S-1 1 d464351ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on September 27, 2017

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PROSHARES TRUST II

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   6221   87-6284802
(State of Organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

Michael L. Sapir

c/o ProShare Capital Management LLC

7501 Wisconsin Avenue

East Tower, 10th Floor

Bethesda, Maryland 20814

(240) 497-6400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

James C. Munsell

Kenny S. Terrero

c/o Sidley Austin LLP

787 Seventh Avenue

New York, New York 10019

and

Richard F. Morris

c/o ProShare Capital Management LLC

7501 Wisconsin Avenue

East Tower, 10th Floor

Bethesda, MD 20814

 

 

Approximate date of commencement of proposed sale to the public: As promptly as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ☒


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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

ProShares Bitcoin ETF

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

ProShares Short Bitcoin ETF

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities to be Registered  

Proposed
Maximum
Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

ProShares Bitcoin ETF

  $1,000,000   $116.00

ProShares Short Bitcoin ETF

  $1,000,000   $116.00

 

 

(1) The proposed maximum aggregate offering price has been calculated assuming that all Shares are sold at a price of $25.00 per Share.
(2) The amount of the registration fees for the indicated securities have been calculated in reliance upon Rule 457(o) under the Securities Act of 1933, as amended (the “1933 Act”). This amount is being paid contemporaneously with the filing of this Registration Statement.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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LOGO

PROSHARES TRUST II

 

 

Common Units of Beneficial Interest

 

 

 

Title of Securities to be Registered

   Benchmark      Proposed
Maximum
Aggregate
Offering Price
Per Fund
 

ProShares Bitcoin ETF [(            )]

     Lead Month Bitcoin Futures      $ [             ]

ProShares Short Bitcoin ETF [(            )]

     Lead Month Bitcoin Futures      $ [             ]

ProShares Trust II (the “Trust”) is a Delaware statutory trust organized into separate series. The Trust may from time to time offer to sell common units of beneficial interest of either of the series of the Trust listed above (each, a “Fund” and collectively, the “Funds”) or other series of the Trust, which represent units of fractional undivided beneficial interest in and ownership of a series of the Trust. Please note that the Trust has series other than the Funds. The shares of beneficial interest (“Shares”) of each Fund will be offered on a continuous basis from time to time. The ProShares Bitcoin ETF (the “Matching Fund”) and the ProShares Short Bitcoin ETF (the “Inverse Fund”) have not, prior to the date of this Prospectus, commenced trading and do not have any performance history.

The Shares of each Fund will be listed on NYSE Arca Equities, Inc. (the “Exchange”) and will trade under the ticker symbols to be announced prior to commencement of trading.

The Matching Fund seeks results (before fees and expenses) that, both for a single day and over time, match the performance of lead month bitcoin futures contracts listed and traded on the Chicago Board of Options Exchange (“CBOE”). These contracts are referred to herein as “Bitcoin Futures Contracts” or the “Benchmark.” “Bitcoin” is a digital asset based on the decentralized, open source protocol of the peer-to-peer bitcoin computer network (“Bitcoin Network”). The Inverse Fund seeks to provide investment results that, on a daily basis correspond (before fees and expenses) to the inverse (-1x) of the daily performance of the Benchmark for a single day. A “single day” is measured from the time a Fund calculates its net asset value (“NAV”) to the time of the Fund’s next NAV calculation. The NAV calculation time for the Funds is typically 4:00 p.m. Eastern time. Please see the section entitled “Summary—Creation and Redemption Transactions” on pages [3-4] for additional details on the NAV calculation time for the Funds.

 

 

INVESTING IN THE SHARES INVOLVES SIGNIFICANT RISKS. PLEASE REFER

TO “RISK FACTORS” BEGINNING ON PAGE [7].

Each Fund will distribute to shareholders a Schedule K-1 that will contain information regarding the income and expenses of the Fund.


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The Funds are not appropriate for all investors and present many different risks than other types of funds, including risks relating to investing in Bitcoin Futures Contracts, exposure to bitcoin, and, in the case of the Inverse Fund, risks associated with the use of leverage.

Each Fund intends to invest substantially all of its assets through either long or short positions, as applicable, in Bitcoin Futures Contracts in a manner consistent with its investment objective. Neither Fund invests directly in bitcoin. Bitcoin is a digital asset with a limited operating history. The performance of the Bitcoin Futures Contracts in which each Fund invests, and therefore the performance of the Funds, can be expected to be very different from the price of bitcoin. The value of a Fund’s investments in Bitcoin Futures Contracts may not be correlated with the price of bitcoin and may go down when the price of bitcoin goes up (and vice versa). An investor should only consider an investment in a Fund if he or she understands the consequences of investing in Bitcoin Futures Contracts.

Bitcoin Futures Contracts have only recently been listed for trading and have a very limited trading history. There can be no assurance that an active trading market for Bitcoin Futures Contracts will develop or be maintained. The Funds’ investments in Bitcoin Futures Contracts may be illiquid and/or highly volatile and the Funds may experience large losses from buying, selling or holding such investments. As with all investments, an investor in either Fund could potentially lose the full principal value of his/her investment, even over periods as short as one day.

An investor should only consider an investment in the Inverse Fund if he or she understands the consequences of seeking daily inverse investment results. The Inverse Fund seeks as its investment objective to provide a return (before fees and expenses) equal to the inverse (-1x) of the performance of the Benchmark for a single day, not for any other period. The return of the Inverse 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, because of this, from the Fund’s multiple (-1X) times the return of the Benchmark for the same period. Daily compounding of the Inverse 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 the Inverse Fund’s return for a period as the return of the Bitcoin Futures Contracts that comprise the Fund’s Benchmark. The Inverse Fund is designed to return for a single day the inverse (-1x) of the return that would be expected of a fund with an objective of matching the performance of the Benchmark for such day.

Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.

Each Fund will continuously offer and redeem its Shares in blocks of 50,000 Shares (a “Creation Unit”). Only Authorized Participants may purchase and redeem Shares from a Fund and then only in Creation Units. An Authorized Participant is an entity that has entered into an Authorized Participant Agreement with the Trust and ProShare Capital Management LLC (the “Sponsor”). The initial Authorized Participant with respect to the Funds is expected to be [Name of Initial Authorized Participant]. It is expected that after the date of this Prospectus, the initial Authorized Participant will, subject to certain terms and conditions, make minimum initial purchases of [at least two initial Creation Units] of 50,000 Shares for each Fund at an initial price per Share of $25.00 equal to $1,250,0000 per Creation Unit. No Fund will commence trading unless and until its initial Authorized Participant effects the minimum initial purchase with respect to such Fund. Following the initial purchase by the initial Authorized Participant, Shares of the Funds will be offered to Authorized Participants in Creation Units at each Fund’s respective NAV. Shares of the Funds are offered to Authorized Participants in Creation Units at each Fund’s respective NAV. Authorized Participants may then offer to the public, from time to time, Shares from any Creation Unit they create at a per-Share market price. The form of Authorized Participant Agreement and the related Authorized Participant Handbook set forth the terms and conditions under which an Authorized Participant may purchase or redeem a Creation Unit. Authorized Participants will not receive from any Fund, the Sponsor, or any of their affiliates, any fee or other compensation in connection with their sale of Shares to the public. An Authorized Participant may receive commissions or fees from investors who purchase Shares through their commission or fee-based brokerage accounts.


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These securities have not been approved or disapproved by the United States Securities and Exchange Commission (the “SEC”) or any state securities commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

NEITHER THE TRUST NOR ANY FUND IS A MUTUAL FUND OR ANY OTHER TYPE OF INVESTMENT COMPANY AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE “1940 ACT”), AND NEITHER IS SUBJECT TO REGULATION THEREUNDER.

THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

THE FUNDS WILL ATTEMPT TO MATCH, OR PROVIDE INVERSE EXPOSURE TO, THE PERFORMANCE OF LEAD MONTH BITCOIN FUTURES CONTRACTS IN A MANNER CONSISTENT WITH THEIR RESPECTIVE INVESTMENT OBJECTIVES. THE FUNDS DO NOT INVEST DIRECTLY IN BITCOIN. NO REPRESENTATION IS BEING MADE THAT THE BITCOIN FUTURES CONTRACTS WILL OR ARE LIKELY TO TRACK THE PRICE OF BITCOIN. NO REPRESENTATION IS BEING MADE THAT THE FUNDS WILL GENERATE PROFITS OR LOSSES SIMILAR TO THAT WHICH MAY BE ACHIEVED BY FUNDS THAT INVEST DIRECTLY IN BITCOIN. IN FACT, THERE CAN BE SHARP DIFFERENCES BETWEEN THE PERFORMANCE OF THE BITCOIN FUTURES CONTRACTS AND THE PERFORMANCE OF BITCOIN.

 

 

             , 2017


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The Shares are neither interests in nor obligations of the Sponsor, Wilmington Trust Company (the “Trustee”), or any of their respective affiliates.

This Prospectus has two parts: the offered series disclosure and the general pool disclosure. These parts are bound together and are incomplete if not distributed together to prospective participants.

COMMODITY FUTURES TRADING COMMISSION

RISK DISCLOSURE STATEMENT

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.

FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL, AT PAGES [43] THROUGH [44] AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE [43].

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGES [5] THROUGH [26].

SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL RISK.

HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR. IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP TRANSACTION MAY, IN CERTAIN INSTANCES, BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL’S OBLIGATIONS OR THE POOL’S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.

 

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THESE POOLS HAVE NOT COMMENCED TRADING AND DO NOT HAVE ANY PERFORMANCE HISTORY.

 

 

THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE REGISTRATION STATEMENT OF THE TRUST. INVESTORS CAN READ AND COPY THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SEC IN WASHINGTON, D.C.

 

 

THE BOOKS AND RECORDS OF THE FUNDS ARE MAINTAINED AS FOLLOWS:

 

    All marketing materials are maintained at the offices of:

SEI Investments Distribution Co. (“SEI” or the “Distributor”)

1 Freedom Valley Drive

Oaks, Pennsylvania 19456

 

    Creation Unit creation and redemption books and records, accounting and certain other financial books and records (including Fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the register, transfer journals and related details) and certain trading and related documents received from Futures Commission Merchants (“FCMs”) are maintained at the offices of:

Brown Brothers Harriman & Co. (“BBH&Co.” or the “Custodian”)

50 Post Office Square

Boston, Massachusetts 02110

 

    All other books and records of the Funds (including minute books and other general corporate records, trading records and related reports) are maintained at the Funds’ principal office, c/o ProShare Capital Management LLC, 7501 Wisconsin Avenue, East Tower, 10th Floor, Bethesda, Maryland 20814. The main business telephone number of each of the Funds and the Sponsor is (240) 497-6400.

SHAREHOLDERS HAVE THE RIGHT, DURING NORMAL BUSINESS HOURS, TO HAVE ACCESS TO AND COPY (UPON PAYMENT OF REASONABLE REPRODUCTION COSTS) SUCH BOOKS AND RECORDS IN PERSON OR BY THEIR AUTHORIZED ATTORNEY OR AGENT. MONTHLY ACCOUNT STATEMENTS CONFORMING TO THE COMMODITY FUTURES TRADING COMMISSION (“CFTC”) AND THE NATIONAL FUTURES ASSOCIATION (THE “NFA”) REQUIREMENTS ARE POSTED ON THE SPONSOR’S WEBSITE AT WWW.PROSHARES.COM . ADDITIONAL REPORTS MAY BE POSTED ON THE SPONSOR’S WEBSITE AT THE DISCRETION OF THE SPONSOR OR AS REQUIRED BY REGULATORY AUTHORITIES. THERE WILL SIMILARLY BE DISTRIBUTED TO SHAREHOLDERS, NOT MORE THAN 90 DAYS AFTER THE CLOSE OF THE FUNDS’ FISCAL YEAR, CERTIFIED AUDITED FINANCIAL STATEMENTS. THE TAX INFORMATION RELATING TO SHARES OF EACH FUND NECESSARY FOR THE PREPARATION OF SHAREHOLDERS’ ANNUAL FEDERAL INCOME TAX RETURNS WILL ALSO BE DISTRIBUTED.

 

 

THE TRUST WILL FILE QUARTERLY AND ANNUAL REPORTS WITH THE SEC. INVESTORS CAN READ AND COPY THESE REPORTS AT THE SEC PUBLIC REFERENCE FACILITIES IN WASHINGTON, D.C. PLEASE CALL THE SEC AT 1–800–SEC–0330 FOR FURTHER INFORMATION.

 

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THE FILINGS OF THE TRUST ARE POSTED AT THE SEC WEBSITE AT WWW.SEC.GOV.

 

 

REGULATORY NOTICES

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST, ANY OF THE FUNDS, THE SPONSOR, THE AUTHORIZED PARTICIPANTS OR ANY OTHER PERSON.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY OFFER, SOLICITATION, OR SALE OF THE SHARES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION, OR SALE IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER, SOLICITATION, OR SALE.

 

 

AUTHORIZED PARTICIPANTS MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN TRANSACTING IN SHARES. SEE “PLAN OF DISTRIBUTION” IN PART TWO OF THIS PROSPECTUS.

 

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PROSHARES TRUST II

Table of Contents

 

     Page  

PART ONE

OFFERED SERIES DISCLOSURE

  

SUMMARY

     1  

Important Information About the Funds

     1  

Overview

     3  

Purchases and Sales in the Secondary Market, on NYSE Arca

     5  

Creation and Redemption Transactions

     5  

Breakeven Amounts

     5  

Important Tax Information

     6  

RISK FACTORS

     7  

Risks Applicable to Investing in the Bitcoin Futures Contracts

     7  

Risks Applicable to Bitcoin and the Bitcoin Network

     8  

Risks Specific to the Inverse Fund

     12  

Additional Risks Applicable to Both Funds

     17  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     27  

DESCRIPTION OF BITCOIN AND THE BITCOIN NETWORK

     28  

INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES

     30  

Investment Objectives

     30  

Principal Investment Strategies

     30  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     37  

CHARGES

     40  

Breakeven Table

     40  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     43  

Status of the Funds

     44  

U.S. Shareholders

     45  

PART TWO

GENERAL POOL DISCLOSURE

  

PERFORMANCE OF THE OTHER COMMODITY POOLS OPERATED BY THE COMMODITY POOL OPERATOR

     56  

USE OF PROCEEDS

     73  

WHO MAY SUBSCRIBE

     74  

CREATION AND REDEMPTION OF SHARES

     74  

Creation Procedures

     75  

Redemption Procedures

     77  

Creation and Redemption Transaction Fee

     78  

Special Settlement

     78  

LITIGATION

     78  

DESCRIPTION OF THE SHARES; THE FUNDS; CERTAIN MATERIAL TERMS OF THE TRUST AGREEMENT

     79  

 

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     Page  

Description of the Shares

     79  

Principal Office; Location of Records; Fiscal Year

     79  

The Funds

     80  

The Trustee

     80  

The Sponsor

     81  

Fiduciary and Regulatory Duties of the Sponsor

     84  

Ownership or Beneficial Interest in the Funds

     85  

Management; Voting by Shareholders

     85  

Recognition of the Trust and the Funds in Certain States

     85  

Possible Repayment of Distributions Received by Shareholders

     85  

Shares Freely Transferable

     85  

Book-Entry Form

     85  

Reports to Shareholders

     86  

Net Asset Value (NAV)

     86  

Indicative Optimized Portfolio Value (“IOPV”)

     87  

Termination Events

     87  

DISTRIBUTIONS

     87  

THE ADMINISTRATOR

     87  

THE CUSTODIAN

     88  

THE TRANSFER AGENT

     88  

THE DISTRIBUTOR

     88  

Description of SEI

     88  

THE SECURITIES DEPOSITORY; BOOK-ENTRY ONLY SYSTEM; GLOBAL SECURITY

     88  

SHARE SPLITS OR REVERSE SPLITS

     89  

CONFLICT OF INTEREST

     90  

Sponsor

     90  

FCMs

     90  

MATERIAL CONTRACTS

     91  

Administrative Agency Agreement

     91  

Custodian Agreement

     92  

Distribution Agreement

     92  

Futures Account Agreement

     92  

PURCHASES BY EMPLOYEE BENEFIT PLANS

     93  

General

     93  

“Plan Assets”

     93  

Ineligible Purchasers

     94  

PLAN OF DISTRIBUTION

     94  

Buying and Selling Shares

     94  

Authorized Participants

     94  

Likelihood of Becoming a Statutory Underwriter

     95  

General

     95  

LEGAL MATTERS

     96  

EXPERTS

     96  

WHERE INVESTORS CAN FIND MORE INFORMATION

     96  

RECENT FINANCIAL INFORMATION AND ANNUAL REPORTS

     96  

INDEX TO FINANCIAL STATEMENTS

     97  

Report of Independent Registered Public Accounting Firm

     97  

PROSHARES SHORT BITCOIN ETF STATEMENT OF FINANCIAL CONDITION DATED [             ]

     98  

PROSHARES SHORT BITCOIN ETF NOTES TO FINANCIAL STATEMENTS DATED [             ]

     98  

Report of Independent Registered Public Accounting Firm

     98  

PROSHARES SHORT BITCOIN ETF STATEMENT OF FINANCIAL CONDITION DATED [             ]

     98  

PROSHARES SHORT BITCOIN ETF NOTES TO FINANCIAL STATEMENTS DATED [             ]

     99  

PRIVACY POLICY

     99  

The Trust’s Commitment to Investors

     99  

 

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     Page  

The Information the Trust Collects About Investors

     99  

How the Trust Handles Investors’ Personal Information

     99  

How the Trust Safeguards Investors’ Personal Information

     99  

INCORPORATION BY REFERENCE OF CERTAIN DOCUMENTS

     100  

FUTURES COMMISSION MERCHANTS

     100  

Litigation and Regulatory Disclosure Relating to FCMs

     101  

Margin Levels Expected to be Held at the FCMs

     114  

SWAP COUNTERPARTIES

     115  

Litigation and Regulatory Disclosure Relating to Swap Counterparties

     115  

APPENDIX A—GLOSSARY

     A-1  


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PART ONE

OFFERED SERIES DISCLOSURE

SUMMARY

Investors should read the following summary together with the more detailed information in this Prospectus before investing in any Shares, including the information under the caption “Risk Factors,” and all exhibits to this Prospectus and the information incorporated by reference in this Prospectus, including the financial statements and the notes to those financial statements in the Trust’s Annual Report on Form 10-K, as amended, Quarterly Reports on Form 10-Q, as amended, and Current Reports, if any, on Form 8-K. Please see the section entitled “Incorporation by Reference of Certain Documents” in Part Two of this Prospectus. For ease of reference, any references throughout this Prospectus to various actions taken by each of the Funds are actually actions that the Trust has taken on behalf of such Funds.

Definitions used in this Prospectus can be found in the Glossary in Appendix A.

Important Information About the Funds

The Funds are not appropriate for all investors and present different risks than other types of funds.

Each Fund intends to invest substantially all of its assets through either long or short positions, as applicable, in Bitcoin Futures Contracts in a manner consistent with its investment objective. Neither Fund invests directly in bitcoin. Bitcoin is a digital asset with a limited operating history. The performance of the Bitcoin Futures Contracts in which each Fund invests, and therefore the performance of the Funds, can be expected to be very different from the price of bitcoin. The value of a Fund’s investments in Bitcoin Futures Contracts may not be correlated with the price of bitcoin and may go down when the price of bitcoin goes up (and vice versa).

An investor should only consider an investment in a Fund if he or she understands the consequences of investing in Bitcoin Futures Contracts, exposure to bitcoin and, in the case of the Inverse Fund, the consequences of seeking daily inverse investment results.

The Matching Fund seeks as its investment objective results (before fees and expenses) that, both for a single day and over time, match the performance of the Benchmark.

The Inverse Fund seeks to return (before fees and expenses) the inverse (-1x) of the performance of the Benchmark for a single day, not for any other period. The Inverse Fund is designed to return for a single day the inverse (-1x) of the return that would be expected of a fund with an objective of matching the same Benchmark. The return of the Inverse 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 the Fund’s multiple times the return of the Benchmark for the same period. Daily compounding of the Inverse Fund’s investment returns can dramatically and adversely affect its longer-term performance, particularly during periods of high volatility. Volatility may be at least as important to the Inverse Fund’s return for a period as the return of the Bitcoin Futures Contracts that comprise the Fund’s Benchmark.

Bitcoin Futures Contracts have only recently been listed for trading and have a very limited trading history. There can be no assurance that an active trading market Bitcoin Futures Contracts will develop or be maintained. The Funds’ investments in Bitcoin Futures Contracts may be illiquid and/or highly volatile and the Funds may experience large losses from buying, selling or holding such investments. As with all investments, an investor in either Fund could potentially lose the full principal value of his/her investment, even over periods as short as one day.

Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.

 

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THE FUNDS WILL ATTEMPT TO MATCH, OR PROVIDE INVERSE EXPOSURE TO, THE PERFORMANCE OF LEAD MONTH BITCOIN FUTURES CONTRACTS IN A MANNER CONSISTENT WITH THEIR RESPECTIVE INVESTMENT OBJECTIVES. THE FUNDS DO NOT INVEST DIRECTLY IN BITCOIN. NO REPRESENTATION IS BEING MADE THAT THE BITCOIN FUTURES CONTRACTS WILL OR ARE LIKELY TO TRACK THE PRICE OF BITCOIN. NO REPRESENTATION IS BEING MADE THAT THE FUNDS WILL GENERATE PROFITS OR LOSSES SIMILAR TO THAT WHICH MAY BE ACHIEVED BY FUNDS THAT INVEST DIRECTLY IN BITCOIN. IN FACT, THERE CAN BE SHARP DIFFERENCES BETWEEN THE PERFORMANCE OF THE BITCOIN FUTURES CONTRACTS AND THE PERFORMANCE OF BITCOIN.

 

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Overview

 

Fund Name

  

Performance Benchmark

ProShares Bitcoin ETF

ProShares Short Bitcoin ETF

   Lead Month Bitcoin Futures Contracts

Each Fund uses as its “Benchmark” the performance of lead month Bitcoin Futures Contracts listed and traded on CBOE or CME. The Funds do not invest directly in bitcoin.

“Bitcoin” is a new digital asset based on the decentralized, open source protocol of the peer-to-peer bitcoin computer network (the “Bitcoin Network”). No single entity owns or operates the Bitcoin Network. Bitcoin is not issued by governments, banks or similar organizations. The infrastructure of the Bitcoin Network is collectively maintained by a decentralized user base. The Bitcoin Network is accessed through software, and software governs bitcoin’s creation, movement, and ownership. The value of bitcoin is determined, in part, by the supply of, and demand for, bitcoin in the global exchange markets for the trading of bitcoin (individually, “Bitcoin Exchanges” and collectively, the “Bitcoin Exchange Market”), market expectations for the adoption of bitcoin by individuals, the number of merchants that accept bitcoin as a form of payment and the volume of private end-user-to-end-user transactions.

Bitcoin transaction and ownership records are reflected on the “Bitcoin Blockchain,” which is a digital public record or ledger. Copies of this ledger are stored in a decentralized manner on the computers of each Bitcoin Network user. Transaction data is permanently recorded in files called “blocks,” which reflect transactions that have been recorded and authenticated by Bitcoin Network participants. The Bitcoin Network software source code includes protocols that govern the creation of bitcoin and the cryptographic system that secures and verifies Bitcoin transactions.

The Matching Fund

The Matching Fund seeks as its investment objective results (before fees and expenses) that, both for a single day and over time, match the performance of the Benchmark. By being “long” Bitcoin Futures Contracts, the Matching Fund seeks to benefit from daily increases in the price of the Bitcoin Futures Contracts. When the price of Bitcoin Futures Contracts held by the Matching Fund declines the Matching Fund will lose value.

The Inverse Fund

The Inverse Fund seeks as its investment objective to provide a return (before fees and expenses) equal to the inverse (-1x) of the performance of the Benchmark for a single day, not for any other period. A “single day” is measured from the time the Fund calculates its net asset value (NAV) to the time of the Fund’s next NAV calculation. The NAV calculation time for the Funds, is typically 4:00 p.m. Eastern Time; please see the section entitled “Summary—Creation and Redemption Transactions” on pages [3-4] for additional details on the NAV calculation time for the Funds. The Inverse Fund seeks to benefit from decreases in the price of the Bitcoin Futures Contracts. When the price of Bitcoin Futures Contracts shorted by the Inverse Fund increases, the Inverse Fund will lose value.

The Inverse Fund seeks to engage in daily rebalancing to position its portfolio so that its exposure to the Benchmark is consistent with the Inverse Fund’s investment objective. The impact of the Benchmark’s movements during the day will affect whether the Inverse Fund’s portfolio needs to be repositioned. For example, if the level of the Benchmark has risen on a given day, net assets of the Inverse Fund should fall. As a result, inverse exposure will need to be decreased. Conversely, if the level of the Benchmark has fallen on a given day, net assets of the Inverse Fund should rise. As a result, inverse exposure will need to be increased. Daily rebalancing and the compounding of each day’s return over time means that the return of the Inverse 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 the inverse (-1x) of the return of the Benchmark for the same period. The Inverse Fund will lose money if the Benchmark’s performance is flat over time, and it is possible for the Inverse Fund to lose money over time regardless of the performance of the Benchmark, as a result of daily rebalancing, the Benchmark’s volatility and compounding.

 

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Both Funds

Each Fund intends to invest substantially all of its assets through either long or short positions, as applicable, in Bitcoin Futures Contracts in a manner consistent with its investment objective. Neither Fund invests directly in bitcoin.

Futures contracts expire on a designated date, referred to as the “expiration date.” Each Fund typically will invest in the lead month Bitcoin Futures Contracts. The “lead month contracts” are the contracts with the earliest expiration date. Prior to the expiration date of such contracts, each Fund will “roll” its Bitcoin Futures Contracts to the next “nearby” Bitcoin Futures Contract. The “nearby” contracts are those contracts with the next closest expiration date, The Funds will incur the costs (or benefits) of continually rolling into the new lead month contracts.

Futures contracts with a longer term to expiration may be priced higher than futures contracts with a shorter term to expiration, a relationship called “contango”. When rolling futures contracts that are in contango, the Matching Fund may sell the expiring Bitcoin Futures Contract at a lower price and buy a longer-dated Bitcoin Futures Contract at a higher price, resulting in a negative roll yield (i.e., a loss). Conversely, futures contracts with a longer term to expiration may be priced lower than futures contracts with a shorter term to expiration, a relationship called “backwardation”. When rolling futures contracts that are in backwardation, the Matching Fund may sell the expiring Bitcoin Futures Contract at a higher price and buy the longer-dated Bitcoin Futures Contract at a lower price, resulting in a positive roll yield (i.e., a gain).

When rolling futures contracts that are in contango, the Inverse Fund may buy the expiring Bitcoin Futures Contract at a lower price and sell a longer-dated Bitcoin Futures Contract at a higher price, resulting in a positive roll yield (i.e., a gain). When rolling futures contracts that are in backwardation, the Inverse Fund may buy the expiring Bitcoin Futures Contract at a higher price and sell the longer-dated Bitcoin Futures Contract at a lower price, resulting in a negative roll yield (i.e., a loss).

Each Fund generally seeks to remain fully invested at all times in Bitcoin Futures Contracts in a manner consistent with its stated investment objective without regard to market conditions, trends or direction. However, each Fund also may obtain exposure to its Benchmark, in whole or in part, through investments in listed options on bitcoin or listed options on Bitcoin Futures Contracts (collectively “Options”). In addition, under limited circumstances, a Fund also may invest in swap contracts that reference the Benchmark (Options and swap contracts are referred to collectively herein as “Financial Instruments”).

The Funds will invest the remainder of their un-invested assets in high-quality, short-term debt instruments that have terms-to-maturity of less than 397 days, such as U.S. government securities and repurchase agreements (“Money Market Instruments”).

The Sponsor does not invest the assets of the Funds based on its view of the investment merit of a particular investment, other than for cash management purposes, nor does it conduct conventional volatility research or analysis, or forecast market movement or trends in managing the assets of the Funds.

ProShare Capital Management LLC, a Maryland limited liability company, serves as the Trust’s Sponsor and commodity pool operator. The principal office of the Sponsor and the Funds is located at 7501 Wisconsin Avenue, East Tower, 10th Floor, Bethesda, Maryland 20814. The telephone number of the Sponsor and each of the Funds is (240) 497-6400.

 

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Purchases and Sales in the Secondary Market, on NYSE Arca

The Shares of each Fund will be listed on the NYSE Arca Equities, Inc. (the “Exchange”) under the ticker symbols to be announced prior to the commencement of trading. Secondary market purchases and sales of Shares are subject to ordinary brokerage commissions and charges.

Creation and Redemption Transactions

Only an Authorized Participant may purchase (i.e., create) or redeem Creation Units in the Funds. Creation Units in a Fund are expected to be created when there is sufficient demand for Shares in such Fund that the market price per Share is at a premium to the NAV per Share. Authorized Participants will likely sell such Shares to the public at prices that are expected to reflect, among other factors, the trading price of the Shares of such Fund and the supply of and demand for the Shares at the time of sale and are expected to fall between the NAV and the trading price of the Shares at the time of sale. Similarly, it is expected that Creation Units in a Fund will be redeemed when the market price per Share of such Fund is at a discount to the NAV per Share. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price of the Shares to track the NAV per Share of a Fund closely over time. Retail investors seeking to purchase or sell Shares on any day are expected to effect such transactions in the secondary market at the market price per Share, rather than in connection with the creation or redemption of Creation Units.

A creation transaction, which is subject to acceptance by SEI, generally takes place when an Authorized Participant deposits a specified amount of cash (unless as provided otherwise in this Prospectus) in exchange for a specified number of Creation Units. Similarly, Shares can be redeemed only in Creation Units, for cash (unless as provided otherwise in this Prospectus). Except when aggregated in Creation Units, Shares are not redeemable. The prices at which creations and redemptions occur are based on the next calculation of the NAV after an order is received in a form described in the Authorized Participant Agreement and the related Authorized Participant Handbook. The manner by which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and Authorized Participant Handbook. By placing a purchase order, an Authorized Participant agrees to deposit cash (unless as provided otherwise in this Prospectus) with BBH&Co., the custodian of the Funds.

Creation and redemption transactions must be placed each day with SEI by the create/redeem cut-off time (stated below), or earlier if the Exchange or other exchange material to the valuation or operation of such Fund closes before such cut-off time, to receive that day’s NAV.

 

Create/Redeem Cut-off

  

NAV Calculation Time

3:30 p.m. (Eastern Time)    4:00 p.m. (Eastern Time)

Breakeven Amounts

A Fund will be profitable only if returns from the Fund’s investments exceed its “breakeven amount.” Estimated breakeven amounts are set forth in the table below. The estimated breakeven amounts represent the estimated amount of trading income that each Fund would need to achieve during one year to offset such Fund’s estimated fees, costs and expenses, net of any interest income earned by such Fund on its investments. It is not possible to predict whether a Fund will break even at the end of the first twelve months of an investment or any other period. See “Charges—Breakeven Table,” beginning on page [43], for more detailed tables showing Breakeven Amounts.

 

Fund Name

   Breakeven Amount
(% Per Annum of
Average
Daily NAV) *
     Assumed
Selling
Price
Per Share *
     Breakeven Amount
($ for the
Assumed Selling
Price Per Share) *
 

ProShares Bitcoin ETF

      $ 25.00     

ProShares Short Bitcoin ETF

      $ 25.00     

 

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* The breakeven analysis set forth in this table assumes that the Shares have a constant month end NAV, and assumes that the selling price per Share will equal the NAV. The analysis is based on an assumed NAV per Share of each Fund as listed in the table above under Assumed Selling Price Per Share. The actual NAV of each Fund will differ and is likely to change on a daily basis. The numbers in this chart have been rounded to the nearest 0.01.

Important Tax Information

Please note that each Fund will distribute to shareholders a Schedule K-1 that will contain information regarding the income and expense items of the Fund. The Schedule K-1 is a complex form and shareholders may find that preparing tax returns may require additional time or may require the assistance of an accountant or other tax preparer, at an additional expense to the shareholder.

 

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RISK FACTORS

Before investors invest in the Shares, they should be aware that there are various risks. Investors should consider carefully the risks described below together with all of the other information included in this Prospectus, as well as information found in documents incorporated by reference in this Prospectus, before they decide to purchase any Shares. These risk factors may be amended, supplemented or superseded from time to time by risk factors contained in any periodic report, prospectus supplement, post-effective amendment or in other reports filed with the SEC in the future.

Risks Applicable to Investing in the Bitcoin Futures Contracts.

The value of the Bitcoin Futures Contracts may not track the price of Bitcoin on the Bitcoin Exchange Market

The Funds are benchmarked to the Bitcoin Futures Contracts, which are a new type of futures contract. The Funds are not benchmarked to the price of bitcoin and will not invest directly in bitcoin. The value of the Bitcoin Futures Contracts is based on the expected value of bitcoin at a future point in time, specifically, the expiration date of the Bitcoin Futures Contracts. A change in the price of bitcoin today will not necessarily result in a corresponding movement in the price of the Bitcoin Futures Contracts since the price of the Bitcoin Futures Contracts is based on expectations of the price of bitcoin at a future point in time. As a result, each Fund should be expected to perform very differently from the performance of bitcoin (or the inverse of such performance) over all periods of time.

The market for Bitcoin Futures Contracts is new, has very limited trading history and may be less liquid and more volatile than other markets

Bitcoin Futures Contracts are a new type of futures contract. Unlike the established futures markets for traditional physical commodities, the market for Bitcoin Futures Contracts is in the development stage and has very limited trading and operational history. As such, Bitcoin Futures Contracts and the market for Bitcoin Futures Contracts may be riskier, less liquid, more volatile and more vulnerable to economic, market, industry, regulatory and other changes than more established futures contracts and futures markets. The liquidity of the market for Bitcoin Futures Contracts will depend on, among other things, the supply and demand for Bitcoin Futures Contracts, the adoption of bitcoin and the commercial and speculative interest in the market for Bitcoin Futures Contracts and the potential ability to hedge against the price of bitcoin with exchange-traded Bitcoin Futures Contracts.

Additionally, because the performance history of the Bitcoin Futures Contracts is extremely limited, the degree to which Bitcoin Futures Contracts are likely to provide exposure to movements in the price of bitcoin is extremely uncertain. If market participants executing trades in Bitcoin Futures Contracts face constraints, including capital constraints, security risks, or high execution costs, the price of Bitcoin Futures Contracts may fail to capture price movements in the underlying price of bitcoin. Moreover, it is not clear how changes to the Bitcoin Network, including changes that result in “forks” (as described herein) will impact the price of any Bitcoin Futures Contracts. On August 1, 2017, the Bitcoin Network was forked by a group of developers and miners accepting changes to the Bitcoin Network software intended to increase transaction capacity. Blocks mined on this network now diverge from blocks mined on the Bitcoin Network, which has resulted in the creation of a new blockchain whose digital asset is referred to as “bitcoin cash.” Bitcoin and bitcoin cash now operate as separate, independent networks. Multiple proposals for increasing the capacity of the Bitcoin Network still exist, and it is possible that one or more of these proposals could result in further network “forks.” Such changes may influence the price of Bitcoin Futures Contracts. In particular, it is possible that the price of the Bitcoin Futures Contracts subsequent to a “fork” will be linked to the price of bitcoin on only one of the resulting Bitcoin Networks, rather than the aggregate price of bitcoin on all resulting Bitcoin Networks, even though investors who hold bitcoin directly would participate in the value of bitcoin on all resulting Bitcoin Networks. It is likely that such changes to the Bitcoin Network would require determinations to be made with respect to the Bitcoin Futures Contracts by the relevant futures exchange, and it is possible that such determinations could adversely impact the value of Bitcoin Futures Contracts.

 

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Risks Applicable to Bitcoin and the Bitcoin Network.

Bitcoin is a new technological innovation with a very limited operating history.

Bitcoin has a very limited history of operations and there is no established performance record for the price of Bitcoin on the Bitcoin Exchange Market that can provide an adequate basis for evaluating an investment in bitcoin, or bitcoin derivatives such as the Bitcoin Futures Contracts. Although past performance is not necessarily indicative of future results, if bitcoin had an established history, such history might (or might not) provide investors with more information on which to evaluate an investment in the Funds.

The price of Bitcoin on the Bitcoin Exchange Market is highly volatile, which could have a negative impact on the performance of Bitcoin Futures Contracts and the performance of the Funds.

The price of bitcoin as determined by the Bitcoin Exchange Market has experienced periods of extreme volatility. This volatility is due in part to the changes exhibited by an early stage technological innovation. Speculators and investors who seek to profit from trading and holding bitcoin currently account for a significant portion of bitcoin demand. Such speculation regarding the potential future appreciation in the value of bitcoin may artificially inflate the price of bitcoin. Conversely, government regulation and the perception of onerous regulatory actions may cause a drop in the price of bitcoin. Developments related to the Bitcoin Network’s operations, individual bitcoin exchanges (the “Bitcoin Exchanges”) and the overall Bitcoin Exchange Market also contribute to the volatility in the price of bitcoin. These factors may continue to increase the volatility of the price of bitcoin which may have a negative impact on the performance of the Bitcoin Futures Contracts and on the performance of the Funds.

Bitcoin is available for trading 24-hours a day and, as such, the price of bitcoin may change dramatically when the market for Bitcoin Futures Contracts is closed or when Shares are not available for trading on the Exchange.

The price of bitcoin may change sharply while the market for Bitcoin Futures Contracts is closed or when the Exchange is closed. Although neither Fund will invest directly in bitcoin, such price changes could impact the price and volatility of the Bitcoin Futures Contracts in which the Funds invest and, therefore, could have a negative impact on your investment in the Funds.

The Bitcoin Exchanges on which bitcoin trades are relatively new and, in most cases, largely unregulated and, therefore, may be more exposed to fraud and security breaches than established, regulated exchanges for other products; this could have a negative impact on the Bitcoin Futures Contracts in which the Funds invest.

Over the past several years, a number of Bitcoin Exchanges have been closed due to fraud, failure, security breaches or governmental regulations. The nature of the assets held at Bitcoin Exchanges make them appealing targets for hackers and a number of Bitcoin Exchanges have been victims of cybercrimes. In many of these instances, the customers of such Bitcoin Exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin Exchanges. No Bitcoin Exchange is immune from these risks but the existence of these risks has created a higher barrier of entry for new Bitcoin Exchanges. The loss of confidence in new and smaller Bitcoin Exchanges and in the Bitcoin Exchange Market overall can slow down the mass adoption of bitcoin. Further, the failure of the Bitcoin Exchange Market or any other major component of the overall bitcoin ecosystem can have consequences for the Bitcoin Network, have an adverse effect on the price of bitcoin and could have a negative impact on the Bitcoin Futures Contracts.

A decline in the adoption of bitcoin could negatively impact the performance of the Funds.

Bitcoin’s adoption has been on a continuous climb since bitcoin first gained mass media attention in 2013. It is increasingly accepted as a form of payment in the U.S. and abroad. The adoption, however, has been limited when compared with the increase in the price of bitcoin as determined by the Bitcoin Exchange Market. The continued adoption of bitcoin will require growth in its usage and in the Bitcoin Blockchain, for various applications. Mass adoption of bitcoin will also require an accommodating regulatory environment. A lack of expansion in usage of bitcoin and the Bitcoin Blockchain could adversely the market for bitcoin and may have a negative impact on the performance of the Bitcoin Futures Contracts and the performance of the Fund. Even if growth in bitcoin adoption

 

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continues in the near or medium-term, there is no assurance that bitcoin usage, or the market for Bitcoin Futures Contracts, will continue to grow over the long-term. A contraction in use of bitcoin may result in increased volatility or a reduction in the price of bitcoin, as well as increased volatility or a reduction in the price of Bitcoin Futures Contracts, which could adversely impact the value of an investment in a Fund.

A new competing digital asset may pose a challenge to bitcoin’s current market dominance, resulting in a reduction in demand for bitcoin, which could have a negative impact on the price of bitcoin and may have a negative impact on the performance of Bitcoin Futures Contracts and the performance of the Fund.

The Bitcoin Network and bitcoin, as an asset, currently hold a “first-to-market” advantage over other digital assets. This first-to-market advantage has resulted in the Bitcoin Network evolving into the most well developed network of any digital asset. The Bitcoin Network enjoys the largest user base and, more importantly, the largest combined mining power in use to secure the Bitcoin Blockchain. Having a large mining network provides users confidence regarding the security and long-term stability of the Bitcoin Network. This in turn creates a domino effect that inures to the benefit of the Bitcoin Network – namely, the advantage of more users and miners makes a digital asset more secure, which potentially makes it more attractive to new users and miners, resulting in a network effect that potentially strengthens the first-to-market advantage. Despite the marked first-mover advantage of the Bitcoin Network over other digital assets, it is possible that real or perceived shortcomings in the Bitcoin Network, technological, regulatory or other developments could result in a decline in popularity and acceptance of bitcoin and the Bitcoin Network and that other digital currencies and trading systems could become more widely accepted and used than the Bitcoin Network.

Regulatory initiatives by governments and uniform law proposals by academics and participants in the bitcoin economy may impact the use of bitcoin or the operation of the Bitcoin Network in a manner that adversely affects the Bitcoin Futures Contracts and on your investment in the Funds.

As bitcoin and other digital assets have grown in popularity and in market size, certain U.S. federal and state governments, foreign governments and self-regulatory agencies have begun to examine the operations of bitcoin, digital assets, the Bitcoin Network, bitcoin users, Bitcoin Exchanges and the Bitcoin Exchange Market. These regulatory efforts include, but are not limited to, the following.

U.S. Federal Regulations

On May 7, 2014 the SEC published an investor alert that highlighted fraud and other concerns relating to certain investment opportunities denominated in bitcoin and fraudulent and unregistered investment schemes targeted at participants in online bitcoin forums. On July 25, 2017, the SEC issued a Report of Investigation or Report which concluded that digital assets or tokens issued for the purpose of raising funds may be securities within the meaning of the federal securities laws. The Report emphasized that whether a digital asset is a security is based on the particular facts and circumstances, including the economic realities of the transactions. The SEC continues to take action against persons or entities misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi scheme), inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities.

On September 17, 2015, the CFTC provided clarity regarding the regulatory treatment of bitcoin in the Coinflip civil enforcement case. There the CFTC determined that bitcoin and other virtual currencies are regulated as commodities under the CEA. Based on this determination, the CFTC applied CEA provisions and CFTC regulations that apply to a bitcoin derivatives trading platform. Also of significance, the CFTC took the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the country of issuance.” On July 6, 2017, the CFTC granted LedgerX, LLC an order of registration as a Swap Execution Facility for digital assets and on July 24, 2017, the CFTC approved Ledger X, LLC as the first derivatives clearing organization for digital currency. On September 21, 2017, the CFTC filed a civil enforcement action in federal court against a New York corporation and its principal, charging them with fraud, misappropriation, and issuing false account statements in connection with a Ponzi scheme involving investments in bitcoin, which the CFTC asserted is a commodity subject to its jurisdiction.

 

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On March 18, 2013, the Financial Crimes Enforcement Network (“FinCEN”) a bureau of the US Department of the Treasury, issued interpretive guidance relating to the application of the Bank Secrecy Act to distributing, exchanging and transmitting “virtual currencies.” More specifically, it determined that a user of virtual currencies (such as bitcoin) for its own account will not be considered a money service business (“MSB”) or be required to register, report and perform recordkeeping; however, an administrator or exchanger of virtual currency must be a registered money services business under FinCEN’s money transmitter regulations. As a result, Bitcoin Exchanges that deal with U.S. residents or otherwise fall under U.S. jurisdiction are required to obtain licenses and comply with FinCEN regulations. FinCEN released additional guidance clarifying that, under the facts presented, miners acting solely for their own benefit, software developers, hardware manufacturers, escrow service providers and investors in bitcoin would not be required to register with FinCEN on the basis of such activity alone, but that Bitcoin Exchanges, certain types of payment processors and convertible digital asset administrators would likely be required to register with FinCEN on the basis of the activities described in the October 2014 and August 2015 letters. FinCEN has also taken significant enforcement steps against companies alleged to have violated its regulations, including the assessment in July 2017 of a civil money penalty in excess of $110 million against BTC-e for alledged willful violation of U.S. anti-money laundering laws.

U.S. State Regulations

In June 2015, the New York Department of Financial Services (the “NYDFS”) finalized a rule that requires most businesses involved in digital currency business activity in or involving New York, excluding merchants and consumers, to apply for a license (“BitLicense”) from the NYDFS and to comply with anti-money laundering, cyber security, consumer protection, and financial and reporting requirements, among others. As an alternative to the BitLicense in New York, firms can apply for a charter to become limited purpose trust companies qualified to engage in digital currency business activity. Other states have considered regimes similar to the BitLicense, or have required digital currency businesses to register with their states as money transmitters, such as Washington and Georgia, which results in digital currency businesses being subject to requirements similar to those of NYDFS’ BitLicense regime. Certain state regulators, such as the Texas Department of Banking, Kansas Office of the State Bank Commissioner and the Illinois Department of Financial and Professional Regulation, have found that mere transmission of bitcoin, without activities involving transmission of fiat currency, does not constitute money transmission requiring licensure. The North Carolina Commissioner of Banks has issued guidance providing that North Carolina’s money transmission regulations only apply to the transmission of digital currency and not its use. In June 2014, the State of California adopted legislation that would formally repeal laws that could be interpreted as making illegal the use of bitcoin or other digital assets as a means of payment. In July 2017, Delaware amended its General Corporation Law to provide for the creation maintenance of certain required records by blockchain technology and permit its use for electronic transmission of stockholder communications.

Proposed Uniform Legal Frameworks

On September 15, 2015, the Conference of State Bank Supervisors finalized their proposed model regulatory framework for state regulation of participants in “virtual currency activities.” The Conference of State Bank Supervisors proposed framework is a non-binding model and would have to be independently adopted, in sum or in

 

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part, by state legislatures or regulators on a case-by-case basis. In July 2017, the Uniform Law Commission (the “ULC”), a private body of lawyers and legal academics from the several U.S. states, voted to finalize and approve a uniform model state law for the regulation of virtual currency businesses, including bitcoin (the “Uniform Virtual Currency Act”). Having been approved by the ULC, the Uniform Virtual Currency Act now goes to each of the U.S. states and territories for their consideration and would have to be independently adopted, in sum or in part, by state legislatures or regulators on a case-by-case basis.

Non-U.S. Regulation

The global regulatory landscape for bitcoin and other digital assets has been inconsistent and continues to evolve. Some countries have taken an accommodating approach to the regulation of digital assets while others have banned their use. There are various accommodative approaches a country may take. Sweden and Australia treat bitcoin as a currency, while Canada and Taiwan have labeled bitcoin as a digital or virtual currency, distinct from fiat currency. Norway categorizes bitcoin as a form of virtual asset or commodity. The United Kingdom treats bitcoin as private money and determined that the value added tax will not apply to bitcoin sales, but it can be charged on the commission instead. In April 2017, legislation took effect in Japan that treats bitcoin and other digital assets as included in the definition of currency. In July 2016, the European Commission released a draft directive that proposed applying counter-terrorism and anti-money laundering regulations to virtual currencies, and, in September 2016, the European Banking authority advised the European Commission to institute new regulation specific to virtual currencies, with amendments to existing regulation as a stopgap measure. Regulatory bodies in some countries such as India and Switzerland have declined to exercise regulatory authority when afforded the opportunity.

Other countries are not as accommodative of bitcoin. For example, the Chinese government on December 3, 2013 issued a notice that classified bitcoin as legal and “virtual commodities;” however, the same notice restricted the banking and payment industries from using bitcoin, creating uncertainty and limiting the ability of Bitcoin Exchanges to operate in the then-second largest bitcoin market. Then on September 15, 2017, the Chinese government and local financial regulators officially requested some Chinese Bitcoin Exchanges and digital asset trading platforms to shut down by the end of September 2017. In addition, the Central Bank of Bolivia banned the use of bitcoin as a means of payment in May 2014. Further, in July 2016, the Russian Ministry of Finance indicated it supports a proposed law that bans bitcoin domestically but allows for its use as a foreign currency. In September 2017 the head of the Russian central bank stated that it is categorically against regulating cryptocurrencies as money, as a means by which payment can be made for goods and services, and against equating them with foreign currency. China’s and other countries’ restrictive stance towards digital assets may reduce the rate of expansion of bitcoin use or even eliminate the use of bitcoin entirely in these geographies.

Still other countries have taken the approach of accommodating bitcoin’s underlying technology or a variation of it. For example, in the summer and fall of 2014, Ecuador announced plans for its own state-backed electronic money, while passing legislation that prohibits the use of decentralized digital assets such as bitcoin. In July 2016, economists at the Bank of England advocated that central banks issue their own digital currency, and the House of Lords and Bank of England started discussing the feasibility of creating a national virtual currency, the BritCoin. As of July 2016, Iceland was studying how to create a system in which all money is created by a central bank, and Canada was beginning to experiment with a digital version of its currency called CAD-COIN, intended to be used exclusively for interbank payments.

The regulation of bitcoin, digital assets and related products and services continues to evolve. The inconsistent and sometimes conflicting regulatory landscape may make it more difficult for bitcoin businesses to provide services, which may impede the growth of the bitcoin economy and have an adverse effect on consumer adoption of bitcoin. There is a possibility of future regulatory change altering, perhaps to a material extent, the nature of an investment in the Funds or the ability of the Funds to continue to operate. Additionally, to the extent that bitcoin itself is determined to be a security, commodity future or other regulated asset, or to the extent that a United States or foreign government or quasi-governmental agency exerts regulatory authority over the Bitcoin Network, bitcoin trading or ownership in bitcoin, the Bitcoin Futures Contracts may be adversely affected, which may have an adverse effect on the value of your investment in the Funds. In sum, bitcoin regulation takes many different forms and will, therefore, impact bitcoin and its usage in a variety of manners.

It may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoin in one or more countries, which could have an adverse effect on the price of bitcoin and the Bitcoin Futures Contracts.

Although currently bitcoin is not regulated or is lightly regulated in most countries, including the United States, some countries have and one or more countries may in the future take regulatory actions that severely restrict the right to acquire, own, hold, sell or use bitcoin or to exchange bitcoin for fiat currency. Such restrictions could have an adverse effect on the price of bitcoin and the Bitcoin Futures Contracts in which the Funds invest and may adversely affect an investment in the Funds.

 

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Intellectual property rights claims may adversely affect the operation of the Bitcoin Network.

The Bitcoin Network is currently maintained by the Core Developers (as defined herein) and no single entity owns the Bitcoin Network (see “Description of Bitcoin and the Bitcoin Network—The Bitcoin Network”). However, third parties may still assert intellectual property rights claims relating to the operation of the Bitcoin Network. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer bitcoin may adversely affect the price of bitcoin and adversely affect the Bitcoin Futures Contracts. Additionally, a meritorious intellectual property rights claim could prevent end-users from accessing the Bitcoin Network or holding or transferring their bitcoin, which could adversely affect the value of the Bitcoin Futures Contracts. As a result, an intellectual property rights claim against Bitcoin Network participants could have a material adverse impact on the Funds.

Banks may not provide banking services, or may cut off banking services, to businesses that provide bitcoin-related services or that accept bitcoin as payment, which could damage the public perception of bitcoin and the utility of bitcoin as a payment system and could decrease the price of bitcoin and the Bitcoin Futures Contract and adversely affect an investment in the Funds.

A number of companies that provide bitcoin-related services have been unable to find banks that are willing to provide them with bank accounts and banking services. Similarly, a number of such companies have had their existing bank accounts closed by their banks. Banks may refuse to provide bank accounts and other banking services to bitcoin-related companies or companies that accept bitcoin for a number of reasons, such as perceived compliance risks or costs. The difficulty that many businesses that provide bitcoin-related services have and may continue to have in finding banks willing to provide them with bank accounts and other banking services may be currently decreasing the usefulness of bitcoin as a payment system and harming public perception of bitcoin or could decrease its usefulness and harm its public perception in the future. Similarly, the usefulness of bitcoin as a payment system and the public perception of bitcoin could be damaged if banks were to close the accounts of many or of a few key businesses providing bitcoin-related services. This could decrease the price of bitcoin and have an adverse effect on the price of Bitcoin Futures Contracts and therefore adversely affect an investment in the Funds.

Risks Specific to the Inverse Fund

In addition to the risks described elsewhere in this “Risk Factors” section, the following risks apply to the Inverse Fund.

Due to the compounding of daily returns, the Inverse Fund’s returns over periods longer than a single day will likely differ in amount and possibly even direction from the Fund’s multiple (-1x) times the return of the Benchmark for the period.

The Inverse Fund has an investment objective to correspond (before fees and expenses) to the inverse (-1x) of the performance of the Benchmark for a single day. The Inverse Fund seeks investment results for a single day only, as measured from NAV calculation time to NAV calculation time, and not for any other period (see “Summary—Creation and Redemption Transactions” for the typical NAV calculation time of each Fund). The return of the Inverse 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 the inverse (-1x) of the return of the Benchmark for the same period. The Inverse Fund will lose money if the price of the Bitcoin Futures Contracts it holds is flat over time, and it is possible for the Inverse Fund to lose money over time regardless of the price of the Bitcoin Futures Contracts, as a result of daily rebalancing, the Bitcoin Futures Contracts’ volatility and the effects of compounding. Longer holding periods, higher volatility, inverse exposure and greater leverage each affect the impact of compounding on the Inverse Fund’s returns. Daily compounding of the Inverse 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 the Inverse Fund’s return for a period as the return of the Benchmark.

The Inverse Fund is designed to return the inverse (-1x) of the return for a single day that would be expected of a fund with an objective of matching the Benchmark for such day. The Inverse Fund is not appropriate for all investors and presents different risks than other funds. The Inverse Fund uses leverage and is riskier than similarly benchmarked

 

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exchange-traded funds that do not use leverage. An investor should only consider an investment in the Inverse Fund if he or she understands the consequences of seeking inverse investment results for a single day. The Inverse Fund, if used properly and in conjunction with the investor’s view on the future direction and volatility of the markets, can be a 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 Inverse Fund should actively manage and monitor their investments, as frequently as daily.

The hypothetical examples below illustrate how daily Inverse Fund returns can behave for periods longer than a single day. Each involves a hypothetical Fund XYZ that seeks the inverse of the daily performance of the Benchmark (i.e., lead month Bitcoin Futures Contracts). On each day, Fund XYZ performs in line with its objective (-1X the daily performance of the Benchmark before fees and expenses). Notice that, in the first example (showing an overall loss for the period), over the entire seven-day period, the Fund XYZ’s total return is less than the inverse of the loss of the period return of the Benchmark. For the seven-day period, the Bitcoin Futures Contracts lost -3.26% while Fund XYZ gained 2.72% (versus % 3.26% (or -1*(-3.26%)).

 

     Bitcoin Futures Contracts     Fund XYZ  
     Price      Daily
Performance
    Daily
Performance
    Net Asset
Value
 

Start

     100.00          $ 100.00  

Day 1

     97.00        -3.00 %     3.00 %   $ 103.00  

Day 2

     99.91        3.00 %     -3.00 %   $ 99.91  

Day 3

     96.91        -3.00 %     3.00 %   $ 102.91  

Day 4

     99.82        3.00 %     -3.00 %   $ 99.82  

Day 5

     96.83        -3.00 %     3.00 %   $ 102.81  

Day 6

     99.73        3.00 %     -3.00 %   $ 99.73  

Day 7

     96.74        -3.00 %     3.00 %   $ 102.72  
     

 

 

   

 

 

   

Total Return

        -3.26 %     2.72 %  
     

 

 

   

 

 

   

Similarly, in another example (showing an overall gain for the period), over the entire seven-day period, the Fund XYZ’s total return is less than the inverse of the period return of the Benchmark. For the seven-day period, the Bitcoin Futures Contracts gained 2.72% while Fund XYZ lost -3.26% (versus -2.72% (or -1 x 2.72%)).

 

     Bitcoin Futures Contracts     Fund XYZ  
     Price      Daily
Performance
    Daily
Performance
    Net Asset
Value
 

Start

     100.00          $ 100.00  

Day 1

     103.00        3.00 %     -3.00 %   $ 97.00  

Day 2

     99.91        -3.00 %     3.00 %   $ 99.91  

Day 3

     102.91        3.00 %     -3.00 %   $ 96.91  

Day 4

     99.82        -3.00 %     3.00 %   $ 99.82  

Day 5

     102.81        3.00 %     -3.00 %   $ 96.83  

Day 6

     99.73        -3.00 %     3.00 %   $ 99.73  

Day 7

     102.72        3.00 %     -3.00 %   $ 96.74  
     

 

 

   

 

 

   

Total Return

        2.72 %     -3.26 %  
     

 

 

   

 

 

   

These effects are caused by compounding, which exists in all investments, but has a more significant impact for the Inverse Fund. In general, during periods of higher Bitcoin Futures Contract volatility, compounding will cause the Inverse Fund’s results for periods longer than a single day to be less than the inverse (-1x) of the return of the Benchmark. This effect becomes more pronounced as volatility increases. Conversely, in periods of lower Bitcoin Futures Contract volatility, the Inverse Fund’s returns over longer periods can be higher than the inverse (-1X) of the Benchmark. Actual results for a particular period, before fees and expenses, are also dependent on the magnitude of the return of the.

 

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The graphs that follow illustrate this point. Each of the graphs shows a simulated hypothetical one-year performance of the Benchmark (i.e., lead month Bitcoin Futures Contracts) compared with the performance of a fund that perfectly achieves its inverse daily investment objective on each day during the period. The graphs demonstrate that, for periods greater than a single day, an inverse fund is likely to underperform or overperform (but not match) the performance of the Bitcoin Futures Contracts (or the inverse of the performance of the Bitcoin Futures Contracts) times the multiple stated as the daily fund objective. Investors should understand the consequences of holding daily rebalanced funds 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 return of the Bitcoin Futures Contracts (or the inverse of the return of the Bitcoin Futures Contracts) times the fund multiple can occur over periods as short as two days (each day as measured from NAV to NAV) and may also occur in periods shorter than a single day (when measured intraday as opposed to NAV to NAV). See “Intraday Price/Performance Risk” below for additional details. To isolate the impact of daily leveraged exposure or inverse exposure, these graphs assume: a) no fund expenses or transaction costs; b) borrowing/lending rates (to obtain required leveraged or inverse exposure) and cash reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (-1x) as of the fund’s NAV calculation time each day. If these assumptions were different, the fund’s performance would be different than that shown. If fund expenses, transaction costs and financing expenses greater than zero percent were included, the fund’s performance would also be different than shown. Each of the graphs also assumes a volatility rate of 95%, which is the five year annualized volatility rate of the spot bitcoin prices against the U.S. Dollar reported by Bloomberg as of December 31, 2016. The prices reported by Bloomberg reflect Bloomberg’s proprietary composite rate of spot bitcoin against the U.S. Dollar at 16:59:59 Eastern Time for each trading day in U.S. equity markets. The composite rate is derived by aggregating information from the following Bitcoin exchanges: BitStamp, CoinBase, ItBit and Kraken. The volatility rate of spot bitcoin is used for illustrative purposes only because the market for Bitcoin Futures Contracts is new and historical information about the volatility of such contracts for extended periods is not yet available. The volatility of spot bitcoin prices and the volatility of Bitcoin Futures Contracts can be expected to be different over both short and long periods of time.

These graphs are presented to provide examples of what can occur if an investor chooses to hold the Inverse Fund 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.

 

LOGO

The graph above shows a scenario where the Benchmark, which exhibits day-to-day volatility, is flat or trendless over the year (i.e., begins and ends the year at 0%), but the Inverse Fund (-1x) is down.

 

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LOGO

The graph above shows a scenario where the Benchmark, which exhibits day-to-day volatility, is down over the year, but the Inverse Fund (-1x) is up less than the inverse of the Benchmark.

 

LOGO

The graph above shows a scenario where the Benchmark, which exhibits day-to-day volatility, is up over the year, but the Inverse Fund (-1x) is down more than the inverse of the Benchmark.

The tables below illustrate the impact of two factors that affect the Inverse Fund’s performance, both volatility and returns of the Bitcoin Futures Contracts. Volatility is a statistical measure of the magnitude of fluctuations in the returns of the Benchmark Futures Contracts. The tables show estimated fund returns for a number of combinations of

 

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both the volatility and return of the Bitcoin Futures Contracts over a one-year period. To isolate the impact of daily inverse exposure, the graphs assume: a) no fund expenses or transaction costs; b) borrowing/lending rates of zero percent (to obtain required leveraged or inverse exposure) and cash reinvestment rates of zero percent; and c) each fund consistently maintaining perfect exposure (-1x) as of the fund’s NAV calculation time each day. If these assumptions were different, the funds’ performance would be different than that shown. If fund expenses, transaction costs and financing expenses were included, a fund’s performance would be different than shown. The table below shows an example in which an inverse fund has an investment objective to correspond (before fees and expenses) to the inverse (-1X) of the daily performance of the Benchmark. The inverse fund could incorrectly be expected to achieve a -10% return on a yearly basis if the return of the Benchmark was 10%, absent the effects of compounding. However, as the table shows, with volatility of the Benchmark of 95%, such a fund would return -63.1%. In the charts below, shaded areas represent those scenarios where an inverse fund with the investment objective described will outperform (i.e., return more than) the performance of the Benchmark times the stated multiple in the fund’s investment objective; conversely areas not shaded represent those scenarios where the fund will underperform (i.e., return less than) the performance of the Benchmark times the multiple stated as the daily fund objective.

Estimated Fund Return Over One Year When the Fund Objective is to Seek Investment Results For a single day, Before Fees and Expenses, that Correspond to the Inverse (-1x) of the Daily Performance of the Bitcoin Futures Contracts.

 

LOGO

The foregoing table is intended to isolate the effect of volatility of the Bitcoin Futures Contracts and performance of the Bitcoin Futures Contracts on the return of an inverse (-1X) fund. The fund’s actual returns 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.

 

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Correlation Risks Specific to the Inverse Fund

In order to achieve a high degree of inverse correlation with the Benchmark, the Inverse Fund seeks to rebalance its portfolio daily to keep exposure consistent with its investment objective. Being materially under or overexposed to the Bitcoin Futures Contracts and Financial Instruments, if any, may prevent the Inverse Fund from achieving a high degree of correlation with the Benchmark. Market disruptions or closures, large movements of assets into or out of the Inverse 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 movements of the price of the Bitcoin Futures Contracts and Financial Instruments, if any, held by the Inverse Fund during each day. Because of this, it is unlikely that the Inverse Fund will be perfectly exposed (i.e., -1x) at the end of each day, and the likelihood of being materially under- or overexposed is higher on days when the price of the Bitcoin Futures Contracts or Financial Instruments, if any, held by the Inverse Fund are volatile near the close of the trading day.

In addition, unlike other funds that do not rebalance their portfolios as frequently, the Inverse Fund may be subject to increased trading costs associated with daily portfolio rebalancings in order to maintain appropriate exposure to the Bitcoin Futures Contracts. Such costs include commissions paid to the FCMs, and may vary by FCM. The effects of these trading costs have been estimated and included in the Breakeven Table. See “Charges—Breakeven Table” below.

For general correlation risks of the Inverse Fund, please see “Several factors may affect a Fund’s ability to closely track its investment objective on a consistent basis.” below.

Intraday Price/Performance Risk.

The Inverse Fund is typically rebalanced at or about the time of its NAV calculation time (which may be other than at the close of the U.S. equity markets). As such, the intraday position of the Inverse Fund will generally be different from the Inverse Fund’s stated daily investment objective (i.e., -1x). When Shares are bought intraday, the performance of the Inverse Fund’s Shares until the Inverse Fund’s next NAV calculation will generally be greater than or less than the Inverse Fund’s stated daily multiple.

The use of inverse positions by the Inverse Fund could result in the total loss of an investor’s investment.

Inverse positions can also result in the total loss of an investor’s investment. For the Inverse Fund, a single-day or intraday increase in the price of the Bitcoin Futures Contracts approaching 100% could result in the total loss or almost total loss of an investor’s investment.

Additional Risks Applicable to Both Funds

The assets that the Funds invest in can be highly volatile and the Funds may experience large losses when buying, selling or holding such instruments.

Investments linked to bitcoin, including the Bitcoin Futures Contracts and Financial Instruments, can be highly volatile and may experience large losses. High volatility may have an adverse impact on the Funds beyond the impact of any performance-based losses of the underlying Bitcoin Futures Contracts and Financial Instruments, if any, especially with respect to the Inverse Fund (see “Risks Specific to the Inverse Fund” for additional details).

The Funds have no operating history, and, as a result, investors have no performance history to serve as a factor for evaluating an investment in the Funds.

The Funds have no performance history upon which to evaluate an investor’s investment in the Funds. Although past performance is not necessarily indicative of future results, if the Funds had any performance history, such performance history might (or might not) provide investors with more information on which to evaluate an investment in the Funds.

 

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The lack of active trading markets for the Shares of the Funds may result in losses on investors’ investments at the time of disposition of Shares.

Although the Shares of the Funds are expected to be publicly listed and traded on the Exchange, there can be no guarantee that an active trading market for the Shares of the Funds will develop or be maintained. If investors need to sell their Shares at a time when no active market for them exists, the price investors receive for their Shares, assuming that investors are able to sell them, likely will be lower than the price that investors would receive if an active market did exist.

Possible illiquid markets may exacerbate losses.

A Fund may not always be able to buy and sell portfolio investments at the desired price. Bitcoin Futures Contracts are a new asset with a very limited trading history. Similarly, options on Bitcoin Futures Contracts and options on bitcoin are new assets with very limited trading history. Therefore, the markets for these instruments may be less liquid and more volatile than other markets for more established products, such as futures contracts for traditional physical commodities and options on such contracts. 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 can also make it difficult to liquidate a position or find a suitable counterparty at a reasonable cost.

Market illiquidity may cause losses for the Funds. The large size of the positions which the Funds may acquire increases the risk of illiquidity by both making their positions more difficult to liquidate and increasing the losses incurred while trying to do so. Any type of disruption or illiquidity will potentially be exacerbated due to the fact that the Funds will typically invest in Financial Instruments related to one benchmark, which is highly concentrated

Potential negative impact from rolling futures positions.

Under normal market conditions, each Fund intends to invest substantially all of its assets in Bitcoin Futures Contracts. The contractual obligations of a buyer or seller holding a futures contract to expiration may 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 Bitcoin Futures Contracts held by the Funds near expiration, they are generally closed out and replaced by contracts with a later expiration. This process is referred to as “rolling.” The Funds do not intend to hold Bitcoin Futures Contracts through expiration, but instead to “roll” their respective positions. Accordingly, the Funds are subjects to risks related to rolling.

When the market for certain futures 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 Bitcoin Futures Contracts would take place at a price that is lower than the price of the more distant Bitcoin Futures Contracts. This pattern of higher futures prices for longer expiration Bitcoin Futures Contracts is often referred to as “contango.” Alternatively, when the market for certain Bitcoin Futures 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 Bitcoin Futures Contracts would take place at a price that is higher than the price of the more distant Bitcoin Futures Contracts. This pattern of higher future prices for shorter expiration Bitcoin Futures Contracts is referred to as “backwardation.”

 

    The presence of contango in the relevant Bitcoin Futures Contracts at the time of rolling would be expected to adversely affect the Matching Fund with long positions, and positively affect the Inverse Fund with short positions.

 

    Similarly, the presence of backwardation in certain Bitcoin Futures Contracts at the time of rolling such Bitcoin Futures Contracts would be expected to adversely affect the Inverse Fund with short positions and positively affect the Matching Fund with long positions.

There have been extended periods in which contango or backwardation has existed in certain futures markets in general (the market for bitcoin futures is in its infancy). Such periods could occur in the future for Bitcoin Futures Contracts and may cause significant and sustained losses.

 

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Several factors may affect a Fund’s ability to closely track its investment objective on a consistent basis.

While the Funds seek to meet their investment objectives, there is no guarantee they will do so. Factors that may affect a Fund’s ability to meet its investment objective include: (1) the Sponsor’s ability to purchase and sell Bitcoin Futures Contracts in a manner that correlates to a Fund’s objective; (2) an imperfect correlation between the performance of the Bitcoin Futures Contracts and any Financial Instruments actually held by a Fund and the performance of the Benchmark; (3) bid-ask spreads on Bitcoin Futures Contracts and Financial Instruments, if any, held by a Fund; (4) fees, expenses, transaction costs, financing costs associated with the use of the Bitcoin Futures Contracts and Financial Instruments, if any, held by a Fund ; (5) holding Bitcoin Futures Contracts or Financial Instruments traded in a market that has become illiquid or disrupted; (6) a Fund’s Share prices being rounded to the nearest cent and/or valuation methodologies; (7) the need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; (8) early or unanticipated closings of the markets on which the Bitcoin Futures Contracts or Financial Instruments, if any, held by a Fund trade, resulting in the inability of the Fund to execute intended portfolio transactions; (9) accounting standards; and (10) although the Sponsor employs an active rolling methodology that attempts to minimize any loses and to maximize any benefits from the rolling process, there can be no assurance that this outcome will occur and it is expected that such related activities will increase potential differences between the performance of the Funds and the performance of the Bitcoin Futures Contracts.

Being materially under- or overexposed to Bitcoin Futures Contracts or Financial Instruments may prevent such Fund from achieving a high degree of correlation with the Benchmark, or the inverse (-1X) of the Benchmark, as applicable. Market disruptions or closures, large movements of assets into or out of the Funds, regulatory restrictions or extreme market volatility will adversely affect such Funds’ ability to maintain a high degree of correlation.

The value of the Shares of each Fund relates directly to the value of, and realized profit or loss from, the Bitcoin Futures Contracts, Financial Instruments and other assets held by that Fund. Fluctuations in the price of the Bitcoin Futures Contracts, Financial Instruments or assets could materially adversely affect an investment in the Funds.

Several factors may affect the price and/or liquidity of the Bitcoin Futures Contracts, the Financial Instruments and other assets, if any, owned by a Fund, including, but not limited to:

 

    Changes in the open-source software protocol of the Bitcoin Network (e.g., a “fork”) that impact the price (or expected future price) of bitcoin;

 

    The level of contango or backwardation in the Bitcoin Futures Contracts market;

 

    Government and quasi-government regulation of bitcoin and other digital assets and their use, or restrictions on or regulations of access to and operation of the Bitcoin Network or similar digital assets;

 

    Continued worldwide growth in the adoption and use of bitcoin and other digital assets; and

 

    General economic conditions and the regulatory environment relating to bitcoin.

These factors interrelate in complex ways, and the effect of one factor on the market value of a Fund may offset or enhance the effect of another factor.

Each Fund seeks to provide investment results (before fees and expenses) that match the performance of the Benchmark, in the case of the Matching Fund, or that correspond to the daily performance of the inverse (-1x) of the Benchmark, in the case of the Inverse Fund, at all times, even during periods when the Benchmark is flat or when the Benchmark moving in a manner which causes the value of the Fund to decline.

Other than for cash management purposes and the rolling methodology employed by the Sponsor, the Funds are not actively managed by traditional methods (e.g., by effecting changes in the composition of a portfolio on the basis of judgments relating to economic, financial and market considerations with a view toward obtaining positive results under all market conditions). Rather, and subject to the Sponsor’s rolling methodology used for the Funds, the Sponsor seeks to cause the NAV of each Fund to track the daily performance of the Bitcoin Futures Contracts in accordance with such Fund’s investment objective, even during periods in which the Bitcoin Futures Contracts are flat or moving in a manner which causes the value of the Fund to decline. It is possible to lose money over time regardless of the performance of the Bitcoin Futures Contracts, due to the effects of daily rebalancing, volatility and compounding (see “Risks Specific to the Inverse Fund” for additional details).

.

 

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Fees are charged regardless of a Fund’s returns and may result in depletion of assets.

The Funds are subject to the fees and expenses described herein which are payable irrespective of a Fund’s returns, as well as the effects of commissions, trading spreads, and embedded financing, borrowing costs and fees associated with swaps, futures contracts, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality, short-term fixed-income or similar securities. Additional charges may include other fees as applicable.

The Funds may be subject to counterparty risks.

Although each Fund generally seeks to remain fully invested at all times in Bitcoin Futures Contracts in a manner consistent with its stated investment objective, each Fund also may invest in swap agreements when accountability rules or position limits applicable to the Bitcoin Futures Contracts (if any) are reached or where the market for a specific Bitcoin Futures Contract experiences emergencies (e.g., natural disaster, terrorist attack or an act of God) or disruptions (e.g., a trading halt or a flash crash) that prevent the Funds from obtaining the appropriate amount of investment exposure to the affected Bitcoin Futures Contracts. Although unlikely, the Funds, under these circumstances, could have 100% exposure to swap agreements.

The Funds will be subject to credit risk with respect to the counterparties to the swap agreements (whether a clearing corporation in the case of cleared instruments or another third party in the case of OTC uncleared instruments). Unlike in futures contracts, the counterparty to uncleared swap agreements is generally a single bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result, a Fund is subject to increased credit risk with respect to the amount it expects to receive from counterparties to uncleared swaps entered into as part of that Fund’s principal investment strategy. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, a Fund could suffer significant losses on these contracts and the value of an investor’s investment in a Fund may decline.

The Funds will seek to mitigate these risks by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain minimum thresholds; however there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings. The Funds typically enter into transactions only with major, global financial institutions.

OTC swaps of the type that may be utilized by the Funds are less liquid than futures contracts because they are not traded on an exchange, do not have uniform terms and conditions, and are generally entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral, and in general, are not transferable without the consent of the counterparty. These agreements contain various conditions, events of default, termination events, covenants and representations. The triggering of certain events or the default on certain terms of the agreement could allow a party to terminate a transaction under the agreement and request immediate payment in an amount equal to the net positions owed the party under the agreement. For example, if the price of bitcoin has a dramatic intraday move that would cause a material decline in the Bitcoin Futures Contracts and ultimately a Fund’s NAV, the terms of the swap may permit the counterparty to immediately close out the transaction with the Fund. In that event, it may not be possible for the affected Fund to enter into another swap agreement or appropriate investment necessary to achieve the desired exposure consistent with such Fund’s objective. This, in turn, may prevent a Fund from achieving its investment objective, particularly if the price of bitcoin reverses all or part of its intraday move by the end of the day. In addition, cleared derivatives transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from such protections. This exposes the Funds to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Funds to suffer a loss.

 

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The Sponsor regularly reviews the performance of its counterparties for, among other things, creditworthiness and execution quality. In addition, the Sponsor periodically considers the addition of new counterparties. See pages 31 through 32 for more information about the Funds’ swap agreements and forward contracts. Each day, the Funds disclose their portfolio holdings as of the prior Business Day (as such term is defined in “Creation and Redemption of Shares—Creation Procedures” below). Each Fund’s portfolio holdings identifies its counterparties, as applicable. This portfolio holdings information may be accessed through the web on the Sponsor’s website at www.ProShares.com .

The counterparty risk for cleared derivatives transactions is generally lower than for uncleared OTC derivatives since generally a clearing organization becomes substituted for each counterparty to a cleared derivatives contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing house for performance of financial obligations. However, there can be no assurance that the clearing house, or its members, will satisfy its obligations to a Fund.

The Funds may be subject to the risks of option contracts

Each Fund may invest in Options. An option contract gives the holder of the option the right to buy (or to sell) a position in a reference asset (such as bitcoin or Bitcoin Futures Contracts) to the writer of the option, at a certain price. A Fund’s investments in Options, if any, are subject to correlation risk because there may be an imperfect correlation between the Options and the underlying reference asset that cause a given transaction to fail to achieve its objectives. The successful use of Options depends on the Sponsor’s ability to correctly predict future price fluctuations and the degree of correlation between the options and securities markets. Exchanges can limit the number of positions that can be held or controlled by the Fund or the Sub-Adviser, thus limiting the ability to implement the Fund’s strategies. Options are also particularly subject to leverage risk and can be subject to liquidity risk.

An investment in the Funds may be adversely affected by competition from other bitcoin investment vehicles or from investment vehicles focused on other digital assets.

The Funds will compete with direct investments in bitcoin and other potential financial vehicles, possibly including securities backed by or linked to bitcoin and other investment vehicles that focus on other digital assets. Market and financial conditions, and other conditions beyond the Funds’ control, may make it more attractive to invest in other vehicles which could adversely affect the performance of the Funds.

Investors cannot be assured of the Sponsor’s continued services, the discontinuance of which may be detrimental to the Funds.

Investors cannot be assured that the Sponsor will be able to continue to service the Funds for any length of time. If the Sponsor discontinues its activities on behalf of the Funds, the Funds may be adversely affected, as there may be no entity servicing the Funds for a period of time. If the Sponsor’s registrations with the CFTC or memberships in the NFA were revoked or suspended, the Sponsor would no longer be able to provide services and/or to render advice to the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their investment objectives unless and until the Sponsor’s ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the Funds.

A Fund may terminate and liquidate at a time that is disadvantageous to shareholders.

If a Fund lacks the demand necessary to remain open, then the Fund will likely be terminated and liquidated. For example, the ProShares Managed Futures Strategy Funds was terminated and liquidated in March 2016 because it lacked the demand necessary to remain open. Termination and liquidation of a Fund could occur at a time that is disadvantageous to shareholders. When the Fund’s assets are sold as part of the Fund’s liquidation, the resulting proceeds distributed to shareholders may be less than those that may be realized in a sale outside of a liquidation context. Investors may be adversely affected by redemption or creation orders that are subject to postponement, suspension or rejection under certain circumstances.

 

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Investors may be adversely affected by redemption or creation orders that are subject to postponement, suspension or rejection under certain circumstances.

A Fund may, in its discretion, suspend the right of creation or redemption or may postpone the redemption or purchase settlement date, for (1) any period during which the Exchange or any other exchange, marketplace or trading center, deemed to affect the normal operations of the Funds, is closed, or when trading is restricted or suspended or restricted on such exchanges in any of the Funds’ Bitcoin Futures Contracts, (2) any period during which an emergency exists as a result of which the fulfillment of a purchase order or the redemption distribution is not reasonably practicable, or (3) such other period as the Sponsor determines to be necessary for the protection of the shareholders of the Funds. In addition, a Fund will reject a redemption order if the order is not in proper form as described in the Authorized Participant Agreement or if the fulfillment of the order might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. For example, the resulting delay may adversely affect the value of the Authorized Participant’s redemption proceeds if the NAV of a Fund declines during the period of delay. The Funds disclaim any liability for any loss or damage that may result from any such suspension or postponement. Suspension of creation privileges may adversely impact how the Shares are traded and arbitraged on the secondary market, which could cause them to trade at levels materially different (premiums and discounts) from the fair value of their underlying holdings.

The NAV may not always correspond to market price and, as a result, investors may be adversely affected by the creation or redemption of Creation Units at a value that differs from the market price of the Shares.

The NAV per Share of a Fund will change as fluctuations occur in the market value of a Fund’s portfolio. Investors should be aware that the public trading price per Share of a Fund may be different from the NAV per Share of the Fund (i.e., the secondary market price may trade at a premium or discount to NAV). Consequently, an Authorized Participant may be able to create or redeem a Creation Unit of a Fund at a discount or a premium to the public trading price per Share of that Fund.

Authorized Participants or their clients or customers may have an opportunity to realize a profit if they can purchase a Creation Unit at a discount to the public trading price of the Shares of a Fund or can redeem a Creation Unit at a premium over the public trading price of the Shares of a Fund. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track the NAV per Share of the Funds closely over time.

Competing claims of intellectual property rights may adversely affect the Funds and an investment in the Funds.

The Sponsor believes that it has properly licensed or obtained the appropriate consent of all necessary parties with respect to intellectual property rights. However, other third parties could allege ownership as to such rights and may bring an action in asserting their claims. To the extent any action is brought by a third party asserting such rights, the expenses in litigating, negotiating, cross-licensing or otherwise settling such claims may adversely affect the Funds. Although the Sponsor does not anticipate that such claims will adversely impact the Funds, it is impossible to provide definite assurances that no such negative impact will occur.

Investors may be adversely affected by an overstatement or understatement of the NAV calculation of the Funds due to the valuation method employed on the date of the NAV calculation.

In certain circumstances, a Fund’s portfolio investments may be valued using techniques other than market quotations. The value established for a portfolio investment may be different from what would be produced through the use of another methodology or if it had been priced using market quotations. Portfolio investments that are valued using techniques other than market quotations, including investments that are “fair valued” may be subject to greater fluctuation in their value from one day to the next than would be the case if market quotations were used. In addition, there is no assurance that the Fund could sell a portfolio investment for the value established for it at any time, and it is possible that the Fund would incur a loss because an investment is sold at a discount to its established value.

 

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The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the market price of the Shares.

In the event that one or more Authorized Participants which have substantial interests in the Shares withdraw from participation, the liquidity of the Shares will likely decrease, which could adversely affect the market price of the Shares and result in investors incurring a loss on their investment.

Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect investors’ investment in the Shares.

Only Authorized Participants may create or redeem Creation Units. All other investors that desire to purchase or sell Shares must do so through the Exchange 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.

The Exchange may halt trading in the Shares of a Fund, which would adversely impact investors’ ability to sell Shares.

Trading in Shares of a Fund may be halted due to market conditions or, in light of the applicable Exchange rules and procedures, for reasons that, in the view of the Exchange, make trading in Shares of a Fund inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a specified decline or rise in a market index (e.g., the Dow Jones Industrial Average) or in the price of a Fund’s Shares. Additionally, the ability to short sell a Fund’s Shares may be restricted when there is a 10% or greater change from the previous day’s official closing price. There can be no assurance that the requirements necessary to maintain the listing of the Shares of a Fund will continue to be met or will remain unchanged.

Shareholders do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act.

The Funds are not subject to registration or regulation under the 1940 Act. Consequently, shareholders do not have the regulatory protections provided to investors in investment companies.

Shareholders do not have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights.

The Shares have limited voting and distribution rights. For example, shareholders do not have the right to elect directors, the Funds may enact splits or reverse splits without shareholder approval and the Funds are not required to pay regular distributions, although the Funds may pay distributions at the discretion of the Sponsor.

The value of the Shares will be adversely affected if the Funds are required to indemnify the Trustee.

Under the Amended and Restated Trust Agreement of the Trust, as may be further amended and restated from time to time (the “Trust Agreement”), the Trustee has the right to be indemnified for any liability or expense incurred without gross negligence or willful misconduct. That means the Sponsor 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 one or more of the Funds.

Although the Shares of the Funds are limited liability investments, certain circumstances such as bankruptcy of a Fund will increase a shareholder’s liability.

The Shares of the Funds are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on their investment. However, shareholders could be required, as a matter of bankruptcy law, to return to the estate of a Fund any distribution they received at a time when such Fund was in fact insolvent or in violation of the Trust Agreement.

 

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Failure of the FCMs to segregate assets may increase losses in the Funds.

The CEA requires a clearing broker to segregate all funds received from customers from such broker’s proprietary assets. There is a risk that assets deposited by the Sponsor on behalf of the Funds as margin with the FCMs may, in certain circumstances, be used to satisfy losses of other clients of the FCMs. If an FCM fails to segregate the funds received from the Sponsor, the assets of the Funds might not be fully protected in the event of the FCM’s bankruptcy. Furthermore, in the event of an FCM’s bankruptcy, Fund Shares could be limited to recovering only a pro rata share of all available funds segregated on behalf of the FCM’s combined customer accounts, even though certain property specifically traceable to a particular Fund was held by the FCM, and it is possible that a Fund may not be able to recover any funds in the event of the FCM’s bankruptcy. Each FCM may, from time to time, be the subject of certain regulatory and private causes of action.

Similarly, the CEA requires a clearing organization approved by the CFTC as a derivatives clearing organization to segregate all funds and other property received from a clearing member’s clients in connection with domestic futures and options contracts from any funds held at the clearing organization to support the clearing member’s proprietary trading. Nevertheless, customer funds held at a clearing organization in connection with any futures or options contracts may be held in a commingled omnibus account, which may not identify the name of the clearing member’s individual customers. With respect to futures and options contracts, a clearing organization may use assets of a non-defaulting customer held in an omnibus account at the clearing organization to satisfy payment obligations of a defaulting customer of the clearing member to the clearing organization. As a result, in the event of a default of the clearing FCM’s other clients or the clearing FCM’s failure to extend its own funds in connection with any such default, a Fund may not be able to recover the full amount of assets deposited by the clearing FCM on behalf of the Fund with the clearing organization. In the event of a bankruptcy or insolvency of any exchange or a clearing house, a Fund could experience a loss of the funds deposited through its FCM as margin with the exchange or clearing house, a loss of any profits on its open positions on the exchange, and the loss of unrealized profits on its closed positions on the exchange.

A court could potentially conclude that the assets and liabilities of a Fund are not segregated from those of another series of the Trust and may thereby potentially expose assets in a Fund to the liabilities of another series of the Trust.

Each series of the Trust is a separate series of a Delaware statutory trust and not itself a separate legal entity. Section 3804(a) of the Delaware Statutory Trust Act, as amended (the “DSTA”), provides that if certain provisions are 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 (directly or indirectly, including through a nominee or otherwise) and 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, contracted for or otherwise existing with respect to 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, and none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the statutory trust generally or any other series thereof shall be enforceable against the assets of such series. The Sponsor is not aware of any court case that has interpreted Section 3804(a) of the DSTA or provided any guidance as to what is required for compliance. The Sponsor maintains separate and distinct records for each series and accounts for them separately, but it is possible a court could conclude that the methods used did not satisfy Section 3804(a) of the DSTA and thus potentially expose assets of a Fund to the liabilities of another series of the Trust.

There may be circumstances that could prevent a Fund from being operated in a manner consistent with its investment objective and principal investment strategies.

There may be circumstances outside the control of the Sponsor and/or a Fund that make it, for all practical purposes, impossible to re-position such Fund and/or to process a purchase or redemption order. Examples of such circumstances include: natural disasters; public service disruptions or utility problems such as those caused by fires, floods, extreme weather conditions, and power outages resulting in telephone, telecopy, and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the aforementioned parties, as well as the Depository Trust Company (“DTC”), the National Securities Clearing Corporation (“NSCC”), or any other participant in the purchase process; and similar extraordinary events. Accordingly, while the Sponsor has implemented and tested a business continuity plan that transfers functions of any disrupted facility to another location and has effected a disaster recovery plan, circumstances, such as those above, may prevent a Fund from being operated in a manner consistent with its investment objective and/or principal investment strategies.

 

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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. 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 a Fund’s third party service provider (including, but not limited to, index providers, the administrator and transfer agent) or the issuers of securities in which the Funds invest, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, the inability of a Fund’s 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. 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 and systems to prevent such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified.

The U.S. federal income taxation of bitcoin is not entirely clear.

There is very limited authority on the tax treatment of bitcoin and no direct authority on bitcoin derivatives. Each of the Funds intends to be treated as a partnership that is not a publicly traded partnership for U.S. federal income tax purposes. Because of a CFTC determination that treats bitcoin as a commodity under the Commodities Exchange Act, each Fund intends to take the position that Bitcoin Futures Contracts consist of futures on commodities for U.S. federal income tax purposes, including (but not limited to) for purposes of the qualifying income test under Section 7704(d) of the Internal Revenue Code (“Code”). If a Fund’s determination were incorrect, such Fund would be taxed as a corporation subject to entity level tax and any Fund distributions to shareholders would be taxed as dividends to the extent of such Fund’s earnings and profits and the after-tax return on a shareholder’s investment in such Fund would be significantly reduced. Prospective investors should consult their own tax advisors on the tax consequences of investing in a Fund.

Shareholders’ tax liability will exceed cash distributions on the Shares.

Shareholders of each Fund are subject to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on their share of the Fund’s taxable income, whether or not they receive cash distributions from the Fund. The Funds do not currently expect to make distributions with respect to capital gains or ordinary income. Accordingly, shareholders of a Fund will not receive cash distributions equal to their share of the Fund’s taxable income or the tax liability that results from such income. A Fund’s income, gains, losses and deductions are allocated to shareholders on a monthly basis. If you own Shares in a Fund at the beginning of a month and sell them during the month, you are generally still considered a shareholder through the end of that month.

The U.S. Internal Revenue Service (the “IRS”) could adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares if the IRS does not accept the assumptions or conventions utilized by the Fund.

U.S. federal income tax rules applicable to partnerships, which each Fund is anticipated to be treated as under the Code, are complex and their application is not always clear. Moreover, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded interests in partnerships. The Funds apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects the shareholders’ economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Regulations (as defined below). It is possible therefore that the IRS will successfully assert that these assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations promulgated thereunder (the “Regulations”) and will require that items of income, gain, deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to investors.

 

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Shareholders will receive partner information tax returns on Schedule K-1, which could increase the complexity of tax returns.

The partner information tax returns on Schedule K-1, which the Funds will distribute to shareholders, will contain information regarding the income items and expense items of the Funds. If you have not received Schedule K-1s from other investments, you may find that preparing your tax return may require additional time, or it may be necessary for you to retain an accountant or other tax preparer, at an additional expense to you, to assist you in the preparation of your return.

Investors could be adversely affected if the current treatment of long-term capital gains under current U.S. federal income tax law is changed or repealed in the future.

Under current law, long-term capital gains are taxed to non-corporate investors at a maximum U.S. federal income tax rate of 20%. This tax treatment may be adversely affected, changed or repealed by future changes in tax laws at any time.

Shareholders of each Fund may recognize significant amounts of ordinary income and short-term capital gain.

Due to the investment strategy of the Funds, the Funds may realize and pass through to shareholders significant amounts of ordinary income and short-term capital gains as opposed to long-term capital gains, which generally are taxed at a preferential rate. A Fund’s income, gains, losses and deductions are allocated to shareholders on a monthly basis. If you own Shares in a Fund at the beginning of a month and sell them during the month, you are generally still considered a shareholder through the end of that month.

PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES OF A FUND; SUCH TAX CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.

Regulatory and exchange accountability levels (if any) may restrict the creation of Creation Units and the operation of the Trust.

Many U.S. commodities exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. In addition, the CFTC, U.S. futures exchanges and certain non-U.S. exchanges have established limits referred to as “speculative position limits” or “accountability levels” on the maximum net long or short futures positions that any person may hold or control in derivatives traded on such exchanges.

In connection with these limits, the Dodd-Frank Act has required the CFTC to adopt regulations establishing speculative position limits applicable to regulated futures and OTC derivatives and impose aggregate speculative position limits across regulated U.S. futures, OTC positions and certain futures contracts traded on non-U.S. exchanges. In December 2016, the CFTC re-proposed rules on position limits with respect to the 25 physical delivery commodity futures and options contracts, as well as to swaps that are economically equivalent to such contracts. The re-proposed position limits would apply with respect to contracts traded on all U.S. and certain foreign exchanges on an aggregate basis. In addition, the CFTC proposed amendments to the requirement of U.S. commodities exchanges to establish corresponding speculative position limits (the “Position Limit Rules”). The re-proposed Position Limit Rules are based on the position limit rules previously proposed in 2013 by the CFTC. In December 2016, the CFTC also adopted final regulations requiring that all accounts owned or managed by an entity that is responsible for such accounts’ trading decisions, their principals and their affiliates would be aggregated for position limit purposes (the “Aggregation Rules”). The re-proposed Position Limit Rules were published in the Federal Register on December 30, 2016, and final Aggregation Rules were published in the Federal Register December 16, 2016 and became effective on February 14, 2017.

 

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Although it is unclear what futures position limit rules will be, the Sponsor is subject to current position and accountability limits established by the CFTC and exchanges. Accordingly, it may be required to reduce the size of outstanding positions or not enter into new positions that would otherwise be taken for the Fund or not trade certain markets on behalf of the Fund in order to comply with those limits or any future limits established by the CFTC and the relevant exchanges. Derivatives contract prices could move to a limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of derivatives positions and potentially subjecting the Funds to substantial losses or periods in which such Funds do not create additional Creation Units. Modification of trades made by the Trust, if required, could adversely affect the Trust’s operations and profitability and significantly limit the Trust’s ability to reinvest income in additional contracts, create additional Creation Units, or add to existing positions in the desired amount.

In addition, the Sponsor may be required to liquidate certain open positions in order to ensure compliance with the speculative position limits at unfavorable prices, which may result in substantial losses for the relevant Funds. There also can be no assurance that the Sponsor will liquidate positions held on behalf of all the Sponsor’s accounts, including any proprietary accounts, in a proportionate manner. In the event the Sponsor chooses to liquidate a disproportionate number of positions held on behalf of any of the Funds at unfavorable prices, such Funds may incur substantial losses and the value of the Shares may be adversely affected.

Further, in October 2012, CFTC rules became effective, which require each registered FCM to establish risk-based limits on position and order size. As a result, the Trust’s FCMs may be required to reduce their internal limits on the size of the positions they will execute or clear for the Funds, and the Trust may seek to use additional FCMs, which may increase the costs for the Funds and adversely affect the value of the Shares.

The Trust may apply to the CFTC or to the relevant exchanges for relief from certain position limits. If the Trust is unable to obtain such relief, a Fund’s ability to issue new Creation Units, or a Fund’s ability to reinvest income in additional futures contracts, may be limited to the extent these activities cause the Trust to exceed applicable position limits. Limiting the size of a Fund may affect the correlation between the price of the Shares, as traded on an exchange, and the net asset value of such Fund. Accordingly, the inability to create additional Creation Units or add to existing positions in the desired amount could result in Shares trading at a premium or discount to NAV.

Margin for Non-cleared Swap and Forward Transactions.

In 2015 and 2016, the CFTC and various federal bank regulators adopted new mandatory margin requirements for un-cleared swap and foreign currency forwards transactions and new requirements for the holding of collateral by derivatives dealers. These requirements may increase the amount of collateral a Fund is required to provide to derivatives dealers for un-cleared swaps and foreign currency forwards.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus and the documents incorporated by reference in this Prospectus contain forward-looking statements that are subject to risks and uncertainties. Investors can identify these forward-looking statements by the use of expressions such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “project,” “should,” “estimate” or any negative or other variations on such expression. These forward-looking statements are based on information currently available to the Sponsor and are subject to a number of risks, uncertainties and other factors, both known, such as those described in “Risk Factors” and elsewhere in this Prospectus and the documents incorporated by reference in this Prospectus, and unknown, that could cause the actual results, performance, prospects or opportunities of the Funds to differ materially from those expressed in, or implied by, these forward-looking statements. Except as expressly required by federal securities laws, the Trust assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should not place undue reliance on any forward-looking statements.

 

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DESCRIPTION OF BITCOIN AND THE BITCOIN NETWORK

Bitcoin

Bitcoin is a new type of digital asset that is issued by, and transmitted through, the decentralized, open source protocol of the bitcoin peer-to-peer network (the “Bitcoin Network”) that hosts a public transaction ledger where bitcoin transfers are recorded (the “Bitcoin Blockchain”). Bitcoin is “stored” or reflected on the Bitcoin Blockchain, which through the transparent reporting of bitcoin transactions, allows the Bitcoin Network to verify and confirm the rightful ownership of the bitcoin assets. The Bitcoin Network and bitcoin software programs can interpret the Bitcoin Blockchain to determine the exact bitcoin balance, if any, of any digital wallet listed in the Bitcoin Blockchain as having taken part in a transaction on the Bitcoin Network. The Bitcoin Blockchain is comprised of a digital file, downloaded and stored, in whole or in part, on all Bitcoin users’ software programs. Each bitcoin transaction is broadcast to the Bitcoin Network and permanently recorded on the Bitcoin Blockchain.

In order to own, transfer or use bitcoin, a person generally must have internet access to connect to the Bitcoin Network. Bitcoin transactions between parties occur rapidly (typically between a few seconds and a few minutes) and may be made directly between end-users without the need for a third-party intermediary, although there are entities that provide third-party intermediary services. Bitcoin’s technological breakthrough was the implementation of system to prevent double spending of a single bitcoin. To prevent the possibility of double-spending a single bitcoin, each transaction is recorded, time stamped and publicly displayed in a “block” in the Bitcoin Blockchain, which is publicly available. Thus, the Bitcoin Network provides confirmation against double-spending by memorializing every transaction in the Bitcoin Blockchain, which is publicly accessible and downloaded in part or in whole by all users’ of the Bitcoin Network software program.

The process by which bitcoin are created and bitcoin transactions are verified is called mining. To begin mining, a user, or “miner,” can download and run a mining client, which, like regular Bitcoin Network software programs, turns the user’s computer into a “node” on the Bitcoin Network that validates blocks. Bitcoin transactions are recorded in new blocks that are added to the Bitcoin Blockchain and new bitcoin being issued to the miners. Miners, through the use of the bitcoin software program, engage in a set of prescribed complex mathematical calculations in order to add a block to the Bitcoin Blockchain and thereby confirm bitcoin transactions included in that block’s data. Bitcoin is created and allocated by the Bitcoin Network protocol through a “mining” process subject to a strict, well-known issuance schedule.

Most bitcoin transactions are recorded in blocks added to the Bitcoin Blockchain. Each block contains the details of some or all of the most recent transactions that are not memorialized in prior blocks, as well as a record of the award of bitcoin to the miner who added the new block. Each unique block can only be solved and added to the Bitcoin Blockchain by one miner; therefore, all individual miners and mining pools on the Bitcoin Network are engaged in a competitive process of constantly increasing their computing power to improve their likelihood of solving for new blocks. As more miners join the Bitcoin Network and its processing power increases, the Bitcoin Network adjusts the complexity of the block-solving equation to maintain a predetermined pace of adding a new block to the Bitcoin Blockchain approximately every ten minutes.

The value of bitcoin is determined, in part, by the supply of and demand for bitcoin in the Bitcoin Exchange Market, market expectations for the adoption of bitcoin by individuals, the number of merchants that accept bitcoin as a form of payment and the volume of private end-user-to-end-user transactions.

The Bitcoin Network

The Bitcoin Network was initially contemplated in a 2009 white paper that also described bitcoin and the operating software to govern the Bitcoin Network. The white paper was purportedly authored by Satoshi Nakamoto; however, no individual with that name has been reliably identified as bitcoin’s creator, and the general consensus is that the name is a pseudonym for the actual inventor or inventors. Since its introduction, the Bitcoin Network has been under active development by a group of developers (the “Core Developers”). As an open source project, however, bitcoin is not represented by an official organization or authority. No single entity owns or operates the Bitcoin Network. The Bitcoin Network does not rely on either governmental authorities or financial institutions to create, transmit or determine the value of bitcoin. Rather, the Bitcoin Network’s infrastructure is collectively maintained by a decentralized user base.

 

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The Bitcoin Network hosts the decentralized public transaction ledger, known as the Bitcoin Blockchain, on which all bitcoin transactions are recorded. While no single entity owns or operates the Bitcoin Network, the Core Developers are able to access and can alter the Bitcoin Network source code and, as a result, they are responsible for quasi-official releases of updates and other changes to the Bitcoin Network’s source code. However, users and miners must accept any changes made to the bitcoin source code by downloading the proposed modification of the Bitcoin Network’s source code. A modification of the Bitcoin Network’s source code is only effective with respect to the bitcoin users and miners that download it. If a modification is accepted only by a percentage of users and miners, a division in the Bitcoin Network will occur such that one network will run the pre-modification source code and the other network will run the modified source code. Such a division is known as a “fork” in the Bitcoin Network.

On August 1, 2017, the Bitcoin Network was forked by a group of developers and miners accepting changes to the bitcoin network software intended to increase transaction capacity. Blocks mined on this network now diverge from blocks mined on the Bitcoin Network, which has resulted in the creation of a new blockchain whose digital asset is referred to as “bitcoin cash.” Bitcoin and bitcoin cash now operate as separate, independent networks. Multiple proposals for increasing the capacity of the Bitcoin Network still exist, and it is possible that one or more of these proposals could result in further network “forks.”

 

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INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES

Investment Objectives

Investment Objective of the Matching Fund: The Matching Fund seeks as its investment objective results (before fees and expenses) that, both for a single day and over time, match the performance of the Benchmark. By being long Bitcoin Futures Contracts, the Matching Fund seeks to benefit from daily increases in the price of the Bitcoin Futures Contracts. When the price of Bitcoin Futures Contracts held by the Matching Fund declines the Matching Fund will lose value.

Investment Objective of the Inverse Fund: The Inverse Fund seeks results for a single day that match (before fees and expenses) the inverse (-1x) of the daily performance of the Benchmark. The Inverse Fund does not seek to achieve its stated objective over a period greater than a single day. A “single day” is measured from the time the Inverse Fund calculates its NAV to the time of the Inverse Fund’s next NAV calculation. The Inverse Fund seeks to benefit from decreases in the price of the Bitcoin Futures Contracts. When the price of Bitcoin Futures Contracts shorted by the Inverse Fund increases the Inverse Fund will lose value.

If the Inverse Fund is successful in meeting its objective, its value on a given day (before fees and expenses) should gain approximately as much on a percentage basis as the price of the Bitcoin Futures Contracts when the Bitcoin Futures Contracts declines. Conversely, its value on a given day (before fees and expenses) should lose approximately as much on a percentage basis as the price of the Bitcoin Futures Contracts when the Bitcoin Futures Contracts rises. The Inverse Fund acquires inverse exposure through any one of or combinations of Bitcoin Futures Contracts and Financial Instruments, including Financial Instruments with respect to the Bitcoin Futures Contracts, such that the Inverse Fund has exposure intended to approximate the inverse (-1x) of the Benchmark at the time of the Fund’s NAV calculation.

There can be no assurance that a Fund will achieve its investment objective or avoid substantial losses. The Funds are benchmarked to the Bitcoin Futures Contracts. The Funds are not benchmarked to bitcoin and do not invest in bitcoin. The Funds should be expected to perform very differently from the performance (or inverse of the performance) of bitcoin.

The Inverse Fund does not seek to achieve its stated investment objective over a period of time greater than a single day because mathematical compounding prevents the Inverse Fund from achieving such results. Results for the Inverse Fund over periods of time greater than a single day should not be expected to be the inverse (-1x) of the period return of the Bitcoin Futures Contracts and will likely differ significantly from such. The Inverse Fund will lose money if the Bitcoin Futures Contracts’ performance is flat over time, and it is possible for the Inverse Fund to lose money over time regardless of the performance of the Bitcoin Futures Contracts, as a result of daily rebalancing, volatility and compounding. Daily compounding of the Inverse 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 the Inverse Fund’s return for a period as the return of the Bitcoin Futures Contracts.

Principal Investment Strategies

In seeking to achieve the Funds’ investment objectives, the Sponsor uses a mathematical approach to investing. Using this approach, the Sponsor determines the type, quantity and mix of investment positions that the Sponsor believes, in combination, should produce daily returns consistent with the Funds’ objectives. The Sponsor relies upon a pre-determined model to generate orders that result in repositioning the Funds’ investments in accordance with their respective investment objective.

Under normal market conditions, each Fund invests substantially all of its assets in Bitcoin Futures Contracts. Each Fund also may obtain exposure (or inverse exposure, as applicable) to its Benchmark, in whole or in part, through investments in listed options on bitcoin or listed options on Bitcoin Futures Contracts (collectively “Options”). For example, a Fund may invest in Options in a manner consistent with its investment objective in situations where the Sponsor believes the market for such Options is more liquid than the market for specific Bitcoin

 

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Futures Contracts or where the Sponsor believes that investing in such Options is otherwise in the best interest of the Fund. In addition, a Fund may invest in swap contracts referencing the Benchmark if the market for a specific Bitcoin Futures Contract experiences emergencies (e.g., natural disaster, terrorist attack or an act of God) or disruptions (e.g., a trading halt or a flash crash) which the Sponsor believes prevent, or otherwise make it impractical, for the Funds to obtain the appropriate amount of investment exposure to Bitcoin Futures Contracts. A Fund also may invest in swap contracts referencing the Benchmark in the event position price or accountability limits (if any) are reached with respect to Bitcoin Futures Contracts.

Each Fund will also hold Money Market Instruments, as collateral for, or pending investment in, Bitcoin Futures Contracts and Financial Instruments.

Subject to the Sponsor’s rolling methodology used for the Funds, the Sponsor does not invest the assets of the Funds based on its view of the investment merit of a particular investment, other than for cash management purposes, nor does it conduct conventional volatility research or analysis, or forecast market movement or trends, in managing the assets of the Funds. Each Fund seeks to remain fully invested at all times in Bitcoin Futures Contracts, Financial Instruments and Money Market Instruments that, in combination, provide exposure to the Bitcoin Futures Contracts consistent with its investment objective without regard to market conditions, trends or direction.

As of the NAV calculation time each trading day, each Fund will seek to reposition its portfolio so that its exposure to the Bitcoin Futures Contracts and Financial Instruments, if any, is consistent with its investment objective. The impact of the Benchmark’s movements during the day will affect whether the Inverse Fund’s portfolio needs to be rebalanced. For example, if the price of Bitcoin Futures Contracts has risen on a given day, net assets of the Inverse Fund should fall. As a result, inverse exposure will need to be decreased. Conversely, if the price of Bitcoin Futures Contracts have fallen on a given day, net assets of the Inverse Fund should rise. As a result, inverse exposure will need to be increased. For the Matching Fund, the Fund’s long exposure will need to be increased on days when the price of the Bitcoin Futures Contracts rise and decreased on days when the price of the Bitcoin Futures Contracts fall. Daily rebalancing and the compounding of each day’s return over time means that the return of the Inverse 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 the inverse (-1x) of the return of the Bitcoin Futures Contracts for the same period. The Inverse Fund will lose money if the Bitcoin Futures Contracts’ performance is flat over time, and it is possible for the Inverse Fund to lose money over time regardless of the performance of the Bitcoin Futures Contracts, as a result of daily rebalancing, volatility and compounding.

Bitcoin Futures Contracts

Under normal market conditions, each Fund invests substantially all of its assets in Bitcoin Futures Contracts. Bitcoin Futures Contracts offer traders the ability to take a view on the expected future price of bitcoin. The Bitcoin Futures Contracts are listed and traded on the CBOE under the ticker symbol “    ”.

The Matching Fund generally invests in rolling long positions in Bitcoin Futures Contracts. By being long Bitcoin Futures Contracts, the Matching Fund seeks to benefit from increases, both on a daily basis and over time, in the price of the Bitcoin Futures Contracts. When the prices of Bitcoin Futures Contracts decline on a daily basis, the Matching Fund will lose value.

The Inverse Fund seeks to benefit from decreases in the price of the Bitcoin Futures Contracts for a single day, not for any other period. When the price of Bitcoin Futures Contracts increase on a daily basis, the Inverse Fund will lose value. A “single day” for these purposes is measured from the time the Fund calculates its net asset value (NAV) to the time of the Fund’s next NAV calculation. The NAV calculation time for the Funds, is typically 4:00 p.m. Eastern Time.

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 particular underlying asset at a specified time and place or alternatively may call for cash settlement. Futures contracts are traded on a wide variety of underlying assets, including bonds, interest rates, agricultural products, stock indexes, currencies, digital assets, energy, metals, economic indicators and statistical measures. The notional size and calendar term futures contracts on a particular underlying asset are identical and are not subject to any negotiation, other than with respect to price and the number of contracts traded

 

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between the buyer and seller. Each Fund generally deposits cash with an FCM for its open positions in futures contracts, which may, in turn, transfer such deposits to the clearing house to protect the clearing house against non-payment by a Fund. The clearing house becomes substituted for each counterparty to a futures contract, and, in effect, guarantees performance. In addition, the FCM may require the Funds to deposit collateral in excess of the clearing house’s margin requirements for the FCM’s own protection.

Certain futures contracts, including the Bitcoin Futures Contracts settle in cash, reflecting the difference between the contract purchase/sale price and the contract settlement price. The cash settlement mechanism avoids the potential for either side to have to deliver the underlying asset. For other futures contracts, the contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying asset 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.

Futures contracts involve, to varying degrees, elements of market risk and exposure to loss in excess of the amounts of variation margin, which are the amounts of cash that the Funds agree to pay to or receive from FCMs equal to the daily fluctuation in the value of a futures contract. Additional risks associated with the use of futures contracts are imperfect correlation between movements in the price of the futures contracts and the level of the underlying benchmark and the possibility of an illiquid market for a futures contract.

With futures contracts, there is minimal but some counterparty risk to the Funds since futures contracts are exchange traded and the exchange’s clearinghouse, as counterparty to all exchange-traded futures contracts, effectively guarantees futures contracts against default. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified times during the trading day. Futures contracts prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting a Fund to substantial losses. If trading is not possible or if a Fund determines not to close a futures position in anticipation of adverse price movements, a Fund may be required to make daily cash payments of variation margin.

Rolling of the Bitcoin Futures Contracts

The contractual obligations of a buyer or seller holding a futures contract to expiration may 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 Bitcoin Futures Contracts held by the Funds near expiration, they are generally closed out and replaced by contracts with a later expiration. This process is referred to as “rolling.” The Funds do not intend to hold Bitcoin Futures Contracts through expiration, but instead to “roll” their respective positions. Accordingly, the Funds are subjects to risks related to rolling.

When the market for these Bitcoin Futures 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 Futures Contracts would take place at a price that is lower than the price of the more distant Bitcoin Futures Contracts. This pattern of higher futures prices for longer expiration Bitcoin Futures Contracts is often referred to as “contango.” Alternatively, when the market for these Bitcoin Futures 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 Bitcoin Futures Contracts would take place at a price that is higher than the price of the more distant Bitcoin Futures Contracts. This pattern of higher future prices for shorter expiration Bitcoin Futures Contracts is referred to as “backwardation.”

 

    The presence of contango in the relevant Bitcoin Futures Contracts at the time of rolling would be expected to adversely affect the Matching Fund with long positions, and positively affect the Inverse Fund with short positions.

 

    Similarly, the presence of backwardation in certain Bitcoin Futures Contracts at the time of rolling such Bitcoin Futures Contracts would be expected to adversely affect the Inverse Fund with short positions and positively affect the Matching Fund with long positions.

 

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Option Contracts

From time to time, each Fund may obtain exposure to its Benchmark, in part or in whole, through investments in exchange listed options on bitcoin or exchange listed options on Bitcoin Futures Contracts (together, “Options”).

An option contract is a financial contract in which the purchaser of the contract has the right, but not the obligation, to buy (call) or sell (put) a financial asset at an agreed-upon price, known as the “strike price,” during a specific time period or on a specific exercise date. The seller of an option contract has a corresponding obligation to sell or buy, as applicable, the financial asset at the strike price during the option period or on the exercise date. A put option gives the purchaser of the option the right to sell, and the issuer of the option the obligation to buy, the underlying asset during the option period. A call option gives the purchaser of the option the right to buy, and the seller of the option the obligation to sell, the underlying asset during the option period.

Swap Agreements

In limited circumstances, each Fund may invest in swap agreements. Swap agreements are two-party contracts that have traditionally been entered into primarily by institutional investors in OTC markets for a specified period ranging from a day to more than a year. However, the Dodd-Frank Act provides for significant reforms of the OTC derivatives markets, including a requirement to execute certain swap transactions on a CFTC regulated market and/or to clear such transactions through a CFTC-regulated central clearing organization. In a standard swap transaction, the parties agree to exchange the returns on a particular predetermined investment, instrument or index for a fixed or floating rate of return (the “interest rate leg,” which will also include the cost of borrowing for short swaps) in respect of a predetermined notional amount. The notional amount of the agreement reflects the extent of a Fund’s total investment exposure under the swap agreement. In the case of futures contracts-based indexes, the reference interest rate is zero, although a financing spread or fee is normally still applied. Transaction or commission costs are reflected in the index level at which the transaction is entered into. The gross returns to be exchanged are calculated with respect to the notional amount and the index returns to which the swap is linked. Swaps are usually closed out on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date specified in the agreement, with the parties receiving or paying, as the case may be, only the net amount of the two payments. Thus, while the notional amount reflects a Fund’s total investment exposure under the swap agreement (i.e., the entire face amount or principal of a swap agreement), the net amount is a Fund’s current obligations (or rights) under the swap agreement, which is the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement on any given termination date.

Swap agreements involve, to varying degrees, elements of market risk and exposure to loss in excess of the amount which would be reflected on the Statement of Financial Condition. The primary risks associated with the use of swap agreements arise from the inability of counterparties to perform. Whenever a Fund invests in swaps, it bears the risk of loss of the net amount, if any, expected to be received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Each such Fund enters or intends to enter into swap agreements only with major, global financial institutions; however, there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. Each Fund may use various techniques to minimize credit risk.

Each Fund generally collateralizes the swap agreements with cash and/or certain securities. Collateral posted in connection with uncleared derivatives transactions is generally held for the benefit of the counterparty in a segregated tri-party account at the Custodian to protect the counterparty against non-payment by a Fund. The counterparty also may collateralize the uncleared swap agreements with cash and/or certain securities, which collateral is typically held for the benefit of such Fund in a segregated tri-party account at the Custodian. In the event of a default by the counterparty, and a Fund is owed money in the uncleared swap transaction, such Fund will seek withdrawal of this collateral from the segregated account and may incur certain costs exercising its right with respect to the collateral. The Funds remain subject to credit risk with respect to the amount it expects to receive from counterparties.

 

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The Funds will seek to mitigate these risks in connection with the uncleared OTC swaps by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of each Fund, marked to market daily, subject to certain minimum thresholds; however there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.

The counterparty risk for cleared derivatives transactions is generally lower than for uncleared OTC derivatives since generally a clearing organization becomes substituted for each counterparty to a cleared derivatives contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing house for performance of financial obligations. In addition, cleared derivatives transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.

In July 2017, the CFTC granted registration to a derivatives clearing organization (“DCO”) permitting it to clear fully collateralized digital currency swaps on the condition that the DCO holds, at all times, funds sufficient to cover the maximum possible loss a counterparty could incur upon the liquidation or expiration of the swap, in the form of the required payment, and subject to the other conditions required by the CFTC. If a Fund determines to have its digital currency swaps on this DCO, the Fund and its counterparty will each be required to collateralize the swap by posting collateral in an amount sufficient to cover the maximum possible loss it could incur upon the liquidation or expiration of the swap.

Money Market Instruments

Money market instruments are short-term debt instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles. Money market instruments may include U.S. government securities, securities issued by governments of other developed countries and repurchase agreements.

U.S. Derivatives Exchanges

Derivatives exchanges, including swap execution facilities that are required under the Dodd-Frank Act, provide centralized market facilities for trading derivatives in which multiple persons have the ability to execute or trade contracts by accepting bids and offers from multiple participants. Members of, and trades executed on, a particular exchange are subject to the rules of that exchange. Among the principal exchanges in the United States are the CBOE (which includes the CFE), the Chicago Mercantile Exchange (“CME”) (which includes, among others, the Chicago Board of Trade (“CBOT”) and the NYMEX) and the Intercontinental Exchange (“ICE”)).

Each derivatives exchange in the United States has an associated “clearing house.” Clearing houses provide services designed to transfer credit risk and ensure the integrity of trades. Once trades between members of an exchange have been confirmed and/or cleared, the clearing house becomes substituted for each buyer and each seller of contracts traded on the exchange and, in effect, becomes the other party to each trader’s open position in the market. Thereafter, each party to a trade looks only to the clearing house for performance. The clearing house generally establishes some sort of security or guarantee fund to which all clearing members of the exchange must contribute. This fund acts as an emergency buffer which is intended to enable the clearing house to meet its obligations with regard to the other side of an insolvent clearing member’s contracts. Furthermore, clearing houses require margin deposits and continuously mark positions to market to provide some assurance that their members will be able to fulfill their contractual obligations. Thus, members effecting derivatives transactions on an organized exchange or clearing an OTC derivatives transaction through a clearing house do not bear the risk of the insolvency of the party on the opposite side of the trade; their credit risk is limited to the respective solvencies of their commodity broker and the clearing house. The clearing house “guarantee” of performance on open positions does not run to customers. If a member firm goes bankrupt, customers could lose money.

If a Fund decides to execute derivatives transactions through such derivatives exchanges—and especially if it decides to become a direct member of one or more exchanges or swap execution facilities—a Fund would be subject to the rules of the exchange or swap executive facility, which would bring additional risks and liabilities, and potential additional regulatory requirements.

 

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Regulations

Derivatives exchanges in the United States are subject to regulation under the CEA, by the CFTC, the governmental agency having responsibility for regulation of derivatives exchanges and trading on those exchanges. Following the adoption of the Dodd-Frank Act, the CFTC also has authority to regulate OTC derivatives markets, including certain OTC foreign exchange markets.

The CFTC has exclusive authority to designate exchanges for the trading of specific futures contracts, and options on futures contracts and to prescribe rules and regulations of the marketing of each. The CFTC also regulates the activities of “commodity pool operators” and the CFTC has adopted regulations with respect to certain of such persons’ activities. Pursuant to its authority, the CFTC requires a commodity pool operator, such as the Sponsor, 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 the Sponsor’s registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and might result in the termination of, the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their investment objectives unless and until the Sponsor’s ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the Funds.

The CEA requires all FCMs to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary funds and account separately for all customers’ funds and positions, and to maintain specified books and records open to inspection by the staff of the CFTC. See “Risk Factors—Risks Related to All Funds—Failure of the FCMs to segregate assets may increase losses in the Funds.”

The CEA also gives the states certain powers to enforce its provisions and the regulations of the CFTC.

Under certain circumstances, the CEA grants shareholders the right to institute a reparations proceeding before the CFTC against the Sponsor (as a registered commodity pool operator), an FCM, 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. At the present time, the NFA is the only self-regulatory organization for commodities professionals other than 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, FCMs, swap dealers, commodity trading advisors, introducing brokers and their respective associated persons and floor brokers. The Sponsor is a member of the NFA (the Funds themselves are not required to become members of the NFA). As an NFA member, the Sponsor is subject to NFA standards relating to fair trade practices, financial condition, and consumer protection. The CFTC is prohibited by statute from regulating trading on foreign commodity exchanges and markets.

The CEA and CFTC regulations prohibit market abuse and generally require that all futures exchange-based trading be conducted in compliance with rules designed to ensure the integrity of market prices and without any intent to manipulate prices. CFTC regulations and futures exchange rules also impose limits on the size of the positions that a person may hold or control as well as standards for aggregating certain positions. The rules of the CFTC and the futures exchanges also authorize special emergency actions to halt, suspend or limit trading overall or to restrict, halt, suspend or limit the trading of an individual trader or to otherwise impose special reporting or margin requirements.

Each Fund’s investments in Bitcoin Futures Contracts and Financial Instruments will be subject to regulation under the CEA and traded pursuant to CFTC and applicable exchange regulations.

Daily Limits

Most U.S. futures exchanges (but generally not foreign exchanges or banks or dealers in the cases of swap agreements) limit the amount of fluctuation in some futures contract or options on futures contract prices during a single day by regulations. These regulations specify what are referred to as “daily price fluctuation limits” or more commonly “daily limits.” Once the daily limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.

 

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Margin

“Initial” or “original” margin is the minimum amount of funds that a counterparty to a cleared derivatives contract must deposit with their commodity broker in order to establish an open position. Maintenance margin is the amount (generally less than initial margin) to which a trader’s account may decline before he must deliver additional margin so as to maintain open positions. A margin deposit is like a cash performance bond. It helps assure the futures trader’s performance of the futures contracts he purchases or sells. The minimum amount of margin required in connection with a particular futures contract is set by the exchange on which such contract is traded and is subject to change at any time during the term of the contract. Futures contracts are customarily bought and sold on margins that represent a small percentage 29.8% as of April 30, 2017 for the Bitcoin Futures Contracts) of the aggregate purchase or sales price of the contract. Because of such low margins, price fluctuations occurring in the futures markets may create profits and losses that are greater, in relation to the amount invested, than are customary in other forms of investments.

Brokerage firms carrying accounts for traders in futures contracts may not accept lower, and may require higher, amounts of margin as a matter of policy in order to afford further protection for themselves.

Margin requirements are computed each day by a commodity broker and the relevant exchange. At the close of each trading day, each open futures contract is marked to market, that is, the gain or loss on the position is calculated from the prior day’s close. When the market value of a particular open futures contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. If the margin call is not met within a reasonable time, the broker may close out the customer’s position.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Investors should consider Management’s Discussion and Analysis of Financial Condition and Results of Operations with respect to the Trust, which section is incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2016, and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017.

Except as noted below, there has not been a material change to the financial statements or the notes to those financial statements in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017.

On March 27, 2017, the Trust launched ProShares UltraPro 3x Crude Oil ETF (OILU) and ProShares UltraPro 3x Short Crude Oil ETF (OILD), listed on NYSE Arca.

On June 27, 2017, the Trust announced a 2-for-1 forward split of the Shares of beneficial interest of ProShares Short VIX Short-Term Futures ETF (the “VIX ETF Fund”).

The forward stock split will decrease the price per Share of the VIX ETF Fund with a proportionate increase in the number of Shares outstanding. For example, for a 2-for-1 split, every pre-split Share will result in the receipt of two post-split Shares, which will be priced at one-half the net asset value (“NAV”) of a pre-split Share.

The split will be effective for shareholders of record after the close of the markets on July 12, 2017. The VIX ETF Fund will trade at their post-split price on July 17, 2017. The ticker symbol for the VIX ETF Fund will not change.

 

Ticker

  

Fund

   Split Ratio  

SVXY

   ProShares Short VIX Short-Term Futures ETF      2:1  

On June 27, 2017, the Trust announced a 1-for-4 reverse split of the Shares of beneficial interest of ProShares VIX Short-Term Futures ETF and ProShares Ultra VIX Short-Term Futures ETF (the “Short-Term VIX ETF Funds”).

The reverse stock splits will increase the price per Share of each Short-Term VIX ETF Fund with a proportionate decrease in the number of Shares outstanding. For example, for a 1-for-4 reverse split, every four pre-split Shares will result in the receipt of one post-split Share, which will be priced four times higher than the NAV of a pre-split Share.

The reverse splits will be effective at the market open on July 17, 2017, when the Short-Term VIX ETF Funds will begin trading at their post-split price. The ticker symbol for the each Short-Term VIX ETF Fund will not change. Each of the Short-Term VIX ETF Funds undergoing a reverse split will be issued a new CUSIP number, listed below.

 

Ticker

  

Fund

   Split Ratio      Old Cusip      New Cusip  

VIXY

   ProShares VIX Short-Term Futures ETF      1:4        74347W262        74347W171  

UVXY

   ProShares Ultra VIX Short-Term Futures ETF      1:4        74347W239        74347W163  

The Shares outstanding and related Share information disclosed in the financial statements and notes to the financial statements in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017, the Trust’s Quarterly Reports on Form 10-Q for the three-months ended March 31, 2017, filed on May 9, 2017 and the Trust’s Quarterly Report on Form 10-Q for the three-months ended June 30, 2017 filed on August 9, 2017, for the Funds listed above were not retroactively adjusted to give effect to the forward split or reverse splits, as permitted under applicable regulations. Presented below are pro forma Shares outstanding and Share information after giving retroactive effect for the respective forward split or reverse splits.

 

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Shares Outstanding

 

     VIX
Short-Term
Futures
ETF
     Short VIX
Short-Term
Futures ETF
     Ultra VIX
Short-Term
Futures ETF
 

Shares Outstanding, at March 31, 2017

     2,608,613        6,900,000        5,556,952  

Shares Outstanding, at December 31, 2016

     2,052,363        5,000,000        2,965,383  

Shares Outstanding, at March 31, 2016

     683,741        20,100,000        463,525  

Shares Outstanding, at December 31, 2015

     397,491        25,300,080        195,025  

Shares Outstanding, at December 31, 2014

     266,241        16,500,080        28,040  

Selected data for a Share outstanding throughout the three month period ended March 31 and year ended December 31:

 

     Net asset
value
     Net
investment
income
(loss)
    Net realized
and
unrealized
gain (loss)
    Change in
net asset
value from
operations
    Net asset
value
     Market
value per
share
 

VIX Short-Term Futures ETF

              

For the three month ended March 31, 2017

     84.8584        (0.0773     (32.0661     (32.1434     52.7150        52.68  

For the year ended December 31, 2016

     264.8433        (1.1014     (178.8835     (179.9849     84.8584        85.04  

For the three month ended March 31, 2016

     264.8433        (0.6632     (31.5233     (32.1865     232.6568        233.60  

For the year ended December 31, 2015

     418.6407        (2.6489     (151.1485     (153.7974     264.8433        266.60  

For the year ended December 31, 2014

     570.7730        (4.0946     (148.0377     (152.1323     418.6407        419.80  

 

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Short VIX Short-Term Futures ETF

              

For the three month ended March 31, 2017

     45.6151        (0.1754     25.1042       24.9288       70.5439        70.58  

For the year ended December 31, 2016

     25.4075        (0.3045     20.5121       20.2076       45.6151        45.49  

For the three month ended March 31, 2016

     25.4075        (0.0522     (0.0388     (0.0910     25.3165        25.27  

For the year ended December 31, 2015

     30.7002        (0.4081     (4.8846     (5.2927     25.4075        25.23  

For the year ended December 31, 2014

     33.7496        (0.5123     (2.5371     (3.0494     30.7002        30.58  

Ultra VIX Short-Term Futures ETF

              

For the three month ended March 31, 2017

     173.9265        (0.3038     (108.8481     (109.1519     64.7746        64.68  

For the year ended December 31, 2016

     2,808.4027        (7.6771     (2,626.7991     (2,634.4762     173.9265        175.00  

For the three month ended March 31, 2016

     2,808.4027        (10.0708     (873.0147     (883.0855     1,925.3172        1,933.00  

For the year ended December 31, 2015

     12,546.0040        (72.2406     (9,665.3607     (9,737.6013     2,808.4027        2,835.00  

For the year ended December 31, 2014

     33,540.9317        (290.5500     (20,704.3777     (20,994.9277     12,546.0040        12,575.00  

 

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CHARGES

Breakeven Table

The projected twelve month breakeven analysis for the Funds is set forth in the Breakeven Table below. For purposes of calculating the amounts in the Breakeven Table for each Fund, the analysis assumes that the average daily NAV per Fund is $25.00.

 

     Dollar Amount and Percentage of Expenses per Fund  

Expenses (1)

   ProShares Bitcoin
Futures ETF
    ProShares Short
Bitcoin
Futures ETF
 
     $      %     $      %  

Selling price per share

     25.00          25.00     

Management fee (2)

                                        

Initial Offering Costs (7)

          

Brokerage commissions and fees

          

Variable create/redeem fees (4)

          

Other expenses

          

Total fees and expenses

          

Interest income (5)

          

Amount of trading income required for the NAV at the end of one year to equal the initial selling price per share (12-Month breakeven) (6)

          

 

(1) The breakeven analysis set forth in this table assumes that the Shares have a constant month end NAV and is based on $25.00 as the NAV per Share of each Fund. The actual NAV of each Fund differs and is likely to change on a daily basis. The numbers provided in this chart have been rounded to the nearest 0.01. The breakeven analysis reflects all fees and expenses, including estimated rebalancing expenses that are anticipated to be incurred by each Fund during the first year of an investor’s investment.
(2) From the Management Fee of [ ]% of each Fund’s average daily net assets, the Sponsor is responsible for paying the fees and expenses of the Administrator, Custodian, Distributor, ProFunds Distributors, Inc. (“PDI”), Transfer Agent and all routine operational, administrative and other ordinary expenses of each Fund. Please note that the fees and expenses paid by the Sponsor are not included in the above Breakeven Table. The Sponsor will not charge its Management Fee in the first year of operations in an amount equal to the offering costs. Because the average daily net assets of each Fund is assumed to be approximately $50,000,000 throughout the first year of each Fund’s operations, it is assumed that the initial offering costs for each Fund will be approximately [            ]% of each Fund’s net asset value, and as a result, the assumed Management Fee paid by the investors of each Fund will be approximately [            ]% at the end of the first year of each Fund’s operations.
(3) Costs incurred in connection with the initial offering of each Fund’s shares will be paid by each Fund. However, the Sponsor will not charge its Management Fee in the first year of operations of each Fund in an amount equal to the offering costs. The Sponsor will reimburse each Fund to the extent that such Fund’s initial offering costs exceed [            ]% of such Fund’s average daily net assets (calculated by dividing the sum of each Fund’s daily net assets for each month by the number of days in such month) for the first year of operations. Expenses incurred in connection with the continuous offering of Shares of each Fund after the commencement of its trading operations will be paid by the Sponsor
(4) Authorized Participants are generally required to pay variable create and redeem fees of up to [            ]% of the value of each order they place. These variable transaction fees offset brokerage commissions incurred by the Funds and are reflected in “Brokerage commissions and fees.” Please see “Creation and Redemption of Shares—Creation and Redemption Transaction Fee.”
(5) Estimated based on the average three- month Treasury Bill rate for the period ended September 30, 2017.
(6) Investors may pay customary brokerage commissions in connection with purchases of the Shares. Because such brokerage commission rates will vary from investor to investor, such brokerage commissions have not been included in the Breakeven Table. Investors are encouraged to review the terms of their brokerage accounts for applicable charges. The breakeven amount reflected in the Breakeven Table reflects the breakeven amount for investors in the secondary market. The breakeven amount for each Authorized Participant is equal to the sum of the breakeven amount for each applicable Fund plus the amount of transaction fees paid by each Authorized Participant for each applicable Fund.

 

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Offering Stage

Initial Offering Costs

Initial offering costs will be amortized by the Funds over a twelve-month period on a straight line basis. The Sponsor will not charge its Management Fee in the first year of operations of the Funds in an amount equal to the initial offering costs incurred by the Funds. The Sponsor will reimburse the Funds to the extent that its initial offering costs, estimated to be approximately $150,000 per Fund, exceed [            ]% of its average daily net assets (calculated by dividing the sum of each Fund’s daily net assets for each month by the number of days in such month) for the first year of operations. The assumed size of each Fund will be approximately $50,000,000 throughout the first year of each Fund’s operations, and therefore, the assumed initial offering costs of $150,000 will be approximately [            ]% of each Fund’s net asset value.

Operational Stage

Management Fee

The Funds pay the Sponsor a management fee (the “Management Fee”), monthly in arrears, in an amount equal to [            ]% per annum of its average daily net assets (calculated by dividing the sum of each Fund’s daily net assets for the month by the number of days in the month). The Sponsor will not charge its Management Fee in the first year of operations of the Funds in an amount equal to the initial offering costs. The Sponsor will reimburse each Fund to the extent that such Fund’s initial offering costs exceed [            ]% of such Fund’s average daily net assets (calculated by dividing the sum of each Fund’s daily net assets for the month by the number of days in the month) for the first year of operations. Because the average daily net assets of each Fund are assumed to be approximately $50,000,000 throughout the first year of each Fund’s operations, it is assumed that the initial offering costs for each Fund will be approximately [            ]% of each Fund’s net asset value, and as a result, the assumed Management Fee paid by the investors of each Fund will be approximately [            ]% at the end of the first year of each Fund’s operations.

No other Management Fee is paid by the Funds. The Management Fee is paid in consideration of the Sponsor’s trading advisory services and the other services provided to the Funds that the Sponsor pays directly.

Routine Operational, Administrative and Other Ordinary Expenses

The Sponsor pays all of the routine operational, administrative and other ordinary expenses of each Fund, generally, as determined by the Sponsor, including, but not limited to, fees and expenses of the Administrator, Custodian, Distributor, PDI and Transfer Agent, licensors, accounting and audit fees and expenses, tax preparation expenses, legal fees not in excess of $100,000 per annum, ongoing SEC registration fees not exceeding [ ]% per annum of the net assets of each Fund, individual Schedule K-1 preparation and mailing fees not exceeding [ ]% per annum of the net assets of each Fund, and report preparation and mailing expenses.

Non-Recurring Fees and Expenses

The Funds pay all of their non-recurring and unusual fees and expenses, if any, as determined by the Sponsor. Non-recurring and unusual fees and expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses also include material expenses which are not currently anticipated obligations of the Funds. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses.

Selling Commission

Retail investors may purchase and sell Shares through traditional brokerage accounts. Investors are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from investor to investor. Investors are encouraged to review the terms of their brokerage accounts for applicable charges. The price at which an Authorized Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit.

 

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Brokerage Commissions and Fees

Each Fund pays all of its respective brokerage commissions, including applicable exchange fees, NFA fees and give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities for each Fund’s investments in CFTC regulated investments.

Each Fund bears other transaction costs including the effects of trading spreads and financing costs/fees, if any, associated with the use of Bitcoin Futures Contracts and Financial Instruments, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements).

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion describes the material U.S. federal (and certain state and local) income tax considerations associated with the purchase, ownership and disposition of Shares as of the date hereof by U.S. Shareholders (as defined below) and non-U.S. Shareholders (as defined below). Except where noted, this discussion deals only with Shares held as capital assets by shareholders who acquired Shares by purchase and does not address special situations, such as those of:

 

    dealers in securities or commodities;

 

    financial institutions;

 

    regulated investment companies;

 

    real estate investment trusts;

 

    partnerships and persons in their capacity as partners;

 

    tax-exempt organizations;

 

    insurance companies;

 

    persons holding Shares as a part of a hedging, integrated or conversion transaction or a straddle;

 

    traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; or

 

    persons liable for alternative minimum tax.

Furthermore, the discussion below is based upon the provisions of the Code, the Regulations, and administrative and judicial interpretations thereof, all as of the date hereof, and such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those described below.

A “U.S. Shareholder” of Shares means a beneficial owner of Shares that is for U.S. federal income tax purposes:

 

    an individual that is a citizen or resident of the United States;

 

    a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

    an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

    a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of such trust or (2) has a valid election in effect under applicable Regulations to be treated as a U.S. person.

A “non-U.S. Shareholder” of Shares means a beneficial owner of Shares that is for U.S. federal income tax purposes:

 

    an individual that is a non-resident alien;

 

    a foreign corporation;

 

    a foreign estate; or

 

    a foreign trust.

If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner of a partnership holding Shares, the Trust urges such investor to consult its own tax advisor.

 

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No statutory, administrative or judicial authority directly addresses the treatment of Shares or instruments similar to Shares for U.S. federal income tax purposes. As a result, the Trust cannot assure investors that the IRS or the courts will agree with the tax consequences described herein. A different treatment from that described below could adversely affect the amount, timing and character of income, gain or loss in respect of an investment in the Shares. If an investor is considering the purchase of Shares, the Trust urges investors to consult their own tax advisor concerning the particular U.S. federal income tax consequences to investors of the purchase, ownership and disposition of Shares, as well as any consequences to investors arising under the laws of any other taxing jurisdiction.

Status of the Funds

Under Section 7704 of the Code, unless certain exceptions apply, a publicly traded partnership is generally treated and taxed as a corporation, and not as a partnership, for U.S. federal income tax purposes. A partnership is a publicly traded partnership if (1) interests in the partnership are traded on an established securities market or (2) interests in the partnership are readily tradable on a secondary market or the substantial equivalent thereof. It is expected that initially or in the future each Fund may be treated as a publicly traded partnership. If 90% or more of the income of a publicly traded partnership during each taxable year consists of “qualifying income” and the partnership is not required to register under the Investment Company Act, it will be treated as a partnership, and not as an association or publicly traded partnership taxable as a corporation, for U.S. federal income tax purposes (the “qualifying income exception”). Qualifying income includes dividends, interest, capital gains from the sale or other disposition of stocks and debt instruments and, in the case of a partnership a principal activity of which is the buying and selling of commodities or certain positions with respect to commodities, income and gains derived from certain swap agreements or regulated futures or forward contracts with respect to commodities.

There is very limited authority on the tax treatment of Bitcoin and no direct authority on Bitcoin derivatives. Because of a CFTC determination that treats Bitcoin as a commodity under the Commodities Exchange Act, each Fund intends to take the position that Bitcoin Futures Contracts consist of futures on commodities for U.S. federal income tax purposes, including (but not limited to) for purposes of the qualifying income test under Section 7704 of the Code. If a Fund’s determination were incorrect, such Fund would be taxed as a corporation subject to entity level tax. Under the assumption that Bitcoin Futures Contracts consist of futures on commodities for U.S. federal income tax purposes, each Fund anticipates that at least 90% of its gross income for each taxable year will constitute qualifying income within the meaning of Section 7704(d) of the Code.

Sidley Austin LLP has acted as counsel to the Trust in connection with this offering. Under current law and assuming full compliance with the terms of the Trust Agreement (and other relevant documents) and based on factual representations made by each Fund, in the opinion of Sidley Austin LLP, each Fund will be classified as a partnership for U.S. federal income tax purposes. The factual representations upon which Sidley Austin LLP has relied are: (1) the Funds have not elected and will not elect to be treated as a corporation for U.S. federal income tax purposes; and (2) for each taxable year, 90% or more of a Fund’s gross income will be qualifying income. Shareholders should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinion. The Sponsor will use its best efforts to operate each Fund in such manner as is necessary for a Fund to continue to meet the qualifying income exception.

While it is expected that each Fund will operate so that it will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation, given the highly complex nature of the rules governing partnerships, the ongoing importance of factual determinations, the lack of direct guidance with respect to the application of tax laws to the activities the Funds are undertaking and the possibility of future changes in its circumstances, it is possible that a Fund will not so qualify for any particular year. Sidley Austin LLP has no obligation to advise a Fund or its shareholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. A Fund’s taxation as a partnership will depend on such Fund’s ability to meet, on a continuing basis, through actual operating results, the qualifying income exception, the compliance of which will not be reviewed by Sidley Austin LLP. Accordingly, no assurance can be given that the actual results of a Fund’s operations for any taxable year will satisfy the qualifying income exception.

 

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If for any reason a Fund becomes taxable as a corporation for U.S. federal income tax purposes, such Fund’s items of income and deduction would not pass through to the Fund’s shareholders and shareholders would be treated for U.S. federal income tax purposes as stockholders in a corporation. The Fund would be required to pay income tax at corporate rates on its net income. Distributions by the Fund to the shareholders would constitute dividend income taxable to such shareholders, to the extent of the Fund’s earnings and profits, and the payment of these distributions would not be deductible by the Fund. These consequences would have a material adverse effect on the Fund, the Fund’s shareholders and the value of the Shares.

If at the end of any taxable year a Fund fails to meet the qualifying income exception, the Fund may still qualify as a partnership if the Fund is entitled to relief under the Code for an inadvertent termination of partnership status. This relief will be available if (1) the failure is cured within a reasonable time after discovery, (2) the failure is determined by the IRS to be inadvertent, and (3) the Fund agrees to make such adjustments or to pay such amounts as are determined by the IRS. It is not possible to state whether a Fund would be entitled to this relief in any or all circumstances. It also is not clear under the Code whether this relief is available for the Fund’s first taxable year as a publicly traded partnership. If this relief provision is not applicable to a particular set of circumstances involving a Fund, it will not qualify as a partnership for U.S. federal income tax purposes. Even if this relief provision applies and a Fund retains its partnership qualification, the Fund or its shareholders (during the failure period) will be required to pay such amounts as determined by the IRS.

The remainder of this discussion assumes that each Fund will qualify to be taxed as a partnership for U.S. federal income tax purposes.

U.S. Shareholders

Treatment of Fund Income

A partnership generally does not incur U.S. federal income tax liability. Instead, each partner of a partnership is required to take into account its share of items of income, gain, loss, deduction and other items of the partnership. Accordingly, each shareholder in a Fund is required to include in income its allocable share of a Fund’s income, gain, loss, deduction and other items for a Fund’s taxable year ending with or within its taxable year. In computing a partner’s U.S. federal income tax liability, such items must be included, regardless of whether cash distributions are made by the partnership. Thus, shareholders in a Fund may be required to take into account taxable income without a corresponding current receipt of cash if a Fund generates taxable income but does not make cash distributions in an amount equal to, or if the shareholder is not able to deduct, in whole or in part, such shareholder’s allocable share of a Fund’s expenses or capital losses. Each Fund’s taxable year ends on December 31 unless otherwise required by law. Each Fund uses the accrual method of accounting.

Shareholders must take into account their share of ordinary income realized by the respective Fund’s investments, including from accruals of interest on the U.S. Treasury securities or other cash and cash equivalents held in a Fund’s portfolio. Each Fund may hold U.S. Treasury securities or other debt instruments with “acquisition discount” or “original issue discount,” in which case shareholders in such Fund are required to include accrued amounts in taxable income on a current basis even though receipt of those amounts may occur in a subsequent year. Each Fund may also acquire U.S. Treasury securities with “market discount.” Upon disposition of such obligations, gain would generally be required to be treated as interest income to the extent of the market discount, and shareholders in such Fund would be required to include as ordinary income their share of such market discount that accrued during the period the obligations were held by such Fund. Income or loss from transactions involving certain derivative instruments, such as periodic and certain non-periodic payments in swap transactions, will also generally constitute ordinary income or loss and may result in recognition of taxable income to a U.S. Shareholder on a current basis even though receipt of those amounts may occur in a subsequent year.

The character and timing of income that a Fund earns from the positions in its investment strategy depends on the particular U.S. federal income tax treatment of each such position. As noted above, the U.S. federal income tax treatment of bitcoin, bitcoin derivatives and certain other positions is not always clear, and the IRS and Congress sometimes take steps which change the manner in which certain positions are taxed. For example, the IRS has issued guidance indicating that a position that certain taxpayers were previously accounting for as prepaid forward contracts for U.S. federal income tax purposes should, instead, be accounted for under the U.S. federal income tax rules for

 

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non-dollar denominated debt instruments. The IRS has also released a Notice seeking comments from practitioners about the application of U.S. federal income tax rules to certain derivative positions, including derivative positions in commodities. The Notice asks for comments about, among other questions, when investors in these positions should have income, the character of income and gain or loss from these positions and whether the U.S. federal “constructive ownership” rules should apply to these positions. It is not possible to predict what changes, if any, will be adopted or when any such changes would take effect. However, any such changes could affect the amount, timing and character of income, gain and loss in respect of a Fund’s investments, possibly with retroactive effect. As the Funds pass through their items of income, gain and loss to shareholders, any change in the manner in which a Fund accounts for these items could have an adverse impact on the shareholders of that Fund.

The Code generally applies a “mark-to-market” system of taxing unrealized gains and losses on, and otherwise provides for special rules of taxation with respect to, Section 1256 Contracts (defined herein). A Section 1256 Contract includes certain regulated futures contracts, certain non-equity options and certain non-U.S. currency forward contracts. The Sponsor expects that each Fund will invest in Bitcoin Futures Contracts on either the CBOE or CME or both through the life of each Fund and thus, the Sponsor expects substantially all of each Fund’s futures contracts and foreign currency forward contracts to qualify as Section 1256 Contracts. Swap agreements and non-currency forward contracts are generally not Section 1256 Contracts. Section 1256 Contracts held by the Funds at the end of a taxable year of the Funds will be treated for U.S. federal income tax purposes as if they were sold by the Funds at their fair market value on the last business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales (known as “marking-to-market”), together with any gain or loss resulting from any actual sales of Section 1256 Contracts (or other termination of a Fund’s obligations under such contracts), must be taken into account by a Fund in computing its taxable income for the year. If a Section 1256 Contract held by a Fund at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on the sale will be adjusted to reflect the gain or loss previously taken into account under the mark-to-market rules.

Capital gains and losses from Section 1256 Contracts generally are characterized as short-term capital gains or losses to the extent of 40% of the gains or losses and as long-term capital gains or losses to the extent of 60% of the gains or losses. Shareholders of a Fund will generally take into account their pro rata share of the long-term capital gains and losses and short-term capital gains and losses from Section 1256 Contracts held by a Fund. If a non-corporate taxpayer incurs a net capital loss for a year, the portion of the loss, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. A loss carried back to a year by a non-corporate taxpayer may be deducted only to the extent (1) the loss does not exceed the net gain on Section 1256 Contracts for the year and (2) the allowance of the carryback does not increase or produce a net operating loss for the year. Due to the Funds’ investment strategy, it is also likely that a significant portion of any capital gain or loss realized by the Funds with respect to non-Section 1256 Contracts will be short-term.

Allocation of the Funds’ Profits and Losses

For U.S. federal income tax purposes, a shareholder’s distributive share of a Fund’s income, gain, loss, deduction and other items is determined by the Trust Agreement, unless an allocation under the agreement does not have “substantial economic effect,” in which case the allocations will be determined in accordance with the “partners’ interests in the partnership.” Subject to the discussions below under “—Monthly Allocation and Revaluation Conventions” and “—Section 754 Election,” the allocations pursuant to the Trust Agreement should be considered to have substantial economic effect or deemed to be made in accordance with the partners’ interests in the partnership.

If the allocations provided by the Trust Agreement were successfully challenged by the IRS, the amount of income or loss allocated to shareholders for U.S. federal income tax purposes under the agreement could be increased or reduced, or the character of the income or loss could be modified.

As described in more detail below, the U.S. tax rules that apply to partnerships are complex and their application is not always clear. Additionally, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded partnerships. Each Fund will apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects the economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Regulations. It is possible, therefore, that the IRS will successfully assert that assumptions made and/or conventions used do not satisfy the technical requirements of the Code or the Regulations and will require that tax items be adjusted or reallocated in a manner that could adversely impact an investor.

 

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Monthly Allocation and Revaluation Conventions

In general, each Fund’s taxable income and losses are determined monthly and are apportioned among the shareholders of a Fund in proportion to the number of Shares treated as owned by each of them as of the close of the last trading day of the preceding month; provided , however , such items for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs shall be allocated to the shareholders as of the opening of the Exchange on the first business day of the next succeeding month. By investing in Shares, a U.S. Shareholder agrees that, in the absence of an administrative determination or judicial ruling to the contrary, it will report income and loss under the monthly allocation and revaluation conventions described below, except for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs, in which case the allocation shall take place as described above.

Under the monthly allocation convention, whoever is treated for U.S. federal income tax purposes as holding Shares as of the close of the last trading day of the preceding month will be treated as continuing to hold the Shares until immediately before the close of the last trading day of the following month. For the initial month during which a Fund becomes operational, the shareholders at the close of trading at month-end will also receive that month’s allocation. As a result, a holder who has disposed of Shares prior to the close of the last trading day of a month may be allocated income, gain, loss and deduction realized after the date of transfer.

The Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to a Fund’s monthly convention for allocating income and deductions. If this were to occur, a Fund’s allocation method might be deemed to violate that requirement.

In addition, for any month in which a creation or redemption of Shares takes place, a Fund generally credits or debits, respectively, the “book” capital accounts of the holders of existing Shares with any unrealized gain or loss in that Fund’s assets. This results in the allocation of items of a Fund’s income, gain, loss, deduction and credit to existing holders of Shares to account for the difference between the tax basis and fair market value of property owned by such Fund at the time new Shares are issued or old Shares are redeemed, or the reverse section 704(c) allocations. The intended effect of these allocations is to allocate any built-in gain or loss in a Fund’s assets at the time of a creation or redemption of Shares to the investors that economically have earned such gain or loss.

As with the other allocations described above, each Fund generally will use a monthly convention for purposes of the reverse section 704(c) allocations. More specifically, each Fund generally credits or debits, respectively, the “book” capital accounts of the holders of existing Shares with any unrealized gain or loss in a Fund’s assets based on a calculation utilizing the creation/redemption price of a Fund’s Shares during the month in which the creation or redemption transaction takes place, rather than the fair market value of its assets at the time of such creation or redemption, or the “revaluation convention.” As a result, it is possible that, for U.S. federal income tax purposes, (1) a purchaser of newly issued Shares will be allocated some or all of the unrealized gain in a Fund’s assets at the time it acquires the Shares or (2) a purchaser of newly issued Shares will not be allocated its entire share in the loss in a Fund’s assets accruing after the time of such acquisition. Furthermore, the applicable Regulations generally require that the “book” capital accounts will be adjusted based on the fair market value of partnership property on the date of adjustment and do not explicitly allow the adoption of a monthly revaluation convention. The Sponsor, in an attempt to eliminate book-tax disparities, will allocate items of income, gain, or loss for U.S. federal income tax purposes among the shareholders under the principles of the remedial method of Section 1.704-3(d) of the Regulations.

The Code and applicable Regulations generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that adjustments to “book” capital accounts be made based on the fair market value of partnership property on the date of adjustment. The Code and Regulations do not contemplate monthly allocation or revaluation conventions.

 

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If the IRS does not accept a Fund’s monthly allocation or revaluation convention, the IRS may contend that taxable income or losses of the Funds must be reallocated among the shareholders. If such a contention were sustained, the holders’ respective tax liabilities would be adjusted to the possible detriment of certain holders. The Sponsor is authorized to revise the Funds’ allocation and revaluation methods in order to comply with applicable law or to allocate items of partnership income and deductions in a manner that reflects more accurately the shareholders’ interests in the Funds.

Section 754 Election

Each Fund has made the election permitted by Section 754 of the Code. Such an election, once made, is irrevocable without the consent of the IRS. The making of such election by a Fund generally has the effect of requiring a purchaser of Shares in that Fund to adjust, utilizing the lowest closing price during the month, its proportionate share of the basis in that Fund’s assets, or the inside basis, pursuant to Section 743(b) of the Code to fair market value (as reflected in the purchase price for the purchaser’s Shares), as if it had acquired a direct interest in that Fund’s assets. The Section 743(b) adjustment is attributed solely to a purchaser of Shares and is not added to the basis of a Fund’s assets associated with all of the other shareholders. Depending on the relationship between a holder’s purchase price for Shares and its unadjusted share of a Fund’s inside basis at the time of the purchase, the Section 754 election may be either advantageous or disadvantageous to the holder as compared to the amount of gain or loss a holder would be allocated absent the Section 754 election.

The calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the calculations, particularly in the context of publicly traded partnerships. Therefore, in making the election under Section 754 of the Code, a Fund applies certain conventions in determining and allocating the Section 743 basis adjustments to help reduce the complexity of those calculations and the resulting administrative costs to a Fund. It is possible that the IRS will successfully assert that some or all of such conventions utilized by a Fund do not satisfy the technical requirements of the Code or the Regulations and, thus, will require different basis adjustments to be made.

In order to make the basis adjustments permitted by Section 754, each Fund is required to obtain information regarding each holder’s secondary market transactions in Shares, as well as creations and redemptions of Shares. Each Fund seeks such information from the record holders of Shares, and, by purchasing Shares, each beneficial owner of Shares will be deemed to have consented to the provision of such information by the record owner of such beneficial owner’s Shares. Notwithstanding the foregoing, however, there can be no guarantee that a Fund will be able to obtain such information from record owners or other sources, or that the basis adjustments that a Fund makes based on the information it is able to obtain will be effective in eliminating disparity between a holder’s outside basis in its share of the Fund interests and its share of inside basis.

Constructive Termination

A Fund will be considered to have terminated for tax purposes if there is a sale or exchange of 50% or more of the total Shares in that Fund within a twelve-month period. A constructive termination results in the closing of a Fund’s taxable year for all holders of Shares in that Fund. In the case of a holder of Shares reporting on a taxable year other than the taxable year used by a Fund (which is a fiscal year ending December 31), the early closing of a Fund’s taxable year may result in more than twelve months of its taxable income or loss being includable in such holder’s taxable income for the year of termination. A Fund would be required to make new tax elections after a termination, including a new election under Section 754. A termination could also result in penalties if a Fund were unable to determine that the termination had occurred.

Treatment of Distributions

Distributions of cash by a partnership are generally not taxable to the distributee to the extent the amount of cash does not exceed the distributee’s tax basis in its partnership interest. Thus, any cash distributions made by a Fund will be taxable to a shareholder only to the extent such distributions exceed the shareholder’s tax basis in the partnership interests it is treated as owning. (See “—U.S. Shareholders—Tax Basis in Shares” below.) Any cash distributions in excess of a shareholder’s tax basis generally will be considered to be gain from the sale or exchange of the Shares. See “—U.S. Shareholders—Disposition of Shares” below. The Funds do not currently expect to make any cash distributions.

 

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Creation and Redemption of Creation Units

Shareholders, other than Authorized Participants (or holders for which an Authorized Participant is acting), generally will not recognize gain or loss as a result of an Authorized Participant’s creation or redemption of a Creation Unit. If a Fund disposes of assets in connection with the redemption of a Creation Unit, however, the disposition may give rise to gain or loss that will be allocated in part to investors. An Authorized Participant’s creation or redemption of a Creation Unit may also affect an investor’s share of a Fund’s tax basis in its assets, which could affect the amount of gain or loss allocated to an investor on the sale or disposition of portfolio assets by a Fund.

Disposition of Shares

If a U.S. Shareholder transfers Shares of a Fund, in a sale or other taxable disposition, the U.S. Shareholder will generally be required to recognize gain or loss measured by the difference between the amount realized on the sale and the U.S. Shareholder’s adjusted tax basis in the Shares. The amount realized will include the U.S. Shareholder’s share of a Fund’s liabilities, as well as any proceeds from the sale. The gain or loss recognized will generally be taxable as capital gain or loss.

Capital gain of non-corporate U.S. Shareholders is eligible to be taxed at reduced rates when the Shares are held for more than one year. The maximum rate is currently 20%. Capital gain of corporate U.S. Shareholders is taxed at the same rate as ordinary income. Any capital loss recognized by a U.S. Shareholder on a sale of Shares will generally be deductible only against capital gains, except that a non-corporate U.S. Shareholder may generally also offset up to $3,000 per year of ordinary income.

Medicare Tax on Investment Income

Certain U.S. Shareholders that are individuals, estates or trusts must pay an additional 3.8% tax on their “net investment income.” U.S. Shareholders should consult their own tax advisors regarding the effect, if any, of this tax on their investment in the Funds.

Tax Basis in Shares

A U.S. Shareholder’s initial tax basis in the partnership interests it is treated as holding will equal the sum of (1) the amount of cash paid by such U.S. Shareholder for its Shares and (2) such U.S. Shareholder’s share of a Fund’s liabilities. A U.S. Shareholder’s tax basis in the Shares will be increased by (1) the U.S. Shareholder’s share of a Fund’s taxable income, including capital gain, (2) the U.S. Shareholder’s share of a Fund’s income, if any, that is exempt from tax and (3) any increase in the U.S. Shareholder’s share of a Fund’s liabilities. A U.S. Shareholder’s tax basis in Shares will be decreased (but not below zero) by (1) the amount of any cash distributed (or deemed distributed) to the U.S. Shareholder, (2) the U.S. Shareholder’s share of a Fund’s losses and deductions, (3) the U.S. Shareholder’s share of a Fund’s expenditures that is neither deductible nor properly chargeable to its capital account and (4) any decrease in the U.S. Shareholder’s share of a Fund’s liabilities.

Limitations on Deductibility of Certain Losses and Expenses

The deductibility for U.S. federal income tax purposes of a U.S. Shareholder’s share of losses and expenses of a Fund is subject to certain limitations, including, but not limited to, rules providing that: (1) a U.S. Shareholder may not deduct a Fund’s losses that are allocated to it in excess of its adjusted tax basis in its Shares; (2) individuals and personal holding companies may not deduct the losses allocable to a particular “activity” in excess of the amount that they are considered to have “at risk” with respect to the activity; (3) the ability of individuals to take certain itemized deductions may be limited by the “alternative minimum tax;” and (4) a non-corporate U.S. Shareholder may deduct its share of expenses of a Fund only to the extent that such share, together with such non-corporate U.S. Shareholder’s other miscellaneous itemized deductions, exceeds 2% of such non-corporate U.S. Shareholder’s adjusted gross income. In addition, in the case of individuals whose U.S. federal adjusted gross income exceeds a certain inflation-adjusted threshold, the aggregate itemized deductions allowable for the year will be reduced by the lesser of

 

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(i) 3% of the excess of U.S. federal adjusted gross income over the applicable threshold; or (ii) 80% of the aggregate itemized deductions otherwise allowable for the taxable year (determined after giving effect to the 2% limitation described above and any other applicable limitations). It is anticipated that Management Fees that each Fund will pay will constitute miscellaneous itemized deductions. To the extent that a loss or expense that cannot be deducted currently is allocated to a U.S. Shareholder, such U.S. Shareholder may be required to report taxable income in excess of its economic income or cash distributions on the Shares. Prospective shareholders are urged to consult their own tax advisors with regard to these and other limitations on the ability to deduct losses or expenses with respect to an investment in a Fund.

Under Section 709(b) of the Code, amounts paid or incurred to organize a partnership may, at the election of the partnership, be treated as deferred expenses, which are allowed as a deduction ratably over a period of not less than 180 months. Each Fund has elected to treat such expenses as ratably deductible over 180 months, beginning with the month the Fund is considered to have started its investment activities for federal tax purposes. A non-corporate U.S. Shareholder’s allocable share of such organizational expenses would constitute miscellaneous itemized deductions. Expenditures in connection with the issuance and marketing of Shares (so-called “syndication fees”) are not eligible for the 180-month amortization provision and are not deductible.

Transferor/Transferee Allocations

In general, a Fund’s taxable income and losses are determined monthly and are apportioned among a Fund’s shareholders in proportion to the number of Shares owned by each of them as of the close of the last trading day of the preceding month; provided , however , such items for the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs shall be allocated to the shareholders as of the opening of the Exchange on the first business day of the next succeeding month. With respect to any Share that was not treated as outstanding as of the close of the last trading day of the preceding month, the first person that is treated as holding such Share (other than an underwriter or other person holding in a similar capacity and except with respect to the period beginning on the closing date and ending on the last day of the month in which the option closing date or the expiration of the over-allotment option occurs) for U.S. federal income tax purposes will be treated as holding such Share for this purpose as of the close of the last trading day of the preceding month. As a result, a shareholder transferring its Shares may be allocated income, gain, loss and deduction realized after the date of transfer.

Section 706 of the Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to a Fund’s convention for allocating income and deductions. In that event, a Fund’s allocation method might be considered a monthly convention that does not literally comply with that requirement.

If the IRS treats transfers of Shares as occurring throughout each month and a monthly convention is not allowed by the Regulations (or only applies to transfers of less than all of a shareholder’s Shares), or if the IRS otherwise does not accept a Fund’s convention, the IRS may contend that taxable income or losses of a Fund must be reallocated among the shareholders. If such a contention were sustained, the shareholders’ respective tax liabilities would be adjusted to the possible detriment of certain shareholders. Each Fund’s Sponsor is authorized to revise a Fund’s methods of allocation between transferors and transferees (as well as among shareholders whose interests otherwise vary during a taxable period).

Tax Reporting by Each Fund

Information returns will be filed with the IRS as required with respect to income, gain, loss, deduction and other items derived from Shares of each Fund. Each Fund will file a partnership return with the IRS and a Schedule K-1 to the shareholders.

 

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Treatment of Securities Lending Transactions Involving Shares

A shareholder whose Shares are loaned to a “short seller” to cover a short sale of Shares may be considered as having disposed of those Shares. If so, such shareholder would no longer be a beneficial owner of a pro rata portion of the partnership interests with respect to those Shares during the period of the loan and may recognize gain or loss from the disposition. As a result, during the period of the loan, (1) any of the relevant Fund’s income, gain, loss, deduction or other items with respect to those Shares would not be reported by the shareholder, and (2) any cash distributions received by the shareholder as to those Shares could be fully taxable, likely as ordinary income. Accordingly, shareholders who desire to avoid the risk of income recognition from a loan of their Shares to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their Shares.

Audits and Adjustments to Tax Liability

Under the Code, adjustments in tax liability with respect to a Fund’s items generally will be made at the Fund level in a partnership proceeding rather than in separate proceedings with each shareholder. Pursuant to the Trust Agreement, the Sponsor will represent each Fund as such Fund’s “Tax Matters Partner” during any audit and in any dispute with the IRS. Each shareholder will be informed of the commencement of an audit of a Fund. In general, the Tax Matters Partner may enter into a settlement agreement with the IRS on behalf of, and that is binding upon, the shareholders.

Adjustments resulting from an IRS audit may require each shareholder to adjust a prior year’s liability, and possibly may result in an audit of its return. Any audit of a shareholder’s return could result in adjustments not related to a Fund’s returns as well as those related to the Fund’s returns.

The Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against shareholders for items in a Fund’s returns. The Tax Matters Partner may bind a shareholder with less than a 1% profits interest in a Fund to a settlement with the IRS unless that shareholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the shareholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any shareholder having at least a 1% interest in profits or by any group of shareholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each shareholder with an interest in the outcome may participate.

The Bipartisan Budget Act of 2015 implements a new regime for the U.S. federal income tax audit of partnerships that generally applies for taxable years of partnerships beginning after December 31, 2017. The Sponsor will be appointed the “partnership representative” of each Fund.

Foreign Tax Credits

Subject to generally applicable limitations, U.S. Shareholders will be able to claim foreign tax credits with respect to certain foreign income taxes paid or incurred by a Fund, withheld on payments made to the Trust or paid by the Trust on behalf of Fund shareholders (if any of such foreign income taxes are so paid, incurred or withheld). U.S. Shareholders must include in their gross income, for U.S. federal income tax purposes, both their share of a Fund’s items of income and gain and also their share of the amount which is deemed to be the shareholder’s portion of foreign income taxes paid with respect to, or withheld from interest or other income derived by, a Fund. U.S. Shareholders may then subtract from their U.S. federal income tax the amount of such taxes withheld, or else treat such foreign taxes as deductions from gross income; however, as in the case of investors receiving income directly from foreign sources, the tax credit or deduction described above is subject to certain limitations. Even if the shareholder is unable to claim a credit, he or she must include all amounts described above in income. U.S. Shareholders are urged to consult their tax advisors regarding this election and its consequences to them.

Tax Shelter Disclosure Rules

There are circumstances under which certain transactions must be disclosed to the IRS in a disclosure statement attached to a taxpayer’s U.S. federal income tax return. (A copy of such statement must also be sent to the IRS Office of Tax Shelter Analysis.) In addition, the Code imposes a requirement on certain “material advisors” to maintain a list of persons participating in such transactions, which list must be furnished to the IRS upon written request. These provisions can apply to transactions not conventionally considered to involve abusive tax planning. Consequently, it is possible that such disclosure could be required by a Fund or the shareholders (1) if a shareholder incurs a loss (in each case, in excess of a threshold computed without regard to offsetting gains or other income or limitations) from the

 

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disposition (including by way of withdrawal) of Shares, or (2) possibly in other circumstances. Furthermore, a Fund’s material advisors could be required to maintain a list of persons investing in that Fund pursuant to the Code. While the tax shelter disclosure rules generally do not apply to a loss recognized on the disposition of an asset in which the taxpayer has a qualifying basis (generally a basis equal to the amount of cash paid by the taxpayer for such asset), such rules will apply to a taxpayer recognizing a loss with respect to interests in a pass-through entity (such as the Shares) even if its basis in such interests is equal to the amount of cash it paid. In addition, significant penalties may be imposed in connection with a failure to comply with these reporting requirements. U.S. Shareholders are urged to consult their tax advisors regarding the tax shelter disclosure rules and their possible application to them.

U.S. Shareholders should consult their own tax advisors regarding any tax reporting or filing obligations they may have as a result of their acquisition, ownership or disposition of Shares.

Non-U.S. Shareholders

As noted above, there is limited authority on the U.S. federal income tax treatment of Bitcoin and no direct authority on Bitcoin derivatives. However, based on the CFTC treatment of Bitcoin as a commodity and on the assumption that each Fund will invest in Bitcoin Futures Contracts through the CBOE or CME or both, each Fund intends to take the position that investing in Bitcoin Futures Contracts falls within the commodities trading safe harbor under Section 864(b) and certain proposed regulations on derivatives. Thus, each Fund anticipates that a non-U.S. Shareholder should not be subject to U.S. federal income tax on such shareholder’s distributive share of a Fund’s income, provided that such income is not considered to be income of the shareholder that is effectively connected with the conduct of a trade or business within the United States. In the case of an individual non-U.S. Shareholder, such shareholder will be subject to U.S. federal income tax on gains on the sale of Shares in a Fund’s or such shareholder’s distributive share of gains if such shareholder is present in the United States for 183 days or more during a taxable year and certain other conditions are met.

If the income from a Fund is “effectively connected” with a U.S. trade or business carried on by a non-U.S. Shareholder (and, if certain income tax treaties apply, is attributable to a U.S. permanent establishment), then such shareholder’s share of any income and any gains realized upon the sale or exchange of Shares will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens and residents and domestic corporations. Non-U.S. Shareholders that are corporations may also be subject to a 30% U.S. branch profits tax (or lower treaty rate, if applicable) on their effectively connected earnings and profits that are not timely reinvested in a U.S. trade or business.

To the extent any interest income allocated to a non-U.S. Shareholder is considered “portfolio interest,” generally neither the allocation of such interest income to the non-U.S. Shareholder nor a subsequent distribution of such interest income to the non-U.S. Shareholder will be subject to withholding, provided that the non-U.S. Shareholder is not otherwise engaged in a trade or business in the United States and provides the relevant Fund with a timely and properly completed and executed IRS Form W-8BEN, Form W-8BEN-E, or other applicable form. In general, “portfolio interest” is interest paid on debt obligations issued in registered form, unless the “recipient” owns 10% or more of the voting power of the issuer.

Non-U.S. Shareholders that are individuals will be subject to U.S. federal estate tax on the value of U.S. situs property owned at the time of their death (unless a statutory exemption or tax treaty exemption applies). It is unclear whether partnership interests such as the Shares will be considered U.S. situs property. Accordingly, non-U.S. Shareholders may be subject to U.S. federal estate tax on all or part of the value of the Shares owned at the time of their death.

Non-U.S. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Shares.

Foreign Account Tax Compliance

The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (“FATCA”) generally impose a reporting and 30% withholding tax regime with respect to certain items of U.S. source income (including dividends and interest) and gross proceeds from the sale or other disposal of property that can produce U.S. source interest or dividends (“Withholdable Payments”). As a general matter, the rules are designed to

 

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require U.S. persons’ direct and indirect ownership of non-U.S. accounts and non-U.S. entities to be reported to the IRS. The 30% withholding tax regime applies if there is a failure to provide required information regarding U.S. ownership. The withholding rules generally apply to Withholdable Payments (other than gross proceeds of the type described above) and beginning January 1, 2019, payments of gross proceeds of the type described above with respect to a sale or disposition.

The rules may subject a non-U.S. Shareholder’s share of Withholdable Payments received by a Fund to 30% withholding tax unless such shareholder provides information, representations and waivers of non-U.S. law as may be required to comply with the provisions of the rules, including information regarding certain U.S. direct and indirect owners of such non-U.S. Shareholder. A non-U.S. Shareholder that is treated as a “foreign financial institution” will generally be subject to withholding unless it agrees to report certain information to the IRS regarding its U.S. accountholders and those of its affiliates.

Although the application of the withholding rules to a sale or other disposal of an interest in a partnership is unclear, it is possible that the gross proceeds of the sale or other disposal of an interest in a Fund will be subject to tax under the withholding rules if such proceeds are treated as an indirect disposal of the non-U.S. Shareholder’s interest in assets that can produce U.S. source interest or dividends, unless the selling non-U.S. Shareholder provides appropriate reporting information. Prospective shareholders should consult their own advisors regarding the requirements under FATCA with respect to their own situation.

Regulated Investment Companies (“RICs”)

The treatment of a RIC’s investment in a Fund will depend, in part, on whether a Fund is classified as a qualified publicly traded partnership (“PTP”) for purposes of the RIC rules. RICs are only allowed to invest up to 25% of their assets in qualified PTPs and to treat gross income and gross gains derived from such investments as qualifying income for purposes of certain rules relevant to determining whether an entity qualifies as a RIC. Similarly, interests in a qualified PTP are treated as issued by such PTP and a RIC is not required to look through to the underlying partnership assets when testing compliance with certain asset diversification or gross income tests applicable to determining whether an entity qualified as a RIC. On the other hand, an investment by a RIC in a publicly traded partnership that is not a qualified PTP is not counted against the 25% limit on a RIC’s investments in qualified PTPs and the RIC is treated as owning its proportionate share of the partnership’s gross assets and earning its proportionate share of the partnership’s gross income and gross gains for purposes of the asset and income tests relevant to determining whether an entity qualifies as a RIC.

While the tax treatment of Bitcoin derivatives is not entirely clear, it is possible that the Funds may be qualified PTPs. Prospective RIC investors should consult a tax advisor regarding the treatment of an investment in a Fund under current tax rules and in light of their particular circumstances.

Tax-Exempt Organizations

An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to taxation with respect to its “unrelated business taxable income” (“UBTI”), to the extent that its UBTI from all sources exceeds $1,000 in any taxable year. Except as noted below with respect to certain categories of exempt income, UBTI generally includes income or gain derived (either directly or through a partnership) from a trade or business, the conduct of which is substantially unrelated to the exercise or performance of the organization’s exempt purpose or function.

UBTI generally does not include passive investment income, such as dividends, interest and capital gains, whether realized by the organization directly or indirectly through a partnership (such as the Funds) in which it is a partner. This type of income is exempt, subject to the discussion of “unrelated debt-financed income” below, even if it is realized from securities-trading activity that constitutes a trade or business. The IRS has expressed in a Notice that Bitcoin is treated as property for U.S. federal income tax purposes and that Bitcoin can be utilized as an investment, among other purposes.

 

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UBTI includes not only trade or business income or gain as described above, but also “unrelated debt-financed income.” This latter type of income generally consists of (1) income derived by an exempt organization (directly or through a partnership) from income producing property with respect to which there is “acquisition indebtedness” at any time during the taxable year and (2) gains derived by an exempt organization (directly or through a partnership) from the disposition of property with respect to which there is acquisition indebtedness at any time during the twelve-month period ending with the date of the disposition. Each Fund does not expect to incur a significant amount of acquisition indebtedness with respect to its assets.

To the extent a Fund recognizes gain from property with respect to which there is “acquisition indebtedness,” the portion of the gain that will be treated as UBTI will be equal to the amount of the gain multiplied by a fraction, the numerator of which is the highest amount of the “acquisition indebtedness” with respect to the property during the twelve-month period ending with the date of its disposition, and the denominator of which is the “average amount of the adjusted basis” of the property during the period that such property is held by a Fund during the taxable year. In determining the unrelated debt-financed income of a Fund, an allocable portion of deductions directly connected with a Fund’s debt-financed property will be taken into account. In making such a determination, for instance, a portion of losses from debt-financed securities (determined in the manner described above for evaluating the portion of any gain that would be treated as UBTI) would offset gains treated as UBTI. A charitable remainder trust is subject to a 100% federal excise tax on any UBTI that it earns; in view of the potential for UBTI, the Shares may not be a suitable investment for a charitable remainder trust.

Certain State and Local Taxation Matters

Prospective shareholders should consider, in addition to the U.S. federal income tax consequences described above, the potential state and local tax consequences of investing in the Shares.

State and local laws often differ from U.S. federal income tax laws with respect to the treatment of specific items of income, gain, loss, deduction and credit. A shareholder’s distributive share of the taxable income or loss of a Fund generally will be required to be included in determining the shareholder’s reportable income for state and local tax purposes in the jurisdiction in which the shareholder is a resident. A Fund may conduct business in one or more jurisdictions that will subject a shareholder to tax (and require a shareholder to file an income tax return with the jurisdiction with respect to the shareholder’s share of the income derived from that business). A prospective shareholder should consult its tax advisor with respect to the availability of a credit for such tax in the jurisdiction in which the shareholder is resident.

Backup Withholding

In certain circumstances, shareholders may be subject to backup withholding on certain payments paid to them if they do not establish that they are exempt from the backup withholding rules or if they do not furnish their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to an investor may be refunded or credited against an investor’s U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS.

Shareholders should be aware that certain aspects of the U.S. federal, state and local income tax treatment regarding the purchase, ownership and disposition of Shares are not clear under existing law. Thus, shareholders are urged to consult their own tax advisors to determine the tax consequences of ownership of the Shares in their particular circumstances, including the application of U.S. federal, state, local and foreign tax laws.

Euroclear System

Any participant of the Euroclear System that holds Shares in the Euroclear System will be deemed to have represented to and agreed with the Funds and Euroclear Bank as a condition to Shares being in the Euroclear System to furnish to the Euroclear Bank (a) its tax identification number, (b) notice of whether it is (i) a person who is not a United States person, (ii) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing or (iii) a tax exempt identity, and (c) such other information as the Euroclear

 

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Bank may request from time to time in order to comply with its United States tax reporting obligations. If a participant in the Euroclear System fails to provide such information, Euroclear Bank may, amongst other courses of action, block trades in the Shares and related income distributions of such participant.

 

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PART TWO

GENERAL POOL DISCLOSURE

This Prospectus has two parts: the offered series disclosure and the general pool disclosure. These parts are bound together and are incomplete if not distributed together to prospective participants.

PERFORMANCE OF THE OTHER COMMODITY POOLS OPERATED BY

THE COMMODITY POOL OPERATOR

The following performance information is presented in accordance with CFTC regulations. The performance of each Fund will differ materially from the performance of the Other Funds which is included herein. The past performance summaries of the Other Funds below are generally not representative of how the Funds might perform in the future. No performance information is presented with respect to the ProShares Bitcoin ETF and ProShares Short Bitcoin ETF which have not commenced investment operations prior to the date of this Prospectus and which will not begin trading until after the initial Creation Units of each Fund are purchased by the initial Authorized Participant (all as described in the “Plan of Distribution” Section in Part Two of this Prospectus). The performance of the ProShares Bitcoin ETF and ProShares Short Bitcoin ETF will differ materially from the Funds listed below and from the Other Funds.

All summary performance information is as of July 31, 2017, except as noted. Performance information is set forth, in accordance with CFTC regulations, since each fund’s inception of trading.

 

Name of Pool:

  

ProShares Ultra Bloomberg Crude Oil

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $10,532,311,289

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $1,607,763,325

Net Asset Value as of July 31, 2017:

   $812,579,931

Net Asset Value per Share3 as of July 31, 2017:

   $17.27

Worst Monthly Loss:4

   -38.93%
(July 2015)

Worst Peak-to-Valley Loss:5

   -98.52%
(Inception - June 2017)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -1.50 %     11.40 %     -2.52 %     -21.61 %     -24.75 %     -7.28 %

February

     16.39 %     -12.31 %     11.74 %     4.51 %     -16.75 %     2.10 %

March

     -8.66 %     10.30 %     -0.94 %     -17.91 %     14.14 %     -14.18 %

April

     1.99 %     -8.84 %     -1.60 %     43.29 %     31.14 %     -6.77 %

May

     -32.85 %     -4.07 %     7.17 %     -2.26 %     9.78 %     -6.09 %

June

     -5.48 %     8.91 %     7.33 %     -4.80 %     -6.05 %     -10.82 %

July

     5.40 %     18.13 %     -12.40 %     -38.93 %     -28.95 %     16.64 %

August

     18.59 %     7.04 %     -4.12 %     0.96 %     9.10 %  

September

     -9.61 %     -9.00 %     -8.50 %     -20.34 %     11.46 %  

October

     -13.83 %     -10.16 %     -20.49 %     3.83 %     -7.66 %  

November

     4.23 %     -8.24 %     -33.62 %     -23.74 %     6.48 %  

December

     4.52 %     12.14 %     -36.15 %     -28.92 %     12.93 %  

Annual

     -28.11 %     9.17 %     -68.37 %     -75.21 %     -7.23 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -26.01 %

See accompanying Footnotes to Performance Information.

 

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Name of Pool:

  

ProShares UltraShort Bloomberg Crude Oil

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $5,167,588,345

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $(27,901,306)

Net Asset Value as of July 31, 2017:

   $189,859,492

Net Asset Value per Share3 as of July 31, 2017:

   $36.23

Worst Monthly Loss:4

   -35.22%
(April 2015)

Worst Peak-to-Valley Loss:5

   -87.86%
(February 2009 - June 2014)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -0.18 %     -10.82 %     1.19 %     13.70 %     17.85 %     5.18

February

     -15.40 %     12.92 %     -11.09 %     -14.92 %     1.14 %     -3.06

March

     7.52 %     -10.12 %     -0.21 %     14.97 %     -18.27 %     13.56

April

     -3.25 %     7.27 %     0.71 %     -35.22 %     -29.23 %     5.81

May

     45.59 %     2.47 %     -7.31 %     -1.23 %     -11.42 %     2.69

June

     -0.84 %     -9.37 %     -7.36 %     2.38 %     0.72 %     8.90

July

     -8.47 %     -16.56 %     13.04 %     55.07 %     33.66 %     -16.58

August

     -17.32 %     -8.08 %     3.35 %     -13.62 %     -13.03 %  

September

     8.99 %     8.57 %     6.99 %     14.99 %     -16.03 %  

October

     12.73 %     9.94 %     23.12 %     -8.93 %     5.69 %  

November

     -6.95 %     7.90 %     41.23 %     26.63 %     -13.39 %  

December

     -5.36 %     -11.62 %     45.65 %     31.98 %     -13.41 %  

Annual

     3.84 %     -21.28 %     145.78 %     70.82 %     -52.41 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       14.31

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares Ultra Euro

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $65,152,456

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $10,718,138

Net Asset Value as of July 31, 2017:

   $11,246,129

Net Asset Value per Share3 as of July 31, 2017:

   $17.30

Worst Monthly Loss:4

   -13.00%
(January 2015)

Worst Peak-to-Valley Loss:5

   -57.77%
(November 2009 - December 2016)

 

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Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     1.94 %     5.71 %     -4.00 %     -13.00 %     -0.90 %     4.71 %

February

     3.62 %     -7.71 %     4.65 %     -2.18 %     0.54 %     -3.92 %

March

     0.05 %     -3.75 %     -0.48 %     -8.11 %     9.10 %     1.00 %

April

     -1.62 %     5.39 %     1.35 %     8.86 %     1.03 %     3.97 %

May

     -12.87 %     -2.75 %     -3.52 %     -4.57 %     -5.83 %     5.96 %

June

     4.59 %     0.17 %     0.84 %     2.75 %     -0.96 %     2.98 %

July

     -5.68 %     4.27 %     -4.48 %     -3.17 %     1.22 %     7.08 %

August

     4.30 %     -1.42 %     -3.81 %     4.05 %     -0.80 %  

September

     4.23 %     4.64 %     -7.74 %     -1.02 %     1.13 %  

October

     1.53 %     0.61 %     -1.76 %     -3.40 %     -4.80 %  

November

     0.53 %     0.01 %     -1.66 %     -7.87 %     -7.10  

December

     2.79 %     2.46 %     -5.45 %     5.33 %     -1.76 %  

Annual

     1.93 %     6.91 %     -23.66 %     -21.95 %     -9.63 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       23.44 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares UltraShort Euro

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $2,607,646,881

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $64,927,560

Net Asset Value as of July 31, 2017:

   $210,080,442

Net Asset Value per Share3 as of July 31, 2017:

   $21.55

Worst Monthly Loss:4

   -8.72%
(March 2016)

Worst Peak-to-Valley Loss:5

   -24.44%
(July 2012 - April 2014)

 

- 58 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -2.49 %     -5.76 %     3.83 %     14.22 %     0.51 %     -4.87 %

February

     -3.88 %     7.90 %     -4.66 %     1.64 %     -1.04 %     3.89 %

March

     -0.47 %     3.51 %     0.22 %     7.50 %     -8.72 %     -1.32 %

April

     1.33 %     -5.46 %     -1.53 %     -8.70 %     -1.26 %     -4.03 %

May

     14.31 %     2.46 %     3.44 %     4.12 %     5.90 %     -5.89 %

June

     -4.86 %     -0.50 %     -1.04 %     -3.42 %     0.28 %     -3.09 %

July

     5.50 %     -4.58 %     4.48 %     2.76 %     -1.42 %     -6.81 %

August

     -4.52 %     1.15 %     3.75 %     -4.61 %     0.51 %  

September

     -4.43 %     -4.73 %     8.01 %     0.52 %     -1.32 %  

October

     -1.83 %     -0.92 %     1.29 %     2.94 %     4.77 %  

November

     -0.81 %     -0.29 %     1.32 %     8.11 %     7.26 %  

December

     -2.97 %     -2.64 %     5.33 %     -5.84 %     1.38 %  

Annual

     -6.49 %     -10.29 %     26.58 %     18.28 %     6.05 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -20.45 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares Ultra Yen

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $16,323,713

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $7,266,236

Net Asset Value as of July 31, 2017:

   $6,089,641

Net Asset Value per Share3 as of July 31, 2017:

   $60.91

Worst Monthly Loss:4

   -16.28%
(November 2016)

Worst Peak-to-Valley Loss:5

   -64.98%
(August 2011 - July 2015)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     1.83 %     -10.24 %     6.04 %     3.80 %     -1.64 %     6.67 %

February

     -12.23 %     -2.89 %     0.65 %     -3.83 %     14.96 %     0.80 %

March

     -3.77 %     -3.21 %     -2.91 %     -0.66 %     0.08 %     1.38 %

April

     7.33 %     -7.13 %     1.82 %     0.76 %     11.41 %     -0.44 %

May

     3.66 %     -6.03 %     0.72 %     -7.61 %     -7.91 %     0.96 %

June

     -4.03 %     2.26 %     0.86 %     2.63 %     14.33 %     -3.38 %

July

     4.50 %     2.39 %     -3.14 %     -2.67 %     1.96 %     3.81 %

August

     -0.57 %     -0.77 %     -2.34 %     4.25 %     -3.10 %  

September

     0.57 %     -0.41 %     -10.17 %     1.94 %     3.70 %  

October

     -4.61 %     -0.20 %     -4.92 %     -1.35 %     -6.77 %  

November

     -6.36 %     -8.02 %     -10.60 %     -4.04 %     -16.28 %  

December

     -9.85 %     -5.48 %     -2.11 %     4.51 %     -4.62 %  

Annual

     -22.73 %     -33.90 %     -24.21 %     -3.05 %     1.24 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       9.90 %

See accompanying Footnotes to Performance Information.

 

- 59 -


Table of Contents

Name of Pool:

  

ProShares UltraShort Yen

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $1,889,252,800

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $(22,081,585)

Net Asset Value as of July 31, 2017:

   $170,823,068

Net Asset Value per Share3 as of July 31, 2017:

   $71.20

Worst Monthly Loss:4

   -13.65%
(February 2016)

Worst Peak-to-Valley Loss:5

   -47.04%
(March 2009 - January 2012)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -2.11 %     10.61 %     -6.14 %     -4.19 %     1.18 %     -6.99 %

February

     13.43 %     2.19 %     -0.93 %     3.62 %     -13.65 %     -1.08 %

March

     3.44 %     2.86 %     2.61 %     0.32 %     -0.43 %     -1.72 %

April

     -7.26 %     6.29 %     -2.09 %     -0.99 %     -11.15 %     0.19 %

May

     -3.88 %     5.69 %     -0.91 %     7.88 %     8.16 %     -1.30 %

June

     3.81 %     -3.30 %     -1.07 %     -3.00 %     -13.59 %     3.24 %

July

     -4.54 %     -2.97 %     3.00 %     2.34 %     -3.07 %     -3.88 %

August

     0.25 %     0.08 %     2.18 %     -4.79 %     2.67 %  

September

     -0.86 %     -0.11 %     10.91 %     -2.22 %     -4.04 %  

October

     4.51 %     -0.16 %     4.36 %     1.08 %     6.84 %  

November

     6.38 %     8.32 %     11.44 %     3.95 %     18.56 %  

December

     10.53 %     5.35 %     1.40 %     -4.69 %     4.42 %  

Annual

     23.92 %     39.61 %     26.07 %     -1.55 %     -8.76 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -11.27 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares Ultra Gold

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   December 1, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $597,544,179

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $97,312,199

Net Asset Value as of July 31, 2017:

   $93,999,485

Net Asset Value per Share3 as of July 31, 2017:

   $39.17

Worst Monthly Loss:4

   -27.55%
(June 2013)

Worst Peak-to-Valley Loss:5

   -73.12%
(August 2011 - December 2015)

 

- 60 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     28.64 %     0.48 %     7.49 %     8.78 %     9.75 %     11.40 %

February

     2.55 %     -9.22 %     12.19 %     -7.45 %     22.46 %     6.82 %

March

     -12.33 %     1.03 %     -5.49 %     -4.70 %     -0.20 %     -2.09 %

April

     -1.83 %     -16.74 %     -0.77 %     -1.44 %     7.59 %     3.15 %

May

     -11.53 %     -10.49 %     -6.04 %     1.62 %     -11.52 %     -0.44 %

June

     4.62 %     -27.55 %     10.33 %     -3.70 %     18.01 %     -4.11 %

July

     2.48 %     20.84 %     -4.74 %     -12.35 %     2.86 %     3.76 %

August

     2.91 %     12.07 %     -0.15 %     6.39 %     -5.20 %  

September

     15.51 %     -10.09 %     -10.69 %     -3.97 %     1.70 %  

October

     -6.65 %     -1.02 %     -8.75 %     4.81 %     -7.84 %  

November

     0.43 %     -10.70 %     2.95 %     -13.85 %     -14.67 %  

December

     -8.05 %     -8.02 %     3.63 %     -0.69 %     -5.81 %  

Annual

     10.35 %     -50.75 %     -3.05 %     -25.68 %     10.68 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       19.04 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares UltraShort Gold

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   December 1, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $822,211,883

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $107,060,605

Net Asset Value as of July 31, 2017:

   $36,399,357

Net Asset Value per Share3 as of July 31, 2017:

   $73.24

Worst Monthly Loss:4

   -24.37%
(January 2012)

Worst Peak-to-Valley Loss:5

   -88.74%
(Inception - September 2012)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -24.37 %     -1.47 %     -8.02 %     -9.28 %     -9.65 %     -11.36 %

February

     -3.48 %     9.42 %     -11.43 %     7.27 %     -20.47 %     -6.93 %

March

     12.18 %     -1.44 %     4.69 %     4.01 %     -1.45 %     1.41 %

April

     0.60 %     14.63 %     0.00 %     0.59 %     -8.04 %     -3.59 %

May

     11.02 %     9.24 %     5.61 %     -2.32 %     11.92 %     -0.13 %

June

     -6.17 %     34.26 %     -9.92 %     3.00 %     -16.76 %     3.71 %

July

     -3.57 %     -19.13 %     4.17 %     12.87 %     -3.43 %     -4.01 %

August

     -3.63 %     -12.23 %     -0.49 %     -7.05 %     4.85 %  

September

     -14.63 %     8.79 %     11.32 %     3.00 %     -2.22 %  

October

     6.40 %     -1.16 %     8.36 %     -5.55 %     7.78 %  

November

     -1.39 %     11.00 %     -3.59 %     15.18 %     15.76 %  

December

     8.09 %     7.09 %     -4.56 %     -0.43 %     5.16 %  

Annual

     -22.78 %     62.07 %     -6.64 %     19.90 %     -21.19 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -19.80 %

See accompanying Footnotes to Performance Information.

 

- 61 -


Table of Contents

Name of Pool:

  

ProShares Ultra Silver

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   December 1, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $2,897,705,150

Aggregate Net Capital Subscriptions2 as of July 31, 2017

   $1,189,792,373

Net Asset Value as of July 31, 2017:

   $260,749,447

Net Asset Value per Share3 as of July 31, 2017:

   $34.10

Worst Monthly Loss:4

   -31.08%
(June 2013)

Worst Peak-to-Valley Loss:5

   -96.33%
(April 2011 - December 2015)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     39.92 %     13.30 %     -2.45 %     10.95 %     2.96 %     12.62 %

February

     21.64 %     -18.79 %     20.54 %     -5.20 %     8.87 %     11.21 %

March

     -25.33 %     -2.67 %     -12.40 %     0.19 %     7.86 %     -3.08 %

April

     -8.23 %     -29.79 %     -7.29 %     -1.57 %     33.68 %     -7.53 %

May

     -19.70 %     -15.45 %     -3.41 %     1.07 %     -19.67 %     -1.72 %

June

     -8.46 %     -31.08 %     20.02 %     -11.68 %     29.58 %     -9.94 %

July

     7.40 %     10.94 %     -2.11 %     -14.58 %     17.59 %     2.62 %

August

     16.30 %     38.75 %     -11.89 %     -2.57 %     -13.33 %  

September

     27.12 %     -17.19 %     -23.25 %     2.35 %     5.61 %  

October

     -13.81 %     3.68 %     -11.00 %     12.78 %     -16.49 %  

November

     11.96 %     -19.82 %     -3.87 %     -19.22 %     -13.12 %  

December

     -24.27 %     -5.11 %     -0.86 %     -4.31 %     -5.94 %  

Annual

     -0.52 %     -63.16 %     -37.84 %     -31.25 %     23.57 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       1.97 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares UltraShort Silver

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   December 1, 2008

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $2,373,445,996

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $235,381,260

Net Asset Value as of July 31, 2017:

   $18,730,353

Net Asset Value per Share3 as of July 31, 2017:

   $33.04

Worst Monthly Loss:4

   -32.75%
(January 2012)

Worst Peak-to-Valley Loss:5

   -99.20%
(Inception - November 2012)

 

- 62 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -32.75 %     -14.21 %     1.13 %     -13.48 %     -5.29 %     -12.52 %

February

     -20.18 %     21.21 %     -18.74 %     3.38 %     -10.36 %     -11.09 %

March

     27.37 %     1.17 %     12.13 %     -2.16 %     -9.47 %     1.26 %

April

     6.34 %     28.38 %     6.27 %     -0.23 %     -27.13 %     7.04 %

May

     20.84 %     14.53 %     2.02 %     -3.34 %     22.15 %     0.55 %

June

     3.78 %     39.17 %     -17.87 %     12.17 %     -24.93 %     9.89 %

July

     -9.59 %     -11.88 %     1.26 %     14.72 %     -18.65 %     -4.92 %

August

     -15.77 %     -31.22 %     12.03 %     -0.50 %     12.60 %  

September

     -25.12 %     14.19 %     28.17 %     -3.90 %     -8.04 %  

October

     14.03 %     -7.05 %     9.83 %     -14.19 %     16.98 %  

November

     -12.57 %     23.06 %     0.22 %     22.43 %     10.18 %  

December

     29.28 %     2.51 %     -1.95 %     2.41 %     3.60 %  

Annual

     -32.99 %     74.69 %     28.77 %     11.72 %     -42.24 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -11.44 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares VIX Short-Term Futures ETF

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   January 3, 2011

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $2,898,897,185

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $806,210,321

Net Asset Value as of July 31, 2017:

   $158,574,404

Net Asset Value per Share3 as of July 31, 2017:

   $36.87

Worst Monthly Loss:4

   -32.69%
(March 2012)

Worst Peak-to-Valley Loss:5

   -99.68%
(September 2011 - July 2017)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -24.92 %     -22.82 %     17.09 %     14.74 %     19.62 %     -23.72 %

February

     -8.04 %     0.85 %     -13.37 %     -24.30 %     4.01 %     -5.32 %

March

     -32.69 %     -17.16 %     -2.59 %     -6.04 %     -29.41 %     -13.98 %

April

     -1.14 %     -5.88 %     -4.97 %     -14.83 %     -5.45 %     -5.35 %

May

     28.89 %     2.55 %     -16.45 %     -13.40 %     -19.23 %     -10.71 %

June

     -29.23 %     7.12 %     -15.10 %     7.28 %     1.63 %     -4.18 %

July

     -9.26 %     -28.01 %     12.63 %     -21.45 %     -25.53 %     -13.63 %

August

     -15.50 %     13.12 %     -11.98 %     71.07 %     -11.04 %  

September

     -22.58 %     -13.20 %     10.50 %     -4.95 %     -4.60 %  

October

     5.59 %     -12.96 %     -2.57 %     -27.10 %     0.02 %  

November

     -21.88 %     -11.75 %     -9.56 %     -1.15 %     -17.88 %  

December

     7.09 %     -6.05 %     14.09 %     6.43 %     -9.47 %  

Annual

     -78.02 %     -66.00 %     -26.66 %     -36.73 %     -67.96 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -56.55 %

See accompanying Footnotes to Performance Information.

 

- 63 -


Table of Contents

Name of Pool:

  

ProShares VIX Mid-Term Futures ETF

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   January 3, 2011

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $523,979,974

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $183,283,521

Net Asset Value as of July 31, 2017:

   $28,052,999

Net Asset Value per Share3 as of July 31, 2017:

   $25.22

Worst Monthly Loss:4

   -18.65%
(January 2013)

Worst Peak-to-Valley Loss:5

   -92.96%
(September 2011 - July 2017)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -9.76 %     -18.65 %     3.08 %     6.98 %     8.60 %     -12.29 %

February

     1.25 %     -3.13 %     -4.27 %     -10.54 %     5.89 %     -3.69 %

March

     -17.42 %     -3.31 %     -2.89 %     0.83 %     -15.06 %     -10.39 %

April

     -0.83 %     -6.78 %     -3.29 %     -5.10 %     3.55 %     -5.88 %

May

     13.10 %     5.89 %     -4.07 %     -6.52 %     -6.39 %     -2.30 %

June

     -12.30 %     8.41 %     -9.99 %     0.90 %     1.71 %     -6.36 %

July

     -5.77 %     -16.71 %     1.32 %     -7.88 %     -8.54 %     -8.17 %

August

     -2.59 %     6.44 %     -3.83 %     27.18 %     -0.56 %  

September

     -17.84 %     -7.58 %     6.37 %     -0.83 %     -3.24 %  

October

     -5.90 %     -4.36 %     -2.28 %     -15.41 %     -2.07 %  

November

     -10.69 %     -5.42 %     -2.64 %     -0.36 %     -4.58 %  

December

     -0.53 %     -7.95 %     4.43 %     0.30 %     -1.41 %  

Annual

     -53.21 %     -44.38 %     -17.61 %     -15.16 %     -21.91 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -40.15 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares Ultra VIX Short-Term Futures ETF

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   October 3, 2011

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $14,271,010,458

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $4,075,525,465

Net Asset Value as of July 31, 2017:

   $381,992,796

Net Asset Value per Share3 as of July 31, 2017:

   $29.10

Worst Monthly Loss:4

   -57.41%
(March 2012)

Worst Peak-to-Valley Loss:5

   -100.00%
(Inception - July 2017)

 

- 64 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -44.29 %     -42.22 %     33.26 %     24.24 %     34.25 %     -42.60 %

February

     -18.65 %     -3.28 %     -27.25 %     -43.79 %     5.64 %     -11.29 %

March

     -57.41 %     -32.67 %     -7.29 %     -13.32 %     -51.67 %     -26.86 %

April

     -6.68 %     -17.72 %     -10.58 %     -28.53 %     -13.26 %     -12.79 %

May

     55.72 %     4.28 %     -30.55 %     -25.98 %     -36.41 %     -23.70 %

June

     -53.69 %     10.79 %     -29.08 %     10.78 %     -14.07 %     -8.79 %

July

     -20.88 %     -48.79 %     23.53 %     -42.05 %     -45.21 %     -25.99 %

August

     -30.01 %     25.79 %     -24.12 %     169.93 %     -21.67 %  

September

     -42.97 %     -25.54 %     19.63 %     -17.82 %     -13.70 %  

October

     8.79 %     -27.85 %     -14.78 %     -50.29 %     -1.25 %  

November

     -41.80 %     -22.65 %     -18.82 %     -6.33 %     -35.39 %  

December

     4.64 %     -12.99 %     21.81 %     5.41 %     -19.36 %  

Annual

     -97.28 %     -91.67 %     -62.59 %     -77.62 %     -93.81 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -83.27 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares Short VIX Short-Term Futures ETF

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   October 3, 2011

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $8,614,140,581

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $(444,948,455)

Net Asset Value as of July 31, 2017:

   $597,505,824

Net Asset Value per Share3 as of July 31, 2017:

   $91.92

Worst Monthly Loss:4

   -47.89%
(August 2015)

Worst Peak-to-Valley Loss:5

   -60.98%
(July 2015 - February 2016)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     31.19 %     25.87 %     -17.67 %     -18.32 %     -22.30 %     29.23 %

February

     4.50 %     -6.34 %     11.30 %     29.43 %     -6.58 %     4.35 %

March

     39.60 %     18.25 %     0.01 %     4.26 %     37.26 %     14.69 %

April

     -3.41 %     -2.00 %     3.83 %     15.50 %     2.22 %     3.04 %

May

     -26.85 %     -3.39 %     18.89 %     13.75 %     20.79 %     6.44 %

June

     29.53 %     -10.35 %     15.77 %     -11.31 %     -20.28 %     3.53 %

July

     5.11 %     36.57 %     -13.79 %     19.86 %     32.73 %     14.75 %

August

     16.20 %     -13.36 %     10.93 %     -47.89 %     11.27 %  

September

     23.02 %     13.40 %     -11.50 %     -4.22 %     -1.33 %  

October

     -7.76 %     9.11 %     -8.50 %     28.56 %     -1.36 %  

November

     22.09 %     12.30 %     9.50 %     -3.31 %     17.32 %  

December

     -13.67 %     4.91 %     -18.10 %     -13.34 %     8.55 %  

Annual

     155.84 %     104.06 %     -9.03 %     -17.24 %     79.54 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       101.52 %

See accompanying Footnotes to Performance Information.

 

- 65 -


Table of Contents

Name of Pool:

  

ProShares Ultra Bloomberg Natural Gas

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   October 4, 2011

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $674,091,098

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $126,094,110

Net Asset Value as of July 31, 2017:

   $44,687,057

Net Asset Value per Share3 as of July 31, 2017:

   $8.21

Worst Monthly Loss:4

   -51.14%
(December 2014)

Worst Peak-to-Valley Loss:5

   -98.94%
(Inception - July 2017)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     -33.79 %     -2.67 %     33.18 %     -16.96 %     -6.84 %     -30.47 %

February

     -7.98 %     2.40 %     -4.60 %     -0.34 %     -46.12 %     -23.59 %

March

     -39.34 %     29.13 %     -8.53 %     -10.49 %     16.16 %     22.55 %

April

     -0.48 %     13.20 %     19.28 %     2.42 %     15.98 %     0.42 %

May

     -0.06 %     -18.86 %     -12.75 %     -12.18 %     -4.07 %     -17.02 %

June

     21.89 %     -21.95 %     -4.13 %     10.59 %     47.36 %     -4.46 %

July

     25.46 %     -7.13 %     -25.71 %     -9.47 %     -4.53 %     -15.95 %

August

     -28.03 %     3.79 %     8.98 %     -6.16 %     -8.03 %  

September

     23.97 %     -7.10 %     -0.68 %     -17.03 %     -7.09 %  

October

     3.06 %     -8.12 %     -16.26 %     -25.89 %     -0.83 %  

November

     -14.18 %     16.00 %     4.01 %     -20.40 %     8.57 %  

December

     -13.68 %     12.97 %     -51.14 %     -1.68 %     20.88 %  

Annual

     -61.71 %     -0.54 %     -60.32 %     -69.88 %     1.50 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -56.43 %

See accompanying Footnotes to Performance Information.

 

Name of Pool:

  

ProShares UltraShort Bloomberg Natural Gas

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   October 4, 2011

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $283,575,725

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $(18,047,775)

Net Asset Value as of July 31, 2017:

   $8,502,676

Net Asset Value per Share3 as of July 31, 2017:

   $37.82

Worst Monthly Loss:4

   -37.18%
(January 2014)

Worst Peak-to-Valley Loss:5

   -81.64%
(March 2012 - April 2014)

 

- 66 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

     30.13 %     -1.67 %     -37.18 %     3.30 %     1.27 %     29.38 %

February

     0.98 %     -5.48 %     -5.47 %     -4.74 %     71.49 %     23.73 %

March

     56.44 %     -24.30 %     5.67 %     5.89 %     -17.44 %     -20.93 %

April

     -4.32 %     -15.15 %     -18.15 %     -7.71 %     -19.84 %     -3.34 %

May

     -8.88 %     17.55 %     11.26 %     8.57 %     -0.52 %     15.56 %

June

     -28.95 %     23.56 %     1.43 %     -14.67 %     -35.93 %     1.52 %

July

     -27.12 %     3.81 %     31.07 %     6.87 %     -2.13 %     14.05 %

August

     30.80 %     -5.64 %     -10.42 %     3.54 %     4.35 %  

September

     -23.39 %     5.64 %     -2.73 %     17.35 %     4.33 %  

October

     -6.83 %     5.95 %     15.73 %     30.43 %     -3.38 %  

November

     11.11 %     -15.20 %     -13.02 %     19.82 %     -12.71 %  

December

     11.43 %     -15.04 %     80.09 %     -8.04 %     -24.57 %  

Annual

     7.26 %     -31.50 %     20.00 %     66.27 %     -50.35 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       63.72 %

See accompanying Footnotes to Performance Information

 

Name of Pool:

  

ProShares Short Euro

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   June 26, 2012

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $44,141,870

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $8,606,660

Net Asset Value as of July 31, 2017:

   $10,081,630

Net Asset Value per Share3 as of July 31, 2017:

   $40.33

Worst Monthly Loss:4

   -4.43%
(March 2016)

Worst Peak-to-Valley Loss:5

   -13.09%
(July 2012 - April 2014)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

         -2.88 %     1.91 %     6.92 %     0.24 %     -2.43 %

February

         3.91 %     -2.39 %     0.85 %     -0.51 %     1.93 %

March

         1.70 %     0.10 %     3.79 %     -4.43 %     -0.66 %

April

         -2.76 %     -0.78 %     -4.41 %     -0.64 %     -2.00 %

May

         1.24 %     1.69 %     2.06 %     2.92 %     -2.95 %

June*

     -1.32 %     -0.24 %     -0.57 %     -1.67 %     0.18 %     -1.53 %

July

     2.68 %     -2.33 %     2.19 %     1.43 %     -0.76 %     -3.43 %

August

     -2.27 %     0.58 %     1.82 %     -2.30 %     0.25 %  

September

     -2.23 %     -2.40 %     3.94 %     0.27 %     -0.69 %  

October

     -0.93 %     -0.46 %     0.67 %     1.50 %     2.39 %  

November

     -0.40 %     -0.15 %     0.67 %     3.96 %     3.58 %  

December

     -1.51 %     -1.37 %     2.61 %     -2.89 %     0.71 %  

Annual

     -5.90 %     -5.26 %     12.33 %     9.30 %     3.04 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -10.65 %
            

See accompanying Footnotes to Performance Information.

 

* Represents rate of return from inception to June 29, 2012, as the inception of trading date for the pool was after June 1, 2012.

 

 

- 67 -


Table of Contents

Name of Pool:

  

ProShares UltraShort Australian Dollar

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   July 17, 2012

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $27,572,772

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $7,411,491

Net Asset Value as of July 31, 2017:

   $11,014,387

Net Asset Value per Share3 as of July 31, 2017:

   $44.06

Worst Monthly Loss:4

   -14.12%
(March 2016)

Worst Peak-to-Valley Loss:5

   -31.68%
(September 2015 - July 2017)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016     2017  

January

       -1.26 %     3.36 %     9.00 %     5.13 %     -9.74 %

February

       3.60 %     -4.43 %     -1.36 %     -2.33 %     -2.50 %

March

       -4.35 %     -8.03 %     3.90 %     -14.12 %     0.30 %

April

       0.10 %     -0.98 %     -8.19 %     0.88 %     3.82 %

May

       16.30 %     -0.94 %     6.37 %     9.89 %     1.27 %

June

       8.41 %     -3.11 %     -2.65 %     -6.95 %     -6.84 %

July*

     -4.17 %     2.33 %     2.29 %     10.70 %     -4.20 %     -7.95 %

August

     2.68 %     1.28 %     -1.48 %     4.60 %     1.80 %  

September

     -1.71 %     -9.75 %     12.91 %     2.03 %     -4.13 %  

October

     -0.91 %     -3.2 %     -1.89 %     -3.84 %     0.94 %  

November

     -1.76 %     7.19 %     6.17 %     -3.38 %     5.65 %  

December

     0.15 %     3.06 %     7.76 %     -2.26 %     4.25 %  

Annual

     -5.70 %     23.53 %     10.27 %     13.94 %     -5.45 %  

Year-to-Date

     N/A       N/A       N/A       N/A       N/A       -20.42 %

See accompanying Footnotes to Performance Information.

 

* Represents rate of return from inception to July 31, 2012, as the inception of trading date for the pool was after July 1, 2012.

 

Name of Pool:

  

ProShares UltraPro 3X Crude Oil ETF

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   March 24, 2017

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $24,649,481

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $18,387,707

Net Asset Value as of July 31, 2017:

   $21,896,851

Net Asset Value per Share3 as of July 31, 2017:

   $24.33

Worst Monthly Loss:4

   -16.85%
(June 2017)

Worst Peak-to-Valley Loss:5

   -33.24%
(April 2017 - June 2017)

 

- 68 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012      2013      2014      2015      2016      2017  

January

                 

February

                 

March *

                    16.98

April

                    -10.47

May

                    -10.32

June

                    -16.85

July

                    24.62

August

                 

September

                 

October

                 

November

                 

December

                 

Annual

                 

Year-to-Date

     N/A        N/A        N/A        N/A        N/A        -2.68

See accompanying Footnotes to Performance Information.

 

* Represents rate of return from inception to March 31, 2017, as the inception of trading date for the pool was after March 1, 2017.

 

Name of Pool:

  

ProShares UltraPro 3X Short Crude Oil ETF

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   March 24, 2017

Aggregate Gross Capital Subscriptions1 as of July 31, 2017:

   $12,737,367

Aggregate Net Capital Subscriptions2 as of July 31, 2017:

   $8,246,823

Net Asset Value as of July 31, 2017:

   $7,979,061

Net Asset Value per Share3 as of July 31, 2017:

   $19.95

Worst Monthly Loss:4

   -24.62%
(July 2017)

Worst Peak-to-Valley Loss:5

   -24.62%
(June 2017 - July 2017)

 

- 69 -


Table of Contents

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012      2013      2014      2015      2016      2017  

January

                 

February

                 

March *

                    -15.37

April

                    8.31

May

                    2.69

June

                    12.44

July

                    -24.62

August

                 

September

                 

October

                 

November

                 

December

                 

Annual

                 

Year-to-Date

     N/A        N/A        N/A        N/A        N/A        -20.22

See accompanying Footnotes to Performance Information.

 

* Represents rate of return from inception to March 31, 2017, as the inception of trading date for the pool was after March 1, 2017.

 

Name of Pool:

  

ProShares Ultra Bloomberg Commodity†

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of September 1, 2016:

   $57,464,446

Aggregate Net Capital Subscriptions2 as of September 1, 2016:

   $1,435,107

Net Asset Value as of September 1, 2016:

   $0.00

Net Asset Value per Share3 as of September 1, 2016:

   $0.00

Worst Monthly Loss:4

   -20.40%
(July 2015)

Worst Peak-to-Valley Loss:5

   -84.25%
(April 2011 - February 2016)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016  

January

     4.65 %     4.64 %     0.37 %     -6.90 %     -3.71 %

February

     5.24 %     -8.17 %     12.63 %     4.84 %     -3.64 %

March

     -8.43 %     0.76 %     0.63 %     -10.29 %     7.39 %

April

     -1.16 %     -5.52 %     4.74 %     11.50 %     17.25 %

May

     -17.71 %     -4.66 %     -5.82 %     -5.61 %     -0.72 %

June

     10.78 %     -9.44 %     1.03 %     3.20 %     8.02 %

July

     12.77 %     2.51 %     -9.88 %     -20.40 %     -10.28 %

August

     2.35 %     6.68 %     -2.24 %     -2.35 %     1.62 %

September

     3.16 %     -5.25 %     -12.27 %     -7.00 %     N/A  

October

     -7.85 %     -3.12 %     -1.84 %     -1.13 %     N/A  

November

     -0.16 %     -1.77 %     -8.30 %     -14.22 %     N/A  

December

     -5.34 %     2.31 %     -14.97 %     -6.47 %     N/A  

Annual

     -5.78 %     -20.32 %     -32.92 %     -45.47 %     N/A  

Year-to-Date

     N/A       N/A       N/A       N/A       14.23 %

See accompanying Footnotes to Performance Information.

 

ProShares Ultra Bloomberg Commodity was liquidated on September 1, 2016 and is no longer in operation.

 

- 70 -


Table of Contents

Name of Pool:

  

ProShares UltraShort Bloomberg Commodity†

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   November 24, 2008

Aggregate Gross Capital Subscriptions1 as of September 1, 2016:

   $95,173,249

Aggregate Net Capital Subscriptions2 as of September 1, 2016:

   $1,803,800

Net Asset Value as of September 1, 2016:

   $0.00

Net Asset Value per Share3 as of September 1, 2016:

   $0.00

Worst Monthly Loss:4

   -15.82%
(April 2016)

Worst Peak-to-Valley Loss:5

   -69.20%
(February 2009 - September 2012)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015     2016  

January

     -5.44 %     -4.91 %     -0.99 %     6.23 %     2.68 %

February

     -5.47 %     8.48 %     -11.70 %     -5.78 %     2.49 %

March

     8.11 %     -1.25 %     -1.10 %     10.43 %     -7.86 %

April

     0.31 %     4.61 %     -4.94 %     -11.13 %     -15.82 %

May

     20.41 %     4.27 %     5.77 %     4.96 %     -0.22 %

June

     -11.11 %     9.63 %     -1.42 %     -3.88 %     -8.44 %

July

     -12.82 %     -3.05 %     10.50 %     24.17 %     10.33 %

August

     -3.00 %     -6.86 %     1.90 %     0.58 %     -2.25 %

September

     -3.84 %     4.94 %     13.23 %     6.48 %     N/A  

October

     7.73 %     2.71 %     1.17 %     0.37 %     N/A  

November

     -0.57 %     1.38 %     7.82 %     15.74 %     N/A  

December

     5.15 %     -2.66 %     16.32 %     5.65 %     N/A  

Annual

     -4.97 %     17.00 %     38.64 %     61.71 %     N/A  

Year-to-Date

     N/A       N/A       N/A       N/A       -19.58 %

See accompanying Footnotes to Performance Information.

 

ProShares UltraShort Bloomberg Commodity was liquidated on September 1, 2016 and is no longer in operation.

 

Name of Pool:

  

ProShares Ultra Australian Dollar†

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   July 17, 2012

Aggregate Gross Capital Subscriptions1 as of June 29, 2015:

   $4,000,200

Aggregate Net Capital Subscriptions2 as of June 29, 2015:

   $1,476,774

Net Asset Value as of June 29, 2015:

   $0.00

Net Asset Value per Share3 as of June 29, 2015:

   $0.00

Worst Monthly Loss:4

   -14.54%
(May 2013)

Worst Peak-to-Valley Loss:5

   -43.55%
(March 2013 - June 2015)

 

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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012     2013     2014     2015  

January

       0.94 %     -3.72 %     -8.78 %

February

       -3.77 %     4.21 %     0.99 %

March

       4.28 %     8.27 %     -4.96 %

April

       -0.56 %     0.71 %     8.12 %

May

       -14.54 %     0.68 %     -6.57 %

June

       -8.63 %     2.93 %     -1.86 %

July*

     4.03 %     -3.08 %     -2.53 %     N/A  

August

     -2.91 %     -1.69 %     1.30 %     N/A  

September

     1.27 %     10.07 %     -11.93 %     N/A  

October

     0.59 %     2.97 %     1.32 %     N/A  

November

     1.50 %     -7.09 %     -6.37 %     N/A  

December

     -0.42 %     -3.42 %     -7.59 %     N/A  

Annual

     3.98 %     -23.77 %     -13.58 %     N/A  

Year-to-Date

     N/A       N/A       N/A       -13.20 %

See accompanying Footnotes to Performance Information.

 

ProShares Ultra Australian Dollar was liquidated on June 29, 2015 and is no longer in operations.
* Represents rate of return from inception to July 31, 2012, as the inception of trading date for the pool was after July 1, 2012.

 

Name of Pool:

  

ProShares Managed Futures Strategy†

Type of Pool:

   Public, Exchange-listed Commodity Pool

Date of Inception of Trading:

   October 1, 2014

Aggregate Gross Capital Subscriptions1 as of March 30, 2016:

   $19,699,612

Aggregate Net Capital Subscriptions2 as of March 30, 2016:

   $7,378,135

Net Asset Value as of March 30, 2016:

   $0.00

Net Asset Value per Share3 as of March 30, 2016:

   $0.00

Worst Monthly Loss:4

   -3.56%
(April 2015)

Worst Peak-to-Valley Loss:5

   -7.96%
(January 2015 - March 2016)

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Rate of Return:6

 

     2012      2013      2014     2015     2016  

January

             3.06 %     -1.53 %

February

             -2.12 %     1.62 %

March

             0.69 %     -2.42 %

April

             -3.56 %     N/A  

May

             0.67 %     N/A  

June

             -1.66 %     N/A  

July

             -.04 %     N/A  

August

             -.57 %     N/A  

September

             1.04 %     N/A  

October*

           0.58 %     -1.45 %     N/A  

November

           3.16 %     1.43 %     N/A  

December

           1.85 %     -.21 %     N/A  

Annual

           5.68 %     -2.85 %     N/A  

Year-to-Date

     N/A        N/A        N/A       N/A       -2.36 %

See accompanying Footnotes to Performance Information.

 

ProShares Managed Futures Strategy was liquidated on March 30, 2016 and is no longer in operations.
* Represents rate of return from inception to October 31, 2014, as the inception of trading date for the pool was after October 1, 2014.

 

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Footnotes to Performance Information

 

1. “Aggregate Gross Capital Subscriptions” is the aggregate of all amounts ever contributed to the pool, including those of investors who subsequently redeemed their investments.
2. “Aggregate Net Capital Subscriptions” is the aggregate of all amounts ever contributed to the pool, excluding those of investors who subsequently redeemed their investments.
3. “Net Asset Value per Share” is the net asset value, based on the pricing policies of the Trust and determined in accordance with Generally Accepted Accounting Principles, of the pool divided by the total number of Shares outstanding as of July 31, 2017. Please see “Description of the Shares; The Funds; Certain Material Terms of the Trust Agreement—Net Asset Value (NAV)” for additional information regarding the pricing policies of the Trust. For the ProShares Short VIX Short-Term Futures ETF, net asset value per share reflects the impact of a 2:1 forward share split announced on June 27, 2017 and effective July 17, 2017. For the ProShares VIX Short-Term Futures ETF and the ProShares Ultra VIX Short-Term Futures ETF, net asset value per share reflects a 1:4 reverse share split announced on June 27, 2017 and effective July 17, 2017.
4. “Worst Monthly Loss” is the largest single month loss sustained during the most recent five calendar years and year-to-date (or since inception of the Fund, if the Fund has had less than five calendar years of performance), expressed as a percentage. “Loss” as used in this section of the Prospectus means losses experienced by the relevant pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Loss is measured on the basis of monthly returns only, and does not reflect intra-month figures.
5. “Worst Peak-to-Valley Loss” is the largest percentage decline in Net Asset Value per Share over the most recent five calendar years and year-to-date (or since inception of the Fund, if the Fund has had less than five calendar years of performance). This need not be a continuous decline, but can be a series of positive and negative returns where the negative returns are larger than the positive returns. Worst Peak-to-Valley Loss represents the greatest percentage decline from any month-end Net Asset Value per Share that occurs without such month-end Net Asset Value per Share being equaled or exceeded as of a subsequent month-end. A Peak-to-Valley loss that begins prior to the beginning of the most recent five calendar years and ends within the most recent five calendar year period is deemed to have occurred during such five calendar year period.
6. Based on the latest calculated net asset value, as applicable to creations and redemptions of Creation Units, with respect to each period.

USE OF PROCEEDS

Under normal market conditions, each Fund invests substantially all of its assets in long or short positions in Bitcoin Futures Contracts in a manner consistent with its investment objective. Each Fund will also hold Money Market Instruments as collateral for Bitcoin Futures Contracts and Financial Instruments and pending investment in Bitcoin Futures Contracts and Financial Instruments. In the event position, price or accountability limits (if any) are reached with respect to Bitcoin Futures Contracts, the Sponsor may, in its commercially reasonable judgment, cause each Fund to obtain exposure to its Benchmark through investment in Financial Instruments. The Funds may also invest in Financial Instruments if the market for a specific Bitcoin Futures Contract experiences emergencies (e.g., natural disaster, terrorist attack or an act of God) or disruptions (e.g., a trading halt or a flash crash) that prevent or make it impractical for a Fund from obtaining the appropriate amount of investment exposure using Bitcoin Futures Contracts. To the extent that the Funds do not invest the proceeds of the offering of the Shares in the manner described above on the day such proceeds are received, such proceeds will be deposited with the Custodian in a non-interest bearing account.

To the extent that the Funds trade in Bitcoin Futures Contracts on U.S. exchanges, the assets deposited by the Funds with the FCMs (or another eligible financial institution, as applicable) as margin must be segregated pursuant to the regulations of the CFTC. Such segregated funds may be invested only in a limited range of instruments—principally U.S. government obligations to margin futures and forward contract positions.

 

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[The Sponsor has selected Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) and RBC Capital Markets, LLC (RBC) as its FCMs. Each of MLPF&S and RBC, in its capacity as a registered FCM, serves as a clearing broker to the Trust and the Funds and as such arranges for the execution and clearing of the Funds’ futures transactions. Each of MLPF&S and RBC acts as clearing broker for many other funds and individuals. A variety of executing brokers may execute futures transactions on behalf of the Funds. The executing brokers will give-up all such transactions to MLPF&S or RBC, as applicable. Each of MLPF&S and RBC is registered as an FCM with the CFTC and is a member of the NFA. MLPF&S and RBC are clearing members of the CBOT, CME, NYMEX, and all other major U.S. commodity exchanges. Neither MLPF&S nor RBC is affiliated with or acts as a supervisor of the Trust, the Funds, the Sponsor, the Trustee or BBH&Co. (the Administrator and the Custodian). Neither MLPF&S nor RBC, in its capacity as FCM, is acting as an underwriter or sponsor of the offering of the Shares, or has passed upon the merits of participating in this offering. Neither MLPF&S nor RBC has passed upon the adequacy of this Prospectus or on the accuracy of the information contained herein. Neither MLPF&S s nor RBC provides any commodity trading advice regarding the Funds’ trading activities. Investors should not rely upon MLPF&S or RBC in deciding whether to invest in the Funds or retain their interests in the Funds. Prospective investors should also note that the Sponsor may select additional clearing brokers or replace MLPF&S and/or RBC as the Funds’ clearing broker.][ProShares confirm that all third parties have agreed to be named in a bitcoin related product]

The Sponsor, a registered commodity pool operator, is responsible for the cash management activities of the Funds, including investing in cash equivalents that may be used as margin for the applicable Fund’s portfolio holdings, as described above.

WHO MAY SUBSCRIBE

Only Authorized Participants may create or redeem Creation Units. Each Authorized Participant must (1) be a registered broker-dealer or other securities market participant such as a bank or other financial institution which is not required to register as a broker-dealer to engage in securities transactions, (2) be a participant in DTC, and (3) have entered into an agreement with the Trust and the Sponsor (an Authorized Participant Agreement).

CREATION AND REDEMPTION OF SHARES

Each Fund creates and redeems Shares from time to time, but only in one or more Creation Units. A Creation Unit is a block of 50,000 Shares of a Fund. Except when aggregated in Creation Units, the Shares are not redeemable securities.

The manner by which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and Authorized Participant Handbook, and all such procedures are at the discretion of the Sponsor. By placing a purchase order, an Authorized Participant agrees to deposit cash with the Custodian of the Funds (unless as provided otherwise by this Prospectus).

If permitted by the Sponsor in its sole discretion with respect to a Fund, an Authorized Participant may also agree to enter into or arrange for an exchange of a futures contract for related position (“EFCRP”) or block trade with the relevant Fund whereby the Authorized Participant would also transfer to such Fund a number and type of exchange-traded futures contracts at or near the closing settlement price for such contracts on the purchase order date. Similarly, the Sponsor in its sole discretion may agree with an Authorized Participant to use an EFCRP to effect an order to redeem Creation Units.

An EFCRP is a technique permitted by the rules of certain futures exchanges that, as utilized by a Fund in the Sponsor’s discretion, would allow such Fund to take a position in a futures contract from an Authorized Participant, or give futures contracts to an Authorized Participant, in the case of a redemption, rather than to enter the futures exchange markets to obtain such a position. An EFCRP by itself will not change either party’s net risk position materially. Because the futures position that a Fund would otherwise need to take in order to meet its investment objective can be obtained without unnecessarily impacting the financial or futures markets or their pricing, EFCRPs can generally be viewed as transactions beneficial to a Fund. A block trade is a technique that permits each Fund to obtain a futures position without going through the market auction system and can generally be viewed as a transaction beneficial to the Fund.

 

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Authorized Participants pay a fixed transaction fee of up to $500 in connection with each order to create or redeem a Creation Unit in order to compensate BBH&Co., as the Administrator, the Custodian and the Transfer Agent of each Fund and its Shares, for services in processing the creation and redemption of Creation Units and to offset the costs of increasing or decreasing derivative positions. Authorized Participants also may pay a variable transaction fee to the Fund of up to [            ]% of the value of the Creation Unit that is purchased or redeemed unless the transaction fee is waived or otherwise adjusted by the Sponsor. The Sponsor provides such Authorized Participant with prompt notice in advance of any such waiver or adjustment of the transaction fee. Authorized Participants may sell the Shares included in the Creation Units they purchase from the Funds to other investors. Further detail on the fees is set forth in the Authorized Participant Handbook.

The form of Authorized Participant Agreement and the related Authorized Participant Handbook set forth the procedures for the creation and redemption of Creation Units and for the payment of cash required for such creations and redemptions. The Sponsor may delegate its duties and obligations under the form of Authorized Participant Agreement to SEI or the Administrator without consent from any shareholder or Authorized Participant. The form of Authorized Participant Agreement and the related procedures attached thereto may be amended by the Sponsor without the consent of any shareholder or Authorized Participant. Authorized Participants who purchase Creation Units from the Funds receive no fees, commissions or other form of compensation or inducement of any kind from either the Sponsor or the Funds, and no such person has any obligation or responsibility to the Sponsor or the Fund to effect any sale or resale of Shares.

Authorized Participants are cautioned that some of their activities may result in their being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the 1933 Act, as described in “Plan of Distribution.”

Each Authorized Participant must be registered as a broker-dealer under the 1934 Act and regulated by FINRA, or exempt from being, or otherwise not required to be, so regulated or registered, and must 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 be regulated under federal and state banking laws and regulations. Each Authorized Participant must have its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.

Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Creation Units.

Persons interested in purchasing Creation Units should contact the Sponsor or the Administrator to obtain the contact information for the Authorized Participants. Shareholders who are not Authorized Participants are only able to redeem their Shares through an Authorized Participant.

Pursuant to the Authorized Participant Agreement, the Sponsor agreed 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 Creation Units 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. The Trust Agreement and the form of Authorized Participant Agreement are filed as exhibits to the Registration Statement of which this Prospectus is a part.

Creation Procedures

On any Business Day, an Authorized Participant may place an order with the Distributor to create one or more Creation Units. For purposes of processing both purchase and redemption orders, a “Business Day” for each Fund means any day on which the NAV of such Fund is determined.

 

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Purchase orders must be placed by the cut-off time shown on page [3] or earlier if the Exchange or other exchange material to the valuation or operation of such Fund closes before the cut-off time. If a purchase order is received prior to the applicable cut-off time, the day on which SEI receives a valid purchase order is the purchase order date. If the purchase order is received after the applicable cut-off time, the purchase order date will be the next business day. Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Creation Units, an Authorized Participant’s DTC account will be charged the non-refundable transaction fee due for the purchase order.

Determination of Required Payment

The total payment required to create each Creation Unit is the NAV of [ ] Shares of the applicable Fund on the purchase order date plus the applicable transaction fee. For each Fund, Authorized Participants have create/redeem cut-off times prior to the NAV calculation time, which may be different from the close of U.S. markets, as shown in the table on page [3].

Delivery of Cash

Cash required for settlement will typically be transferred to the Custodian through: (1) the Continuous Net Settlement (“CNS”) clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or (2) the facilities of DTC on a Delivery Versus Payment (DVP) basis, which is the procedure in which the buyer’s payment for securities is due at the time of delivery. Security delivery and payment are simultaneous. If the Custodian does not receive the cash by the market close on the first Business Day following the purchase order date (T+1), such order may be charged interest for delayed settlement or cancelled. The Sponsor reserves the right to extend the deadline for the Custodian to receive the cash required for settlement up to the third Business Day following the purchase order date (T+3). In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing the Fund for all costs associated with cancelling the order including costs for repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement. The Creation Unit will be delivered to the Authorized Participant upon the Custodian’s receipt of the purchase amount.

Delivery of Exchange of Futures Contract for Related Position (EFCRP) Futures Contracts or Block Trades

In the event that the Sponsor shall have determined to permit the Authorized Participant to transfer futures contracts pursuant to an EFCRP or to engage in a block trade purchase of futures contracts from the Authorized Participant with respect to a Fund, as well as to deliver cash, in the creation process, futures contracts required for settlement must be transferred directly to the Fund’s account at its FCM. If the cash is not received by the market close on the third Business Day following the purchase order date (T+3); such order may be charged interest for delayed settlements or cancelled. In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. The Creation Unit will be delivered to the Authorized Participant upon the Custodian’s receipt of the cash purchase amount and the futures contracts.

Suspension or Rejection of Purchase Orders

In respect of any Fund, the Sponsor may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date: (1) for any period during which any of the Exchange, Eurex, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Fund is closed or when trading is suspended or restricted on such exchanges in any of the underlying Bitcoin Futures Contracts; (2) for any period during which an emergency exists as a result of which the fulfillment of a purchase order is not reasonably practicable; or (3) for such other period as the Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.

The Sponsor also may reject a purchase order if:

it determines that the purchase order is not in proper form;

 

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the Sponsor believes that the purchase order would have adverse tax consequences to a Fund or its shareholders; the order would be illegal; or

circumstances outside the control of the Sponsor make it, for all practical purposes, not feasible to process creations of Creation Units.

None of the Sponsor, the Administrator or the Custodian will be liable for the suspension or rejection of any purchase order.

Redemption Procedures

The procedures by which an Authorized Participant can redeem one or more Creation Units mirror the procedures for the creation of Creation Units. On any Business Day, an Authorized Participant may place an order with the Distributor to redeem one or more Creation Units. If a redemption order is received prior to the applicable cut-off time, or earlier if the Exchange or other exchange material to the valuation or operation of such Fund closes before the cut-off time, the day on which SEI receives a valid redemption order is the redemption order date. If the redemption order is received after the applicable cut-off time, the redemption order date will be the next day. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Creation Units. Individual shareholders may not redeem directly from a Fund.

By placing a redemption order, an Authorized Participant agrees to deliver the Creation Units to be redeemed through DTC’s book-entry system to the applicable Fund not later than noon (Eastern Time), on the first Business Day immediately following the redemption order date (T+1). The Sponsor reserves the right to extend the deadline for each Fund to receive the Creation Units required for settlement up to the third Business Day following the redemption order date (T+3). By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant must wire to the Custodian the non-refundable transaction fee due for the redemption order or any proceeds due will be reduced by the amount of the fee payable. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement.

Upon request of an Authorized Participant made at the time of a redemption order, the Sponsor at its sole discretion may determine, in addition to delivering redemption proceeds, to transfer futures contracts to the Authorized Participant pursuant to an EFCRP or to a block trade sale of futures contracts to the Authorized Participant.

Determination of Redemption Proceeds

The redemption proceeds from a Fund consist of the cash redemption amount and, if permitted by the Sponsor in its sole discretion with respect to a Fund, an EFCRP or block trade with the relevant Fund as described in “—Creation and Redemption of Shares” above. The cash redemption amount is equal to the NAV of the number of Creation Unit(s) of such Fund requested in the Authorized Participant’s redemption order as of the time of the calculation of such Fund’s NAV on the redemption order date, less transaction fees and any amounts attributable to any applicable EFCRP or block trade.

Delivery of Redemption Proceeds

The redemption proceeds due from a Fund are delivered to the Authorized Participant at noon (Eastern Time), on the third Business Day immediately following the redemption order date if, by such time on such Business Day immediately following the redemption order date, a Fund’s DTC account has been credited with the Creation Units to be redeemed. The Fund should be credited through: (1) the CNS clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or (2) the facilities of DTC on a Delivery Versus Payment basis. If a Fund’s DTC account has not been credited with all of the Creation Units to be redeemed by such time, the redemption distribution is delivered to the extent whole Creation Units are received. Any remainder of the redemption distribution is delivered on the next Business Day to the extent any remaining whole Creation Units are received if: (1) the Sponsor receives the fee applicable to the extension of the redemption distribution date which the Sponsor may, from time to time, determine, and (2) the remaining Creation Units to be redeemed are credited to the Fund’s DTC account by noon (Eastern Time), on such next Business Day. Any further outstanding amount of the redemption order may be cancelled. The Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for repositioning the portfolio.

 

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The Sponsor is also authorized to deliver the redemption distribution notwithstanding that the Creation Units to be redeemed are not credited to a Fund’s DTC account by noon (Eastern Time), on the third Business Day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Creation Units through DTC’s book-entry system on such terms as the Sponsor may determine from time to time.

In the event that the Authorized Participant shall have requested, and the Sponsor shall have determined to permit the Authorized Participant to receive futures contracts pursuant to an EFCRP, as well as the cash redemption proceeds, in the redemption process, futures contracts required for settlement shall be transferred directly from the Fund’s account at its FCM to the account of the Authorized Participant at its FCM.

Suspension or Rejection of Redemption Orders

In respect of any Fund, the Sponsor may, in its discretion, suspend the right of redemption, or postpone the redemption settlement date, (1) for any period during which any of the Exchange, Eurex, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Fund is closed or when trading is suspended or restricted on such exchanges in any of the underlying Bitcoin Futures Contracts; (2) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable; or (3) for such other period as the Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.

The Sponsor will reject a redemption order if the order is not in proper form as described in the form of Authorized Participant Agreement or if the fulfillment of the order might be unlawful.

Creation and Redemption Transaction Fee

To compensate BBH&Co. for services in processing the creation and redemption of Creation Units and to offset some or all of the transaction costs, an Authorized Participant may be required to pay a fixed transaction fee to BBH&Co. of up to $500 per order to create or redeem Creation Units and may pay a variable transaction fee to a Fund of up to [            ]% of the value of a Creation Unit. An order may include multiple Creation Units. The transaction fee(s) may be reduced, increased or otherwise changed by the Sponsor at its sole discretion.

Special Settlement

The Sponsor may allow for early settlement of purchase or redemption orders. Such arrangements may result in additional charges to the Authorized Participant.

LITIGATION

As of the date of this Prospectus, there is no pending legal proceeding, other than ordinary routine litigation incidental to the business of the Trust and that which is described below, to which the Trust or a Fund is a claimant or defendant or to which any of their property is the subject.

As of the date of this Prospectus, there are no material administrative, civil or criminal actions, whether pending or concluded, within five years preceding the date of the Prospectus, against the Sponsor. Louis Mayberg and Michael Sapir, both principals of the Sponsor, were named as defendants in a purported class action lawsuit in the United States District Court for the Southern District of New York, styled In re ProShares Trust Securities Litigation, Civ. No. 09-cv-6935. The Trust was also a defendant in this action, along with several others. The action was initially brought by Steven Novick, on behalf of himself and all others similarly situated, in a complaint filed August 5, 2009, and was consolidated on April 28, 2011, with 33 related putative class actions. The second amended complaint alleged that the defendants violated Sections 11 and 15 of the 1933 Act by including untrue statements of material fact and

 

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omitting material facts in the Registration Statement for one or more of ProShares’ exchange-traded funds (“ETFs”) and allegedly failing to adequately disclose the funds’ investment objectives and risks. Claimants, all purchasers of shares of ETFs sold by the Trust or ProShares Trust, sought class certification, compensatory damages, punitive damages, litigation costs, expectation damages and declaratory judgment. The six other series of the Trust named in the complaint were ProShares Ultra Silver, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares UltraShort DJ-UBS Crude Oil (n/k/a ProShares UltraShort Bloomberg Crude Oil), ProShares Ultra DJ-UBS Crude Oil (n/k/a ProShares Ultra Bloomberg DJ-UBS Crude Oil), and ProShares UltraShort Silver. On September 10, 2012, the District Court issued an Opinion and Order dismissing the class action lawsuit in its entirety. On July 22, 2013, the United States Court of Appeals for the Second Circuit issued an Opinion affirming the District Court’s decision and dismissing the class action lawsuit in its entirety.

MLPF&S and RBC are clearing members of the CBOT, CME, NYMEX, and all other major U.S. commodity exchanges. From time to time, each of MLPF&S and RBC (in its capacity as a commodities broker) and its respective principals may be involved in numerous legal actions, some of which individually and all of which in the aggregate, seek significant or indeterminate damages. However, except for the actions described in the section entitled “Futures Commission Merchants—Litigation and Regulatory Disclosure Relating to FCMs” beginning on page 37, each of MLPF&S and RBC has advised that during the five years preceding the date of this Prospectus there has been no material administrative, civil, or criminal action against it or any of its respective principals.

DESCRIPTION OF THE SHARES; THE FUNDS; CERTAIN MATERIAL

TERMS OF THE TRUST AGREEMENT

The following summary describes in brief the Shares and certain aspects of the operation of the Trust, the Funds, and the respective responsibilities of the Trustee and the Sponsor concerning the Trust and the material terms of the Trust Agreement. Prospective investors should carefully review the Trust Agreement filed as an exhibit to the Registration Statement of which this Prospectus is a part and consult with their own advisors concerning the implications to such prospective investors of investing in a series of a Delaware statutory trust. Capitalized terms used in this section and not otherwise defined shall have such meanings assigned to them under the Trust Agreement.

Description of the Shares

Each Fund will issue common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Funds.

The Shares may be purchased from the Funds or redeemed on a continuous basis, but only by Authorized Participants and only in Creation Units. Individual Shares may not be purchased or redeemed from the Funds. Shareholders that are not Authorized Participants may not purchase or redeem any Shares or Creation Units from the Funds. The Shares of each Fund are expected to trade on the Exchange and provide institutional and retail investors with direct access to each Fund. Each Fund’s Shares may be bought and sold on the Exchange like any other exchange-listed security.

Principal Office; Location of Records; Fiscal Year

The Trust is organized as a statutory trust under the DSTA. The Trust is managed by the Sponsor, whose office is located at 7501 Wisconsin Avenue, East Tower, 10th Floor, Bethesda, Maryland 20814.

The books and records of the Funds are maintained as follows: all marketing materials are maintained at the offices of SEI, One Freedom Valley Drive, Oaks, Pennsylvania 19456. Creation Unit creation and redemption books and records, certain financial books and records (including Fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details) and certain trading and related documents received from FCMs are maintained by BBH&Co., 50 Post Office Square, Boston, Massachusetts 02110.

 

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All other books and records of the Funds (including minute books and other general corporate records, trading records and related reports) are maintained at the Funds’ principal office, c/o ProShare Capital Management LLC, 7501 Wisconsin Avenue, East Tower, 10th Floor, Bethesda, Maryland 20814.

Trust books and records located at the foregoing addresses, are available for inspection and copying (upon payment of reasonable reproduction costs) by Fund shareholders or their representatives for any purposes reasonably related to such shareholder’s interest as a beneficial owner during regular business hours as provided in the Trust Agreement. The Sponsor will maintain and preserve the Trust’s books and records for a period of not less than six years.

The fiscal year of each Fund ends on December 31 of each year.

The Funds

The Trust is formed and operated in a manner such that each series of the Trust is liable only for obligations attributable to such series and shareholders of a series are not subject to the losses or liabilities of any other series of the Trust. If any creditor or shareholder in a series asserted against a series a valid claim with respect to its indebtedness or Shares, the creditor or shareholder would only be able to recover money from that particular series and its assets. Accordingly, the debts, liabilities, obligations and expenses, or collectively, claims, incurred, contracted for or otherwise existing solely with respect to a particular series, are enforceable only against the assets of that series, and not against any other series of the Trust or the Trust generally, or any of their respective assets. The assets of each series include only those funds and other assets that are paid to, held by, or distributed to a series on account of and for the benefit of that series, including, without limitation, funds delivered to the Trust for the purchase of Shares or Creation Units in a series. This limitation on liability is referred to as the “Inter-Series Limitation on Liability.” The Inter-Series Limitation on Liability is expressly provided for under the DSTA, which provides that if certain conditions (as set forth in Section 3804(a)) are met, then the debts of any particular series will be enforceable only against the assets of such series and not against the assets of any other series of the Trust or the Trust generally.

The Trustee

Wilmington Trust Company, a Delaware trust company, is the sole Trustee of the Trust. The rights and duties of the Trustee and the Sponsor with respect to the offering of the Shares and 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, the Sponsor or the shareholders of a Fund. The Trustee’s principal offices are located at 1100 North Market Street, Wilmington, Delaware 19890. The Trustee is unaffiliated with the Sponsor.

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 the Sponsor. The Trustee is compensated by the Funds, as appropriate, and is indemnified by the Funds, as appropriate, against any expenses it incurs relating to or arising out of the formation, operation or termination of such Fund, as appropriate, or the performance of its duties pursuant to the Trust Agreement, except to the extent that such expenses result from the gross negligence or willful misconduct of the Trustee. The Sponsor has the discretion to replace the Trustee.

Only the assets of the Trust and the Sponsor 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, the Sponsor 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 the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor. The shareholders have no voice in the day-to-day management of the business and operations of the Funds 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 Funds and the Trust, the Sponsor may, in its sole and absolute discretion, appoint an affiliate or affiliates of the Sponsor as additional sponsors and retain such persons, including affiliates of the Sponsor, as it deems necessary to effectuate and carry out the purposes, business and objectives of the Trust.

 

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Because the Trustee has no authority over the Trust’s operations, the Trustee itself is not registered in any capacity with the CFTC.

The Sponsor

ProShare Capital Management LLC, is the Sponsor of the Trust, the Funds and the other series of the Trust. As noted above, the Sponsor has exclusive management and control of all aspects of the business of the Funds. The Trustee has no duty or liability to supervise the performance of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor.

The Sponsor serves as the Trust’s commodity pool operator. Specifically, with respect to the Trust, the Sponsor:

selects the Funds’ service providers;

negotiates various agreements and fees;

performs such other services as the Sponsor believes that the Trust may require from time to time;

selects the FCM and Financial Instrument counterparties, if any;

manages the Funds’ portfolio of other assets, including cash equivalents; and

manages the Funds with a view toward achieving the Funds’ investment objectives.

The Shares are not deposits or other obligations of the Sponsor, the Trustee or any of their respective subsidiaries or affiliates or any other bank, are not guaranteed by the Sponsor, the Trustee or any of their respective subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. An investment in the Shares of the Funds offered hereby is speculative and involves a high degree of risk.

The principal office of the Sponsor is located at 7501 Wisconsin Avenue, East Tower, 10th Floor, Bethesda, Maryland 20814. The telephone number of the Sponsor is (240) 497-6400.

Background and Principals

The Sponsor currently serves as the commodity pool operator of the Trust and the Funds, and previously also served as the commodity trading advisor to the Trust and the other series of the Trust. The Sponsor is registered as a commodity pool operator with the CFTC and is a member in good standing of the NFA. The Sponsor’s membership with the NFA was originally approved on June 11, 1999. It withdrew its membership with the NFA on August 31, 2000 but later re-applied and had its membership subsequently approved on January 8, 2001. Its membership with the NFA is currently effective. The Sponsor’s registration as a commodity trading advisor was approved on June 11, 1999. On February 17, 2013, the Sponsor’s commodity trading advisor registration was withdrawn. The Sponsor’s registration as a commodity pool operator was originally approved on June 11, 1999. It withdrew its registration as a commodity pool operator on August 30, 2000 but later re-applied and had its registration subsequently approved on November 28, 2007. Its registration as a commodity pool operator is currently effective. As a registered commodity pool operator, with respect to the Trust, the Sponsor must comply with various regulatory requirements under the CEA, and the rules and regulations of the CFTC and the NFA, including investor protection requirements, antifraud prohibitions, disclosure requirements, and reporting and recordkeeping requirements. The NFA approved the Sponsor as a Swaps Firm on January 4, 2013. The Sponsor is also subject to periodic inspections and audits by the CFTC and NFA. Its principal place of business is 7501 Wisconsin Avenue, East Tower, 10th Floor, Bethesda, Maryland 20814, and its telephone number is (240) 497-6400. The registration of the Sponsor with the CFTC and its membership in the NFA must not be taken as an indication that either the CFTC or the NFA has recommended or approved the Sponsor, the Trust and the Funds.

 

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In its capacity as a commodity pool operator, the Sponsor