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Item 1A. Risk Factors

2022-02-25 compared with 2021-02-26 · 58 added, 67 removed, 424 unchanged (23% of the section changed)

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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 financial statements and the related notes.

Each Trust Series’ investment objective is for the daily percentage change in the NAV per share to reflect the daily percentage changes of the Applicable Index, less the Trust Series’ expenses.

Each Trust Series’ investment objective is for the daily percentage changes in the NAV per share to reflect the daily percentage changes of the Applicable Index, less the Trust Series’ expenses.

Each Trust Series seeks to achieve its investment objective by investing in a combination of Futures Contracts and Other Commodity Related Investments such that the daily percentage changes in its NAV, measured in percentage terms, will closely track the changes in the daily price of the Applicable Index, also measured in percentage terms.

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COVID-19 and other infectious disease outbreaks could negatively affect the valuation and performance of the Trust Series’ investments.

An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now been detected globally.

An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has spread globally.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

COVID-19 has resulted in numerous deaths, travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines and the imposition of both local and more widespread “work from home” measures, cancellations, loss of employment, supply chain disruptions, and lower consumer and institutional demand for goods and services, as well as general concern and uncertainty.

The ongoing spread of COVID-19 has had, and is expected to continue to have, a material adverse impact on local economies in the affected jurisdictions and also on the global economy, as cross border commercial activity and market sentiment are increasingly impacted by the outbreak and government and other measures seeking to contain its spread.

The ongoing spread of COVID-19 has had, and is expected to continue to have, a material adverse impact on local economies in the affected jurisdictions and also on the global economy, as cross border commercial activity and market sentiment are impacted by the outbreak and government and other measures seeking to contain its spread.

The impact of COVID-19, and other infectious disease outbreaks that may arise in the future, could adversely affect individual issuers and capital markets in ways that cannot necessarily be foreseen.

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The foregoing could impair the Trust Series’ ability to maintain operational standards (such as with respect to satisfying redemption requests), disrupt the operations of the Trust Series’ service providers, adversely affect the value and liquidity of the Trust Series’ investments, and negatively impact the Trust Series’ performance and your investment in the Trust Series.

The extent to which COVID-19 will affect the Trust Series and the Trust Series’ service providers and portfolio investments will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19.

The extent to which COVID-19 continues to affect the Trust Series and the Trust Series’ service providers and portfolio investments will depend on future developments.

There continues to be uncertainty around the COVID-19 pandemic as the Delta variant of COVID-19, which appears to be the most transmissible and contagious variant to date, has caused an increase in COVID-19 cases globally.

The full impact of the COVID-19 pandemic on our business will depend on factors such as the length of time of the pandemic;

how federal, state and local governments are responding, the impact of the Delta variant, the Omicron variant, and other variants that may emerge;

vaccination rates among the population;

the efficacy of the COVID-19 vaccines against the Delta variant, Omicron variant, and other variants that may emerge;

and the longer-term impact of the pandemic on the economy and consumer behavior.

Given the significant economic and financial market disruptions associated with the COVID-19 pandemic, the valuation and performance of the Trust Series’ investments could be impacted adversely.

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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 commodities comprising the Applicable Index and the Applicable Index 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.

Generally, 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 commodities comprising the Applicable Index and the Applicable Index at any point in time.

USCF expects that exploitation of certain arbitrage opportunities by Authorized Participants and their clients 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 a Trust Series’ shares may also be influenced by non-concurrent trading hours between the NYSE Arca and the various futures exchanges on which a commodity comprising the Applicable Index is traded.

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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.

As discussed above, on October 15, 2020, the CFTC approved the Position Limits Rule.

On October 15, 2020, the CFTC approved the Position Limits Rule.

The Position Limits Rule establishes federal position limits for 25 core referenced futures contracts (comprised of agricultural, energy and metals futures contracts), futures and options linked to the core referenced futures contracts, and swaps that are economically equivalent to the core referenced futures contracts.

The Position Limits Rule sets position limits for the spot month and non-spot month;

however, the non-spot month limits only apply in respect of the agricultural futures contracts that are currently subject to position limits under Part 150 of the CFTC regulations (the “legacy agricultural contracts”).

With respect to regulatory oversight, the Position Limits Rule delegates authority to designated contract markets and swap execution facilities to oversee certain aspects of the position limits framework.

In addition to setting the federal position limits, the Position Limits Rule also provides several exemptions from such position limits, including an expanded list of enumerated bona fide hedge exemptions and certain spread exemptions.

Further, the Position Limits Rule sets forth two alternative processes for pursuing an exemption for non-enumerated hedge positions.

Other than for the legacy agricultural contracts, compliance with the limits imposed by the Position Limits Rule will not be required until 2022, except that economically equivalent swaps need not comply with the Position Limits Rule until 2023.

Certain of the Applicable Benchmark Component Futures Contracts will be subject to position limits under the Position Limits Rule, and the Trust Series’ trading does not qualify as an enumerated bona fide hedge.

Accordingly, the Position Limits Rule could negatively impact the ability of the Trust Series to meet their investment objectives by inhibiting USCF’s ability to effectively invest the proceeds from sales of Creation Baskets of the Trust Series in particular amounts and types of its permitted investments.

Until such time as compliance with the Position Limits Rule is required, 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 the nine legacy agricultural contracts, 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).

Under existing CFTC regulations and the Position Limits Rule, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions, to aggregate in accordance with the Aggregation Rules.

All of these limits may potentially cause a tracking error between the price of a Trust Series’ shares and the Applicable Index.

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In addition, if a Trust Series 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 a Trust Series’ shares and the Applicable Index.

Risk mitigation measures imposed by the Trust Series’ FCMs have the potential to cause tracking error by limiting a Trust Series’ investments, including its ability to fully invest in the Applicable Benchmark Component Futures Contract and other Futures Contracts, which could cause the price of the Trust Series’ shares to substantially vary from the price of the Applicable Benchmark Component Futures Contracts.

Risk mitigation measures that could be imposed by the Trust Series’ FCMs have the potential to cause tracking error by limiting a Trust Series’ investments, including its ability to fully invest in the Applicable Benchmark Component Futures Contract and other Futures Contracts, which could cause the price of the Trust Series’ shares to substantially vary from the price of the Applicable Benchmark Component Futures Contracts.

The Trust Series’ FCMs have discretion to impose limits on the positions that a Trust Series may hold in the Applicable Benchmark Component Futures Contracts as well as certain other months.

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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 Trust Series’ taxable income, without regard to whether they receive distributions or the amount of any distributions.

federal income tax and, in some cases, state, local, or foreign

income tax, on their allocable share of a Trust Series’ 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.

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federal income tax laws, each Trust Series will be treated as a partnership that is not taxable as a corporation for U.S.

federal income tax purposes, provided that (i) at least 90 percent of the Trust Series’ annual gross income will be derived from (a) income and gains from commodities (not held as inventory) or futures, forwards, options, swaps and other notional principal contracts with respect to commodities, and (b) interest income, (ii) the Trust and each Trust Series is organized and operated in accordance with its governing agreements and applicable law and (iii) the Trust and each Trust Series does not elect to be taxed as a corporation for federal income tax purposes.

federal income tax purposes.

Although USCF anticipates that each Trust Series has satisfied and will continue to satisfy the “qualifying income” requirement for all of its taxable years that result cannot be assured.

No Trust Series has requested and nor will any Trust Series request any ruling from the IRS with respect to its classification as a partnership not taxable as a corporation for federal income tax purposes.

If the IRS were to successfully assert that a Trust Series is taxable as a corporation for federal income tax purposes in any taxable year, rather than passing through its income, gains, losses and deductions proportionately to shareholders, the Trust Series would be subject to tax on its net income for the year at corporate tax rates.

In addition, although USCF does not currently intend to make distributions with respect to shares, any distributions would be taxable to Shareholders as dividend income.

No Trust Series has requested and nor will any Trust Series request any ruling from the IRS with respect to its classification as a partnership not taxable as a corporation for U.S.

federal income tax purposes.

If the IRS were to successfully assert that a Trust Series 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, the Trust Series would be subject to tax on its net income for the year at corporate tax rates.

In addition, although USCF does not currently intend to make distributions with respect to shares, any distributions would be taxable to Shareholders as dividend income to the extent of a Trust Series’ current and accumulated earnings and profits.

Taxation of the Trust and each Trust Series as a corporation could materially reduce the after-tax return on an investment in shares and could substantially reduce the value of the shares.

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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.

Legislative or other actions relating to taxes could have a negative effect on a Trust Series or investors in a Trust Series.

The rules dealing with U.S.

federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S.

Treasury Department.

The Biden Administration has proposed significant changes to the existing U.S.

tax rules, and there are a number of proposals in Congress that would similarly modify the existing U.S.

The likelihood of any such legislation being enacted is uncertain, and we cannot predict with certainty how any changes in the tax laws might affect a Trust Series, investors in a Trust Series or investments made by any Trust Series.

Investors are urged to consult with their tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our securities.

OTC Contract Risk

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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 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, for the OTC derivatives, 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.

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All other investors that desire to purchase or sell shares must do so through the NYSE Arca or in other markets, if any, in which the shares may be traded.

Shares may trade at a premium or discount to NAV per share.

Shares may trade at a premium or discount relative to NAV per share.

The lack of an active trading market for a Trust Series’ shares may result in losses on an investor’s investment in a Trust Series at the time the investor sells the shares.

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The LLC Agreement provides limited authority to the Non-Management Directors, and any Director of USCF may be removed by USCF’s parent company, which is wholly owned by Concierge, a controlled public company where the majority of shares are owned by Nicholas D.

Gerber along with certain family members and certain other shareholders.

USCF’s Board of Directors currently consists of four Management Directors, each of whom are executive officers or employees of USCF, and three Non-Management Directors, each of whom are considered independent for purposes of applicable NYSE Arca and SEC rules.

Gerber along with certain of his family members and certain other shareholders.

USCF’s Board of Directors currently consists of four Management Directors, who are executive officers or employees of USCF, and three Non-Management Directors, who are considered independent for purposes of applicable NYSE Arca 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.

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The sole shareholder of Wainwright is Concierge Technologies, Inc., a company publicly traded under the ticker symbol “CNCG” (“Concierge”).

Gerber, along with certain other family members and certain other shareholders, owns the majority of the shares in Concierge, which is the sole shareholder of Wainwright, the sole member of USCF.

Gerber, along with certain of his other family members and certain other shareholders, owns the majority of the 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.

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As a consequence, it could be necessary to liquidate positions in a Trust Series’ trading positions before the time that the trading strategies would otherwise dictate liquidation.

A 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.

A Trust Series may determine that to allow it to reinvest the proceeds from sales of its Creation Baskets in currently permitted assets in a manner that meets its investment objective it may limit its offers of Creation Baskets.

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Adverse effects can become particularly acute if those events affect Fund’s electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our data.

In addition, a service provider that has experienced a cyber-security incident may divert resources normally devoted to servicing a Trust Series to addressing the incident, which would be likely to have an adverse effect on a Trust Series’ operations.

Cyber-attacks may also cause disruptions to the futures exchanges and clearinghouses through which a Trust Series invests in futures contracts, which could result in disruptions to a Trust Series’ ability to pursue its investment objective, resulting in financial losses to a Trust Series and its shareholders.

In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future.

The Funds and their shareholders could be negatively impacted as a result.

While the Funds have established business continuity plans, there are inherent limitations in such plans.

General Risk Factors

Changes to U.S.

tariff and import/export regulations could have a negative effect on the Funds.

There has been ongoing discussion and commentary regarding significant changes that have been and could be made to U.S.

trade policies, treaties and tariffs.

presidential administration and U.S.

Congress is in the process of reversing changes made by the prior U.S.

presidential administration and there is 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, could have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global trade and, in particular, trade between the impacted nations and the United States.

Any of these factors could depress economic activity and negatively impact the Funds.

There is uncertainty surrounding potential legal, regulatory and policy changes by the new presidential administration in the United States that may directly affect financial institutions and the global economy.

As a result of the United States presidential election, which occurred on November 3, 2020 and subsequent senate runoff elections, there has been a change in control of the executive and legislative branches of the U.S.

Changes in federal policy, including tax policies, and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and regulation of the energy sector, climate change, and the financial services industry, as well as changes in tax rates.

The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting the energy sector and financial institutions remain highly uncertain.

Uncertainty surrounding future changes may adversely affect the Funds' investments.

A Trust Series and its shareholders could be negatively impacted as a result.

While USCF and the Related Public Funds, including a Trust Series, have established business continuity plans, there are inherent limitations in such plans, including the possibility that certain risks have not been identified or that new risks will emerge before countervailing measures can be implemented.

Furthermore, a Trust Series cannot control cybersecurity plans and systems of its service providers, market makers or Authorized Participants.

A Trust Series’ investment returns could be negatively affected by climate change and greenhouse gas restrictions.

Driven by concern over the risks of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions or production and use of oil and gas.

These include adoption of cap and trade regimes, carbon taxes, trade tariffs, minimum renewable usage requirements, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy.

Political and other actors and their agents increasingly seek to advance climate change objectives indirectly, such as by seeking to reduce the availability of or increase the cost for, financial and investment in the oil and gas sector and taking actions intended to promote changes in business strategy for oil and gas companies.

Many governments are also providing tax advantages and other subsidies to support transitioning to alternative energy sources or mandating the use of specific fuels other than oil or natural gas.

Depending on how policies are formulated and applied, they could have the potential to negatively affect a Trust Series’ investment returns and make oil and natural gas products more expensive or less competitive.

USCF is the subject of class action litigation.

In light of the inherent uncertainties involved in litigation matters, an adverse outcome in this litigation could materially adversely affect USCF's financial condition.

USCF and USCF's directors and certain of its officers are currently subject to class action litigation.

Estimating an amount or range of possible losses resulting from litigation proceedings to USCF is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages and are subject to appeal.

In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties' settlement posture and their evaluation of the strength or weakness of their case against USCF.

For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting therefrom.

In light of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially adversely affect USCF's financial condition, results of operations or cash flows in any particular reporting period.

In addition, litigation could result in substantial costs and divert USCF's management's attention and resources from conducting USCF's operations, including the management of the Trust Series and the Related Public Funds.

For more information, see “Item 3.

Legal Proceedings” in this annual report on Form 10-K.

Unresolved Staff Comments.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors