that:
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the purchase order or Creation Basket Deposit is not in proper form;
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it would not be in the best interest of the shareholders of the Fund;
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due to position limits or otherwise, investment alternatives that will enable a Trust Series to
meet its investment objective are not available to such Trust Series at that time;
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the acceptance of the purchase order or the Creation Basket Deposit would have adverse tax consequences
to a Trust Series or its shareholders;
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the acceptance or receipt of which would, in the opinion of counsel to USCF, be unlawful; or
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circumstances outside the control of USCF, the Marketing Agent or the Custodian make it, for all
practical purposes, not feasible to process Creation Baskets (including if USCF determines that the investments available to the
Fund at that time will not enable it to meet its investment objective).
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None of USCF, the Marketing Agent or the
Custodian will be liable for the rejection of any purchase order or Creation Basket Deposit.
Redemption Procedures
The procedures by which an Authorized Participant
will be able to redeem one or more baskets will mirror the procedures for the creation of baskets. On any business day, an Authorized
Participant may place an order with the Marketing Agent to redeem one or more baskets. Redemption orders must be placed by 12:00
p.m. New York time or the close of regular trading on NYSE Arca, whichever is earlier. A redemption order so received will
be effective on the date it is received in satisfactory form and approved by the Marketing Agent (“Redemption Order Date”)
in accordance with the procedures set forth in the Authorized Participant Agreement. The redemption procedures allow Authorized
Participants to redeem baskets and do not entitle an individual shareholder to redeem any shares in an amount less than a Redemption
Basket, or to redeem baskets other than through an Authorized Participant.
By placing a redemption order, an Authorized
Participant agrees to deliver the baskets to be redeemed through DTC’s book-entry system to the Fund not later than noon
New York time on the second business day following the effective date of the redemption order. Prior to the delivery of the redemption
distribution for a redemption order, the Authorized Participant must also have wired to USCF’s account at the Custodian the
non-refundable transaction fee due for the redemption order. An Authorized Participant may not withdraw a redemption order.
The manner by which redemptions will be
made will be dictated by the terms of the Authorized Participant Agreement. By placing a redemption order, an Authorized Participant
will be agreeing to (1) deliver the Redemption Basket to be redeemed through DTC’s book-entry system to a Trust Series’
account with the Custodian no later than 3:00 p.m. New York time on the second business day following the effective date of
the redemption order (“Redemption Order Date”), and (2) if required by USCF in its sole discretion, enter into
or arrange for a block trade, an exchange for physical or exchange for swap, or any other OTC transaction (through itself or a
designated acceptable broker) with a Trust Series for the purchase of a number and type of futures contracts at the closing
settlement price for such contracts on the Redemption Order Date. If an Authorized Participant fails to consummate (1) and
(2), the order shall be cancelled. The number and type of contracts specified shall be determined by USCF, in its sole discretion,
to meet a Trust Series’ investment objective and shall be sold as a result of the Authorized Participant’s sale of
shares.
Determination of Redemption Distribution
The redemption distribution from a Trust
Series will consist of a transfer to the redeeming Authorized Participant of an amount of Treasuries and/or cash that is in
the same proportion to the total assets of such Trust Series (net of estimated accrued but unpaid fees, expenses and other
liabilities) on the date the order to redeem is properly received as the number of shares to be redeemed under the redemption order
is in proportion to the total number of shares outstanding on the date the order is received. USCF, directly or in consultation
with the Administrator, determines the requirements for Treasuries and cash, including the remaining maturities of the Treasuries
and proportions of Treasuries and cash that may be included in distributions to redeem baskets. The Marketing Agent will publish
an estimate of the redemption distribution per basket as of the beginning of each business day.
Delivery of Redemption Distribution
The redemption distribution due from a
Trust Series will be delivered to the Authorized Participant on the second business day following the redemption order date
if, by 3:00 p.m., New York time on such second business day, such Trust Series’ DTC account has been credited with the baskets
to be redeemed. If such Trust Series’ DTC account has not been credited with all of the baskets to be redeemed by such time,
the redemption distribution will be delivered to the extent of whole baskets received. Any remainder of the redemption distribution
will be delivered on the next business day to the extent of remaining whole baskets received if USCF receives the fee applicable
to the extension of the redemption distribution date which USCF may, from time to time, determine and the remaining baskets to
be redeemed are credited to a Trust Series’ DTC account by 3:00 p.m., New York time on such next business day. Any further
outstanding amount of the redemption order shall be cancelled. Pursuant to information from USCF, the Custodian will also be authorized
to deliver the redemption distribution notwithstanding that the baskets to be redeemed are not credited to a Trust Series’
DTC account by 3:00 p.m., New York time on the second business day following the redemption order date if the Authorized Participant
has collateralized its obligation to deliver the baskets through DTC’s book entry-system on such terms as USCF may from time
to time determine.
Suspension or Rejection of Redemption
Orders
USCF may, in its discretion, suspend the
right of redemption, or postpone the redemption settlement date, (1) for any period during which NYSE Arca or any of the futures
exchanges upon which a Benchmark Oil Futures Contract is traded is closed other than customary weekend or holiday closings, or
trading on NYSE Arca or such futures exchanges is suspended or restricted, (2) for any period during which an emergency exists
as a result of which delivery, disposal or evaluation of Treasuries is not reasonably practicable, or (3) for such other period
as USCF determines to be necessary for the protection of the shareholders. For example, USCF may determine that it is necessary
to suspend redemptions to allow for the orderly liquidation of a Trust Series’ assets at an appropriate value to fund a redemption.
If USCF has difficulty liquidating a Trust Series’ positions, e.g., because of a market disruption event in the futures markets
or an unanticipated delay in the liquidation of a position in an over the counter contract, it may be appropriate to suspend redemptions
until such time as such circumstances are rectified. None of USCF, the Marketing Agent, or the Custodian will be liable to any
person or in any way for any loss or damages that may result from any such suspension or postponement.
Redemption orders must be made in whole
baskets. USCF acting by itself or through the Marketing Agent may, in its sole discretion, reject any Redemption Order (1) USCF
determines that the Redemption Order is not in proper form, (2) the fulfillment of which its counsel advises may be illegal
under applicable laws and regulations, or (3) if circumstances outside the control of USCF, the Marketing Agent or the Custodian
make it for all practical purposes not feasible for the shares to be delivered under the Redemption Order. USCF may also reject
a redemption order if the number of shares being redeemed would reduce the remaining outstanding shares to 100,000 shares (i.e.,
two (2) baskets) or less.
Creation and Redemption Transaction
Fee
To compensate each Trust Series for
expenses in connection with the creation and redemption of baskets, an Authorized Participant is required to pay a transaction
fee to each Trust Series equal to 0.04% of total NAV of the Creation Baskets to create or redeem baskets. The transaction
fee may be waived, reduced, increased or otherwise changed by USCF. USCF shall notify DTC of any change in the transaction fee
and will not implement any increase in the fee for the redemption of baskets until thirty (30) days after the date of notice.
Tax Responsibility
Authorized Participants are responsible
for any transfer tax, sales or use tax, stamp tax, recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such tax or charge is imposed directly on the Authorized
Participant, and agree to indemnify USCF and each Trust Series if they are required by law to pay any such tax, together with
any applicable penalties, additions to tax and interest thereon.
Secondary Market Transactions
As noted, each Trust Series will create
and redeem shares from time to time, but only in one or more Creation Baskets or Redemption Baskets. The creation and redemption
of baskets are only made in exchange for delivery to a Trust Series or the distribution by a Trust Series of the amount
of Treasuries and/or cash equal to the aggregate NAV of the number of shares included in the baskets being created or redeemed
determined on the day the order to create or redeem baskets is properly received.
As discussed above, Authorized Participants
will be the only persons that may place orders to create and redeem baskets. Authorized Participants must be registered broker-dealers
or other securities market participants, such as banks and other financial institutions that are not required to register as broker-dealers
to engage in securities transactions. An Authorized Participant will be under no obligation to create or redeem baskets, and an
Authorized Participant will be under no obligation to offer to the public shares of any baskets it does create. Authorized Participants
that do offer to the public shares from the baskets they create will do so at per-share offering prices that are expected to reflect,
among other factors, the trading price of the shares on NYSE Arca, the NAV of the shares at the time the Authorized Participant
purchased the Creation Baskets, the NAV of the shares at the time of the offer of the shares to the public, the supply of and demand
for shares at the time of sale, and the liquidity of the Oil Futures Contract market and the market for Other Oil-Related Investments.
Baskets will generally be redeemed when the price per share is at a discount to the NAV per share. Shares initially comprising
the same basket but offered by Authorized Participants to the public at different times may have different offering prices. An
order for one or more baskets may be placed by an Authorized Participant on behalf of multiple clients. Authorized Participants
who make deposits with a Trust Series in exchange for baskets receive no fees, commissions or other forms of compensation
or inducement of any kind from either a Trust Series or USCF and no such person has any obligation or responsibility to USCF
or a Trust Series to effect any sale or resale of shares. Shares trade in the secondary market on NYSE Arca. Shares are expected
to trade in the secondary market on NYSE Arca. Shares may trade in the secondary market at prices that are lower or higher relative
to their NAV per share. The amount of the discount or premium in the trading price relative to the NAV per share may be influenced
by various factors, including the number of investors who seek to purchase or sell shares in the secondary market and the liquidity
of the Oil Futures Contract market and the market for Other Oil-Related Investments. While the shares trade during the core trading
session on the NYSE Arca until 4:00 p.m. New York time, liquidity in the market for Oil Interests may be reduced after the
close of the NYMEX at 2:30 p.m. New York time. As a result, during this time, trading spreads, and the resulting premium or
discount, on the shares may widen.
Who is the Trustee?
Wilmington Trust, National Association,
a national banking association, with its principal place of business in the State of Delaware, as Delaware trustee (the “Trustee”)
serves as the Trust’s corporate trustee as required under the Delaware Statutory Trust Act (“DSTA”). USCF pays
the Trustee $3,000 annually for its services to the Trust.
The Trustee is the sole trustee of the
Trust. The rights and duties of the Trustee and USCF with respect to the offering of the shares and the Fund management and the
shareholders are governed by the provisions of the DSTA and by the Trust Agreement. The Trustee will accept service of legal process
on the Trust in the State of Delaware and will make certain filings under the DSTA. The Trustee does not owe any other duties to
the Trust, USCF or the shareholders of the Fund. The Trustee’s principal offices are located at 1100 North Market Street,
Wilmington, Delaware, 19890. The Trustee is unaffiliated with USCF.
The Trustee is permitted to resign upon
at least sixty (60) days’ notice to the Trust, provided, that any such resignation will not be effective until a successor
Trustee is appointed by USCF. USCF has the discretion to replace the Trustee.
Only the assets of the Trust and USCF 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 Trustee’s liability in connection
with the issuance and sale of the shares is limited solely to the express obligations of the Trustee set forth in the Trust Agreement.
Investments
USCF will cause a Trust Series to
transfer the proceeds of the sale of Creation Baskets to the Custodian or another custodian for use in trading activities. USCF
will invest a Trust Series’ assets in Oil Interests. When a Trust Series purchases Oil Interests that are exchange-traded,
the Trust Series will be required to deposit typically 5% to 30% with the FCM on behalf of the exchange a portion of the value
of the contract or other interest as security to ensure payment for the obligation under the Oil Interests at maturity. This deposit
is known as initial margin. Counterparties in transactions in OTC contracts will generally impose similar collateral requirements
on a Trust Series. USCF will invest a Trust Series’ assets that remain after margin and collateral is posted in Treasuries,
cash and/or cash equivalents. Subject to these margin and collateral requirements, USCF has sole authority to determine the percentage
of assets that will be:
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held as margin or collateral with FCMs or other custodians;
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used for other investments, and
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held in bank accounts to pay current obligations and as reserves.
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Approximately 15% to 90% of a Trust
Series’ assets will be committed as margin for commodity futures contracts. However, from time to time, the percentage
of assets committed as margin may be substantially more, or less, than such range. Ongoing margin and collateral payments
will generally be required for both exchange-traded and OTC contracts based on changes in the value of the Oil Interests.
Furthermore, ongoing collateral requirements with respect to OTC contracts are negotiated by the parties, and may be affected
by overall market volatility, volatility of the underlying commodity or index, the ability of the counterparty to hedge its
exposure under the Oil Interests, and each party’s creditworthiness. In light of the differing requirements for initial
payments under exchange-traded and OTC contracts and the fluctuating nature of ongoing margin and collateral payments, it is
not possible to estimate what portion of a Trust Series’ assets will be posted as margin or collateral at any given
time. The Treasuries, cash and cash equivalents held by a Trust Series will constitute reserves that will be available
to meet ongoing margin and collateral requirements. All interest income will be used for the Trust Series’ benefit.
USCF invests the balance of a Trust Series’ assets not invested in Oil Interests or held in margin as reserves to be
available for changes in margin. All interest income is used for the Trust Series’ benefit.
An FCM, counterparty, government agency
or exchange could increase margin or collateral requirements applicable to a Trust Series to hold trading positions at any
time. Moreover, margin is merely a security deposit and has no bearing on the profit or loss potential for any positions held.
The assets of a Trust Series posted
as margin for the Benchmark Oil Futures Contracts or other exchange-traded futures contracts will be held in segregation pursuant
to the CEA and CFTC regulations.
If a Trust Series enters into a swap
agreement, it must post both collateral and independent amounts to its swap counterparty(ies). The amount of collateral a Trust
Series posts changes according to the amounts owed by the Trust Series to its counterparty on a given swap transaction,
while independent amounts are fixed amounts posted by the Trust Series at the start of a swap transaction. Collateral and
independent amounts posted to swap counterparties will be held by a third party custodian.
The Commodity Interest Markets
General
The CEA governs the regulation of commodity
interest transactions, markets and intermediaries. The CEA provides for varying degrees of regulation of commodity interest transactions
depending upon: (1) the type of instrument being traded (e.g., contracts for future delivery, forwards, options, swaps or
spot contracts), (2) the type of commodity underlying the instrument (distinctions are made between instruments based on agricultural
commodities, energy and metals commodities and financial commodities), (3) the nature of the parties to the transaction (e.g.,
retail or eligible contract participant), (4) whether the transaction is entered into on a principal-to-principal or intermediated
basis, (5) the type of market on which the transaction occurs, and (6) whether the transaction is subject to clearing
through a clearing organization.
The offer and sale of shares of each Trust
Series, as well as shares of each Related Public Fund, is registered under the Securities Act. Each Trust Series and the Related
Public Funds are subject to the requirements of the Securities Act, the Exchange Act and the rules and regulations adopted
thereunder as administered by the SEC. Firms’ participation in the distribution of shares is regulated as described above,
as well as by the self-regulatory association, FINRA.
Futures Contracts
A futures contract is a standardized contract
traded on, or subject to the rules of, an exchange that calls for the future delivery of a specified quantity and type of
a commodity at a specified time and place. Futures contracts are traded on a wide variety of commodities, including agricultural
products, bonds, stock indices, interest rates, currencies, energy and metals. The size and terms of futures contracts on a particular
commodity are identical and are not subject to any negotiation, other than with respect to price and the number of contracts traded
between the buyer and seller.
The contractual obligations of a buyer
or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting
sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. The difference
between the price at which the futures contract is purchased or sold and the price paid for the offsetting sale or purchase, after
allowance for brokerage commissions, constitutes the profit or loss to the trader. Some futures contracts, such as stock index
contracts, settle in cash (reflecting the difference between the contract purchase/sale price and the contract settlement price)
rather than by delivery of the underlying commodity.
In market terminology, a trader who purchases
a futures contract is long in the market and a trader who sells a futures contract is short in the market. Before a trader closes
out his long or short position by an offsetting sale or purchase, his outstanding contracts are known as open trades or open positions.
The aggregate amount of open positions held by traders in a particular contract is referred to as the open interest in such contract.
Forward Contracts
A forward contract is a contractual obligation
to purchase or sell a specified quantity of a commodity at or before a specified date in the future at a specified price and, therefore,
is economically similar to a futures contract. Unlike futures contracts, however, forward contracts are typically traded in the
OTC markets and are not standardized contracts. Forward contracts for a given commodity are generally available for various amounts
and maturities and are subject to individual negotiation between the parties involved. Moreover, generally there is no direct means
of offsetting or closing out a forward contract by taking an offsetting position as one would a futures contract on a U.S. exchange.
If a trader desires to close out a forward contract position, he generally will establish an opposite position in the contract
but will settle and recognize the profit or loss on both positions simultaneously on the delivery date. Thus, unlike in the futures
contract market where a trader who has offset positions will recognize profit or loss immediately, in the forward market a trader
with a position that has been offset at a profit will generally not receive such profit until the delivery date, and likewise a
trader with a position that has been offset at a loss will generally not have to pay money until the delivery date. Nevertheless,
in some instances forward contracts now provide a right of offset or cash settlement as an alternative to making or taking delivery
of the underlying commodity.
In general, the CFTC does not regulate
the interbank and forward foreign currency markets with respect to transactions in contracts between certain sophisticated counterparties
such as a Trust Series or between certain regulated institutions and retail investors. Although U.S. banks are regulated in
various ways by the Federal Reserve Board, the Comptroller of the Currency and other U.S. federal and state banking officials,
banking authorities do not regulate the forward markets to the same extent that the swap markets are regulated by the CFTC and
SEC.
Regulation exempts both foreign exchange
swaps and foreign exchange forwards from the definition of “swap” and, by extension, certain regulatory requirements
applicable to swaps (such as clearing and margin). The exemption does not extend to other foreign exchange derivatives, such as
foreign exchange options, currency swaps and non-deliverable forwards.
While the U.S. government does not currently
impose any restrictions on the movements of currencies, it could choose to do so. The imposition or relaxation of exchange controls
in various jurisdictions could significantly affect the market for that and other jurisdictions’ currencies. Trading in the
interbank market also exposes the Trust Series to a risk of default since failure of a bank with which a Trust Series had
entered into a forward contract would likely result in a default and thus possibly substantial losses to the Trust Series.
Options on Futures Contracts
Options on futures contracts are standardized
contracts traded on an exchange. An option on a futures contract gives the buyer of the option the right, but not the obligation,
to take a position at a specified price (the striking, strike, or exercise price) in the underlying futures contract or underlying
interest. The buyer of a call option acquires the right, but not the obligation, to purchase or take a long position in the underlying
interest, and the buyer of a put option acquires the right, but not the obligation, to sell or take a short position in the underlying
interest.
The seller, or writer, of an option is
obligated to take a position in the underlying interest at a specified price opposite to the option buyer if the option is exercised.
The seller of a call option must stand ready to take a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand, must stand ready to take a long position in the underlying
interest at the strike price.
A call option is said to be in-the-money
if the strike price is below current market levels and out-of-the-money if the strike price is above current market levels. Conversely,
a put option is said to be in-the-money if the strike price is above the current market levels and out-of-the-money if the strike
price is below current market levels.
Options have limited life spans, usually
tied to the delivery or settlement date of the underlying interest. Some options, however, expire significantly in advance of such
date. The purchase price of an option is referred to as its premium, which consists of its intrinsic value (which is related to
the underlying market value) plus its time value. As an option nears its expiration date, the time value shrinks and the market
and intrinsic values move into parity. An option that is out-of-the-money and not offset by the time it expires becomes worthless.
On certain exchanges, in-the-money options are automatically exercised on their expiration date, but on others unexercised options
simply become worthless after their expiration date.
Regardless of how much the market swings,
the most an option buyer can lose is the option premium. The option buyer deposits his premium with his broker, and the money goes
to the option seller. Option sellers, on the other hand, face risks similar to participants in the futures markets. For example,
since the seller of a call option is assigned a short futures position if the option is exercised, his risk is the same as someone
who initially sold a futures contract. Because no one can predict exactly how the market will move, the option seller typically
posts margin to demonstrate his ability to meet any potential contractual obligations.
Options on Forward Contracts or Commodities
Options on forward contracts or commodities
operate in a manner similar to options on futures contracts. An option on a forward contract or commodity gives the buyer of the
option the right, but not the obligation, to take a position at a specified price in the underlying forward contract or commodity.
However, unlike options on futures contracts, options on forward contracts or on commodities are individually negotiated contracts
between counterparties and are typically traded in the OTC market. Therefore, options on forward contracts and physical commodities
possess many of the same characteristics of forward contracts with respect to offsetting positions and credit risk that are described
above.
Swap Contracts
Swap transactions generally involve contracts
between two parties to exchange a stream of payments computed by reference to a notional amount and the price of the asset that
is the subject of the swap. Swap contracts are principally traded off-exchange, although certain swap contracts are also being
traded in electronic trading facilities and cleared through clearing organizations.
Swaps are usually entered into on a net
basis, that is, the two payment streams are netted out in a cash settlement on the payment date or dates specified in the agreement,
with the parties receiving or paying, as the case may be, only the net amount of the two payments. Swaps do not generally involve
the delivery of underlying assets or principal. Accordingly, the risk of loss with respect to swaps is generally limited to the
net amount of payments that the party is contractually obligated to make. In some swap transactions one or both parties may require
collateral deposits from the counterparty to support that counterparty’s obligation under the swap agreement. If the counterparty
to such a swap defaults, the risk of loss consists of the net amount of payments that the party is contractually entitled to receive
less any collateral deposits it is holding.
Some swap transactions are cleared through
central counterparties. “Clearing” refers to the process by which a trade that is bilaterally executed by two parties
is submitted to a central clearing counterparty, via a clearing member (i.e., an FCM), and replaced by two mirror swaps, with the
central clearing counterparty becoming the counterparty to both of the initial parties to the swap. These transactions, known as
cleared swaps, involve two counterparties first agreeing to the terms of a swap transaction, then submitting the transaction to
a clearing house that acts as the central counterparty. Once accepted by the clearing house, the original swap transaction is terminated
and replaced by two mirror trades for which the central counterparty becomes the counterparty to each of the original parties based
upon the trade terms determined in the original transaction. In this manner each individual swap counterparty reduces its risk
of loss due to counterparty nonperformance because the clearing house acts as the counterparty to each transaction.
Commodities Regulation
Futures exchanges in the United States
are subject to varying degrees of regulation under the CEA depending on whether such exchange is a designated contract market,
exempt board of trade or electronic trading facility. Clearing organizations are also subject to the CEA and the rules and
regulations adopted thereunder and administered by the CFTC. The CFTC is the governmental agency charged with responsibility for
regulation of futures exchanges and commodity interest trading. The CFTC’s function is to implement the CEA’s objectives
of preventing price manipulation and excessive speculation and promoting orderly and efficient commodity interest markets. In addition,
the various exchanges and clearing organizations themselves exercise regulatory and supervisory authority over their member firms.
The CFTC also regulates 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 CPO, such as USCF, to keep
accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend, modify or terminate the registration
of any registrant for failure to comply with CFTC rules or regulations. Suspension, restriction or termination of USCF’s
registration as a CPO would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and
might result in the termination of, the Trust Series or the Related Public Funds.
Under certain circumstances, the CEA grants
shareholders the right to institute a reparations proceeding before the CFTC against USCF (as a registered commodity pool operator),
as well as those of their respective employees who are required to be registered under the CEA. Shareholders may also be able to
maintain a private right of action for certain violations of the CEA.
Pursuant to authority in the CEA, the NFA
has been formed and registered with the CFTC as a registered futures association. The NFA is the only self-regulatory association
for commodities professionals other than the exchanges. As such, the NFA promulgates rules governing the conduct of commodity
professionals and disciplines those professionals that do not comply with such standards. The CFTC has delegated to the NFA responsibility
for the registration of commodity pool operators. USCF is a member of the NFA. As a member of the NFA, USCF is subject to NFA standards
relating to fair trade practices, financial condition, and consumer protection.
The CEA requires all FCMs, i.e., Trust
Series’ clearing brokers, to meet and maintain specified fitness and financial requirements, to segregate customer funds
from proprietary funds and account separately for all customers’ funds and positions, and to maintain specified books and
records open to inspection by the staff of the CFTC. The CFTC has similar authority over introducing brokers, or persons who solicit
or accept orders for commodity interest trades but who do not accept margin deposits for the execution of trades. The CEA authorizes
the CFTC to regulate trading by FCMs and by their officers and directors, permits the CFTC to require action by exchanges in the
event of market emergencies, and establishes an administrative procedure under which customers may institute complaints for damages
arising from alleged violations of the CEA.
The regulations of the CFTC and the NFA
prohibit any representation by a person registered with the CFTC or by any member of the NFA, that registration with the CFTC,
or membership in the NFA, in any respect indicates that the CFTC or the NFA, as the case may be, has approved or endorsed that
person or that person’s trading program or objectives. The registrations and memberships of the parties described in this
summary must not be considered as constituting any such approval or endorsement. Likewise, no futures exchange has given or will
give any similar approval or endorsement.
CFTC regulations require enhanced customer
protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures
and auditing and examination programs for FCMs. These regulations are intended to afford greater assurances to market participants
that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of the risks of
futures trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust manner,
the capital and liquidity of FCMs are strengthened to safeguard the continued operations, and the auditing and examination programs
of the CFTC and the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner.
Each Trust Series’ investors are
afforded prescribed rights for reparations under the CEA against USCF (as a registered commodity pool operator), as well as its
respective employees who are required to be registered under the CEA. Investors may also be able to maintain a private right of
action for violations of the CEA. The CFTC has adopted rules implementing the reparation provisions of the CEA, which provide
that any person may file a complaint for a reparations award with the CFTC for violation of the CEA against a floor broker or an
FCM, introducing broker, commodity trading advisor, CPO, and their respective associated persons.
The regulation of commodity interest trading
in the United States and other countries is an evolving area of the law. Below are discussed several key regulatory items that
are relevant to the Trust Series. The various statements made in this summary are subject to modification by legislative action
and changes in the rules and regulations of the CFTC, the NFA, the futures exchanges, clearing organizations and other regulatory
bodies. In addition, with regard to any other rules that the CFTC or SEC may adopt in the future, the effect of any such regulatory
changes on a Trust Series is impossible to predict, but it could be substantial and adverse.
Futures Contracts and Position Limits
The CFTC is generally prohibited by statute
from regulating trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing
of non-U.S. futures contracts in the United States. These regulations permit certain contracts on non-U.S. exchanges to be offered
and sold in the United States.
As discussed above, the CFTC has proposed
to adopt limits on speculative positions in 25 physical commodity futures and option contracts as well as swaps that are economically
equivalent to such contracts in the agriculture, energy and metals markets. The Position Limit Rules would, among other things:
identify which contracts are subject to speculative position limits; set thresholds that restrict the size of speculative positions
that a person may hold in the spot month, other individual months, and all months combined; create an exemption for positions that
constitute bona fide hedging transactions; impose responsibilities on DCMs and SEFs to establish position limits or, in some cases,
position accountability rules; and apply to both futures and swaps across four relevant venues: OTC, DCMs, SEFs as well as certain
non-U.S. located platforms. The CFTC’s first attempt at finalizing the Position Limit Rules, in 2011, was successfully challenged
by market participants in 2012 and, since then, the CFTC has re-proposed them and solicited comments from market participants multiple
times. At this time, it is unclear how the Position Limit Rules may affect the Trust Series, but the effect may be substantial
and adverse. By way of example, the Position Limit Rules may negatively impact the ability of a Trust Series to
meet its investment objectives through limits that may inhibit USCF’s ability to sell additional Creation Baskets of a Trust
Series. See "The Commodity Interest Markets-Commodities Regulation" in this annual report on Form 10-K for
additional information.
Until such time as the Position Limit Rules are
adopted, the regulatory architecture in effect prior to the adoption of the Position Limit Rules will govern transactions
in commodities and related derivatives. Under that system, the CFTC enforces federal limits on speculation in nine agricultural
products (e.g., corn, wheat and soy), while futures exchanges establish and enforce position limits and accountability levels for
other agricultural products and certain energy products (e.g., oil and natural gas). As a result, a Trust Series may
be limited with respect to the size of its investments in any commodities subject to these limits.
Under existing and recently adopted CFTC
regulations, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions,
to aggregate all positions for which that participant controls the trading decisions with all positions for which that participant
has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting
pursuant to an express or implied agreement or understanding with that participant. The Aggregation Rules will also apply
with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.
Margin Requirements
Futures and Cleared Swaps
Original or initial margin is the minimum
amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally less than the original margin) to which a trader’s
account may decline before he must deliver additional margin. A margin deposit is like a cash performance bond. It helps assure
the trader’s performance of the futures contracts that he or she purchases or sells.
Futures contracts are customarily bought
and sold on initial margin that represents a very small percentage (ranging upward from 5%) of the aggregate purchase or sales
price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create
profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation.
As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial
margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by
the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract.
Brokerage firms, such as the Trust Series’
clearing brokers, carrying accounts for traders in commodity interest contracts may not accept lower, and generally require higher,
amounts of margin as a matter of policy to further protect themselves. The clearing brokers require a Trust Series to make
margin deposits equal to exchange minimum levels for all commodity interest contracts. This requirement may be altered from time
to time in the clearing brokers’ discretion.
Margin requirements are computed each day
by the relevant clearing organization and a trader’s clearing broker. When the market value of a particular open commodity
interest position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call
is made by the broker. With respect to trading by a Trust Series, a Trust Series (and not its investors personally) is subject
to margin calls.
Finally, many major U.S. exchanges have
passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an
account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring
the total risk of the combined positions.
Options
When a trader purchases an option, there
is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he
or she may be required to deposit margin in an amount determined by the margin requirements established for the underlying interest
and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling
of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher
than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions,
which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying
interest.
OTC Swaps
In October 2015 the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and
the Federal Housing Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted
final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based
swap dealers, and major security-based swap participants (“Swap Entities”) that are subject to the jurisdiction of
one of the Agencies (such entities, “Covered Swap Entities”, and the joint final rules, the “Final Margin Rules”).
The Final Margin Rules will subject
non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities, and between Covered Swap
Entities and financial end users that have material swaps exposure (i.e., an average daily aggregate notional of $8 billion or
more in non-cleared swaps calculated in accordance with the Final Margin Rules), to a mandatory two-way minimum initial margin
requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated
by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the
gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the
Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction
over the particular Covered Swap Entity. The Final Margin Rules specify the types of collateral that may be posted or collected
as initial margin for non-cleared swaps and non-cleared security-based swaps with financial end users (generally cash, certain
government, government-sponsored enterprise securities, certain liquid debt, certain equity securities, certain eligible publicly
traded debt, and gold); and sets forth haircuts for certain collateral asset classes.
The Final Margin Rules require minimum
variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities
and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular
financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the swap to the Covered
Swap Entity, taking into account variation margin previously posted or collected. For non-cleared swaps and security-based swaps
between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral
that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party
custodian, and may, if permitted by contract, be rehypothecated.
The initial margin requirements of the
Final Margin Rules are being phased in over time, and the variation margin requirements of the Final Margin Rules are
currently in effect. Each of the Trust Series is not a Covered Swap Entity under the Final Margin Rules, but it is a financial
end-user. Accordingly, each of the Trust Series is currently subject to the variation margin requirements of the Final Margin
Rules. However, each of the Trust Series does not have material swaps exposure and, accordingly, will not be subject to the
initial margin requirements of the Final Margin Rules.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) required the CFTC and the SEC to adopt their own margin rules to apply to
a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap
participants that are not subject to the jurisdiction of one of the Agencies. On December 16, 2015, the CFTC finalized its
margin rules, which are substantially the same as the Final Margin Rules and have the same implementation timeline. The SEC
adopted margin rules for security-based swap dealers and major security-based swap participants on June 21, 2019. The
SEC’s margin rules are generally aligned with the Final Margin Rules and the CFTC’s margin rules, but they
differ in a few key respects relating to timing for compliance and the manner in which initial margin must be segregated. Trust
Series do not currently engage in security-based swap transactions and, therefore, the SEC’s margin rules are not
expected to apply to Trust Series.
Mandatory Trading and Clearing of
Swaps
CFTC regulations require that certain swap
transactions be executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing
organizations (“derivative clearing organizations” (“DCOs”)), if the CFTC mandates the central clearing
of a particular class of swap and such swap is “made available to trade” on a swap execution facility. Currently, swap
dealers, major swap participants, commodity pools, certain private funds and entities predominantly engaged in activities that
are financial in nature are required to execute on a swap execution facility, and clear, certain interest rate swaps and index-based
credit default swaps. As a result, if a Trust Series enters into an interest rate or index-based credit default swaps that
is subject to these requirements, such swap will be required to be executed on a swap execution facility and centrally cleared.
Mandatory clearing and “made available to trade” determinations with respect to additional types of swaps are expected
in the future, and, when finalized, could require a Trust Series to electronically execute and centrally clear certain OTC
instruments presently entered into and settled on a bi-lateral basis. If a swap is required to be cleared, initial and variation
margin requirements are set by the relevant clearing organization, subject to certain regulatory requirements and guidelines. Additional
margin may be required and held by the FCM of each Trust Series.
Other Requirements for Swaps
In addition to the margin requirements
described above, swaps that are not required to be cleared and executed on an SEF but that are executed bilaterally are also subject
to various requirements pursuant to CFTC regulations, including, among other things, reporting and recordkeeping requirements and,
depending on the status of the counterparties, trading documentation requirements and dispute resolution requirements.
Derivatives Regulations in Non-U.S.
Jurisdictions
In addition to U.S. laws and regulations, the
Trust Series may be subject to non-U.S. derivatives laws and regulations if it engages in futures and/or swap transactions
with non-U.S. persons. For example, the Trust Series may be impacted by European laws and regulations to the extent that
it engages in futures transactions on European exchanges or derivatives transactions with European entities. Other jurisdictions
impose requirements applicable to futures and derivatives that are similar to those imposed by the U.S., including position limits,
margin, clearing and trade execution requirements.
SEC Reports
The Trust makes available, free of charge,
on its website, its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K
and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon
as reasonably practicable after these forms are filed with, or furnished to, the SEC. These reports are also available from the
SEC through its website at: www.sec.gov.
CFTC Reports
The Trust and its Trust Series also
makes available its monthly reports and its annual reports required to be prepared and filed with the NFA under the CFTC regulations.
Intellectual Property
USCF owns trademark registrations for USCF
(and Design) (U.S. Reg. No. 5127374) for “Fund investment services,” in use since April 10, 2016, USCF (U.S.
Reg No. 5040755) for “Fund investment services,” in use since June 24, 2008, and INVEST IN WHAT’S REAL
(U.S. Reg. No. 5450808) for “Fund investment services,” in use since April 2016 USCF relies upon these trademarks
and service mark through which it markets its services and strives to build and maintain brand recognition in the market and among
current and potential investors. So long as USCF continues to use these trademarks to identify its services, without challenge
from any third party, and properly maintains and renews the trademark registrations under applicable laws, rules and regulations;
it will continue to have indefinite protection for these trademarks under current laws, rules and regulations. USCF has been
granted two patents Nos. 7,739,186 and 8,019,675, for systems and methods for an exchange traded fund (ETF) that tracks the price
of one or more commodities.
Item 1A. Risk Factors.
The following risk factors should be
read in connection with the other information included in this annual report on Form 10-K, including Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the Trust‘s and Trust Series’ financial statements
and the related notes.
Risks Related to Leveraged Investments
Due to the compounding of daily returns,
each Fund’s returns over periods longer than a single day will likely differ in amount and possibly even direction from such
Fund multiple times the benchmark return for the period.
The investment objective of each Fund was
for the daily changes in percentage terms of its per share NAV to reflect, in the case of USOU, three times (3x) the daily change
in percentage terms of the Benchmark Oil Futures Contract, and in the case of USOD, three times the inverse (-3x) of the daily
change in percentage terms of the Benchmark Oil Futures Contract. Each Fund sought investment results for a single day only, as
measured from NAV calculation time to NAV calculation time, and not for any other period. The return of each Fund for a period
longer than a single day is the result of its return for each day compounded over the period, and usually will differ from, in
the case of USOU, three times (3x) the return of the Benchmark Oil Futures Contract for the same period, and in the case of USOD,
three times the inverse (-3x) of the return of the Benchmark Oil Futures Contract for the same period. The Funds could lose money
over time regardless of the performance of the Benchmark Oil Futures Contract, including as a result of daily rebalancing, the
Benchmark Oil Futures Contract’s volatility, and compounding. Longer holding periods, higher volatility of the Benchmark
Oil Futures Contract, inverse exposure in the case of USOD, and greater leverage each affect the impact of compounding on each
Fund’s returns. Daily compounding of each Fund’s investment returns can dramatically and adversely affect its longer-term
performance during periods of high volatility. Volatility may be at least as important to each Fund’s return for a period
as the return of the Benchmark Oil Futures Contract.
The Funds uses leverage and should produce
returns for a single day that are more volatile than that of the Benchmark Oil Futures Contract. For example, the return for a
single day should be approximately three times as volatile for a single day as the return of a fund with an objective of matching,
in the case of USOU, or inversely tracking, in the case of USOD, the performance of the Benchmark Oil Futures Contract. The Funds
are not appropriate for all investors and present different risks than other funds. The Funds uses leverage and are riskier than
similarly benchmarked exchange-traded funds that do not use leverage. An investor should only consider an investment in the Funds
if he or she understands the consequences of seeking daily leveraged investment results, or the inverse thereof, for a single day.
Daily objective leveraged funds or inverse leveraged funds, if used properly and in conjunction with the investor’s view
on the future direction and volatility of the markets, can be useful tools for investors who want to manage their exposure to various
markets and market segments and who are willing to monitor and/or periodically rebalance their portfolios. Shareholders who invest
in the Funds should actively manage and monitor their investments, as frequently as daily.
In general, during periods of higher volatility
for the Benchmark Oil Futures Contract, compounding will cause each Fund’s results for periods longer than a single day to
be less than, in the case of USOU, three times (3x) the return of the Benchmark Oil Futures Contract, and in the case of USOD,
three times the inverse (-3x) of the return of the Benchmark Oil Futures Contract. This effect becomes more pronounced as volatility
increases. Conversely, in periods of lower volatility for the Benchmark Oil Futures Contract (particularly when combined with higher
returns for the Benchmark Oil Futures Contract), each Fund’s returns over longer periods can be higher than, in the case
of USOU, three times (3x) the return of the Benchmark Oil Futures Contract, or, in the case of USOD, three times the inverse (-3x)
of the return of the Benchmark Oil Futures Contract. Actual results for a particular period, before fees and expenses, are also
dependent on the magnitude of the return of the Benchmark Oil Futures Contract in addition to the volatility of the Benchmark Oil
Futures Contract. The significance of these effects may be even greater with inverse leveraged funds, such as the Funds.
Intraday Price/Performance Risk
Each Fund is typically rebalanced at or
about the time of its NAV calculation. As such, the intraday position of each Fund will generally be different from such Fund’s
stated daily investment objective (i.e., -3x). When shares are bought intraday, the performance of each Fund’s shares until
such Fund’s next NAV calculation will generally be greater than or less than such Fund’s stated daily multiple for
USOU or inverse multiple for USOD.
The use of leveraged or inverse leveraged
positions could result in the total loss of an investor’s investment.
Each Fund utilizes leverage in seeking
to achieve its investment objective and will lose more money in market environments adverse to its respective daily investment
objectives than funds that do not employ leverage. The use of leveraged positions could result in the total loss of an investor’s
investment.
For example, because the investment objective
of the Fund is for the daily changes in percentage terms of its per share NAV to reflect three times (3x), in the case of USOU,
or the inverse (-3x) of, in the case of USOD, the daily change in percentage terms of the Benchmark Oil Futures Contract, a single-day
movement in the Benchmark Oil Futures Contract approaching 33% at any point in the day could result in the total loss or almost
total loss of an investor’s investment if that movement is contrary to the investment objective of the applicable Fund, even
if the Benchmark Oil Futures Contract subsequently moves in an opposite direction, eliminating all or a portion of the movement.
This would be the case with downward, in the case of USOU, or upward, in the case of USOD, single-day or intraday movements in
the Benchmark Oil Futures Contract, even if the Benchmark Oil Futures Contract maintains a level greater than zero at all times.
Investment Risk
The NAV of the Fund’s shares
relates directly for USOU and inversely for USOD to the value of the Benchmark Oil Futures Contracts and other assets held by such
Fund and fluctuations in the prices of these assets could materially adversely affect an investment in such Fund’s shares.
The net assets of USOU consist primarily
of investments in Oil Futures Contracts and, to a lesser extent, in Other Oil-Related Investments. The net assets of USOD consist
primarily of short positions in Oil Futures Contracts and, to a lesser extent, in Other Oil-Related Investments. The NAV of each
Fund’s shares relates directly to the value of these assets (less liabilities, including accrued but unpaid expenses), which
in turn relates to the price of light, sweet crude oil in the marketplace. Crude oil prices depend on local, regional and global
events or conditions that affect supply and demand for oil.
Economic conditions
impacting crude oil. The demand for crude oil correlates closely with general economic growth rates. The occurrence of
recessions or other periods of low or negative economic growth will typically have a direct adverse impact on crude oil prices.
Other factors that affect general economic conditions in the world or in a major region, such as changes in population growth rates,
periods of civil unrest, government austerity programs, or currency exchange rate fluctuations, can also impact the demand for
crude oil. Sovereign debt downgrades, defaults, inability to access debt markets due to credit or legal constraints, liquidity
crises, the breakup or restructuring of fiscal, monetary, or political systems such as the European Union, and other events or
conditions that impair the functioning of financial markets and institutions also may adversely impact the demand for crude oil.
Other crude
oil demand-related factors. Other factors that may affect the demand for crude oil and therefore its price, include technological
improvements in energy efficiency; seasonal weather patterns, which affect the demand for crude oil associated with heating and
cooling; increased competitiveness of alternative energy sources that have so far generally not been competitive with oil without
the benefit of government subsidies or mandates; and changes in technology or consumer preferences that alter fuel choices, such
as toward alternative fueled vehicles.
Other crude
oil supply-related factors. Crude oil prices also vary depending on a number of factors affecting supply. For example,
increased supply from the development of new oil supply sources and technologies to enhance recovery from existing sources tends
to reduce crude oil prices to the extent such supply increases are not offset by commensurate growth in demand. Similarly, increases
in industry refining or petrochemical manufacturing capacity may impact the supply of crude oil. World oil supply levels can also
be affected by factors that reduce available supplies, such as adherence by member countries to the OPEC production quotas and
the occurrence of wars, hostile actions, natural disasters, disruptions in competitors’ operations, or unexpected unavailability
of distribution channels that may disrupt supplies. Technological change can also alter the relative costs for companies in the
petroleum industry to find, produce, and refine oil and to manufacture petrochemicals, which in turn may affect the supply of and
demand for oil.
Other factors
impacting the crude oil market. The supply of and demand for crude oil may also be impacted by changes in interest rates,
inflation, and other local or regional market conditions, as well as by the development of alternative energy sources.
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 the Fund.
Changes to U.S. tariff and import/export
regulations may have a negative effect on a Trust Series developments.
There has been ongoing discussion and commentary
regarding potential significant changes to U.S. trade policies, treaties and tariffs. The current U.S. presidential administration,
along with the U.S. Congress, has created significant uncertainty about the future relationship between the United States and other
countries with respect to trade policies, treaties and tariffs. These developments, or the perception that any of them could occur,
may have a material adverse effect on global economic conditions and the stability of global crude oil, generally. Any of these
factors could depress economic activity and could have a material adverse effect on a Trust Series business, financial condition
and results of operations, which in turn would negatively impact Fund and its shareholders.
Uncertainty about presidential administration
initiatives could negatively impact a Trust Series business, financial condition and results of operations.
The current presidential administration
has called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy. Accordingly,
there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as
the state and local levels. Recent events have created heightened uncertainty and introduced new and difficult-to-quantify macroeconomic
and political risks. There has been a corresponding increase in the uncertainty surrounding interest rates, inflation, foreign
exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current presidential administration
implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade
and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation, supply and demand
for commodities (including crude oil), and other areas. Although a Trust Series cannot predict the impact, if any, of these
changes to a Trust Series business, they could adversely affect a Trust Series business, financial condition, operating
results and cash flows.
Economic impacts due to Brexit.
In June 2016, the United Kingdom held
a referendum in which voters approved an exit from the European Union (“Brexit”) and, following the House of Commons
having passed a Brexit deal on December 20, 2019, the U.K. formally left the European Union on January 31, 2020. The U.K. is currently
in a transition period until December 31, 2020, when agreements surrounding trade and other aspects of the U.K.’s future
relationship with the European Union will need to be finalized. Until such agreements are finalized, there will be political and
economic uncertainty in the United Kingdom and the European Union. In addition, the fiscal and monetary policies of foreign nations,
such as Russia and China, may have a severe impact on the worldwide and U.S. commodity markets. Such disruptions could adversely
impact the value of the investments of each Trust Series.
Because USCF anticipates it will
“roll” a Trust Series’ positions in Oil Interests, it may be subject to the potential negative impact from rolling
futures positions.
USCF anticipates it will “roll”
a Trust Series’ positions in Oil Interests and, as a result, is subject to risks related to rolling. The contractual obligations
of a buyer or seller holding a futures contract to expiration may generally be satisfied by settling in cash as designated in the
contract specifications. Alternatively, futures contracts may be closed out prior to expiration by making an offsetting sale or
purchase of an identical futures contract on the same or linked exchange before the designated date of settlement. Once this date
is reached, the futures contract “expires.” As the futures contracts held by a Trust Series near expiration, they
are generally closed out and replaced by contracts with a later expiration. This process is referred to as “rolling.”
The Trust Series does not intend to hold futures contracts through expiration, but instead to “roll” its positions.
When the market for these contracts is
such that the prices are higher in the more distant delivery months than in the nearer delivery months, the sale during the course
of the “rolling process” of the more nearby contract would take place at a price that is lower than the price of the
more distant contract. This pattern of higher futures prices for longer expiration futures contracts is often referred to as “contango.”
Alternatively, when the market for these contracts is such that the prices are higher in the nearer months than in the more distant
months, the sale during the course of the “rolling process” of the more nearby contract would take place at a price
that is higher than the price of the more distant contract. This pattern of higher futures prices for shorter expiration futures
contracts is referred to as “backwardation.”
The presence of contango in certain futures
contracts at the time of rolling would be expected to adversely affect a Trust Series’ long positions, and positively affect
a Trust Series’ short positions. Similarly, the presence of backwardation in certain futures contracts at the time of rolling
such contracts would be expected to adversely affect a Trust Series’ short positions and positively affect a Trust Series’
long positions.
There have been extended periods in which
contango or backwardation has existed in the futures contract markets for various types of futures contracts, and such periods
can be expected to occur in the future. These extended periods have in the past and can in the future cause significant losses
for a Trust Series, and the periods can have as much or more impact over time than movements in the level of Trust Series’
Benchmark Oil Futures Contract.
An investment in a Fund may provide
little or no diversification benefits. Thus, in a declining market, a Fund may have no gains to offset losses from other investments,
and an investor may suffer losses on an investment in a Fund while incurring losses with respect to other asset classes.
Historically, Oil Futures Contracts and
Other Oil-Related Investments have generally been non-correlated to the performance of other asset classes such as stocks and bonds.
Non-correlation means that there is a low statistically valid relationship between the performance of futures and other commodity
interest transactions, on the one hand, and stocks or bonds, on the other hand.
However, there can be no assurance that
such non-correlation will continue during future periods. If, contrary to historic patterns, a Fund’s performance were to
move in the same general direction as the financial markets, investors will obtain little or no diversification benefits from an
investment in such Fund’s shares. In such a case, a Fund may have no gains to offset losses from other investments, and investors
may suffer losses on their investment in such Fund at the same time they incur losses with respect to other investments.
Variables such as drought, floods, weather,
embargoes, tariffs and other political events may have a larger impact on crude oil prices and crude oil-linked instruments, including
Oil Futures Contracts and Other Oil-Related Investments, than on traditional securities. These additional variables may create
additional investment risks that subject the Fund’s investments to greater volatility than investments in traditional securities.
Non-correlation should not be confused
with negative correlation, where the performance of two asset classes would be opposite of each other. There is no historical evidence
that the spot price of crude oil and prices of other financial assets, such as stocks and bonds, are negatively correlated. In
the absence of negative correlation, a Fund cannot be expected to be automatically profitable during unfavorable periods in the
case of USOU or favorable periods in the case of USOD for the stock market, or vice versa.
Historical performance of a Trust
Series and the Benchmark Oil Futures Contract is not indicative of future performance.
Past performance of a Trust Series or
the Benchmark Oil Futures Contract is not necessarily indicative of future results. Therefore, past performance of a Trust Series or
the Benchmark Oil Futures Contract should not be relied upon in deciding whether to buy shares of a Trust Series.
Correlation Risk
Investors purchasing shares to hedge against
movements in the price of crude oil will have an efficient hedge only if the price investors pay for their shares closely correlates,
in the case of USOU and, closely correlates on an inverse basis, in the case of USOD, with the price of crude oil. Investing in
each Fund’s shares for hedging purposes involves the following risks:
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The market price at which the investor buys or sells shares may be significantly less or more than
NAV.
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Daily percentage changes in NAV may not closely correlate with daily percentage changes, on a leveraged
basis for USOU, and on an inverse leveraged basis for USOD, in the price of the Benchmark Oil Futures Contract.
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Daily percentage changes in the price of the Benchmark Oil Futures Contract may not closely correlate
with daily percentage changes in the price of light, sweet crude oil.
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Further, in order to achieve a high degree
of correlation or inverse correlation, as applicable, with the Benchmark Oil Futures Contract, each Fund seeks to rebalance its
portfolios daily to keep exposure consistent with its investment objectives. Being materially under- or overexposed to the Benchmark
Oil Futures Contract may prevent such Fund from achieving a high degree of correlation or inverse correlation, as applicable, with
the Benchmark Oil Futures Contract. Market disruptions or closures, large amounts of assets into or out of a Fund, regulatory restrictions
or extreme market volatility will adversely affect such Fund’s ability to adjust exposure to requisite levels. The target
amount of portfolio exposure is impacted dynamically by the Benchmark Oil Futures Contract’s movements during each day. Because
of this, it is unlikely that a Fund will be perfectly exposed (i.e., 3x or -3x, as applicable) at the end of each day, and the
likelihood of being materially under or overexposed is higher on days when the benchmark levels are volatile near the close of
the trading day.
In addition, unlike other funds that do
not rebalance their portfolios as frequently, the Funds may be subject to increased trading costs associated with daily portfolio
rebalancing in order to maintain appropriate exposure to the underlying benchmarks. Such costs include commissions paid to the
FCMs, and may vary by FCM.
The market price at which investors
buy or sell shares may be significantly less or more than NAV.
Each Fund’s NAV per share will change
throughout the day as fluctuations occur in the market value of such Fund’s portfolio investments. The public trading price
at which an investor buys or sells shares during the day from their broker may be different from the NAV of the shares. Price differences
may relate primarily to supply and demand forces at work in the secondary trading market for shares that are closely related to,
but not identical to, the same forces influencing the prices of the light, sweet crude oil and the Benchmark Oil Futures Contract
at any point in time. USCF expects that exploitation of certain arbitrage opportunities by Authorized Participants and their clients
and customers will tend to cause the public trading price to track NAV per share closely over time, but there can be no assurance
of that.
The NAV of each Fund’s shares may
also be influenced by non-concurrent trading hours between the NYSE Arca and the various futures exchanges on which crude oil is
traded. While the shares trade on the NYSE Arca from 9:30 a.m. to 4:00 p.m. Eastern Time, the trading hours for the futures
exchanges on which light, sweet crude oil 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 Time, liquidity in the global light sweet crude market will be reduced after
the close of the NYMEX at 2:30 p.m. Eastern Time. As a result, during periods when the NYSE Arca is open and the futures exchanges
on which light, sweet crude oil is traded are closed, trading spreads and the resulting premium or discount on the shares may widen
and, therefore, increase the difference between the price of the shares and the NAV of the shares.
Daily percentage changes in each
Fund’s NAV may not correlate with daily percentage changes, on leveraged, or an inverse leveraged basis, as applicable, in
the price of the Benchmark Oil Futures Contract.
It is possible that the daily percentage
changes in each Fund’s NAV per share may not closely correlate, on leveraged or an inverse leveraged basis, as applicable,
to daily percentage changes in the price of the Benchmark Oil Futures Contract. Non-correlation may be attributable to disruptions
in the market for light, sweet crude oil, the imposition of position or accountability limits by regulators or exchanges, or other
extraordinary circumstances. As each Fund approaches or reaches position limits with respect to the Benchmark Oil Futures Contract
and other Oil Futures Contracts or in view of market conditions, such Fund may begin investing in Other Oil-Related Investments.
In addition, the Funds are not able to replicate exactly the changes in the price of the Benchmark Oil Futures Contract because
the total return generated by the Funds are reduced by expenses and transaction costs, including those incurred in connection with
each Fund’s trading activities, and increased by interest income from each Fund’s holdings of Treasuries (defined below).
Tracking the Benchmark Oil Futures Contract for USOU requires trading of its portfolio with a view to tracking the Benchmark Oil
Futures Contract over time and is dependent upon the skills of USCF and its trading principals, among other factors. Similarly,
tracking the inverse of the Benchmark Oil Futures Contract for USOD requires trading of its portfolio with a view to tracking the
inverse of the Benchmark Oil Futures Contract over time and is dependent upon the skills of USCF and its trading principals, among
other factors.
Daily percentage changes in the price
of the Benchmark Oil Futures Contract may not correlate with daily percentage changes in the spot price of light, sweet crude oil.
The correlation between changes in prices
of the Benchmark Oil Futures Contract and the spot price of crude oil may at times be only approximate. The degree of imperfection
of correlation depends upon circumstances such as variations in the speculative oil market, supply of and demand for Oil Futures
Contracts (including the Benchmark Oil Futures Contract) and Other Oil-Related Investments, and technical influences in oil futures
trading.
Natural forces in the oil futures
market known as “backwardation” and “contango” may increase the Fund’s tracking error and/or negatively
impact total return.
The design of each Fund’s Benchmark
Oil Futures Contract is such that every month it begins by using the near month contract to expire until the near month contract
is within two weeks of expiration, when, over a four day period, it transitions to the next month contract to expire as its benchmark
contract and keeps that contract as its benchmark until it becomes the near month contract and close to expiration. In the event
of a crude oil futures market where near month contracts trade at a higher price than next month to expire contracts, a situation
described as “backwardation” in the futures market, then absent the impact of the overall movement in crude oil prices
the value of the benchmark contract would tend to rise as it approaches expiration. Conversely, in the event of a crude oil futures
market where near month contracts trade at a lower price than next month contracts, a situation described as “contango”
in the futures market, then absent the impact of the overall movement in crude oil prices the value of the benchmark contract would
tend to decline as it approaches expiration. When compared to total return of other price indices, such as the spot price of crude
oil, the impact of backwardation and contango may cause the total return of the Fund’s per share NAV to vary significantly.
Moreover, absent the impact of rising or falling oil prices, a prolonged period of contango, in the case of USOU, or backwardation,
in the case of USOD, could have a significant negative impact on the Fund’s per share NAV and total return and investors
could lose part or all of their investment. See “Additional Information About the Funds, Their Investment Objective and
Investments” for a discussion of the potential effects of contango and backwardation.
Accountability levels, position limits,
and daily price fluctuation limits set by the exchanges have the potential to cause tracking error, which could cause the price
of shares to substantially vary from the price of the Benchmark Oil Futures Contract.
DCMs, such as the NYMEX and ICE Futures
have established accountability levels and position limits on the maximum net long or net short futures contracts in commodity
interests that any person or group of persons under common trading control (other than as a hedge, which is not currently applicable
to the Trust Series’ investments) may hold, own or control. These levels and position limits apply to the futures contracts
that the Fund invests in to meet its investment objective. In addition to accountability levels and position limits, the NYMEX
and ICE Futures also set daily price limits on futures contracts. The daily price fluctuation limit establishes the maximum amount
that the price of a futures contract may vary either up or down from the previous day’s settlement price. Once the daily
price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
The accountability levels for the Benchmark
Oil Futures Contract and other Oil Futures Contracts traded on U.S.-based futures exchanges, such as the NYMEX, are not a fixed
ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor’s positions.
The current accountability level for investments for any one month in the Benchmark Oil Futures Contract is 10,000 contracts. In
addition, the NYMEX imposes an accountability level for all months of 20,000 net futures contracts for light, sweet crude oil.
In addition, the ICE Futures maintains the same accountability levels, position limits and monitoring authority for its light,
sweet crude oil contracts as the NYMEX. If the Trust Series and the Related Public Funds exceed these accountability levels
for investments in the futures contracts for light, sweet crude oil, the NYMEX and ICE Futures will monitor such exposure and may
ask for further information on their activities including the total size of all positions, investment and trading strategy, and
the extent of liquidity resources of the Trust Series and the Related Public Funds. If deemed necessary by the NYMEX and/or
ICE Futures, each of the Trust Series could be ordered to reduce its Crude Oil Futures CL contracts to below the 10,000 single
month and/or 20,000 all month accountability level.
Position limits differ from accountability
levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow
such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that
may apply at any time, the NYMEX and ICE Futures impose position limits on contracts held in the last few days of trading in the
near month contract to expire. It is unlikely that the Trust Series will run up against such position limits because each
of the Trust Series’ investment strategies is to close out its positions and “roll” from the near month contract
to expire to the next month contract during a four-day period beginning two weeks from expiration of the contract.
As discussed above, the CFTC has proposed
to adopt limits on speculative positions in 25 physical commodity futures and option contracts as well as swaps that are economically
equivalent to such contracts in the agriculture, energy and metals markets. The Position Limit Rules would, among other things:
identify which contracts are subject to speculative position limits; set thresholds that restrict the size of speculative positions
that a person may hold in the spot month, other individual months, and all months combined; create an exemption for positions that
constitute bona fide hedging transactions; impose responsibilities on DCMs and SEFs to establish position limits or, in some cases,
position accountability rules; and apply to both futures and swaps across four relevant venues: OTC, DCMs, SEFs as well as certain
non-U.S. located platforms. The CFTC’s first attempt at finalizing the Position Limit Rules, in 2011, was successfully challenged
by market participants in 2012 and, since then, the CFTC has re-proposed them and solicited comments from market participants multiple
times. At this time, it is unclear how the Position Limit Rules may affect the Trust Series, but the effect may be substantial
and adverse. By way of example, the Position Limit Rules may negatively impact the ability of a Trust Series to
meet its investment objectives through limits that may inhibit USCF’s ability to sell additional Creation Baskets of a Trust
Series. See "The Commodity Interest Markets-Commodities Regulation" in this annual report on Form 10-K for
additional information.
Until such time as the Position Limit Rules are
adopted, the regulatory architecture in effect prior to the adoption of the Position Limit Rules will govern transactions
in commodities and related derivatives. Under that system, the CFTC enforces federal limits on speculation in nine agricultural
products (e.g., corn, wheat and soy), while futures exchanges establish and enforce position limits and accountability levels for
other agricultural products and certain energy products (e.g., oil and natural gas). As a result, a Trust Series may
be limited with respect to the size of its investments in any commodities subject to these limits.
Under existing and recently adopted CFTC
regulations, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions,
to aggregate all positions for which that participant controls the trading decisions with all positions for which that participant
has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting
pursuant to an express or implied agreement or understanding with that participant. The Aggregation Rules will also apply
with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.
All of these limits may potentially cause
a tracking error between the price of the Fund’s shares and the price of the Benchmark Oil Futures Contract. This may in
turn prevent investors from being able to effectively use the Fund as a way to hedge against crude oil-related losses or as a way
to indirectly invest, in the case of USOU, or take a short position, in the case of USOD, in crude oil.
The Funds do not limit the size of their
offering and each Fund is committed to utilizing substantially all of its proceeds to purchase, in the case of USOU, or take short
positions in, in the case of USOD, Oil Futures Contracts and Other Oil-Related Investments. If a Fund encounters accountability
levels, position limits, or price fluctuation limits for Oil Futures Contracts on the NYMEX or ICE Futures, it may then, if permitted
under applicable regulatory requirements, purchase, in the case of USOU, or take short positions in, in the case of USOD, Oil Futures
Contracts on other exchanges that trade listed crude oil futures or enter into swaps or other transactions to meet its investment
objective. In addition, if a Fund exceeds accountability levels on either the NYMEX or ICE Futures and is required by such exchanges
to reduce its holdings, such reduction could potentially cause a tracking error between the price of such Fund’s shares and
the price of the Benchmark Oil Futures Contract.
Tax Risk
An investor’s tax liability
may exceed the amount of distributions, if any, on its shares.
Cash or property will be distributed at
the sole discretion of USCF. USCF does not currently intend to make cash or other distributions with respect to shares. Investors
will be required to pay U.S. federal income tax and, in some cases, state, local, or foreign income tax, on their allocable share
of a Fund’s taxable income, without regard to whether they receive distributions or the amount of any distributions. Therefore,
the tax liability of an investor with respect to its shares may exceed the amount of cash or value of property (if any) distributed.
An investor’s allocable share
of taxable income or loss may differ from its economic income or loss on its shares.
Due to the application of the assumptions
and conventions applied by a Fund in making allocations for U.S. federal income tax purposes and other factors, an investor’s
allocable share of such Fund’s income, gain, deduction or loss may be different than its economic profit or loss from its
shares for a taxable year. This difference could be temporary or permanent and, if permanent, could result in it being taxed on
amounts in excess of its economic income.
Items of income, gain, deduction,
loss and credit with respect to shares could be reallocated, and for taxable periods beginning after December 31, 2017, the
Fund could be liable for U.S. federal income tax, if the U.S. Internal Revenue Service (“IRS”) does not accept the
assumptions and conventions applied by the Fund in allocating those items, with potential adverse consequences for an investor.
The U.S. tax rules pertaining to entities
taxed as partnerships are complex and their application to large, publicly traded entities such as a Fund is in many respects uncertain.
Each Fund applies certain assumptions and conventions in an attempt to comply with the intent of the applicable rules and
to report taxable income, gains, deductions, losses and credits in a manner that properly reflects shareholders’ economic
gains and losses. These assumptions and conventions may not fully comply with all aspects of the Internal Revenue Code (the “Code”)
and applicable Treasury Regulations, however, and it is possible that the IRS will successfully challenge such Fund’s allocation
methods and require such Fund to reallocate items of income, gain, deduction, loss or credit in a manner that adversely affects
investors. If this occurs, investors may be required to file an amended tax return and to pay additional taxes plus deficiency
interest.
In addition, for periods beginning after
December 31, 2017, each Fund may be liable for U.S. federal income tax on any “imputed understatement” of tax
resulting from an adjustment as a result of an IRS audit. The amount of the imputed understatement generally includes increases
in allocations of items of income or gains to any investor and decreases in allocations of items of deduction, loss, or credit
to any investor without any offset for any corresponding reductions in allocations of items of income or gain to any investor or
increases in allocations of items of deduction, loss, or credit to any investor. If a Fund is required to pay any U.S. federal
income taxes on any imputed understatement, the resulting tax liability would reduce the net assets of such Fund and would likely
have an adverse impact on the value of the shares. Under certain circumstances, such Fund may be eligible to make an election to
cause the investors to take into account the amount of any imputed understatement, including any interest and penalties. The ability
of a publicly traded partnership such as a Fund to make this election is uncertain. If the election is made, such Fund would be
required to provide investors who owned beneficial interests in the shares in the year to which the adjusted allocations relate
with a statement setting forth their proportionate shares of the adjustment (“Adjusted K-1s”). The investors would
be required to take the adjustment into account in the taxable year in which the Adjusted K-1s are issued. For an additional discussion
please see “U.S. Federal Income Tax Considerations – Other Tax Matters.”
Each Fund could be treated as a corporation
for U.S. federal income tax purposes, which may substantially reduce the value of the shares.
The Trust, on behalf of each Fund, has
received an opinion of counsel that, under current U.S. federal income tax laws, such Fund will be treated as a partnership that
is not taxable as a corporation for U.S. federal income tax purposes, provided that (i) at least 90 percent of such Fund’s
annual gross income consists of “qualifying income” as defined in the Code, (ii) the Trust and such Fund is organized
and operated in accordance with its governing agreements and applicable law and (iii) the Trust and such Fund do not elect
to be taxed as a corporation for U.S. federal income tax purposes. Although USCF anticipates that each Fund will satisfy the “qualifying
income” requirement for all of its taxable years, that result cannot be assured. The Funds have not requested and nor will
the Funds request any ruling from the IRS with respect to the classification of each Fund as a partnership not taxable as a corporation
for U.S. federal income tax purposes. If the IRS were to successfully assert that a Fund is taxable as a corporation for U.S. federal
income tax purposes in any taxable year, rather than passing through its income, gains, losses and deductions proportionately to
shareholders such the Fund would be subject to tax on its net income for the year at corporate tax rates. In addition, although
no Fund currently intends to make any distributions with respect to the shares any distributions would be taxable to shareholders
as dividend income to the extent of such Fund’s current or accumulated earnings and profits. Subject to holding period and
other requirements, any such dividend would be a qualifying dividend subject to U.S. federal income tax at the lower maximum tax
rates applicable to long-term capital gains. Taxation of the Trust and the Funds as a corporation could materially reduce the after-tax
return on an investment in shares and could substantially reduce the value of the shares.
Each Fund is organized and operated
as a series of a Delaware statutory trust in accordance with the provisions of its Trust Agreement and applicable state law, but
is taxed in a manner similar to a limited partnership, and, therefore, has a more complex tax treatment than conventional mutual
funds.
The Funds are organized and operated as
series of a Delaware statutory trust in accordance with the provisions of its Trust Agreement and applicable state law, but is
taxed in a manner similar to a limited partnership, and therefore, has a more complex tax treatment than conventional mutual funds.
No U.S. federal income tax is paid by the Funds on their income. Instead, each Fund will furnish shareholders each year with tax
information on IRS Schedule K-1 (Form 1065) and each U.S. shareholder is required to report on its U.S. federal income tax
return its allocable share of the income, gain, loss and deduction of such Fund. This must be reported without regard to the amount
(if any) of cash or property the shareholder receives as a distribution from such Fund during the taxable year. A shareholder,
therefore, may be allocated income or gain by such Fund but receive no cash distribution with which to pay the tax liability resulting
from the allocation, or may receive a distribution that is insufficient to pay such liability.
In addition to U.S. federal income taxes,
shareholders may be subject to other taxes, such as state and local income taxes, unincorporated business taxes, business franchise
taxes and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which the Funds do business
or own property or where the shareholders reside. Although an analysis of those various taxes is not presented here, each prospective
shareholder should consider their potential impact on its investment in a Fund. It is each shareholder’s responsibility to
file the appropriate U.S. federal, state, local and foreign tax returns.
If a Fund is required to withhold
tax with respect to any Non-U.S. shareholders, the cost of such withholding may be borne by all shareholders.
Under certain circumstances, a Fund may
be required to pay withholding tax with respect to allocations to Non-U.S. shareholders. Although the Trust Agreement provides
that any such withholding will be treated as being distributed to the Non-U.S. shareholder, a Fund may not be able to cause the
economic cost of such withholding to be borne by the Non-U.S. shareholder on whose behalf such amounts were withheld since such
Fund does not intend to make any distributions. Under such circumstances, the economic cost of the withholding may be borne by
all shareholders, not just the shareholders on whose behalf such amounts were withheld. This could have a material impact on the
value of the shares.
The impact of U.S. tax reform on the
Trust Series is uncertain.
On December 22, 2017, H.R. 1, the
bill formerly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), was signed into law. The Tax Act substantially
alters the U.S. federal tax system in a variety of ways, including significant changes to the taxation of business entities, the
deductibility of interest expense, and the tax treatment of capital investment. We cannot predict with certainty how any changes
in the tax laws might affect the U.S. economy or the demand for and the price of commodities. As a result, it is possible that
the Tax Act, as well as any U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act
and any future legislation related to tax reform, could have unexpected or negative impacts on a Trust Series and some
or all of its shareholders. Shareholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or
administrative developments and proposals and their potential effect on an investment in a Trust Series.
OTC Contract Risk
The Funds will be subject to credit
risk with respect to counterparties to OTC contracts entered into by the Trust on behalf of the Funds or held by special purpose
or structured vehicles.
The Funds face the risk of non-performance
by the counterparties to the OTC contracts. Unlike in futures contracts, the counterparty to these contracts is generally a single
bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result,
there will be greater counterparty credit risk in these transactions. A counterparty may not be able to meet its obligations to
a Fund, in which case such Fund could suffer significant losses on these contracts. The two-way margining requirements imposed
by U.S. regulators, discussed in “Item 1. Business – Commodities Regulation,” are intended to mitigate
this risk.
Nevertheless, if a counterparty becomes
bankrupt or otherwise fails to perform its obligations due to financial difficulties, a Fund may experience significant delays
in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Trust on behalf of such Fund may obtain only
limited recovery or may obtain no recovery in such circumstances.
Valuing OTC derivatives may be less
certain that actively traded financial instruments.
In general, valuing OTC derivatives is
less certain than valuing actively traded financial instruments such as exchange traded futures contracts and securities or cleared
swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated,
and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers
and dealers generally quote indicative prices or terms for entering into or terminating OTC contracts, they typically are not contractually
obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent
value for an outstanding OTC derivatives transaction.
Compounding Risk
Each Fund has a single-day investment objective,
and the Fund’s performance for periods greater than a single day will be the result of each day’s returns compounded
over the period, which is likely to be either better or worse than the performance of the Benchmark Oil Futures Contract times
the stated multiple inverse multiple, as applicable, in the Fund’s investment objective, before accounting for fees and fund
expenses. Compounding affects all investments, but it has a more significant effect on a leveraged fund. Particularly during periods
of higher Benchmark Oil Futures Contract volatility, compounding will cause results for periods longer than a single day to vary
from three times (3x) or the inverse (-3x), as applicable, of the return of the Benchmark Oil Futures Contract. This effect becomes
more pronounced as volatility increases. Fund performance for periods greater than a single day will be affected by the following
factors: (i) Benchmark Oil Futures Contract volatility, (ii) Benchmark Oil Futures Contract performance, (iii) period
of time, (iv) financing rates associated with exposure and (v) other Fund expenses.
Each Fund is designed to be utilized only
by knowledgeable investors who understand the potential consequences of seeking daily leveraged or inverse leveraged, as applicable,
investment results and are willing to monitor their portfolios frequently. The Funds are not intended to be used by, and are not
appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Each Fund’s returns over periods
longer than a single day will likely differ in amount and possibly even direction from three times the Benchmark Oil Futures Contract
return for the period as a result of compounding of daily returns.
USOU has an investment objective of corresponding
(before fees and expenses) to a multiple of 3x, or for USOD, a multiple of -3x, the performance of the Benchmark Oil Futures Contract
for a given day. Each Fund seeks investment results for a single day only, as measured from the calculation of the NAV for a particular
day to the calculation of the NAV for the next day (see “Calculating Per Share NAV”). The return of the Fund for a
period longer than a single day is the result of its return for each day compounded over the period, and usually will differ from
three times (3x) for USOU or the inverse (-3x), for USOD, of the return of the Benchmark Oil Futures Contract for the same period.
Each Fund will lose money if the Benchmark Oil Futures Contract’s performance is flat over time, and it is possible for such
Fund to lose money over time regardless of the performance of the Benchmark Oil Futures Contract, as a result of daily rebalancing,
the Benchmark Oil Futures Contract’s volatility and compounding. Longer holding periods, higher Benchmark Oil Futures Contract
volatility, inverse exposure and greater leverage each affect the impact of compounding on such Fund’s returns. Daily compounding
of each Fund’s investment returns can dramatically and adversely affect its longer-term performance during periods of high
volatility. Volatility may be at least as important to each Fund’s return for a period as the return of such Fund’s
underlying Benchmark Oil Futures Contract.
Each Fund uses leverage and should produce
returns for a single day that are more volatile than that of the Benchmark Oil Futures Contract. For example, the return for a
single day of USOU, with a 3x multiple, should be approximately three times as volatile for a single day as the return of a fund
with an objective of matching the same Benchmark Oil Futures Contract. Similarly, the return for a single day of USOD, with a -3x
multiple, should be approximately three times the inverse (-3x) of the return that would be expected of a fund with an objective
of matching the same Benchmark Oil Futures Contract. The Funds are not appropriate for all investors and presents different risks
than other funds. The Funds use leverage and are riskier than similarly benchmarked exchange-traded funds that do not use leverage.
An investor should only consider an investment in the Funds if he or she understands the consequences of seeking daily leveraged
or daily inverse leveraged, as applicable, investment results for a single day. Leveraged funds, if used properly and in conjunction
with the investor’s view on the future direction and volatility of the markets, can be useful tools for investors who want
to manage their exposure to various markets and market segments and who are willing to monitor and/or periodically rebalance their
portfolios. Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.
The hypothetical examples below illustrate
how a leveraged fund’s returns can behave for periods longer than a single day, e.g., a fund that seeks to triple the daily
performance of benchmark contract. On each day, the Fund performs in line with its objective (three times (3x) the benchmark’s
daily performance before fees and expenses). Notice that, in the first example where there has been an overall benchmark loss for
the period, over the entire seven-day period, the Fund’s total return is more than three times the loss of the period return
of the Benchmark Oil Futures Contract. For the seven-day period, benchmark lost -3.26% while the Fund lost -11.19%, not -9.78%
(or 3 x -3.26%)).
|
|
Benchmark
|
|
|
Fund
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
97.00
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
91.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
99.19
|
|
Day 3
|
|
|
96.91
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
90.26
|
|
Day 4
|
|
|
99.82
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
98.39
|
|
Day 5
|
|
|
96.83
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
89.53
|
|
Day 6
|
|
|
99.73
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
97.59
|
|
Day 7
|
|
|
96.74
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
88.81
|
|
Total Return
|
|
|
|
|
|
|
-3.26
|
%
|
|
|
-11.19
|
%
|
|
|
|
|
Similarly, in another example (showing
an overall benchmark gain for the period), over the entire seven-day period, the Fund’s total return is considerably less
than triple that of the period return of the benchmark. For the seven-day period, benchmark gained 2.72% while the Fund gained
6.37% (versus 8.16% (or 3 x 2.72%)).
|
|
Benchmark
|
|
|
Fund
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
103.00
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
109.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
99.19
|
|
Day 3
|
|
|
102.91
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
108.12
|
|
Day 4
|
|
|
99.82
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
98.39
|
|
Day 5
|
|
|
102.81
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
107.24
|
|
Day 6
|
|
|
99.73
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
97.59
|
|
Day 7
|
|
|
102.72
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
106.37
|
|
Total Return
|
|
|
|
|
|
|
2.72
|
%
|
|
|
6.37
|
%
|
|
|
|
|
The hypothetical examples below illustrate
how an inversely leveraged fund’s returns can behave for periods longer than a single day, e.g., a fund that seeks to inversely
triple the daily performance of benchmark contract. On each day, the Fund performs in line with its objective (negative three times
(-3x) the benchmark’s daily performance before fees and expenses). Notice that, in the first example where there has been
an overall benchmark loss for the period, over the entire seven-day period, the Fund’s total return is approximately two
times the inverse return of the Benchmark Oil Futures Contract. For the seven-day period, benchmark lost -3.26% while the Fund
gained 6.37%, not 9.78% (or -3 x -3.26%)).
|
|
Benchmark
|
|
|
Fund
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
103.00
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
109.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
99.19
|
|
Day 3
|
|
|
102.91
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
108.12
|
|
Day 4
|
|
|
99.82
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
98.39
|
|
Day 5
|
|
|
102.81
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
107.24
|
|
Day 6
|
|
|
99.73
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
97.59
|
|
Day 7
|
|
|
102.72
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
106.37
|
|
Total Return
|
|
|
|
|
|
|
2.72
|
%
|
|
|
6.37
|
%
|
|
|
|
|
Similarly, in another example (showing
an overall benchmark gain for the period), over the entire seven-day period, the Fund’s total return is considerably less
than three times the inverse return of the Benchmark Oil Futures Contract. For the seven-day period, benchmark gained 2.72% while
the Fund lost -11.19% (versus -8.16% (or -3 x 2.72%)).
|
|
Benchmark
|
|
|
Fund
|
|
|
|
Level
|
|
|
Daily
Performance
|
|
|
Daily
Performance
|
|
|
Net Asset Value
|
|
Start
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
Day 1
|
|
|
97.00
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
91.00
|
|
Day 2
|
|
|
99.91
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
99.19
|
|
Day 3
|
|
|
96.91
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
90.26
|
|
Day 4
|
|
|
99.82
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
98.39
|
|
Day 5
|
|
|
96.83
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
89.53
|
|
Day 6
|
|
|
99.73
|
|
|
|
3.00
|
%
|
|
|
9.00
|
%
|
|
$
|
97.59
|
|
Day 7
|
|
|
96.74
|
|
|
|
-3.00
|
%
|
|
|
-9.00
|
%
|
|
$
|
88.81
|
|
Total Return
|
|
|
|
|
|
|
-3.26
|
%
|
|
|
-11.19
|
%
|
|
|
|
|
These effects are caused by compounding,
which exists in all investments, but has a more significant impact on leveraged funds. In general, during periods of higher benchmark
volatility, compounding will cause the Fund’s results for periods longer than a single day to be less than three times (3x)
the return of the Benchmark Oil Futures Contract for USOU and, less than three times the inverse (-3x) of the return of the Benchmark
Oil Futures Contract for USOD. This effect becomes more pronounced as volatility increases. Conversely, in periods of lower benchmark
volatility (particularly when combined with higher Benchmark Oil Futures Contract returns), the Fund’s returns over longer
periods can be higher than three times (3x) the return of the Benchmark Oil Futures Contract for USOU and three times the inverse
(-3x) of the return of the Benchmark Oil Futures Contract for USOD. Actual results for a particular period, before fees and expenses,
are also dependent on the magnitude of the Benchmark Oil Futures Contract return in addition to the Benchmark volatility. These
effects may be even greater with USOD than with USOU.
The graphs that follow illustrate this
point. Each of the graphs shows a simulated hypothetical one year performance of the Benchmark Oil Futures Contract compared with
the performance of the Fund that perfectly achieves its daily investment objective on each day during the period. The graphs demonstrate
that, for periods greater than a single day, USOU is likely to underperform or outperform (but not match) the Benchmark Oil Futures
Contract performance for USOU or the inverse of the Benchmark Oil Futures Contract performance for USOD, in each case, times the
multiple stated as the daily Fund objective. Investors should understand the consequences of holding a daily rebalanced Fund for
periods longer than a single day and should actively manage and monitor their investments, as frequently as daily. A one-year period
is used solely for illustrative purposes. Deviations from the Benchmark Oil Futures Contract return, or the inverse thereof, as
applicable, times the Fund multiple can occur over periods as short as two days (each day as measured from daily NAV to the next
daily NAV) and may also occur in periods shorter than a single day (when measured intraday as opposed to daily NAV to the next
daily NAV) (see “Calculating Per Share NAV” below for additional details). To isolate the impact of inversed leveraged,
or inverse leveraged exposure, these graphs assume: a) no Fund expenses or transaction costs; b) borrowing/lending rates (to obtain
required leveraged or inverse leveraged exposure) and cash reinvestment rates of zero percent; and c) each Fund consistently maintaining
perfect exposure of 3x, in the case of USOU or -3x, in the case of USOD, as of such Fund’s NAV calculation time each day.
If these assumptions were different, each Fund’s performance would be different than that shown. If fund expenses, transaction
costs and financing expenses greater than zero percent were included, each Fund’s performance would also be different than
shown. Each of the graphs also assumes a volatility rate of 33%, which is the approximate five-year historical volatility rate
of the Benchmark Oil Futures Contract. A benchmark’s volatility rate is a statistical measure of the magnitude of fluctuations
in its returns. These graphs are presented to provide examples of what can occur if an investor chooses to hold the funds for periods
longer than one-day. They are not intended to suggest that longer holding periods such as one-year are an appropriate holding period.
The graph above shows a scenario where
the Benchmark Oil Futures Contract, which exhibits day-to-day volatility, is flat or trendless over a year (i.e., provides a return
of 0.1% over the course of the year), but USOU (3x) and USOD (-3x) are both significantly down.
The graph above shows a scenario where
the Benchmark Oil Futures Contract, which exhibits day-to-day volatility, is down over the year, but USOU (3x) is down less than
three times the Benchmark Oil Futures Contract and USOD (-3x) is up significantly less than three times the inverse of the Benchmark
Oil Futures Contract.
The graph above shows a scenario where
the Benchmark Oil Futures Contract, which exhibits day-to-day volatility, is up over the year, but the USOU (3x) is up significantly
less than three times the Benchmark Oil Futures Contract and USOD (-3x) is down less than three times the inverse of the Benchmark
Oil Futures Contract.
The tables below illustrate the impact
of two factors that affect a leveraged fund’s performance: benchmark volatility and benchmark return. Benchmark Oil Futures
Contract volatility is a statistical measure of the magnitude of fluctuations in the returns of a benchmark and is calculated as
the standard deviation of the natural logarithms of one plus the benchmark return (calculated daily), multiplied by the square
root of the number of trading days per year (assumed to be 252). The tables show estimated Fund returns for a number of combinations
of benchmark volatility and benchmark return over a one-year period. To isolate the impact of daily leveraged or inverse leveraged
exposure, these tables assume: a) no fund expenses or transaction costs; b) borrowing/lending rates of zero percent (to obtain
required leveraged or inverse leveraged exposure) and cash reinvestment rates of zero percent; c) the Fund consistently maintaining
perfect 3x for USOU, or -3x for USOD exposure, as of each Fund’s NAV time each day, and d) the volatility of the Benchmark
Oil Futures Contract remains constant over time. If these assumptions were different, each Fund’s performance would be different
than that shown. If fund expenses, transaction costs and financing expenses were included, each Fund’s performance would
be different than shown. The second table below shows an example in which Fund has an investment objective to correspond (before
fees and expenses) to three times, in the case of USOU, and the inverse (-3x) of, in the case of USOD, the daily performance of
its benchmark. Each Fund might be incorrectly expected to achieve a 30% return on a yearly basis, for USOU, or -30% return on a
yearly basis for USOD, if the benchmark return was 10%, absent the effects of compounding. However, as the table shows, with a
benchmark volatility of 40%, USOU would return 17.6% and USOD would return -71.2%. In the charts below, shaded areas represent
those scenarios where each of the Funds, each discussed in the chart with the investment objective as described below, will outperform
(i.e., return more than) the benchmark performance times the stated multiple in the investment objective of such Fund; conversely
areas not shaded represent those scenarios where each Fund will underperform (i.e., return less than) the benchmark performance
times the multiple stated as the daily fund objective with respect to such Fund.
Expected Fund Return Over One Year
for USOU. (USOU’s objective is only to seek daily investment results, before fees and expenses, that correspond to three
times (3x) the daily performance of a benchmark. USOU does not seek to match 3x the benchmark over a period longer than one day.)
Expected Fund Return over One Year
for USOD. (USOD’s objective is only to seek daily investment results, before fees and expenses, that correspond to three
times the inverse (-3x) of the daily performance of a benchmark. USOD does not seek to match 3x the inverse of the benchmark over
a period longer than one day.)
The foregoing tables are intended to isolate
the effect of benchmark volatility and benchmark performance on the return of USOU or USOD. The actual returns of USOU or USOD
may be significantly greater or less than the returns shown above as a result of any of the factors discussed above or under the
below risk factor describing correlation risks.
Other Risks
NYSE Arca may halt trading in each
Fund’s shares, which would adversely impact an investor’s ability to sell shares.
Each Fund’s shares are listed for
trading on NYSE Arca under the market symbol “USOU” for USOU and “USOD” for USOD. Trading in shares may
be halted due to market conditions or, in light NYSE Arca rules and procedures, for reasons that, in the view of NYSE Arca,
make trading in shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility
pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a specified
market decline. Additionally, there can be no assurance that the requirements necessary to maintain the listing of a Fund’s
shares will continue to be met or will remain unchanged.
The lack of an active trading market
for Fund shares may result in losses on an investor’s investment in such Fund at the time the investor sells the shares.
Although each Fund’s shares are listed
and traded on NYSE Arca, there can be no guarantee that an active trading market for the shares will be maintained. If an investor
needs to sell shares at a time when no active trading market for them exists, the price the investor receives upon sale of the
shares, assuming they were able to be sold, likely would be lower than if an active market existed.
Certain of a Fund’s investments
could be illiquid, which could cause large losses to investors at any time or from time to time.
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. A market disruption, such as a foreign government taking political actions that disrupt the market for
its currency, its crude oil production or exports, or another major export, can also make it difficult to liquidate a position.
Because both Oil Futures Contracts and Other Oil-Related Investments may be illiquid, a Fund’s Oil Interests may be more
difficult to liquidate at favorable prices in periods of illiquid markets and losses may be incurred during the period in which
positions are being liquidated. The large size of the positions that a Fund may acquire increases the risk of illiquidity both
by making its positions more difficult to liquidate and by potentially increasing losses while trying to do so.
OTC contracts that are not subject to clearing
may be even less marketable than futures contracts because they are not traded on an exchange, do not have uniform terms and conditions,
and are entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral,
and in general, they are not transferable without the consent of the counterparty. These conditions make such contracts less liquid
than standardized futures contracts traded on a commodities exchange and could adversely impact the Fund’s ability to realize
the full value of such contracts. In addition, even if collateral is used to reduce counterparty credit risk, sudden changes in
the value of OTC transactions may leave a party open to financial risk due to a counterparty default since the collateral held
may not cover a party’s exposure on the transaction in such situations.
USOD is not actively managed and
inversely tracks the Benchmark Oil Futures Contract during periods in which the price of the Benchmark Oil Futures Contract is
flat or rising as well as when the price is declining.
USOD is not actively managed by conventional
methods. Accordingly, if USOD’s short positions in Oil Interests are declining in value, USOD will not close out such positions
except in connection with paying the proceeds to an Authorized Participant upon the redemption of a basket or closing out futures
positions in connection with the monthly change in the Benchmark Oil Futures Contract. USCF will seek to cause the NAV of USOD’s
shares to inversely track the Benchmark Oil Futures Contract during periods in which its price is flat or rising as well as when
the price is declining.
USOU is not actively managed and
tracks the Benchmark Oil Futures Contract during periods in which the price of the Benchmark Oil Futures Contract is flat or declining
as well as when the price is rising.
USOU is not actively managed by conventional
methods. Accordingly, if USOU’s investments in Oil Interests are declining in value, USOU will not close out such positions
except in connection with paying the proceeds to an Authorized Participant upon the redemption of a basket or closing out futures
positions in connection with the monthly change in the Benchmark Oil Futures Contract. USCF will seek to cause the NAV of USOU’s
shares to track the Benchmark Oil Futures Contract during periods in which its price is flat or declining as well as when the price
is rising.
Regulation of the commodity interests
and energy markets is extensive and constantly changing; future regulatory developments are impossible to predict but may significantly
and adversely affect the Funds.
The futures markets are subject to comprehensive
statutes, regulations, and margin requirements. In addition, the CFTC and futures 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. Regulation of commodity interest
transactions in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed
in the United States. In addition, various national governments outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the energy markets and the need to regulate the derivatives markets in general. The
effect of any future regulatory change on the Funds is impossible to predict, but it could be substantial and adverse. For a more
detailed discussion of the regulations to be imposed by the CFTC and the SEC and the potential impacts thereof on the Funds, please
see “Item 1. Business – Commodities Regulation” in this annual report on Form 10-K.
Trading in international markets
could expose a Fund to credit and regulatory risk.
Each Fund invests primarily in Oil Futures
Contracts, a significant portion of which are traded on United States exchanges, including the NYMEX. However, a portion of a Fund’s
trades may take place on markets and exchanges outside the United States. Trading on such non-U.S. markets or exchanges presents
risks because they are not subject to the same degree of regulation as their U.S. counterparts, including potentially different
or diminished investor protections. In trading contracts denominated in currencies other than U.S. dollars, a Fund is subject to
the risk of adverse exchange-rate movements between the dollar and the functional currencies of such contracts. Additionally, trading
on non-U.S. exchanges is subject to the risks presented by exchange controls, expropriation, increased tax burdens and exposure
to local economic declines and political instability. An adverse development with respect to any of these variables could reduce
the profit or increase the loss earned on trades in the affected international markets.
USCF’s Limited Liability Agreement
(“LLC Agreement”) provides limited authority to the Non-Management Directors, and any Director of USCF may be removed
by USCF’s parent company, Wainwright Holdings, Inc. (“Wainwright”) which is a wholly owned subsidiary of
Concierge Technologies Inc. (“Concierge”), a controlled public company where the majority of shares are owned by Nicholas
D. Gerber along with certain other family members and certain other shareholders.
USCF’s Board of Directors
currently consists of four Management Directors, each of whom are, also executive officers or employees of USCF, and three
Non-Management Directors, each of whom are considered independent for purposes of applicable exchange and SEC rules. Under
USCF’s LLC Agreement, the Non-Management Directors have only such authority as the Management Directors expressly
confer upon them, which means that the Non-Management Directors may have less authority to control the actions of the
Management Directors than is typically the case with the independent members of a company’s Board of Directors. In
addition, any Director may be removed by written consent of Wainwright Holdings, Inc. (“Wainwright”), which
is the sole member of USCF. The sole shareholder of Wainwright is Concierge Technologies Inc., a company publicly traded
under the ticker symbol “CNCG”. Mr. Nicholas D. Gerber along with certain family members and certain other
shareholders, own the majority of shares in Concierge, which is the sole shareholder of Wainwright, the sole member of USCF.
Accordingly, although USCF is governed by the USCF Board of Directors, which consists of both Management Directors and
Non-Management Directors, pursuant to the LLC Agreement, it is possible for Mr. Gerber to exercise his indirect control
of Wainwright to effect the removal of any Director (including the Non-Management Directors which comprise the Audit
Committee) and to replace that Director with another Director. Having control in one person could have a negative impact on
USCF and the Funds, including their regulatory obligations.
There is a risk that a Fund will
not earn trading gains sufficient to compensate for the fees and expenses that it must pay and as such a Fund may not earn any
profit.
Each Fund is contractually obligated to
pay a management fee to USCF, fees to brokers subject to a cap, and certain expenses regardless of whether such Fund’s activities
are profitable. Accordingly, a Fund must earn trading gains sufficient to compensate for these fees and expenses before it can
earn any profit.
Each Trust Series is subject
to extensive regulatory reporting and compliance.
Each Trust Series is subject to a
comprehensive scheme of regulation under the federal commodities and securities laws. Each Trust Series could be subject to
sanctions for a failure to comply with those requirements, which could adversely affect its financial performance (in the case
of financial penalties) or ability to pursue its investment objective (in the case of a limitation on its ability to trade).
Because the shares of each Trust Series’
are publicly traded, each Trust Series is subject to certain rules and regulations of federal, state and financial market
exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded.
These entities include the Public Company Accounting Oversight Board (the “PCAOB”), the SEC, the CFTC and NYSE Arca
and these authorities have continued to develop additional regulations or interpretations of existing regulations. Each Trust Series ongoing
efforts to comply with these regulations and interpretations have resulted in, and are likely to continue resulting in, a diversion
of management’s time and attention from revenue-generating activities to compliance related activities.
Each Trust Series is responsible for
establishing and maintaining adequate internal control over financial reporting. Each Trust Series’ internal control system
is designed to provide reasonable assurance to its management regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective may provide only reasonable assurance with respect to financial statement preparation and presentation.
Regulatory
changes or actions, including the implementation of new legislation is impossible to predict but may significantly
and adversely affect the Funds.
The futures markets are subject to comprehensive
statutes, regulations, and margin requirements. In addition, the CFTC and futures 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. Regulation of commodity interest
transactions in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed
in the United States. In addition, the SEC, 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. Further, various national governments outside of the
United States have expressed concern regarding the disruptive effects of speculative trading in the commodities markets and the
need to regulate the derivatives markets in general. The effect of any future regulatory change on the Funds is impossible to predict,
but it could be substantial and adverse.
The Trust is not a registered investment
company so shareholders do not have the protections of the 1940 Act.
The Trust is not an investment company
subject to the 1940 Act. Accordingly, investors do not have the protections afforded by that statute, which, for example, requires
investment companies to have a majority of disinterested directors and regulates the relationship between the investment company
and its investment manager.
Each Fund will seek to achieve its investment
objective by primarily investing or taking short positions, as applicable, in futures contracts for light, sweet crude oil that
are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Oil Futures Contracts”).
Each Fund will, to a lesser extent and
in view of regulatory requirements and/or market conditions:
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(i)
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next invest in (a) cleared swap transactions based on the Benchmark Oil Futures Contract or
short positions in the Benchmark Oil Futures Contract, as applicable, (b) non-exchange traded (“over-the-counter”
or “OTC”), negotiated swap contracts that are based on the Benchmark Oil Futures Contract or short positions in the
Benchmark Oil Futures Contract, as applicable, and (c) forward contracts for oil;
|
|
(ii)
|
followed by investments or taking short positions, as applicable, in futures contracts for other
types of crude oil, diesel-heating oil, gasoline, natural gas, and other petroleum-based fuels, each of which are traded on the
NYMEX, ICE Futures or other U.S. and foreign exchanges as well as cleared swap transactions and OTC swap contracts valued
based on the foregoing; and
|
|
(iii)
|
finally, invest in exchange-traded cash settled options on Oil Futures Contracts.
|
All such other investments are referred
to as “Other Oil-Related Investments” and, together with Oil Futures Contracts, are “Oil Interests.”
None of the commodity-based derivatives
noted above are considered to be “securities” as defined by Section 2(a)(1) of the Securities Act of 1933
or under the Securities Exchange Act of 1934. Moreover, these types of commodity-based derivatives have not been interpreted as
being securities under the 1940 Act by the SEC in no action letters or other interpretive notices, or pursuant to the jurisdictional
accord between the SEC and the Commodity Futures Trading Commission. In addition, the cash, cash equivalents and Treasuries are
not “investment securities” for purposes of determining whether or not an entity is an investment company required
to be registered under the 1940 Act. As a result, the Funds will not be investing in securities and neither Fund will be considered
an “investment company” for purposes of the 1940 Act.
The Funds have a limited operating
history so there is limited performance history to serve as a basis for you to evaluate an investment in the Funds.
Each Fund is new and has a limited operating
history. Therefore, there is limited past performance of such Fund to serve as a basis for you to evaluate an investment in such
Fund. The Sponsor’s current experience involves managing the Related Public Funds and limited experience managing the Funds.
The Sponsor’s results with the Related Public Funds may not be directly applicable to the Funds since the Funds have different
investment objectives than the Related Public Funds.
The Funds and USCF may have conflicts
of interest, which may permit them to favor their own interests to the detriment of shareholders.
Each Fund is subject to actual and potential
inherent conflicts involving USCF, various commodity futures brokers and Authorized Participants. USCF’s officers, directors
and employees do not devote their time exclusively to such Fund. These persons are directors, officers or employees of other entities
that may compete with such Fund for their services. They could have a conflict between their responsibilities to a Fund and to
those other entities. As a result of these and other relationships, parties involved with each Fund have a financial incentive
to act in a manner other than in the best interests of such Fund and the shareholders. USCF has not established any formal procedure
to resolve conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject to
such conflicts of interest to resolve them equitably. Although USCF attempts to monitor these conflicts, it is extremely difficult,
if not impossible, for USCF to ensure that these conflicts do not, in fact, result in adverse consequences to the shareholders.
The Funds may also be subject to certain
conflicts with respect to the FCM, 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 FCM. In
addition, USCF's principals, officers, directors or employees may trade futures and related contracts for their own account. A
conflict of interest may exist if their trades are in the same markets and at the same time as the Funds trades using the clearing
broker to be used by the Funds. A potential conflict also may occur if USCF's principals, officers, directors or employees trade
their accounts more aggressively or take positions in their accounts which are opposite, or ahead of, the positions taken by the
Funds.
USCF’s officers, directors
and employees do not devote their time exclusively to the Funds and could have a conflict between their responsibilities to each
Fund and to the Related Public Funds.
Each Fund and USCF may have inherent conflicts
to the extent USCF attempts to maintain each Fund’s asset size in order to preserve its fee income and this may not always
be consistent with each Fund’s objective of having the value of its shares’ NAV track, on a leveraged basis or an inverse
leveraged basis, as applicable, changes in the value of the Benchmark Oil Futures Contracts.
USCF’s officers, directors and employees
do not devote their time exclusively to each of the Funds. For example, USCF’s directors, officers and employees act in such
capacity for other entities, including the Related Public Funds, that may compete with a Fund for their services. Accordingly,
they could have a conflict between their responsibilities to a Fund and to other entities.
USCF has sole current authority to manage
the investments and operations of each Fund. This authority to manage the investments and operations of the Fund may allow USCF
to act in a way that furthers its own interests in conflict with the best interests of investors. Shareholders have very limited
voting rights, which will limit the ability to influence matters such as amending the Trust Agreement, changing a Fund’s
basic investment objective, dissolving a Fund, or selling or distributing a Fund’s assets.
The Funds and REX MLPshares, LLC
(“REX”) may have conflicts of interest, which may permit REX to favor its own interests to the detriment of Fund shareholders.
REX may have conflicts of interest, which
may permit it to favor its own interests to the detriment of shareholders. REX’s officers, directors and employees do not
devote their time exclusively to the Funds or to REX MLPshares, LLC and also are directors, officers or employees of other entities
that may compete with the Funds for their services. They could have a conflict between their responsibilities to the Funds and
to those other entities. As a result of these and other relationships, parties involved with REX may have a financial incentive
to act in a manner other than in the best interests of the Funds and the shareholders. USCF has not established any formal procedure
to resolve REX conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject
to such conflicts of interest to resolve them equitably. Although USCF attempts to monitor these conflicts, it is extremely difficult,
if not impossible, for USCF to ensure that these conflicts do not, in fact, result in adverse consequences to each Fund’s
shareholders.
REX’s officers, directors and
employees do not devote their time exclusively to the Funds and could have a conflict between their responsibilities to other entities.
REX’s officers, directors and employees
do not devote their time exclusively to the Funds. Rather, REX’s directors, officers and employees act in various capacities
for other entities, some of which may now, or in the future, compete with the Funds for their services. Accordingly, REX’s
officers, directors and employees could have a conflict between their responsibilities to the Funds and to other entities.
USCF has sole current authority to manage
the investments and operations of the Funds. However, REX may act in a way that furthers its own interests in conflict with the
best interests of investors.
Investors cannot be assured of REX’s
continued services, and discontinuance may be detrimental to the Fund.
Investors cannot be assured that REX will
be willing or able to continue to service the Funds for any length of time. If REX discontinues its activities on behalf of the
Funds, the Funds may be adversely affected.
Shareholders have only very limited
voting rights and have the power to replace USCF only under specific circumstances. Shareholders do not participate in the management
of the Funds and do not control USCF, so they do not have any influence over basic matters that affect the Funds.
Shareholders have very limited voting rights
with respect to each Fund’s affairs and have none of the statutory rights normally associated with the ownership of shares
of a corporation (including, for example, the right to bring “oppression” or “derivative” actions). Shareholders
may elect a replacement sponsor only if USCF resigns voluntarily or loses its charter. Shareholders are not permitted to participate
in the management or control of a Fund or the conduct of its business. Shareholders must therefore rely upon the duties and judgment
of USCF to manage each Fund’s affairs. For example, the dissolution or resignation of USCF would cause a Fund to terminate
unless, within 90 days of the event, shareholders holding shares representing at least 66 2/3% of the outstanding shares of such
Fund elect to continue the Trust and appoint a successor sponsor. In addition, USCF may terminate a Fund if it determines that
such Fund’s aggregate net assets in relation to its operating expenses make the continued operation of such Fund unreasonable
or imprudent. However, no level of losses will require USCF to terminate a Fund. A Fund’s termination would result in the
liquidation of its assets and the distribution of the proceeds thereof, first to creditors and then to the shareholders in accordance
with their positive book capital account balances, after giving effect to all contributions, distributions and allocations for
all periods, and such Fund could incur losses in liquidating its assets in connection with a termination.
A Fund could terminate at any time
and cause the liquidation and potential loss of an investor’s investment and could upset the overall maturity and timing
of an investor’s investment portfolio.
A Fund could terminate at any time, regardless
of whether such Fund has incurred losses, subject to the terms of the Trust Agreement. In particular, unforeseen circumstances,
including the bankruptcy, dissolution, or removal of USCF as the sponsor of the Trust could cause a Fund to terminate unless a
successor is appointed in accordance with the Trust Agreement. However, no level of losses will require USCF to terminate a Fund.
A Fund’s termination would cause the liquidation and potential loss of an investor’s investment. Termination could
also negatively affect the overall maturity and timing of an investor’s investment portfolio.
An unanticipated number of redemption
requests during a short period of time could have an adverse effect on a Fund’s NAV.
If a substantial number of requests for
redemption of a block of 50,000 shares (“Redemption Baskets”) are received by a Fund during a relatively short period
of time, such Fund may not be able to satisfy the requests from Fund assets not committed to trading. As a consequence, it could
be necessary to liquidate positions in such Fund’s trading positions before the time that the trading strategies would otherwise
dictate liquidation.
The Funds do not expect to make cash
distributions.
The Funds do not intend to make any cash
distributions and intend to reinvest any realized gains in additional Oil Interests rather than distributing cash to shareholders.
Therefore, unlike mutual funds, commodity pools or other investment pools that actively manage their investments in an attempt
to realize income and gains from their investing activities and distribute such income and gains to their investors, the Funds
generally do not expect to distribute cash to shareholders. An investor should not invest in the Funds if the investor will need
cash distributions from a Fund to pay taxes on its share of income and gains of such Fund, if any, or for any other reason. Nonetheless,
although the Funds do not intend to make cash distributions, the income earned from each Fund’s investments held directly
or posted as margin may reach levels that merit distribution, e.g., at levels where such income is not necessary to support its
underlying investments in Oil Interests and investors adversely react to being taxed on such income without receiving distributions
that could be used to pay such tax. If this income becomes significant then cash distributions may be made.
The Trust Series may potentially
lose money on its holdings of money market mutual funds.
The SEC adopted amendments to Rule 2a-7
under the 1940 Act which became effective in 2016, to reform money market funds (“MMFs”). While the rule applies
only to MMFs, it may indirectly affect institutional investors such as the Trust Series. A portion of the assets of each Trust
Series that are not used for margin or collateral in the Futures Contracts currently are invested in government MMFs. No Trust
Series holds any non-government MMFs and neither Trust Series anticipates investing in any non-government MMFs.
However, if a Trust Series invests in other types of MMFs besides government MMFs in the future, such Trust Series could
be negatively impacted by investing in an MMF that does not maintain a stable $1.00 NAV or that has the potential to impose
redemption fees and gates (temporary suspension of redemptions).
Although such government money market funds
seek to preserve the value of an investment at $1.00 per share, there is no guarantee that they will be able to do so and a
Trust Series may lose money by investing in a government money market fund. An investment in a government money market fund
is not insured or guaranteed by the Federal Deposit Insurance Corporation, referred to herein as the FDIC, or any other government
agency. The share price of a government money market fund can fall below the $1.00 share price. A Trust Series cannot
rely on or expect a government money market fund’s adviser or its affiliates to enter into support agreements or take other
actions to maintain the government money market fund’s $1.00 share price. The credit quality of a government money market
fund’s holdings can change rapidly in certain markets, and the default of a single holding could have an adverse impact on
the government money market fund’s share price. Due to fluctuations in interest rates, the market value of securities held
by a government money market fund may vary. A government money market fund’s share price can also be negatively affected
during periods of high redemption pressures and/or illiquid markets.
The failure or bankruptcy of a futures
commission merchant or clearing house could result in a substantial loss of Trust Series’ assets and could impair Trust Series in
its ability to execute trades.
The Commodity Exchange Act and CFTC regulations
impose several requirements on FCMs and clearing houses that are designed to protect customers, including mandating the implementation
of risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing
and examination programs. In particular, the Commodity Exchange Act and CFTC regulations require FCM and clearing houses to segregate
all funds received from customers from proprietary assets. There can be no assurance that the requirements imposed by the Commodity
Exchange Act and CFTC regulations will prevent losses to, or not materially adversely affect, each Trust Series or its investors.
In particular, in the event of an FCM’s
or clearing house’s bankruptcy, each Trust Series could be limited to recovering either a pro rata share of all available
funds segregated on behalf of the FCM’s combined customer accounts or the Trust Series may not recover any assets at
all. The Trust Series may also incur a loss of any unrealized profits on its open and closed positions. This is because if
such a bankruptcy were to occur, each Trust Series would be afforded the protections granted to customers of an FCM, and participants
to transactions cleared through a clearing house, under the United States Bankruptcy Code and applicable CFTC regulations. Such
provisions generally provide for a pro rata distribution to customers of customer property held by the bankrupt FCM or an Exchange’s
clearing house if the customer property held by the FCM or the Exchange’s clearing house is insufficient to satisfy all customer
claims.
Bankruptcy of a clearing FCM can be caused
by, among other things, the default of one of the FCM’s customers. In this event, the Exchange’s clearing house is
permitted to use the entire amount of margin posted by the Trust Series (as well as margin posted by other customers of the
FCM) to cover the amounts owed by the bankrupt FCM. Consequently, the Trust Series could be unable to recover amounts due
to it on its futures positions, including assets posted as margin, and could sustain substantial losses.
Notwithstanding that the Trust Series could
sustain losses upon the failure or bankruptcy of its FCM, the majority of the Trust Series’ assets are held in Treasuries,
cash and/or cash equivalents with the Custodian and would not be impacted by the bankruptcy of an FCM.
The failure or bankruptcy of the
Trust Series’ Custodian could result in a substantial loss of the Trust Series’ assets.
The majority of the Trust Series’
assets are held in Treasuries, cash and/or cash equivalents with the Custodian. The insolvency of the Custodian could result in
a complete loss of the Trust Series’ assets held by that Custodian, which, at any given time, would likely comprise a substantial
portion of the Trust Series’ total assets.
The liability of USCF and the Trustee
are limited under the Trust Agreement, and the value of the Fund shares will be adversely affected if a Fund is required to indemnify
the Trustee or USCF.
Under the Trust Agreement, the Trustee and USCF are not liable,
and have the right to be indemnified, for any liability or expense incurred absent gross negligence or willful misconduct on the
part of the Trustee or USCF or breach by USCF of the Trust Agreement, as the case may be. As a result, USCF may require the assets
of a Fund to be sold in order to cover losses or liability suffered by it or by the Trustee. Any sale of that kind would reduce
the NAV of such Fund and the value of its shares.
Although the shares of each Fund
are limited liability investments, certain circumstances such as bankruptcy or indemnification of the Fund by a shareholder will
increase the shareholder’s liability.
The shares of each Fund are limited liability
investments; shareholders may not lose more than the amount that they invest plus any profits recognized on their investment. However,
shareholders could be required, as a matter of bankruptcy law, to return to the estate of a Fund any distribution they received
at a time when such Fund was in fact insolvent or in violation of its Trust Agreement. In addition, a number of states do not have
“statutory trust” statutes such as the Delaware statutes under which the Trust has been formed in the State of Delaware.
It is possible that a court in such 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. Finally,
in the event the Trust or a Fund is made a party to any claim, dispute, demand or litigation or otherwise incurs any liability
or expense as a result of or in connection with any shareholder’s (or assignee’s) obligations or liabilities unrelated
to the business of the Trust or such Fund, as applicable, such shareholder (or assignees cumulatively) is required under the Trust
Agreement to indemnify the Trust or such Fund, as applicable, for all such liability and expense incurred, including attorneys’
and accountants’ fees.
Each Fund is a series of the Trust
and, as a result, a court could potentially conclude that the assets and liabilities of such Fund are not segregated from those
of another series of the Trust, thereby potentially exposing assets in such Fund to the liabilities of another series of the Trust.
Each Fund is a series of a Delaware statutory
trust and not itself a separate legal entity. The Delaware Statutory Trust Act provides that if certain provisions are included
in the formation and governing documents of a statutory trust organized in series and if separate and distinct records are maintained
for any series and the assets associated with that series are held in separate and distinct records and are accounted for in such
separate and distinct records separately from the other assets of the statutory trust, or any series thereof, then the debts, liabilities,
obligations and expenses incurred by a particular series are enforceable against the assets of such series only, and not against
the assets of the statutory trust generally or any other series thereof. Conversely, none of the debts, liabilities, obligations
and expenses incurred with respect to any other series thereof shall be enforceable against the assets of such series. USCF is
not aware of any court case that has interpreted this Inter-Series Limitation on Liability or provided any guidance as to
what is required for compliance. USCF intends to maintain separate and distinct records for each Fund and account for each Fund
separately from any other series of the Trust, but it is possible a court could conclude that the methods used do not satisfy the
Delaware Statutory Trust Act, which would potentially expose assets in one series to the liabilities of another series of the Trust.
USCF and the Trustee are not obligated
to prosecute any action, suit or other proceeding in respect of Fund property.
Neither USCF nor the Trustee is obligated
to, although each may in its respective discretion, prosecute any action, suit or other proceeding in respect of Fund property.
The Trust Agreement does not confer upon shareholders the right to prosecute any such action, suit or other proceeding.
Third parties may infringe upon or
otherwise violate intellectual property rights or assert that USCF has infringed or otherwise violated their intellectual property
rights, which may result in significant costs and diverted attention.
It is possible that third parties might
utilize a Fund’s intellectual property or technology, including the use of its business methods, trademarks and trading program
software, without permission. USCF has a patent for each Fund’s business method and has registered its trademarks. The Funds
do not currently have any proprietary software. However, if it obtains proprietary software in the future, any unauthorized use
of a Fund’s proprietary software and other technology could also adversely affect its competitive advantage. The Funds may
not have adequate resources to implement procedures for monitoring unauthorized uses of its patents, trademarks, proprietary software
and other technology. Also, third parties may independently develop business methods, trademarks or proprietary software and other
technology similar to that of USCF or claim that USCF has violated their intellectual property rights, including their copyrights,
trademark rights, trade names, trade secrets and patent rights. As a result, USCF may have to litigate in the future to protect
its trade secrets, determine the validity and scope of other parties’ proprietary rights, defend itself against claims that
it has infringed or otherwise violated other parties’ rights, or defend itself against claims that its rights are invalid.
Any litigation of this type, even if USCF is successful and regardless of the merits, may result in significant costs, divert its
resources from the Funds, or require it to change its proprietary software and other technology or enter into royalty or licensing
agreements.
Due to the increased use of technologies,
intentional and unintentional cyber-attacks pose operational and information security risks.
With the increased use of technologies
such as the Internet and the dependence on computer systems to perform necessary business functions, the Funds are susceptible
to operational and information security risks. In general, cyber incidents can result from deliberate attacks or unintentional
events such as a cyber-attack against the Funds, a natural catastrophe, an industrial accident, failure of a Fund’s disaster
recovery systems, or consequential employee error. Cyber-attacks include, but are not limited to, gaining unauthorized access to
digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption.
Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service
attacks on websites. Cyber security failures or breaches of each Fund’s clearing broker or third party service provider (including,
but not limited to, index providers, the administrator and transfer agent, the custodian), have the ability to cause disruptions
and impact business operations, potentially resulting in financial losses, the inability of Fund shareholders to transact business,
violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation
costs, and/or additional compliance costs. Adverse effects can become particularly acute if those events affect the Funds electronic
data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our
data.
In addition, substantial costs may be incurred
in order to prevent any cyber incidents in the future. Each Fund and its shareholders could be negatively impacted as a result.
While USCF and the Funds have established business continuity plans, there are inherent limitations in such plans.