Unassociated Document
As
filed with the Securities and Exchange Commission on October 31,
2007
File
No. 333-[ ]
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-3
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
United
States Oil Fund, LP
(Exact
name of registrant as specified in its charter)
Delaware
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6770
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20-2830691
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(State
or other jurisdiction of incorporation
or organization)
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(Primary
Standard Industrial Classification Code Number)
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(I.R.S.
Employer Identification
Number)
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Nicholas
D. Gerber
3120
Harbor Bay Parkway, Suite 145
Alameda,
CA 94502
(510)
522-3336
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
Copies
to:
James
M. Cain, Esq.
W.
Thomas Conner, Esq.
Sutherland,
Asbill & Brennan LLP
1275
Pennsylvania Avenue, N.W.
Washington,
DC 20004-2405
(202)
383-0590
(Name,
Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Agent for Service)
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If
the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box:
o
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, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: x
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. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. o
If
this
Form is a post-effective amendment to a registration statement filed pursuant
to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box. o
CALCULATION
OF REGISTRATION FEE
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Title of Each Class of Securities to Be Registered
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Amount to Be Registered
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Proposed Maximum Offering Price
Per Unit(1)
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Proposed Maximum Aggregate Offering Price(1)
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Amount of Registration Fee
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Units
of United States Oil Fund, LP
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30,000,000
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$
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65.83
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$
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1,974,900,000
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$
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60,629.43
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(1)
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Estimated
solely for the purpose of calculation of the registration fee pursuant
to
Rule 457(d) under the Securities Act of 1933. The price per unit
reflects
the closing price on AMEX on October 23,
2007.
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This
prospectus contains a combined prospectus under Rule 429 of the Securities
Act
of 1933, which relates to File No. 333-140117. Accordingly, upon effectiveness,
this registration statement shall act as a post-effective amendment to File
No.
333-140117.
The
Registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
PROSPECTUS
United
States Oil Fund, LP
30,000,000
Units
United
States Oil Fund, LP, a Delaware limited partnership, is a commodity pool that
issues units that may be purchased and sold on the American Stock Exchange.
United States Oil Fund, LP is referred to as USOF throughout this document.
The
investment objective of USOF is to have the changes in percentage terms of
the
units’ net asset value reflect the changes in percentage terms of the spot price
of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the price of the futures contract on light, sweet crude oil as traded
on the New York Mercantile Exchange that is the near month contract to expire,
except when the near month contract is within two weeks of expiration, in which
case the futures contract will be the next month contract to expire, less USOF’s
expenses. This is a best efforts offering. USOF will continuously offer creation
baskets consisting of 100,000 units to authorized purchasers through ALPS
Distributors, Inc., which is the marketing agent. A list of USOF’s current
authorized purchasers is available from the marketing agent. Authorized
purchasers will pay a transaction fee of $1,000 for each order placed to create
one or more baskets. This is a continuous offering and will not terminate until
all of the registered units have been sold. Our units are listed on the American
Stock Exchange under the symbol “USO.”
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Authorized
purchasers may purchase creation baskets of 100,000 units. The per
unit
price of units on a particular day will be the total net asset value
of
USOF calculated shortly after the close of the American Stock Exchange
on
that day divided by the number of issued and outstanding
units.
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Authorized
purchasers are the only persons that may place orders to create and
redeem
baskets. An authorized purchaser is under no obligation to create
or
redeem baskets, and an authorized purchaser is under no obligation
to
offer to the public units of any baskets it does create. Authorized
purchasers that do offer to the public units from the baskets they
create
will do so at per-unit offering prices that are expected to reflect,
among
other factors, the trading price of the units on the American Stock
Exchange, the net asset value of USOF at the time the authorized
purchaser
purchased the creation basket and the net asset value of the units
at the
time of the offer of the units to the public, the supply of and demand
for
units at the time of sale, and the liquidity of the crude oil futures
contract market and the market for other crude oil interests. The
prices
of units offered by authorized purchasers are expected to fall between
USOF’s net asset value and the trading price of the units on the American
Stock Exchange at the time of sale. The difference between the price
paid
by authorized purchasers as underwriters and the price paid to such
authorized purchasers by investors will be deemed underwriting
compensation. Units initially comprising the same basket but offered
by
authorized purchasers to the public at different times may have different
offering prices. Units trade in the secondary market on the American
Stock
Exchange. Units may trade in the secondary market at prices that
are lower
or higher relative to their net asset value per unit. The amount
of the
discount or premium in the trading price relative to the net asset
value
per unit may be influenced by various factors, including the number
of
investors who seek to purchase or sell units in the secondary market
and
the liquidity of the crude oil futures contract market and the market
for
other crude oil interests. Authorized purchasers are not required
to sell
any specific number or dollar amount of units.
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USOF
is not a mutual fund registered under the Investment Company Act of 1940 and
is
not subject to regulation under such Act.
Some
of
the risks of investing in USOF include:
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Investing
in crude oil interests subjects USOF to the risks of the crude oil
industry which could result in large fluctuations in the price of
USOF’s
units.
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If
certain correlations do not exist, then investors may not be able
to use
USOF as a cost-effective way to invest indirectly in crude oil or
as a
hedge against the risk of loss in oil-related
transactions.
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USOF
does not expect to make cash distributions.
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USOF
and its general partner may have conflicts of interest, which may
permit
them to favor their own interests to your
detriment.
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Investing
in USOF involves other significant risks. See “What Are the Risk Factors
Involved with an Investment in USOF?” beginning on page
10.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED IN THIS
PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE
COMMODITY FUTURES TRADING COMMISSION (“CFTC”) HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS IT PASSED ON THE ADEQUACY OR ACCURACY OF
THIS
DISCLOSURE DOCUMENT.
This
prospectus is in two parts: a disclosure document and a statement of additional
information. These parts are bound together, and both contain important
information.
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Per Unit
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Per Basket
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Price
of the units*
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$
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72.52
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$
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7,232,000
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*Based
on
closing net asset value on October 29, 2007. The price may vary based on net
asset value in effect on a particular day.
The
date
of this prospectus is November [TBD], 2007.
COMMODITY
FUTURES TRADING COMMISSION
RISK
DISCLOSURE STATEMENT
YOU
SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO
PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES
AND OPTIONS 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, ADVISORY
AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO
THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR
EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE
DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL BEGINNING ON PAGE 43 AND
A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, ON PAGE 5.
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 THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS
OF
THIS INVESTMENT, BEGINNING ON PAGE 10.
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR
OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES,
INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT
TO
REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND
ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO
COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN
NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE
EFFECTED.
TABLE
OF CONTENTS
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
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iii
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PROSPECTUS
SUMMARY
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1
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Overview
of USOF
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1
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The
Units
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3
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USOF’s
Investments in Oil Interests
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3
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Principal
Investment Risks of an Investment in USOF
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4
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Principal
Offices of USOF and the General Partner
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5
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Financial
Condition of USOF
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5
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Breakeven
Analysis
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5
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Offering
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7
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WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN USOF?
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10
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Risks
Associated With Investing Directly or Indirectly in Oil
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10
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USOF’s
Operating Risks
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14
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Risk
of Leverage and Volatility
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21
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Over-the-Counter
Contract Risk
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21
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Risk
of Trading in International Markets
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22
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Tax
Risk
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22
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Legal
Risks
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24
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THE
OFFERING
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25
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What
is USOF?
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25
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Who
is the General Partner?
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25
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Prior
Performance of the General Partner and Affiliates
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28
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How
Does USOF Operate?
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34
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What
is USOF’s Investment Strategy?
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39
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What
are Oil Futures Contracts?
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40
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What
is the Crude Oil Market and the Petroleum-Based Fuel
Market?
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43
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Why
Does USOF Purchase and Sell Oil Futures Contracts?
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44
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What
is the Flow of Units?
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45
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What
are the Trading Policies of USOF?
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45
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Who
are the Service Providers?
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46
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Fees
of USOF
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47
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Form
of Units
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48
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Transfer
of Units
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49
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Withdrawal
of Limited Partners
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50
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What
is the Plan of Distribution?
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51
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Use
of Proceeds
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56
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Limited
Partnership Agreement
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57
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Liability
and Indemnification
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60
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Books
and Records
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62
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Statements,
Filings, and Reports
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62
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Reports
to Limited Partners
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62
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Fiscal
Year
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63
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Governing
Law; Consent to Delaware Jurisdiction
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63
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Legal
Matters
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63
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Privacy
Policy
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63
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U.S.
Federal Income Tax Considerations
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64
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Backup
Withholding
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71
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Other
Tax Considerations
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71
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Investment
By ERISA Accounts
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71
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INFORMATION
YOU SHOULD KNOW
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74
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SUMMARY
OF PROMOTIONAL AND SALES MATERIAL
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74
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PATENT
APPLICATION PENDING
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74
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WHERE
YOU CAN FIND MORE INFORMATION
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74
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STATEMENT
OF ADDITIONAL INFORMATION
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SAI-1
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CFTC
Annual Report
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SAI-12
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STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This
Prospectus includes “forward-looking statements” which generally relate to
future events or future performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
the negative of these terms or other comparable terminology. All statements
(other than statements of historical fact) included in this Prospectus and
movements in the commodities markets and indexes that track such movements,
USOF’s operations, the General Partner’s plans and references to USOF’s future
success and other similar matters, are forward-looking statements. These
statements are only predictions. Actual events or results may differ materially.
These statements are based upon certain assumptions and analyses the General
Partner has made based on its perception of historical trends, current
conditions and expected future developments, as well as other factors
appropriate in the circumstances. Whether or not actual results and developments
will conform to the General Partner’s expectations and predictions, however, is
subject to a number of risks and uncertainties, including the special
considerations discussed in this Prospectus, general economic, market and
business conditions, changes in laws or regulations, including those concerning
taxes, made by governmental authorities or regulatory bodies, and other world
economic and political developments. See “What Are the Risk Factors Involved
with an Investment in USOF?” Consequently, all the forward-looking statements
made in this Prospectus are qualified by these cautionary statements, and there
can be no assurance that the events or developments that will or may occur
in
the future, including such matters as changes in inflation in the United States
movements in the stock market, movements in the U.S. and foreign currencies,
actual results or developments the General Partner anticipates will be realized
or, even if substantially realized, that they will result in the expected
consequences to, or have the expected effects on, USOF’s operations or the value
of the units.
PROSPECTUS
SUMMARY
This
is only a summary of the prospectus and, while it contains material information
about USOF and its units, it does not contain or summarize all of the
information about USOF and the units contained in this prospectus that is
material and/or which may be important to you. You should read this entire
prospectus, including “What Are the Risk Factors Involved with an Investment in
USOF?” beginning on page 10, before making an investment decision about the
units.
Overview
of USOF
United
States Oil Fund, LP, a Delaware limited partnership (“USOF” or “Us” or “We”), is
a commodity pool that issues units that may be purchased and sold on the
American Stock Exchange. USOF was organized as a limited partnership under
Delaware law on May 12, 2005. USOF is operated pursuant to the Third Amended
and
Restated Agreement of Limited Partnership Agreement (“LP Agreement”). It is
managed and controlled by its general partner, Victoria Bay Asset Management,
LLC (“General Partner”). The General Partner is a single member limited
liability company formed in Delaware on May 10, 2005 that is registered as
a
commodity pool operator (“CPO”) with the Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures Association
(“NFA”).
The
net
assets of USOF consist primarily of investments in futures contracts for light,
sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas,
and other petroleum-based fuels that are traded on the New York Mercantile
Exchange, ICE Futures or other U.S. and foreign exchanges (collectively, “Oil
Futures Contracts”) and other oil interests such as cash-settled options on Oil
Futures Contracts, forward contracts for oil, and over-the-counter transactions
that are based on the price of oil, other petroleum-based fuels, Oil Futures
Contracts and indices based on the foregoing (collectively, “Other Oil
Interests”). For convenience and unless otherwise specified, Oil Futures
Contracts and Other Oil Interests collectively are referred to as “oil
interests” in this Prospectus. The General Partner is authorized by USOF in its
sole judgment to employ, establish the terms of employment for, and terminate
commodities trading advisors or futures commission merchants.
The
investment objective of USOF is to have the changes in percentage terms of
the
units’ net asset value reflect the changes in percentage terms of the spot price
of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the price of the futures contract on light, sweet crude oil as traded
on the New York Mercantile Exchange that is the near month contract to expire,
except when the near month contract is within two weeks of expiration, in which
case it will be measured by the futures contract that is the next month contract
to expire, less USOF’s expenses. It is not the intent of USOF to be operated in
a fashion such that its net asset value (“NAV”) will equal, in dollar terms, the
spot price of light, sweet crude oil or any particular futures contract based
on
light, sweet crude oil.
USOF
seeks to achieve its investment objective by investing in a mix of Oil Futures
Contracts and Other Oil Interests such that changes in USOF’s NAV will closely
track the changes in the price of a specified Oil Futures Contract (“Benchmark
Oil Futures Contract”). The General Partner believes the Benchmark Oil Futures
Contract historically exhibited a close correlation with the spot price of
light, sweet crude oil. On any valuation day (a valuation day is any day as
of
which USOF calculates its NAV), the Benchmark Oil Futures Contract is the near
month futures contract for light, sweet crude oil traded on the New York
Mercantile Exchange unless the near month futures contract will expire within
two weeks of the valuation day, in which case the Benchmark Oil Futures Contract
is the next month futures contract for light, sweet crude oil traded on the
New
York Mercantile Exchange. This convention is used to define the Benchmark Oil
Futures Contract because the General Partner believes from its review of past
market activity that most Oil Futures Contracts traded on the New York
Mercantile Exchange are closed out or offset by the parties prior to the
settlement date of the contract and there is lighter trading during the days
immediately preceding settlement. Because there is lighter trading during the
two-week period prior to settlement, the trading price of the near month
contract may not provide as accurate a reflection of the spot price of oil.
The
General Partner generally invests in the next month contract to expire during
this period.
As
a
specific benchmark, the General Partner endeavors to place USOF’s trades in Oil
Futures Contracts and Other Oil Interests and otherwise manage USOF’s
investments so that A will be within plus/minus 10 percent of B,
where:
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A
is the average daily change in USOF’s NAV for any period of 30 successive
valuation days, i.e
.,
any day as of which USOF calculates its NAV , and
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B
is the average daily change in the price of the Benchmark Oil Futures
Contract over the same period.
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The
Benchmark Oil Futures Contract is changed, or “rolled” from the near month
contract to expire to the next month to expire over a four (4) day
period.
The
General Partner believes that market arbitrage opportunities will cause USOF’s
unit price on the American Stock Exchange to closely track USOF’s NAV per unit.
The General Partner further believes that the prices of the Benchmark Oil
Futures Contract have historically closely tracked the spot prices of light,
sweet crude oil. The General Partner believes that the net effect of these
two
expected relationships and the expected relationship described above between
USOF’s NAV and the Benchmark Oil Futures Contract, will be that the changes in
the price of USOF’s units on the American Stock Exchange will closely track, in
percentage terms, the changes in the price of the spot price of a barrel of
light, sweet crude oil, less USOF’s expenses.
USOF
invests in oil interests to the fullest extent possible without being leveraged
or unable to satisfy its current or potential margin or collateral obligations
with respect to its investments in Oil Futures Contracts and Other Oil
Interests. The primary focus of the General Partner is the investment in Oil
Futures Contracts and the management of its investments in short-term
obligations of the United States of two years or less (“Treasuries”), cash
and/or cash equivalents for margining purposes and as collateral.
The
General Partner employs a “neutral” investment strategy intended to track the
changes in the price of the Benchmark Oil Futures Contract regardless of whether
the price goes up or goes down. USOF’s “neutral” investment strategy is designed
to permit investors generally to purchase and sell USOF’s units for the purpose
of investing indirectly in crude oil in a cost-effective manner, and/or to
permit participants in the crude oil or other industries to hedge the risk
of
losses in their crude oil-related transactions. Accordingly, depending on the
investment objective of an individual investor, the risks generally associated
with investing in crude oil and/or the risks involved in hedging may exist.
In
addition, an investment in USOF involves the risk that the changes in the price
of USOF’s units will not accurately track changes in the price of the Benchmark
Oil Futures Contract. For example, USOF also invests in Treasuries, cash and/or
cash equivalents to be used to meet its current or potential margin or
collateral requirements with respect to its investments in Oil Futures Contracts
and Other Oil Interests. USOF does not expect there to be any meaningful
correlation between the performance of USOF’s investments in
Treasuries/cash/cash equivalents and the changes in the price of light, sweet
crude oil. While the level of interest earned on or the market price of these
investments may in some respect correlate to changes in the price of crude
oil,
this correlation is not anticipated as part of USOF’s efforts to meet its
objectives. This and certain risk factors discussed in this prospectus may
cause
a lack of correlation between changes in USOF’s NAV and changes in the price of
light, sweet crude oil.
USOF
creates and redeems units only in blocks called Creation Baskets and Redemption
Baskets, respectively. Only Authorized Purchasers may purchase or redeem
Creation Baskets or Redemption Baskets. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under
no
obligation to offer to the public units of any baskets it does create. Baskets
are generally created when there is sufficient demand for units that the market
price per unit is at a premium to the NAV per unit. Authorized Purchasers will
then sell such units, which will be listed on the American Stock Exchange,
to
the public at per-unit offering prices that are expected to reflect, among
other
factors, the trading price of the units on the American Stock Exchange, the
NAV
of USOF at the time the Authorized Purchaser purchased the Creation Baskets
and
the NAV at the time of the offer of the units to the public, the supply of
and
demand for units at the time of sale, and the liquidity of the Oil Futures
Contracts market and the market for Other Oil Interests. The prices of units
offered by Authorized Purchasers are expected to fall between USOF’s NAV and the
trading price of the units on the American Stock Exchange at the time of sale.
Similarly, baskets are generally redeemed when the market price per unit is
at a
discount to the NAV per unit. Retail investors seeking to purchase or sell
units
on any day are expected to effect such transactions in the secondary market,
on
the American Stock Exchange, at the market price per unit, rather than in
connection with the creation or redemption of baskets.
All
proceeds from the sale of Creation Baskets are invested as quickly as possible
in the investments described in this prospectus. Investments are held through
USOF’s custodian, Brown Brothers Harriman & Co. (“Custodian”), or through
accounts with USOF’s commodity futures brokers. There is no stated maximum time
period for USOF’s operations and the fund will continue until all units are
redeemed or the fund is liquidated pursuant to the terms of the LP
Agreement.
There
is
no specified limit on the maximum amount of Creation Baskets that can be sold.
At some point, position limits on certain of the futures contracts in which
USOF
intends to invest may practically limit the maximum amount of Creation Baskets
that will be sold if the General Partner determines that the other investment
alternatives available to USOF at that time will not enable it to meet its
stated investment objective. In this regard, the General Partner is in the
process of registering another other exchange traded security fund, the United
States 12 Month Oil Fund, LP (“US12OF”) that will invest in the near month
contract to expire and the contracts for the following eleven months, for a
total of 12 consecutive months’ contracts for light, sweet crude oil primarily
traded on the New York Mercantile Exchange. Any futures contracts held by US12OF
will be aggregated with the ones held by USOF in determining New York Mercantile
Exchange position limits.
Units
may
also be purchased and sold by individuals and entities that are not Authorized
Purchasers in smaller increments than Creation Baskets on the American Stock
Exchange. However, these transactions are effected at bid and ask prices
established by specialist firm(s). Like any listed security, units of USOF
can
be purchased and sold at any time a secondary market is open.
In
managing USOF’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs
quantitative methodologies whereby each time one or more baskets are purchased
or redeemed, the General Partner will purchase or sell Oil Futures Contracts
and
Other Oil Interests with an aggregate face amount that approximates the amount
of Treasuries and/or cash received or paid upon the purchase or redemption
of
the basket(s).
Note
to Secondary Market Investors:
The
units can be directly purchased from or redeemed by USOF only in Creation
Baskets or Redemption Baskets, respectively, and only by Authorized Purchasers.
Each Creation Basket and Redemption Basket consists of 100,000 units and is
expected to be worth millions of dollars. Individual investors, therefore,
will
not be able to directly purchase units from or redeem units with USOF. Some
of
the information contained in this prospectus, including information about buying
and redeeming units directly from and to USOF is only relevant to Authorized
Purchasers. Units are listed and traded on the American Stock Exchange and
may
be purchased and sold as individual units. Individuals interested in purchasing
units in the secondary market should contact their broker. Units purchased
or
sold through a broker may be subject to commissions.
Except
when aggregated in Redemption Baskets, units are not redeemable securities.
There is no guarantee that units will trade at or near the per-unit
NAV.
The
Units
The
units
are registered as securities under the Securities Act of 1933 (“1933 Act”) and
do not provide dividend rights or conversion rights and there will not be
sinking funds. The units may only be redeemed when aggregated in Redemption
Baskets as discussed under “Creations and Redemptions” and limited partners have
limited voting rights as discussed under “Who is the General Partner?”
Cumulative voting is neither permitted nor required and there are no preemptive
rights. As discussed in the LP Agreement, upon liquidation of USOF, its assets
will be distributed pro rata to limited partners based upon the number of units
held. Each limited partner will receive its share of the assets in cash or
in
kind, and the proportion of such share that is received in cash may vary from
partner to partner, as the General Partner in its sole discretion may
decide.
This
is a
continuous offering under Rule 415 of the 1933 Act and will terminate when
all
of the registered units have been sold. It is anticipated that when all
registered units have been sold pursuant to this registration statement,
additional units will be registered in subsequent registration statements.
As
discussed above, the minimum purchase requirement for Authorized Purchasers
is a
Creation Basket, which consists of 100,000 units. Under the plan of
distribution, USOF does not require a minimum purchase amount for investors
who
purchase units from Authorized Purchasers. There are no arrangements to place
funds in an escrow, trust, or similar account.
USOF’s
Investments in Oil Interests
A
brief
description of the principal types of oil interests in which USOF may invest
is
set forth below.
|
·
|
A
futures contract is a standardized contract traded on a futures exchange
that calls for the future delivery of a specified quantity of a commodity
at a specified time and place.
|
|
·
|
A
forward contract is a supply contract between principals, not traded
on an
exchange, to buy or sell a specified quantity of a commodity at or
before
a specified date at a specified
price.
|
|
·
|
A
spot contract is a cash market transaction in which the buyer and
seller
agree to the immediate purchase and sale of a commodity, usually
with a
two-day settlement. Spot contracts are not uniform and are not
exchange-traded.
|
|
·
|
An
option on a futures contract, forward contract or a commodity on
the spot
market gives the buyer of the option the right, but not the obligation,
to
buy or sell a futures contract, forward contract or a commodity,
as
applicable, at a specified price on or before a specified date. Options
on
futures contracts are standardized contracts traded on an exchange,
while
options on forward contracts and commodities on the spot market,
referred
to collectively in this prospectus as over-the-counter options, generally
are individually negotiated, principal-to-principal contracts not
traded
on an exchange.
|
|
·
|
Over-the-counter
contracts (such as swap contracts) generally involve an exchange
of a
stream of payments between the contracting parties. Over-the-counter
contracts generally are not uniform and not
exchange-traded.
|
A
more
detailed description of oil interests and other aspects of the crude oil and
crude oil interest markets can be found later in this prospectus.
As
noted, USOF invests primarily in Oil Futures Contracts, including those traded
on the New York Mercantile Exchange. USOF expressly disclaims any association
with such Exchange or endorsement of USOF by such Exchange and acknowledges
that
“NYMEX” and “New York Mercantile Exchange” are registered trademarks of such
Exchange.
Principal
Investment Risks of an Investment in USOF
An
investment in USOF involves a degree of risk. Some of the risks you may face
are
summarized below. A more extensive discussion of these risks appears beginning
on page 10.
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·
|
Unlike
mutual funds, commodity pools or other investment pools that actively
manage their investments in an attempt to realize income and gains
from
their investing activities and distribute such income and gains to
their
investors, USOF generally does not distribute cash to limited partners
or
other unitholders. You should not invest in USOF if you will need
cash
distributions from USOF to pay taxes on your share of income and
gains of
USOF, if any, or for any other
reason.
|
|
·
|
There
is the risk that the changes in the price of USOF’s units on the American
Stock Exchange will not closely track the changes in spot price of
light,
sweet crude oil. This could happen if the price of units traded on
the
American Stock Exchange does not correlate closely with USOF’s NAV; the
changes in USOF’s NAV do not closely correlate with the changes in the
price of the Benchmark Oil Futures Contract; or the changes in the
price
of the Benchmark Oil Futures Contract do not closely correlate with
the
changes in the cash or spot price of light, sweet crude oil. This
is a
risk because if these correlations do not exist, then investors may
not be
able to use USOF as a cost-effective way to invest indirectly in
crude oil
or as a hedge against the risk of loss in crude oil-related
transactions.
|
|
·
|
USOF
seeks to have the changes in its units’ NAV in percentage terms track
changes in the price of Benchmark Oil Futures Contract in percentage
terms
rather than profit from speculative trading of oil interests. The
General
Partner therefore endeavors to manage USOF’s positions in oil interests so
that USOF’s assets are, unlike those of other commodity pools, not
leveraged (i.e.,
so that the aggregate value of USOF’s unrealized losses from its
investments in such oil interests at any time will not exceed the
value of
USOF’s assets). There is no assurance that the General Partner will
successfully implement this investment strategy. If the General Partner
permits USOF to become leveraged, you could lose all or substantially
all
of your investment if USOF’s trading positions suddenly turn unprofitable.
These movements in price may be the result of factors outside of
the
General Partner’s control and may not be anticipated by the General
Partner.
|
|
·
|
Investors
may choose to use USOF as a means of investing indirectly in crude
oil and
there are risks involved in such investments. Among other things,
the
crude oil industry experiences numerous operating risks. These operating
risks include the risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards. Environmental
hazards include oil spills, natural gas leaks, ruptures and discharges
of
toxic gases. Crude oil operations also are subject to various U.S.
federal, state and local regulations that materially affect
operations.
|
|
·
|
Investors,
including those who directly participate in the crude oil market,
may
choose to use USOF as a vehicle to hedge against the risk of loss
and
there are risks involved in hedging activities. While hedging can
provide
protection against an adverse movement in market prices, it can also
preclude a hedgor’s opportunity to benefit from a favorable market
movement.
|
|
·
|
USOF
invests primarily in Oil Futures Contracts, and particularly in Oil
Futures Contracts traded on the New York Mercantile
Exchange.
|
|
·
|
USOF
invests primarily in Oil Futures Contracts that are traded in the
United
States. However, a portion of USOF’s trades may take place in markets and
on exchanges outside the United States. Some non-U.S. markets present
risks because they are not subject to the same degree of regulation
as
their U.S. counterparts. In some of these non-U.S. markets, the
performance on a contract is the responsibility of the counterparty
and is
not backed by an exchange or clearing corporation and therefore exposes
USOF to credit risk. Trading in non-U.S. markets also leaves USOF
susceptible to fluctuations in the value of the local currency against
the
U.S. dollar.
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|
·
|
USOF
may also invest in Other Oil Interests, many of which are negotiated
contracts that are not as liquid as Oil Futures Contracts and expose
USOF
to credit risk that its counterparty may not be able to satisfy its
obligations to USOF.
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|
·
|
USOF
pays fees and expenses that are incurred regardless of whether it
is
profitable.
|
|
·
|
You
will have no rights to participate in the management of USOF and
will have
to rely on the duties and judgment of the General Partner to manage
USOF.
|
|
·
|
The
structure and operation of USOF may involve conflicts of interest.
For
example, a conflict may arise because the General Partner and its
principals and affiliates may trade for themselves. In addition,
the
General Partner has sole current authority to manage the investments
and
operations, which may create a conflict with the unitholders’ best
interests. The General Partner may also have a conflict to the extent
that
its trading decisions may be influenced by the effect they would
have on
other commodity pools it manages, or any other commodity pool the
General
Partner may form and manage in the future, including
US12OF.
|
For
additional risks, see “What Are the Risk Factors Involved with an Investment in
USOF?”
Principal
Offices of USOF and the General Partner
USOF’s
principal office is located at 1320 Harbor Bay Parkway, Suite 145, Alameda,
California 94502. The telephone number is 510.522.3336. The General Partner’s
principal office is also located at 1320 Harbor Bay Parkway, Suite 145, Alameda,
California 94502.
Financial
Condition of USOF
USOF’s
NAV is determined as of the earlier of the close of the New York Stock Exchange
or 4:00 p.m. New York time on each American Stock Exchange trading
day.
Breakeven
Analysis
The
breakeven analysis below indicates the approximate dollar returns and percentage
required for the redemption value of a hypothetical $50.00 initial investment
in
a single unit to equal the amount invested twelve months after the investment
was made. (We based the $50.00 assumption on recent values of USOF’s NAV.) This
breakeven analysis refers to the redemption of baskets by Authorized Purchasers
and is not related to any gains an individual investor would have to achieve
in
order to break even. The breakeven analysis is an approximation
only.
Assumed
initial selling price per unit
|
|
$
|
50.00
|
|
Management
Fee (0.50%)*
|
|
$
|
0.25
|
|
Creation
Basket Fee**
|
|
$
|
(0.01
|
)
|
Estimated
Brokerage Fee (0.13%)***
|
|
$ |
0.06 |
|
Interest
Income (3.66 %)****
|
|
$
|
(1.83
|
)
|
Registration
Fees*****
|
|
$
|
1.36
|
|
Legal,
Printing, and Accounting Expenses******
|
|
$
|
0.65
|
|
New
York Mercantile Exchange Licensing Fee*******
|
|
$ |
0.20 |
|
Independent
Directors and Officers’ Fee********
|
|
$ |
0.01 |
|
Amount
of trading income (loss) required for the redemption value at the
end of
one year
to
equal the initial selling price of the unit
|
|
$ |
0.69 |
|
Percentage
of initial selling price per unit
|
|
|
0.01 |
|
*
|
USOF
is contractually obligated to pay the General Partner a management
fee
based on daily net assets and paid monthly of 0.50% per annum on
average
net assets of $1,000,000,000 or less. For purposes of this example
we
assumed that the average net assets are $1,000,000,000 or less. If
the
average net assets were greater than $1,000,000,000 then the management
fee for such excess assets would be 0.20% and the breakeven amount
would
be lower.
|
**
|
Authorized
Purchasers are required to pay a Creation Basket fee of $1,000 for
each
order they place to create or redeem one or more baskets. An order
must be
at least one basket, which is 100,000 units. This breakeven analysis
assumes a hypothetical investment in a single unit so the Creation
Basket
fee is $.01 (1,000/100,000).
|
***
|
USOF
determined this estimate as follows. The breakeven analysis assumes
an
initial investment by an investor in one unit. USOF would be required
to
issue one Creation Basket of 100,000 units in order for the investor
to
purchase the one unit. Assuming the price of the units was $50.00,
USOF
would receive $5,000,000 upon the sale of the basket. Assuming the
current
near month contract to expire is $65.00, USOF would be required to
purchase and sell (in order to close out) 76 oil futures contracts
at
$65,000 per contract (1,000 barrels of oil per contract × $65.00 per
barrel) during each month of the year, or 912 contracts bought and
sold
per year. Futures commission merchants typically charge approximately
$3.50 per contract buy or sale ($7.00 per buy and sale, or “round turn”),
so the total annual commission charge would be $6,384 (912 contracts
per
year × $7.00 per buy and sell per contract). As a percentage of the total
investment of $5,000,000 to support the issuance of the Creation
Basket,
USOF’s annual commission expense would be 0.13% ($6,384 ÷
$5,000,000).
|
****
|
USOF
earns interest on funds it deposits with the commodities futures
merchant
and the Custodian and it estimates that the interest rate will be
3.66%
based on the current interest rate on three-month Treasury Bills
as of
October 18, 2007. The actual rate may
vary.
|
*****
|
The
fee to register 30,000,000 units with the SEC and the Financial Industry
Regulatory Authority (“FINRA”) is $136,129 (the SEC’s fee is $60,629 and
FINRA’s fee is $75,500). An order must be at least one basket which is
100,000 units. This breakeven analysis assumes a hypothetical investment
in a single unit so the fee is $1.36 ($136,129/100,000). This fee
borne by
USOF.
|
******
|
USOF
estimates that the legal, printing, and accounting costs will be
approximately $65,000.
An order must be at least one basket which is 100,000 units. This
breakeven analysis assumes a hypothetical investment in a single
unit so
this cost per unit is $1.00 ($65,000/100,000). These costs are borne
by
USOF.
|
*******
|
Assuming
the aggregate assets of USOF and certain other funds formed by the
General
Partner are $1,000,000,000 or less, the New York Mercantile Exchange
licensing fee is expected to be .04%. For more information see “Fees of
USOF.”
|
********
|
For
2007, this amount is estimated at $184,000. USOF determined the per
unit
estimate as follows: it is assumed that USOF will have an aggregate
NAV of
$425,000,000 and that the offering price per unit is $50.00. Assuming
that 8.5
million units are issued, the allocation cost per unitholder would
be
$0.0075.
|
Offering
|
|
USOF
is offering Creation Baskets consisting of 100,000 units through
ALPS
Distributors, Inc. (“Marketing Agent”) as marketing agent to Authorized
Purchasers. Authorized Purchasers may purchase Creation Baskets
consisting
of 100,000 units at USOF’s NAV.
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|
|
|
Use
of Proceeds:
|
|
The
General Partner will apply substantially all of USOF’s assets in
Oil
Futures Contracts, other oil interests and in Treasuries,
cash and/or cash equivalents. The General Partner will deposit
substantially all of USOF’s net assets with the futures commission
merchant, UBS Securities LLC, or other custodian to be used to
meet its
current or potential margin or collateral requirements in connection
with
its investment in Oil Futures Contracts, other oil interests and
in
Treasuries. USOF uses only Treasuries, cash and/or cash equivalents
to
satisfy these requirements. The General Partner expects that all
entities
that will hold or trade USOF’s assets will be based in the United States
and will be subject to United States regulations. Approximately
5% to 10%
of USOF’s assets are normally committed as margin for commodity futures
contracts. However, from time to time, the percentage of assets
committed
as margin may be substantially more, or less, than such range.
The
remaining portion of USOF’s assets are held in Treasuries, cash and/or
cash equivalents by its custodian, Brown Brothers Harriman & Co.
(“Custodian”) or posted as collateral to support USOF’s investments in oil
interests. All interest income earned on these investments is retained
for
USOF’s benefit.
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|
|
|
American
Stock Exchange Symbol:
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|
USO
|
|
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|
Creation
and Redemption:
|
|
Authorized
Purchasers pay a $1,000 fee for each order to create or redeem
one or more
Creation Baskets or Redemption Baskets. Authorized Purchasers are
not
required to sell any specific number or dollar amount of units.
The per
unit price of units offered in Creation Baskets on any day after
the
effective date of the registration statement relating to this prospectus
is the total NAV of USOF calculated shortly after the close of
the
American Stock Exchange on that day divided by the number of issued
and
outstanding units.
|
Withdrawal:
|
|
As
discussed in the LP Agreement, if the General Partner gives at
least
fifteen (15) days’ written notice to a limited partner, then the General
Partner may for any reason, in its sole discretion, require any
such
limited partner to withdraw entirely from the partnership or to
withdraw a
portion of its partner capital account. If the General Partner
does not
give at least fifteen (15) days’ written notice to a limited partner, then
it may only require withdrawal of all or any portion of the capital
account of any limited partner in the following
circumstances:
(i)
the unitholder made a misrepresentation to the General Partner
in
connection with its purchase of units; or
(ii)
the limited partner’s ownership of units would result in the violation of
any law or regulations applicable to the partnership or a
partner.
|
|
|
Individual
certificates will not be issued for the units. Instead, units will
be
represented by one or more global certificates, which will be deposited
by
the Custodian with the Depository Trust Company (“DTC”) and registered in
the name of Cede & Co., as nominee for DTC. The global certificates
evidence all of the units outstanding at any time. Unitholders
are limited
to (1) participants in DTC such as banks, brokers, dealers and
trust
companies (“DTC Participants”), (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC Participant (“Indirect
Participants”), and (3) those banks, brokers, dealers, trust
companies and others who hold interests in the units through DTC
Participants or Indirect Participants, in each case who satisfy
the
requirements for transfers of units. DTC Participants acting on
behalf of
investors holding units through such participants’ accounts in DTC will
follow the delivery practice applicable to securities eligible
for DTC’s
Same-Day Funds Settlement System. Units will be credited to DTC
Participants’ securities accounts following confirmation of receipt of
payment.
The
administrator, Brown Brothers Harriman & Co. (“Administrator”) has
been appointed registrar and transfer agent for the purpose of
registering
and transferring units. The General Partner will recognize transfer
of
units only if such transfer is done on accordance with the LP Agreement,
including the delivery of a transfer application.
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|
|
|
Net
Asset Value:
|
|
The
NAV is calculated by taking the current market value of USOF’s total
assets and subtracting any liabilities. Under USOF’s current operational
procedures, the Administrator calculates the NAV of USOF’s units as of the
earlier of 4:00 p.m. New York time or the close of the New York
Stock
Exchange each day. The American Stock Exchange currently calculates
an
approximate net asset value every 15 seconds throughout each day
USOF’s
units are traded on the American Stock Exchange for as long as
the New
York Mercantile Exchange’s main pricing mechanism is
open.
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|
|
|
|
|
USOF
pays the General Partner a management fee of 0.50% of NAV on the
first
$1,000,000,000 of assets and 0.20% of NAV after the first $1,000,000,000
of assets. Brokerage fees for Treasuries, Oil Futures Contracts,
and Other
Oil Interests are estimated to be 0.16% and will be paid to unaffiliated
brokers. USOF also pays any licensing fees for the use of intellectual
property, registration fees with the SEC, FINRA, or other regulatory
agency in connection with this and subsequent offers and sales
of the
units and the legal, printing, accounting and other expenses associated
with such registrations. The license fee paid to the New York Mercantile
Exchange is .04% of NAV for the first $1,000,000,000 of assets
and .02% of
NAV after the first $1,000,000,000 of assets. The assets of USOF
are
aggregated with those of other funds formed by the General Partner.
USOF
also is responsible for the fees and expenses, which may include
directors
and officers liability insurance, of the independent directors
of the
General Partner in connection with their activities with respect
to USOF.
These director fees and expenses may be shared with other funds
managed by
the General Partner. These fees and expenses are, in total, currently
estimated to be $276,000 for 2007, and USOF’s portion is currently
estimated to be $184,000, though these amounts may change in future
years.
In
accordance with the Fourth Amended and Restated Agreement of Limited
Partnership that is currently being discussed with the limited partners,
USOF
will pay the fees and expenses associated with its tax accounting
and
reporting requirements with the exception of certain initial
implementation services fees and base services fees which will
be paid by
the General Partner. The General Partner, and not USOF, is responsible
for
payment of the fees of USOF’s Marketing Agent, Administrator and
Custodian. USOF and/or the General Partner may be required to indemnify
the Marketing Agent, Administrator or Custodian under certain
circumstances.
|
|
|
USOF
shall continue in effect from the date of its formation in perpetuity,
unless sooner terminated upon the occurrence of any one or more
of the
following events: the death, adjudication of incompetence, bankruptcy,
dissolution, withdrawal, or removal of a General Partner who is
the sole
remaining General Partner, unless a majority in interest of limited
partners within ninety (90) days after such event elects to continue
the
partnership and appoints a successor general partner; or the affirmative
vote of a majority in interest of the limited partners subject
to certain
conditions. Upon termination of the partnership, the affairs of
the
partnership shall be wound up and all of its debts and liabilities
discharged or otherwise provided for in the order of priority as
provided
by law. The fair market value of the remaining assets of the partnership
shall then be determined by the General Partner. Thereupon, the
assets of
the partnership shall be distributed pro rata to the partners in
accordance with their units.
|
|
|
|
Authorized
Purchasers:
|
|
USOF
has entered into agreements with several Authorized Purchasers.
A current
list of Authorized Purchasers is set forth on USOF’s website at
www.unitedstatesoilfund.com. Authorized Purchasers purchase or
redeem
Creation Baskets or Redemption Baskets, respectively, from or to
USOF.
Authorized Purchasers must be (1) registered broker-dealers or
other
securities market participants, such as banks and other financial
institutions, that are not required to register as broker-dealers
to
engage in securities transactions, and (2) DTC Participants. To
become an
Authorized Purchaser, a person must enter into an Authorized Purchaser
Agreement with the General
Partner.
|
WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN USOF?
You
should consider carefully the risks described below before making an investment
decision. You should also refer to the other information included in this
prospectus as well as information found in our periodic reports, which include
USOF’s financial statements and related notes, that are incorporated by
reference. See “Incorporation By Reference of Certain
Information.”
Risks
Associated With Investing Directly or Indirectly in Crude
Oil
Investing
in oil interests subjects USOF to the risks of the crude oil industry and this
could result in large fluctuations in the price of USOF’s
units.
USOF
is
subject to the risks and hazards of the crude oil industry because it invests
in
oil interests. The risks and hazards that are inherent in the oil industry
may
cause the price of oil to widely fluctuate. If USOF’s units accurately track the
percentage changes in the Benchmark Oil Futures Contract or the spot price
of
light, sweet crude oil, then the price of its units may also
fluctuate.
The
risks
of crude oil drilling and production activities include the
following:
|
·
|
no
commercially productive crude oil or natural gas reservoirs will
be
found;
|
|
·
|
crude
oil and natural gas drilling and production activities may be shortened,
delayed or canceled;
|
|
·
|
the
ability of an oil producer to develop, produce and market reserves
may be
limited by:
|
|
·
|
political
conflicts, including war,
|
|
·
|
compliance
with governmental requirements,
|
|
·
|
mechanical
difficulties or shortages or delays in the delivery of drilling rigs
and
other equipment;
|
|
·
|
decisions
of the cartel of oil producing countries (e.g.
,
OPEC, the Organization of the Petroleum Exporting Countries), to
produce
more or less oil;
|
|
·
|
increases
in oil production due to price rises may make it more economical
to
extract oil from additional sources and may later temper further
oil price
increases; and
|
|
·
|
economic
activity of users, as certain economies expand, oil consumption and
prices
increase (e.g.
,
China, India), and as economies contract (in a recession or depression),
oil demand and prices fall.
|
The
crude
oil industry experiences numerous operating risks. These operating risks include
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards. Environmental hazards include oil spills,
natural gas leaks, ruptures and discharges of toxic gases.
Crude
oil
operations also are subject to various U.S. federal, state and local regulations
that materially affect operations. Matters regulated include discharge permits
for drilling operations, drilling and abandonment bonds, reports concerning
operations, the spacing of wells and pooling of properties and taxation. At
various times, regulatory agencies have imposed price controls and limitations
on production. In order to conserve supplies of crude oil and natural gas,
these
agencies have restricted the rates of flow of crude oil and natural gas wells
below actual production capacity. Federal, state, and local laws regulate
production, handling, storage, transportation and disposal of crude oil and
natural gas, by-products from crude oil and natural gas and other substances
and
materials produced or used in connection with crude oil and natural gas
operations.
The
price of USOF’s units may be influenced by factors such as the short-term supply
and demand for crude oil and the short-term supply and demand for USOF’s units.
This may cause the units to trade at a price that is above or below USOF’s NAV
per unit. Accordingly, changes in the price of units may substantially vary
from
the changes in the spot price of light, sweet crude oil. If this variation
occurs, then you may not be able to effectively use USOF as a way to hedge
against crude oil-related losses or as a way to indirectly invest in crude
oil.
While
it
is expected that the trading prices of the units will fluctuate in accordance
with the changes in USOF’s NAV, the prices of units may also be influenced by
other factors, including the short-term supply and demand for crude oil and
the
units. There is no guarantee that the units will not trade at appreciable
discounts from, and/or premiums to, USOF’s NAV. This could cause the changes in
the price of the units to substantially vary from the changes in the spot price
of light, sweet crude oil. This may be harmful to you because if changes in
the
price of units vary substantially from changes in the Benchmark Oil Futures
Contract or the spot price of light, sweet crude oil, then you may not be able
to effectively use USOF as a way to hedge the risk of losses in your crude
oil-related transactions or as a way to indirectly invest in crude
oil.
Changes
in USOF’s NAV may not correlate with changes in the price of the Benchmark Oil
Futures Contract. If this were to occur, you may not be able to effectively
use
USOF as a way to hedge against crude oil-related losses or as a way to
indirectly invest in crude oil.
The
General Partner endeavors to invest USOF’s assets as fully as possible in
short-term Oil Futures Contracts and Other Oil Interests so that the changes
in
percentage terms in the NAV closely correlate with the changes in percentage
terms in the the price of the Benchmark Oil Futures Contract. However, changes
in USOF’s NAV may not correlate with the changes in the price of the Benchmark
Oil Futures Contract for several reasons as set forth below:
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USOF
(i) may not be able to buy/sell the exact amount of Oil Futures Contracts
and Other Oil Interests to have a perfect correlation with NAV; (ii)
may
not always be able to buy and sell Oil Futures Contracts or Other
Oil
Interests at the market price; (iii) may not experience a perfect
correlation between the spot price of light, sweet crude oil and
the
underlying investments in Oil Futures Contracts, Other Oil Interests
and
Treasuries, cash and cash equivalents; and (iv) is required to pay
fees,
including brokerage fees and the management fee, which will have
an effect
on the correlation.
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Short-term
supply and demand for light, sweet crude oil may cause the market
price of
the changes in the Benchmark Oil Futures Contract to vary from changes
in
USOF’s NAV if USOF has fully invested in Oil Futures Contracts that do
not
reflect such supply and demand and it is unable to replace such contracts
with Oil Futures Contracts that do reflect such supply and demand.
In
addition, there are also technical differences between the two markets,
e.g.,
one is a physical market while the other is a futures market traded
on
exchanges, that may cause variations between the spot price of oil
and the
prices of related futures
contracts.
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USOF
plans to buy only as many Oil Futures Contracts and Other Oil Interests
that it can to get the changes in percentage terms of the NAV as
close as
possible to the changes in percentage terms in the price of the Benchmark
Oil Futures Contract. The remainder of its assets will be invested
in
Treasuries, cash and/or cash equivalents and will be used to satisfy
initial margin and additional margin requirements, if any, and to
otherwise support its investments in oil interests. Investments in
Treasuries, cash and/or cash equivalents, both directly and as margin,
will provide rates of return that will vary from changes in the value
of
the spot price of light, sweet crude oil and the price of the Benchmark
Oil Futures Contract.
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In
addition, because USOF will incur certain expenses in connection
with its
investment activities, and will hold most of its assets in more liquid
short-term securities for margin and other liquidity purposes and
for
redemptions that may be necessary on an ongoing basis, the General
Partner
will not be able to fully invest USOF’s assets in Oil Futures Contracts or
Other Oil Interests and there cannot be perfect correlation between
changes in USOF’s NAV and the changes in the price of the Benchmark Oil
Futures Contract.
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As
USOF grows, there may be more or less correlation. For example, if
USOF
only has enough money to buy three Benchmark Oil Futures Contracts
and it
needs to buy four contracts to track the price of crude oil then
the
correlation will be lower, but if it buys 20,000 Benchmark Oil Futures
Contracts and it needs to buy 20,001 contracts then the correlation
will
be higher. At certain asset levels, USOF may be limited in its ability
to
purchase the Benchmark Oil Futures Contract or other Oil Futures
Contracts
due to accountability levels imposed by the relevant exchanges. To
the
extent that USOF invests in these other Oil Futures Contracts or
Other Oil
Interests, the correlation with the Benchmark Oil Futures Contracts
may be
lower. If USOF is required to invest in other Oil Futures Contracts
and
Other Oil Interests that are less correlated with the Benchmark Oil
Futures Contract, USOF would likely invest in over-the-counter contracts
to increase the level of correlation of USOF’s assets. Over-the-counter
contracts entail certain risks described below under “Over-the-Counter
Contract Risk.”
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USOF
may not be able to buy the exact number of Oil Futures Contracts
and Other
Oil Interests to have a perfect correlation with the Benchmark Oil
Futures
Contract if the purchase price of Oil Futures Contracts required
to be
fully invested in such contracts is higher than the proceeds received
for
the sale of a Creation Basket on the day the basket was sold. In
such
case, USOF could not invest the entire proceeds from the purchase
of the
Creation Basket in such futures contracts (for example, assume USOF
receives $6,679,000 for the sale of a Creation Basket and assume
that the
price of an Oil Futures Contract for light, sweet crude oil is $66,800,
then USOF could only invest in only 99 Oil Futures Contracts with
an
aggregate value of $6,613,200). USOF would be required to invest
a
percentage of the proceeds in Treasuries to be deposited as margin
with
the futures commission merchant through which the contract was purchased.
The remainder of the purchase price for the Creation Basket would
remain
invested in Treasuries, cash and/or cash equivalents as determined
by the
General Partner from time to time based on factors such as potential
calls
for margin or anticipated redemptions. If the trading market for
Oil
Futures Contracts is suspended or closed, USOF may not be able to
purchase
these investments at the last reported price for such
investments.
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If
changes in USOF’s NAV do not correlate with changes in the price of the
Benchmark Oil Futures Contract, then investing in USOF may not be an effective
way to hedge against oil-related losses or indirectly invest in
oil.
The
Benchmark Oil Futures Contract may not correlate with the spot price of light,
sweet, crude oil and this could cause the changes in the price of the units
to
substantially vary from the changes in the spot price of light, sweet crude
oil.
If this were to occur, then you may not be able to effectively use USOF as
a way
to hedge against crude oil-related losses or as a way to indirectly invest
in
crude oil.
When
using the Benchmark Oil Futures Contract as a strategy to track the spot price
of light, sweet crude oil, at best the correlation between changes in prices
of
such oil interests and the spot price of crude oil can be only approximate.
The
degree of imperfection of correlation depends upon circumstances such as
variations in the speculative oil market, supply of and demand for such oil
interests and technical influences in oil futures trading. If there is a weak
correlation between the oil interests and the spot price of light, sweet, crude
oil, then the price of units may not accurately track the spot price of light,
sweet crude oil and you may not be able to effectively use USOF as a way to
hedge the risk of losses in your crude oil-related transactions or as a way
to
indirectly invest in crude oil.
USOF
may experience a loss if it is required to sell Treasuries at a price lower
than
the price at which they were acquired.
The
value
of Treasuries generally moves inversely with movements in interest rates. If
USOF is required to sell Treasuries at a price lower than the price at which
they were acquired, USOF will experience a loss. This loss may adversely impact
the price of the units and may decrease the correlation between the price of
the
units, the price of the Benchmark Oil Futures Contracts and Other Oil Interests,
and the spot price of light, sweet crude oil.
Certain
of USOF’s investments could be illiquid which could cause large losses to
investors at any time or from time to time.
USOF
may
not always be able to liquidate its positions in its investments at the desired
price. It is difficult to execute a trade at a specific price when there is
a
relatively small volume of buy and sell orders in a market. A market disruption,
such as a foreign government taking political actions that disrupt the market
in
its currency, its crude oil production or exports, or in another major export,
can also make it difficult to liquidate a position. Alternatively, limits
imposed by futures exchanges or other regulatory organizations, such as
accountability levels, position limits and price fluctuation limits, may
contribute to a lack of liquidity with respect to some commodity
interests.
Unexpected
market illiquidity may cause major losses to investors at any time or from
time
to time. In addition, USOF does not intend at this time to establish a credit
facility, which would provide an additional source of liquidity and instead
will
rely only on the Treasuries, cash and/or cash equivalents that it holds. The
anticipated large value of the positions in Oil Futures Contracts that the
General Partner will acquire or enter into for USOF, increases the risk of
illiquidity. Other Oil Interests that USOF invests in, or in negotiated
over-the-counter contracts, may have a greater likelihood of being illiquid
since they are contracts between two parties that take into account not only
market risk, but also the relative credit, tax, and settlement risks under
such
contracts. Such contracts also have limited transferability that results from
such risks and the contract’s express limitations.
Because
both Oil Futures Contracts and Other Oil Interests may be illiquid, USOF’s oil
interests may be more difficult to liquidate at favorable prices in periods
of
illiquid markets and losses may be incurred during the period in which positions
are being liquidated.
If
the nature of hedgors and speculators in futures markets has shifted such that
crude oil purchasers are the predominant hedgors in the market, USOF might
have
to reinvest at higher futures prices or choose Other Oil
Interests.
The
changing nature of the hedgors and speculators in the crude oil market will
influence whether futures prices are above or below the expected future spot
price. In order to induce speculators to take the corresponding long side of
the
same futures contract, crude oil producers must generally be willing to sell
futures contracts at prices that are below expected future spot prices.
Conversely, if the predominant hedgors in the futures market are the purchasers
of the crude oil who purchase futures contracts to hedge against a rise in
prices, then speculators will only take the short side of the futures contract
if the futures price is greater than the expected future spot price of crude
oil. This can have significant implications for USOF when it is time to reinvest
the proceeds from a maturing futures contract into a new futures
contract.
While
USOF does not intend to take physical delivery of oil under its Oil Futures
Contracts, physical delivery under such contracts impacts the value of the
contracts.
While
it
is not the current intention of USOF to take physical delivery of crude oil
under its Oil Futures Contracts, futures contracts are not required to be
cash-settled and it is possible to take delivery under these contracts. Storage
costs associated with purchasing crude oil could result in costs and other
liabilities that could impact the value of Oil Futures Contracts or Other Oil
Interests. Storage costs include the time value of money invested in crude
oil
as a physical commodity plus the actual costs of storing the crude oil less
any
benefits from ownership of crude oil that are not obtained by the holder of
a
futures contract. In general, Oil Futures Contracts have a one-month delay
for
contract delivery and the back month (the back month is any future delivery
month other than the spot month) includes storage costs. To the extent that
these storage costs change for crude oil while USOF holds Oil Futures Contracts
or Other Oil Interests, the value of the Oil Futures Contracts or Other Oil
Interests, and therefore USOF’s NAV, may change as well.
The
price relationship between the near month contract and the next month contract
that compose the Benchmark Oil Futures Contract will vary and may impact both
the total return over time of USOF’s NAV, as well as the degree to which its
total return tracks other crude oil price indices’ total
returns.
The
design of USOF’s Benchmark Oil Futures Contract is such that every month it
begins by using the near month contract to expire until the near month contract
is within two weeks of expiration, when it will use the next month contract
to
expire as its benchmark contract and keeps that contract as its benchmark until
it becomes the near month contract and close to expiration. In the event of
a
crude oil futures market where near month contracts trade at a higher price
than
next month to expire contracts, a situation described as “backwardation” in the
futures market, then absent the impact of the overall movement in crude oil
prices the value of the benchmark contract would tend to rise as it approaches
expiration. As a result the total return of the Benchmark Oil Futures Contract
would tend to track higher. Conversely, in the event of a crude oil futures
market where near month contracts trade at a lower price than next month
contracts, a situation described as “contango” in the futures market, then
absent the impact of the overall movement in crude oil prices the value of
the
benchmark contract would tend to decline as it approaches expiration. As a
result the total return of the Benchmark Oil Futures Contract would tend to
track lower. When compared to total return of other price indices, such as
the
spot price of crude oil, the impact of backwardation and contango may lead
the
total return of USOF’s NAV to vary significantly. In the event of a prolonged
period of contango, and absent the impact of rising or falling oil prices,
this
could have a significant negative impact on USOF’s NAV and total
return.
Regulation
of the commodity interests and energy markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect USOF.
The
regulation of commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental
and
judicial action. In addition, various national governments have expressed
concern regarding the disruptive effects of speculative trading in the energy
markets and the need to regulate the derivatives markets in general. The effect
of any future regulatory change on USOF is impossible to predict, but could
be
substantial and adverse.
If
you are investing in USOF for purposes of hedging, you might be subject to
several risks including the possibility of losing the benefit of favorable
market movement.
Participants
in the crude oil or in other industries may use USOF as a vehicle to hedge
the
risk of losses in their crude oil-related transactions. There are several risks
in connection with using USOF as a hedging device. While hedging can provide
protection against an adverse movement in market prices, it can also preclude
a
hedgor’s opportunity to benefit from a favorable market movement. In a hedging
transaction, the hedgor may be concerned that the hedged item will increase
in
price, but must recognize the risk that the price may instead decline and if
this happens he will have lost his opportunity to profit from the change in
price because the hedging transaction will result in a loss rather than a gain.
Thus, the hedgor foregoes the opportunity to profit from favorable price
movements.
In
addition, if the hedge is not a perfect one, the hedgor can lose on the hedging
transaction and not realize an offsetting gain in the value of the underlying
item being hedged.
When
using futures contracts as a hedging technique, at best, the correlation between
changes in prices of futures contracts and of the items being hedged can be
only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative markets, demand for futures
and
for crude oil products, technical influences in futures trading, and differences
between anticipated energy costs being hedged and the instruments underlying
the
standard futures contracts available for trading. Even a well-conceived hedge
may be unsuccessful to some degree because of unexpected market behavior as
well
as the expenses associated with creating the hedge.
In
addition, using an investment in USOF as a hedge for changes in energy costs
(e.g.,
investing in crude oil, heating oil, gasoline, natural gas or other fuels,
or
electricity) may not correlate because changes in the spot price of
crude
oil may vary from changes in energy costs because the spot price may not
be at
the same rate as changes in the price of other energy products, and, in any
case, the price of crude
oil does
not reflect the refining, transportation, and other costs that may impact
the
hedgor’s energy costs.
An
investment in USOF may provide you little or no diversification benefits. Thus,
in a declining market, USOF may have no gains to offset your losses from other
investments, and you may suffer losses on your investment in USOF at the same
time you incur losses with respect to other asset
classes.
Historically,
Oil Futures Contracts and Other Oil Interests have generally been non-correlated
to the performance of other asset classes such as stocks and bonds.
Non-correlation means that there is a low statistically valid relationship
between the performance of futures and other commodity interest transactions,
on
the one hand, and stocks or bonds, on the other hand. However, there can be
no
assurance that such non-correlation will continue during future periods. If,
contrary to historic patterns, USOF’s performance were to move in the same
general direction as the financial markets, you will obtain little or no
diversification benefits from an investment in the units. In such a case, USOF
may have no gains to offset your losses from other investments, and you may
suffer losses on your investment in USOF at the same time you incur losses
with
respect to other investments.
Variables
such as drought, floods, weather, embargoes, tariffs and other political events
may have a larger impact on crude oil prices and crude oil-linked instruments,
including Oil Futures Contracts and Other Oil Interests, than on traditional
securities. These additional variables may create additional investment risks
that subject USOF’s investments to greater volatility than investments in
traditional securities.
Non-correlation
should not be confused with negative correlation, where the performance of
two
asset classes would be opposite of each other. There is no historic evidence
that the spot price of crude oil and prices of other financial assets, such
as
stocks and bonds, are negatively correlated. In the absence of negative
correlation, USOF cannot be expected to be automatically profitable during
unfavorable periods for the stock market, or vice versa.
USOF’s
Operating Risks
USOF
is not a registered investment company so you do not have the protections of
the
Investment Company Act of 1940.
USOF
is
not an investment company subject to the Investment Company Act of 1940.
Accordingly, you do not have the protections afforded by that statute which,
for
example, requires investment companies to have a majority of disinterested
directors and regulates the relationship between the investment company and
its
investment manager.
The
General Partner is leanly staffed and relies heavily on key personnel to manage
trading activities.
In
managing and directing the day-to-day activities and affairs of USOF, the
General Partner relies heavily on Mr. Nicholas Gerber, Mr. John Love
and Mr. John Hyland. If Mr. Gerber, Mr. Love, or Mr. Hyland
were to leave or be unable to carry out their present responsibilities, it
may
have an adverse effect on the management of USOF. Furthermore, Mr. Gerber,
Mr. Love and Mr. Hyland are currently involved in the management of
USNG, and the General Partner is currently in the process of registering four
other exchange traded security funds, United States Heating Oil Fund, LP
(“USHO”), United States Gasoline Fund, LP (“USG”), United States 12 Month Oil
Fund, LP (“US12OF”) and United States 12 Month Natural Gas Fund, LP (“US12NG”).
Mr. Gerber and Mr. Love are also employed by Ameristock Corporation, a
registered investment adviser that manages a public mutual fund. It is estimated
that Mr. Gerber will spend approximately 50% of his time on USOF, USNG, USHO,
USG, US12OF
and US12NG
matters.
Mr. Love will spend approximately 95% of his time on USOF, USNG, USHO, USG,
US12OF and US12NG matters and Mr. Hyland will spend approximately 75% of his
time on USOF, USNG, USHO, USG US12OF and US12NG matters. To the extent that
the
General Partner establishes additional funds, even greater demands will be
placed on Mr. Gerber, Mr. Love and Mr. Hyland, as well as the other officers
of
the General Partner, including Mr. Mah, the Chief Financial Officer, and its
Board of Directors.
Accountability
levels, position limits, and daily price fluctuation limits set by the exchanges
have the potential to cause a tracking error, which could cause the price of
units to substantially vary from the price of the Benchmark Oil Futures Contract
and prevent you from being able to effectively use USOF as a way to hedge
against crude oil-related losses or as a way to indirectly invest in crude
oil.
U.S.
designated contract markets such as the New York Mercantile Exchange have
established accountability levels and position limits on the maximum net long
or
net short futures contracts in commodity interests that any person or group
of
persons under common trading control (other than as a hedge, which an investment
in USOF is not) may hold, own or control. For example, the current
accountability level for investments at any one time in the Benchmark Oil
Futures Contract is 20,000. While this is not a fixed ceiling, it is a threshold
above which the New York Mercantile Exchange may exercise greater scrutiny
and
control over an investor, including limiting an investor to holding no more
than
20,000 Benchmark Oil Futures Contracts. With regard to position limits, the
New
York Mercantile Exchange limits an investor from holding more than 3,000 net
futures in the last 3 days of trading in the near month contract to
expire.
In
addition to accountability levels and position limits, the New York Mercantile
Exchange also sets daily price fluctuation limits on futures contracts. The
daily price fluctuation limit establishes the maximum amount that the price
of
futures contracts may vary either up or down from the previous day’s settlement
price. Once the daily price fluctuation limit has been reached in a particular
futures contract, no trades may be made at a price beyond that
limit.
For
example, the New York Mercantile Exchange imposes a $10.00 per barrel ($10,000
per contract) price fluctuation limit for Benchmark Oil Futures Contracts.
This
limit is initially based off of the previous trading day’s settlement price. If
any Benchmark Oil Futures Contract is traded, bid, or offered at the limit
for
five minutes, trading is halted for five minutes. When trading resumes it begins
at the point where the limit was imposed and the limit is reset to be $10.00
per
barrel in either direction of that point. If another halt were triggered, the
market would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There is no maximum price
fluctuation limit during any one trading session.
All
of
these limits may potentially cause a tracking error between the price of the
units and the price of the Benchmark Oil Futures Contract. This may in turn
prevent you from being able to effectively use USOF as a way to hedge against
crude oil-related losses or as a way to indirectly invest in crude
oil.
USOF
is
not limiting the size of the offering and is committed to utilizing
substantially all of its proceeds to purchase Oil Futures Contracts and Other
Oil Interests. If USOF encounters accountability levels, position limits, or
price fluctuation limits for futures contracts on the New York Mercantile
Exchange, it may then, if permitted under applicable regulatory requirements,
purchase futures contracts on the ICE Futures (formerly, the International
Petroleum Exchange) or other exchanges that trade listed crude oil futures.
The
futures contracts available on the ICE Futures are comparable to the contracts
on the New York Mercantile Exchange, but they may have different underlying
commodities, sizes, deliveries, and prices.
There
are technical and fundamental risks inherent in the trading system the General
Partner intends to employ.
The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In addition, it is
also possible that a computer or software program may malfunction and cause
an
error in computation.
USOF
and the General Partner may have conflicts of interest, which may permit them
to
favor their own interests to your detriment.
USOF
and
the General Partner may have inherent conflicts to the extent the General
Partner attempts to maintain USOF’s asset size in order to preserve its fee
income and this may not always be consistent with USOF’s objective of having the
value of its unit’s NAV track changes in the Benchmark Oil Futures Contract. The
General Partner’s officers, directors and employees do not devote their time
exclusively to USOF. These persons are directors, officers or employees of
other
entities that may compete with USOF for their services. They could have a
conflict between their responsibilities to USOF and to those other
entities.
In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account. A conflict of
interest may exist if their trades are in the same markets and at the same
time
as USOF trades using the clearing broker to be used by USOF. A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by
USOF.
The
General Partner has sole current authority to manage the investments and
operations of USOF, and this may allow it to act in a way that furthers its
own
interests which may create a conflict with your best interests. Limited partners
have limited voting control, which will limit the ability to influence matters
such as amendment of the LP Agreement, change in USOF’s basic investment policy,
dissolution of this fund, or the sale or distribution of USOF’s
assets.
The
General Partner serves as the general partner to both USOF and USNG and will
serve as the general partner for USHO, USG, US12OF and US12NG,if
such
other funds offer their securities to the public or begin operations.
The
General Partner may have a conflict to the extent that its trading decisions
for
USOF may be influenced by the effect they would have on the other funds it
manages. These trading decisions may be influenced since the General Partner
also serves as the general partner for all of the funds and is required to
meet
all of the funds’ investment objectives as well as USOF’s. If the General
Partner believes that a trading decision it made on behalf of USOF might
(i)
impede its other funds from reaching their investment objectives, or (ii)
improve the likelihood of meeting its other funds’ objectives, then the General
Partner may choose to change its trading decision for USOF, which could either
impede or improve the opportunity for USOF from meeting its investment
objective. In addition, the General Partner is required to indemnify the
officers and directors of its other funds if the need for indemnification
arises. This potential indemnification will cause the General Partner’s assets
to decrease. If the General Partner’s other sources of income are not sufficient
to compensate for the indemnification, then the General Partner may terminate
and you could lose your investment.
Unitholders
may only vote on the removal of the General Partner and limited partners have
only limited voting rights. Unitholders and limited partners will not
participate in the management of USOF and do not control the General Partner
so
they will not have influence over basic matters that affect
USOF.
Unitholders
that have not applied to become limited partners have no voting rights, other
than to remove the General Partner. Limited partners will have limited voting
rights with respect to USOF’s affairs. Unitholders may remove the General
Partner only if 66 2/3% of the unitholders elect to do so. Unitholders and
limited partners will not be permitted to participate in the management or
control of USOF or the conduct of its business. Unitholders and limited partners
must therefore rely upon the duties and judgment of the General Partner to
manage USOF’s affairs.
The
General Partner may manage a large amount of assets and this could affect USOF’s
ability to trade profitably.
Increases
in assets under management may affect trading decisions. In general, the General
Partner does not intend to limit the amount of assets of USOF that it may
manage. The more assets the General Partner manages, the more difficult it
may
be for it to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of managing
risk associated with larger positions.
USOF
could terminate at any time and cause the liquidation and potential loss of
your
investment and could upset the overall maturity and timing of your investment
portfolio.
USOF
may
terminate at any time, regardless of whether USOF has incurred losses, subject
to the terms of the LP Agreement. In particular, unforeseen circumstances,
including the death, adjudication of incompetence, bankruptcy, dissolution,
or
removal of the General Partner could cause USOF to terminate unless a majority
interest of the limited partners within 90 days of the event elects to continue
the partnership and appoints a successor general partner[, or the affirmative
vote of a majority interest of the limited partners subject to conditions].
However, no level of losses will require the General Partner to terminate USOF.
USOF’s termination would cause the liquidation and potential loss of your
investment. Termination could also negatively affect the overall maturity and
timing of your investment portfolio.
Limited
partners may not have limited liability in certain circumstances, including
potentially having liability for the return of wrongful
distributions.
Under
Delaware law, a limited partner might be held liable for our obligations as
if
it were a General Partner if the limited partner participates in the control
of
the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
A
limited
partner will not be liable for assessments in addition to its initial capital
investment in any of our capital securities representing limited partnership
interests. However, a limited partner may be required to repay to us any amounts
wrongfully returned or distributed to it under some circumstances. Under
Delaware law, we may not make a distribution to limited partners if the
distribution causes our liabilities (other than liabilities to partners on
account of their partnership interests and nonrecourse liabilities) to exceed
the fair value of our assets. Delaware law provides that a limited partner
who
receives such a distribution and knew at the time of the distribution that
the
distribution violated the law will be liable to the limited partnership for
the
amount of the distribution for three years from the date of the
distribution.
With
adequate notice, a limited partner may be required to withdraw from the
partnership for any reason.
If
the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its sole discretion,
require any such limited partner to withdraw entirely from the partnership
or to
withdraw a portion of its partner capital account. The General Partner may
require withdrawal even in situations where the limited partner has complied
completely with the provisions of the LP Agreement.
USOF’s
existing units are, and any units USOF issues in the future will be, subject
to
restrictions on transfer. Failure to satisfy these requirements will preclude
you from being able to have all the rights of a limited
partner.
No
transfer of any unit or interest therein may be made if such transfer would
(a)
violate the then applicable federal or state securities laws or rules and
regulations of the SEC, any state securities commission, the CFTC or any other
governmental authority with jurisdiction over such transfer, or (b) cause USOF
to be taxable as a corporation or affect USOF’s existence or qualification as a
limited partnership. In addition, investors may only become limited partners
if
they transfer their units to purchasers that meet certain conditions outlined
in
the LP Agreement, which provides that each record holder or limited partner
or
unitholder applying to become a limited partner (each a record holder) may
be
required by the General Partner to furnish certain information, including that
holder’s nationality, citizenship or other related status. A transferee who is
not a U.S. resident may not be eligible to become a record holder or a limited
partner if its ownership would subject USOF to the risk of cancellation or
forfeiture of any of its assets under any federal, state or local law or
regulation. All purchasers of USOF’s units, who wish to become limited partners
or record holders, and receive cash distributions, if any, or have certain
other
rights, must deliver an executed transfer application in which the purchaser
or
transferee must certify that, among other things, he, she or it agrees to be
bound by USOF’s LP Agreement and is eligible to purchase USOF’s securities. Any
transfer of units will not be recorded by the transfer agent or recognized
by us
unless a completed transfer application is delivered to the General Partner
or
the Administrator. A person purchasing USOF’s existing units, who does not
execute a transfer application and certify that the purchaser is eligible to
purchase those securities acquires no rights in those securities other than
the
right to resell those securities. Whether or not a transfer application is
received or the consent of the General Partner obtained, our units will be
securities and will be transferable according to the laws governing transfers
of
securities. See “Transfer of Units.”
USOF
does not expect to make cash distributions.
The
General Partner has not previously made any cash distributions and intends
to
re-invest any realized gains in additional oil interests rather than
distributing cash to limited partners. Therefore, unlike mutual funds, commodity
pools or other investment pools that actively manage their investments in an
attempt to realize income and gains from their investing activities and
distribute such income and gains to their investors, USOF generally does not
expect to distribute cash to limited partners. You should not invest in USOF
if
you will need cash distributions from USOF to pay taxes on your share of income
and gains of USOF, if any, or for any other reason. Although USOF does not
intend to make cash distributions, the income earned from its investments held
directly or posted as margin may reach levels that merit distribution, e.g.,
at
levels where such income is not necessary to support its underlying investments
in Oil Interests and investors adversely react to being taxed on such income
without receiving distributions that could be used to pay such tax. If this
income becomes significant then cash distributions may be made.
There
is a risk that USOF will not earn trading gains sufficient to compensate for
the
fees and expenses that it must pay and as such USOF may not earn any
profit.
USOF
pays
brokerage charges of approximately 0.16% based on futures commission merchant
fees of $3.50 per buy or sell, management fees of 0.50% of NAV on the first
$1,000,000,000 of assets and 0.20% of NAV after the first $1,000,000,000 of
assets, and over-the-counter spreads and extraordinary expenses (i.e.,
expenses
not in the ordinary course of business, including the indemnification of any
person against liabilities and obligations to the extent permitted by law and
required under the LP Agreement and under agreements entered into by the General
Partner on USOF’s behalf and the bringing and defending of actions at law or in
equity and otherwise engaging in the conduct of litigation and the incurring
of
legal expenses and the settlement of claims and litigation) that can not be
quantified. These fees and expenses must be paid in all cases regardless of
whether USOF’s activities are profitable. Accordingly, USOF must earn trading
gains sufficient to compensate for these fees and expenses before it can earn
any profit.
USOF
has historically depended upon its affiliates to pay all its expenses. If this
offering of units does not raise sufficient funds to pay USOF’s future expenses
and no other source of funding of expenses is found, USOF may be forced to
terminate and investors may lose all or part of their
investment.
Prior
to
the offering of units that commenced on January 30, 2007, all of USOF’s expenses
were funded by the General Partner and its affiliates. These payments by the
General Partner and its affiliates were designed to allow USOF the ability
to
commence the public offering of its units. USOF now directly pays certain of
these fees and expenses. The General Partner will continue to pay other fees
and
expenses, as set forth in the LP Agreement. If the General Partner and USOF
are
unable to raise sufficient funds to cover their expenses or locate any other
source of funding, USOF may be forced to terminate and investors may lose all
or
part of their investment.
USOF
may incur higher fees and expenses upon renewing existing or entering into
new
contractual relationships.
The
clearing arrangements between the clearing brokers and USOF generally are
terminable by the clearing brokers once the clearing broker has given USOF
notice. Upon termination, the General Partner may be required to renegotiate
or
make other arrangements for obtaining similar services if USOF intends to
continue trading in Oil Futures Contracts or Other Oil Interest contracts at
its
present level of capacity.
The
services of any clearing broker may not be available, or even if available,
these services may not be available on the terms as favorable as those of the
expired or terminated clearing arrangements.
USOF
may miss certain trading opportunities because it will not receive the benefit
of the expertise of independent trading advisors.
The
General Partner does not employ trading advisors for USOF; however, it reserves
the right to employ them in the future. The only advisor to USOF is the General
Partner. A lack of independent trading advisors may be disadvantageous to USOF
because it will not receive the benefit of a trading advisor’s
expertise.
An
unanticipated number of redemption requests during a short period of time could
have an adverse effect on the NAV of USOF.
If
a
substantial number of requests for redemption of Redemption Baskets are received
by USOF during a relatively short period of time, USOF may not be able to
satisfy the requests from USOF’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in USOF’s trading
positions before the time that the trading strategies would otherwise dictate
liquidation.
The
failure or bankruptcy of a clearing broker could result in a substantial loss
of
USOF’s assets.
Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or is unable to satisfy
a substantial deficit in a customer account, its other customers may be subject
to risk of a substantial loss of their funds in the event of that clearing
broker’s bankruptcy. In that event, the clearing broker’s customers, such as
USOF, are entitled to recover, even in respect of property specifically
traceable to them, only a proportional share of all property available for
distribution to all of that clearing broker’s customers. USOF also may be
subject to the risk of the failure of, or delay in performance by, any exchanges
and markets and their clearing organizations, if any, on which commodity
interest contracts are traded.
From
time
to time, the clearing brokers may be subject to legal or regulatory proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear USOF’s
trades.
Third
parties may infringe upon or otherwise violate intellectual property rights
or
assert that the General Partner has infringed or otherwise violated their
intellectual property rights, which may result in significant costs and diverted
attention.
Third
parties may utilize USOF’s intellectual property or technology, including the
use of its business methods, trademarks and trading program software, without
permission. The General Partner has a patent pending for USOF’s business method
and it is registering its trademarks. USOF does not currently have any
proprietary software. However, if it obtains proprietary software in the future,
then any unauthorized use of USOF’s proprietary software and other technology
could also adversely affect its competitive advantage. USOF may have difficulty
monitoring unauthorized uses of its patents, trademarks, proprietary software
and other technology. Also, third parties may independently develop business
methods, trademarks or proprietary software and other technology similar to
that
of the General Partner or claim that the General Partner has violated their
intellectual property rights, including their copyrights, trademark rights,
trade names, trade secrets and patent rights. As a result, the General Partner
may have to litigate in the future to protect its trade secrets, determine
the
validity and scope of other parties’ proprietary rights, defend itself against
claims that it has infringed or otherwise violated other parties’ rights, or
defend itself against claims that its rights are invalid. Any litigation of
this
type, even if the General Partner is successful and regardless of the merits,
may result in significant costs, divert its resources from USOF, or require
it
to change its proprietary software and other technology or enter into royalty
or
licensing agreements. See “Legal Risks” below.
The
success of USOF depends on the ability of the General Partner to accurately
implement trading systems, and any failure to do so could subject USOF to losses
on such transactions.
The
General Partner uses mathematical formulas built into a generally available
spreadsheet program to decide whether it should buy or sell oil interests each
day. Specifically, the General Partner uses the spreadsheet to make mathematical
calculations and to monitor positions in oil interests and Treasuries and
correlations to the spot price of light, sweet crude oil. The General Partner
must accurately process the spreadsheets’ outputs and execute the transactions
called for by the formulas. In addition, USOF relies on the General Partner
to
properly operate and maintain its computer and communications systems. Execution
of the formulas and operation of the systems are subject to human error. Any
failure, inaccuracy or delay in implementing any of the formulas or systems
and
executing USOF’s transactions could impair its ability to achieve USOF’s
investment objective. It could also result in decisions to undertake
transactions based on inaccurate or incomplete information. This could cause
substantial losses on transactions.
USOF
may experience substantial losses on transactions if the computer or
communications system fails.
USOF’s
trading activities, including its risk management, depend on the integrity
and
performance of the computer and communications systems supporting them.
Extraordinary transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or even fail.
Any
significant degradation or failure of the systems that the General Partner
uses
to gather and analyze information, enter orders, process data, monitor risk
levels and otherwise engage in trading activities may result in substantial
losses on transactions, liability to other parties, lost profit opportunities,
damages to the General Partner’s and USOF’s reputations, increased operational
expenses and diversion of technical resources.
If
the computer and communications systems are not upgraded, USOF’s financial
condition could be harmed.
The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting USOF’s
trading activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the systems
of
exchanges, clearing brokers and the executing brokers. As a result, if these
third parties upgrade their systems, the General Partner will need to make
corresponding upgrades to continue effectively its trading activities. USOF’s
future success will depend on USOF’s ability to respond to changing technologies
on a timely and cost-effective basis.
USOF
depends on the reliable performance of the computer and communications systems
of third parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.
USOF
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other
data
providers that the General Partner uses to conduct trading activities. Failure
or inadequate performance of any of these systems could adversely affect the
General Partner’s ability to complete transactions, including its ability to
close out positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a material adverse
effect on revenues and materially reduce USOF’s available capital. For example,
unavailability of price quotations from third parties may make it difficult
or
impossible for the General Partner to use its proprietary software that it
relies upon to conduct its trading activities. Unavailability of records from
brokerage firms may make it difficult or impossible for the General Partner
to
accurately determine which transactions have been executed or the details,
including price and time, of any transaction executed. This unavailability
of
information also may make it difficult or impossible for the General Partner
to
reconcile its records of transactions with those of another party or to
accomplish settlement of executed transactions.
The
occurrence of a terrorist attack, or the outbreak, continuation or expansion
of
war or other hostilities could disrupt USOF’s trading activity and materially
affect USOF’s profitability.
The
operations of USOF, the exchanges, brokers and counterparties with which USOF
does business, and the markets in which USOF does business could be severely
disrupted in the event of a major terrorist attack or the outbreak, continuation
or expansion of war or other hostilities. The terrorist attacks of September
11,
2001 and the war in Iraq, global anti-terrorism initiatives and political unrest
in the Middle East and Southeast Asia continue to fuel this
concern.
Risk
of Leverage and Volatility
If
the General Partner permits USOF to become leveraged, you could lose all or
substantially all of your investment if USOF’s trading positions suddenly turn
unprofitable.
Commodity
pools’ trading positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds that represent
only a small percentage of a futures contract’s (or other commodity interests’)
entire face value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity interests)
with an aggregate value in excess of the commodity pool’s assets. While this
leverage can increase the pool’s profits, relatively small adverse movements in
the price of the pool’s futures contracts can cause significant losses to the
pool. While the General Partner has not and does not intend to leverage USOF’s
assets, it is not prohibited from doing so under the LP Agreement or
otherwise.
The
price of crude oil is volatile which could cause large fluctuations in the
price
of units.
Movements
in the price of crude oil may be the result of factors outside of the General
Partner’s control and may not be anticipated by the General Partner. For
example, price movements for barrels of oil are influenced by, among other
things:
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changes
in interest rates;
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actions
by oil producing countries such as the OPEC
countries;
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governmental,
agricultural, trade, fiscal, monetary and exchange control programs
and
policies;
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·
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weather
and climate conditions;
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·
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changing
supply and demand relationships, including but not limited to increased
demand by other countries such as
China;
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·
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changes
in balances of payments and trade;
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U.S.
and international rates of
inflation;
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currency
devaluations and revaluations;
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U.S.
and international political and economic events;
and
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changes
in philosophies and emotions of market
participants.
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Over-the-Counter
Contract Risk
Over-the-counter
transactions are subject to little, if any,
regulation.
A
portion
of USOF’s assets may be used to trade over-the-counter crude oil interest
contracts, such as forward contracts or swap or spot contracts. Over-the-counter
contracts are typically traded on a principal-to-principal basis through dealer
markets that are dominated by major money center and investment banks and other
institutions and are essentially unregulated by the CFTC. You therefore do
not
receive the protection of CFTC regulation or the statutory scheme of the
Commodity Exchange Act in connection with this trading activity by USOF. The
markets for over-the-counter contracts rely upon the integrity of market
participants in lieu of the additional regulation imposed by the CFTC on
participants in the futures markets. The lack of regulation in these markets
could expose USOF in certain circumstances to significant losses in the event
of
trading abuses or financial failure by participants.
USOF
will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by USOF or held by special purpose
or
structured vehicles.
USOF
faces the risk of non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these contracts
is
generally a single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a result, there
will be greater counterparty credit risk in these transactions. A counterparty
may not be able to meet its obligations to USOF, in which case USOF could suffer
significant losses on these contracts.
If
a
counterparty becomes bankrupt or otherwise fails to perform its obligations
due
to financial difficulties, USOF may experience significant delays in obtaining
any recovery in a bankruptcy or other reorganization proceeding. USOF may obtain
only limited recovery or may obtain no recovery in such
circumstances.
USOF
may be subject to liquidity risk with respect to its over-the-counter
contracts.
Over-the-counter
contracts may have terms that make them less marketable than Oil Futures
Contracts. Over-the-counter contracts are less marketable because they are
not
traded on an exchange, do not have uniform terms and conditions, and are entered
into based upon the creditworthiness of the parties and the availability of
credit support, such as collateral, and in general, they are not transferable
without the consent of the counterparty. These conditions diminish the ability
to realize the full value of such contracts.
Risk
of Trading in International Markets
Trading
in international markets would expose USOF to credit and regulatory
risk.
The
General Partner invests primarily in Oil Futures Contracts, a significant
portion of which will be on United States exchanges including the New York
Mercantile Exchange. However, a portion of USOF’s trades may take place on
markets and exchanges outside the United States. Some non-U.S. markets present
risks because they are not subject to the same degree of regulation as their
U.S. counterparts. None of the CFTC, NFA, or any domestic exchange regulates
activities of any foreign boards of trade or exchanges, including the execution,
delivery and clearing of transactions, nor has the power to compel enforcement
of the rules of a foreign board of trade or exchange or of any applicable
non-U.S. laws. Similarly, the rights of market participants, such as USOF,
in
the event of the insolvency or bankruptcy of a non-U.S. market or broker are
also likely to be more limited than in the case of U.S. markets or brokers.
As a
result, in these markets, USOF has less legal and regulatory protection than
it
does when it trades domestically.
In
some
of these non-U.S. markets, the performance on a contract is the responsibility
of the counterparty and is not backed by an exchange or clearing corporation
and
therefore exposes USOF to credit risk. Trading in non-U.S. markets also leaves
USOF susceptible to swings in the value of the local currency against the U.S.
dollar. Additionally, trading on non-U.S. exchanges is subject to the risks
presented by exchange controls, expropriation, increased tax burdens and
exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the profit
or
increase the loss earned on trades in the affected international
markets.
International
trading activities subject USOF to foreign exchange
risk.
The
price
of any non-U.S. futures, options on futures or other commodity interest contract
and, therefore, the potential profit and loss on such contract, may be affected
by any variance in the foreign exchange rate between the time the order is
placed and the time it is liquidated, offset or exercised. As a result, changes
in the value of the local currency relative to the U.S. dollar may cause losses
to USOF even if the contract traded is profitable.
USOF’s
international trading could expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.
Some
non-U.S. exchanges also may be in a more developmental stage so that prior
price
histories may not be indicative of current price dynamics. In addition, USOF
may
not have the same access to certain positions on foreign trading exchanges
as do
local traders, and the historical market data on which General Partner bases
its
strategies may not be as reliable or accessible as it is for U.S.
exchanges.
Tax
Risk
Please
refer to “U.S. Federal Income Tax Considerations” for information regarding the
U.S. federal income tax consequences of the purchase, ownership and disposition
of units.
Your
tax liability may exceed the amount of distributions, if any, on your
units.
Cash
or
property will be distributed at the sole discretion of the General Partner.
The
General Partner has not and does not intend to make cash or other distributions
with respect to units. You will be required to pay U.S. federal income tax
and,
in some cases, state, local, or foreign income tax, on your allocable share
of
USOF’s taxable income, without regard to whether you receive distributions or
the amount of any distributions. Therefore, your tax liability with respect
to
your units may exceed the amount of cash or value of property (if any)
distributed.
Your
allocable share of taxable income or loss may differ from your economic income
or loss on your units.
Due
to
the application of the assumptions and conventions applied by USOF in making
allocations for tax purposes and other factors, your allocable share of USOF’s
income, gain, deduction or loss may be different than your economic profit
or
loss from your units for a taxable year. This difference could be temporary
or
permanent and, if permanent, could result in your being taxed on amounts in
excess of your economic income.
Items
of income, gain, deduction, loss and credit with respect to units could be
reallocated if the IRS does not accept the assumptions and conventions applied
by USOF in allocating those items, with potential adverse consequences for
you.
The
U.S.
tax rules pertaining to partnerships are complex and their application to large,
publicly traded partnerships such as USOF is in many respects uncertain. USOF
will apply certain assumptions and conventions in an attempt to comply with
the
intent of the applicable rules and to report taxable income, gains, deductions,
losses and credits in a manner that properly reflects unitholders’ economic
gains and losses. These assumptions and conventions may not fully comply with
all aspects of the Internal Revenue Code (“Code”) and applicable Treasury
Regulations, however, and it is possible that the U.S. Internal Revenue Service
will successfully challenge our allocation methods and require us to reallocate
items of income, gain, deduction, loss or credit in a manner that adversely
affects you. If this occurs, you may be required to file an amended tax return
and to pay additional taxes plus deficiency interest.
We
could be treated as a corporation for federal income tax purposes, which may
substantially reduce the value of your units.
USOF
has
received an opinion of counsel that, under current U.S. federal income tax
laws,
USOF will be treated as a partnership that is not taxable as a corporation
for
U.S. federal income tax purposes, provided that (i) at least 90 percent of
USOF’s annual gross income consists of “qualifying income” as defined in the
Code, (ii) USOF is organized and operated in accordance with its governing
agreements and applicable law and (iii) USOF does not elect to be taxed as
a
corporation for federal income tax purposes. Although the General Partner
anticipates that USOF has satisfied and will continue to satisfy the “qualifying
income” requirement for all of its taxable years, that result cannot be assured.
USOF has not requested and will not request any ruling from the IRS with respect
to its classification as a partnership not taxable as a corporation for federal
income tax purposes. If the IRS were to successfully assert that USOF is taxable
as a corporation for federal income tax purposes in any taxable year, rather
than passing through its income, gains, losses and deductions proportionately
to
unitholders, USOF would be subject to tax on its net income for the year at
corporate tax rates. In addition, although the General Partner does not
currently intend to make distributions with respect to units, any distributions
would be taxable to unitholders as dividend income. Taxation of USOF as a
corporation could materially reduce the after-tax return on an investment in
units and could substantially reduce the value of your units.
PROSPECTIVE
INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO
THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN UNITS; SUCH TAX
CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
USOF
has been notified of intellectual property rights that could adversely impact
USOF.
Goldman,
Sachs & Co. (“Goldman Sachs”) sent USOF a letter on March 17, 2006,
providing USOF and the General Partner notice under 35 U.S.C. Section 154(d)
of
two pending United States patent applications, Publication Nos. 2004/0225593A1
and 2006/0036533A1. Both patent applications are generally directed to a method
and system for creating and administering a publicly traded interest in a
commodity pool. In particular, the Abstract of each patent application defines
a
means for creating and administering a publicly traded interest in a commodity
pool that includes the steps of forming a commodity pool having a first position
in a futures contract and a corresponding second position in a margin
investment, and issuing equity interest of the commodity pool to third party
investors. USOF Units are equity interests in a publicly traded commodity pool.
In addition, USOF will directly invest in futures contracts and hold other
investments to be used as margin for its future contract positions. If patents
were to be issued to Goldman Sachs based upon these patent applications as
currently drafted, and USOF continued to operate as currently contemplated
after
the patents were issued, claims against USOF and the General Partner for
infringement of the patents may be made by Goldman Sachs. However, as these
patent applications are pending and have not been substantively examined by
the
U.S. Patent and Trademark Office, it is uncertain at this time what subject
matter will be covered by the claims of any patent issuing on one of these
applications, should a patent issue at all.
Under
the
provisions of 35 U.S.C. §154(d), Goldman Sachs may seek damages in the form of a
reasonable royalty from the date the units are publicly offered for sale to
the
date one of their cited patent applications issues as a U.S. Patent if, and
only
if, the invention as claimed in the issued patent is substantially identical
to
the invention as claimed in the published patent application. To obtain a
reasonable royalty under 35 U.S.C. §154(d), one of Goldman Sachs’s patents must
issue and then it must be proved that post-issuance acts or systems of USOF
infringe a valid claim of the issued patent, and that the infringed claim is
substantially identical to one of the claims in the corresponding published
application. If at the time a Goldman Sachs patent issues, USOF does not
infringe the claims of the issued patent based on its current design or through
modifications made prior to issuance, or if any infringed issued claim is not
substantially identical to a published claim, then Goldman Sachs will not be
able to obtain a reasonable royalty under 35 U.S.C. §154(d). At this time
neither of Goldman Sachs’s patent applications have been substantively examined
by an examiner at the U.S. Patent and Trademark Office nor are they currently
being considered for examination on an expedited basis under a Petition to
Make
Special, and considering that both have been placed in Class 705 for
examination, which has an average pendency of approximately 44-45 months to
issuance (or abandonment) and an issuance rate of approximately 11% in 2004,
it
is likely that neither application will issue within the next two years.
Nonetheless, USOF currently is reviewing the Goldman Sachs published patent
applications, and is engaged in discussions with Goldman Sachs regarding their
pending applications and USOF’s own pending patent application. At this time,
due in part to the requirements of 35 U.S.C. §154(d) and the fact that the
Goldman Sachs patent applications are pending and have not been issued as U.S.
Patents, USOF is unable to determine what the outcome from this matter will
be.
See “Operating Risks — Third parties may infringe upon or otherwise violate
intellectual property rights or assert that the General Partner has infringed
or
otherwise violated their intellectual property rights, which may result in
significant costs and diverted attention.”
THE
OFFERING
What
is USOF?
USOF
is a
Delaware limited partnership organized on May 12, 2005. USOF maintains its
main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. USOF is a commodity pool. It operates pursuant to the terms of the LP
Agreement dated as of January 19, 2007, which grants full management control
to
the General Partner.
Who
is the General Partner?
Our
sole
General Partner is Victoria Bay Asset Management, LLC, a single member limited
liability company that was formed in the state of Delaware on May 10, 2005
and
which changed its name on June 10, 2005. It maintains its main business office
at 1320 Harbor Bay Parkway, Suite 145, Alameda, California 94502. The General
Partner is a wholly-owned subsidiary of Wainwright Holdings, Inc., a Delaware
corporation (“Wainwright”). Mr. Nicholas Gerber (discussed below) controls
Wainwright by virtue of his ownership of Wainwright’s shares. Wainwright is a
holding company that also owns an insurance company organized under Bermuda
law
and a registered investment adviser firm named Ameristock Corporation. The
General Partner is a member of the NFA and is registered with the CFTC as of
December 1, 2005. The General Partner’s registration as a CPO with the NFA was
approved on December 1, 2005.
On
September 8, 2006, the General Partner formed USNG, another limited partnership
that is a commodity pool and issues units traded on the American Stock Exchange.
The investment objective of USNG is for the changes in percentage terms of
its
units’ NAV to reflect the changes in percentage terms of the price of natural
gas delivered at the Henry Hub, Louisiana as measured by the “Benchmark Futures
Contract,” less USNG’s expenses. USNG began trading on April 18, 2007. The
General Partner is the general partner of USNG and will be responsible for
the
management of the USNG. Wainwright was the initial limited partner of
USNG.
The
General Partner is currently in the process of registering four other exchange
traded security funds, USHO, USG, US12OF and US12NG. USHO will be a publicly
traded limited partnership which seeks to have the changes in percentage terms
of its units’ NAV track the changes in percentage terms of the price of heating
oil (also known as No. 2 fuel) delivered to the New York harbor. USG will be
a
publicly traded limited partnership which seeks to have the changes in
percentage terms of its units' NAV track the changes in percentage terms of
the
price of unleaded gasoline delivered to the New York harbor. US12OF will be
a
publicly traded limited partnership which will seek to have the changes in
percentage terms of its units’ NAV reflect the changes in percentage terms of
the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured
by the changes in the average of the prices of 12 futures contracts on crude
oil
traded on the New York Mercantile Exchange. US12NG will be a publicly traded
limited partnership which will seek to
have
the changes in percentage terms of its units’ NAV reflect the changes in
percentage terms of the price of natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the average of the prices of 12 futures
contracts on natural gas traded on the New York Mercantile Exchange, consisting
of the near month contract to expire and the contracts for the following eleven
months, for a total of 12 consecutive months’ contracts.
The
General Partner is required to evaluate the credit risk for USOF to the futures
commission merchant, oversee the purchase and sale of USOF’s units by certain
Authorized Purchasers, review daily positions and margin requirements of USOF,
and manage USOF’s investments. The General Partner also pays the fees of the
Marketing Agent, the Administrator, and the Custodian.
Limited
partners have no right to elect the General Partner on an annual or any other
continuing basis. If the General Partner voluntarily withdraws, however, the
holders of a majority of our outstanding limited partner interests (excluding
for purposes of such determination interests owned by the withdrawing General
Partner and its affiliates) may elect its successor. The General Partner may
not
be removed as general partner except upon approval by the affirmative vote
of
the holders of at least 66 2/3 percent of our outstanding limited partnership
interests (excluding limited partnership interests owned by the General Partner
and its affiliates), subject to the satisfaction of certain conditions set
forth
in the LP Agreement.
The
business and affairs of our General Partner are managed by a board of directors,
which is comprised of four management directors who are also its executive
officers (the “Management Directors”) and three independent directors who meet
the independent director requirements established by the American Stock Exchange
and the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, the
Management Directors have the authority to manage the General Partner pursuant
to its Limited Liability Company Agreement. The General Partner has an audit
committee which is made up of the three independent directors (Peter M.
Robinson, Gordon L. Ellis, and Malcolm R. Fobes III). The audit committee is
governed by an audit committee charter that is posted on USOF’s website. Gordon
L. Ellis and Malcolm R. Fobes III meet the financial sophistication requirements
of the American Stock Exchange and the audit committee charter. Through its
Management Directors, the General Partner manages the day-to-day operations
of
USOF.
Nicholas
Gerber
has been
the President and CEO of the General Partner since June 9, 2005 and a Management
Director of the General Partner since May 10, 2005. He maintains his main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. Mr. Gerber acts as a portfolio manager for USOF and USNG. Mr. Gerber
will act as a portfolio manager for USHO, USG, US12OF and US12NG. He registered
with the NFA as a Principal of the General Partner in November 2005, and as
an
Associated Person of the General Partner in December 2005. Currently,
Mr. Gerber manages USOF and USNG. He will also manage USHO, USG, US12OF and
US12NG. Mr. Gerber has also served as Vice President/Chief Investment Officer
of
Lyon’s Gate Reinsurance Company, Ltd. since June of 2003. Mr. Gerber has an
extensive background in securities portfolio management and in developing
investment funds that make use of indexing and futures contracts. He is also
the
founder of Ameristock Corporation, a California-based investment adviser
registered under the Investment Advisers Act of 1940, that has been sponsoring
and providing portfolio management services to mutual funds since 1995. Since
1995, Mr. Gerber has been the portfolio manager of the Ameristock Mutual
Fund, Inc. a mutual fund registered under the Investment Company Act of 1940,
focused on large cap U.S. equities that currently has approximately $482 million
in assets. He has also been a Trustee
for the Ameristock ETF Trust since June 2006, and a portfolio manager for the
Ameristock/Ryan 1 Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury ETF since
June 2007. In
these
roles, Mr. Gerber has gained extensive experience in evaluating and
retaining third-party service providers, including custodians, accountants,
transfer agents, and distributors. Prior to managing Ameristock Mutual Fund
Inc., Mr. Gerber served as a portfolio manager with Bank of America Capital
Management. While there he was responsible for the daily stewardship of four
funds with a combined value in excess of $240 million. At Bank of America
Capital Management, Mr. Gerber worked extensively in the development and
managing of mutual funds and institutional accounts that were designed to track
assorted equity market indices such as the Standard & Poor’s 500 and the
Standard & Poor’s Midcap 400. Before joining Bank of America, he was
managing director and founder of the Marc Stevens Futures Index Fund, a fund
that combined the use of commodity futures with equity stock index futures.
The
futures index fund was a commodity pool and Mr. Gerber was the CPO. It was
ultimately purchased by Newport Commodities. Mr. Gerber’s two decades of
experience in institutional investment include a period of employment as a
floor
trader on the New York Futures Exchange. Mr. Gerber has passed the Series 3
examination for associated persons. He holds an MBA in finance from the
University of San Francisco and a BA from Skidmore College. Mr. Gerber is
45 years old.
Howard
Mah
has been
a Management Director of the General Partner since May 10, 2005, Secretary
of
the General Partner since June 9, 2005, and Chief Financial Officer of the
General Partner since May 23, 2006. In these roles, Mr. Mah is currently
involved in the management of USOF and USNG and will be involved in the
management of USHO, USG, US12OF and US12NG. Mr. Mah also serves as the
General Partner’s Chief Compliance Officer. He received a Bachelor of Education
from the University of Alberta, in 1986 and an MBA from the University of San
Francisco in 1988. He has been Secretary and Chief Compliance Officer of the
Ameristock ETF Trust since February 2007, Compliance Officer of Ameristock
Corporation since 2001; a tax & finance consultant in private practice since
1995, Secretary of Ameristock Mutual Fund since 1995 and Ameristock Focused
Value Fund from December 2000 to January 2005; Chief Compliance Officer of
Ameristock Mutual Fund since 2004 and the Co-Portfolio Manager of the Ameristock
Focused Value Fund from December 2000 to January 2005. Mr. Mah is 43 years
old.
Andrew
F. Ngim
has been
a Management Director of the General Partner since May 10, 2005 and Treasurer
of
the General Partner since June 9, 2005. As Treasurer of the General Partner,
Mr. Ngim is currently involved in the management of USOF and USNG and will
be involved in the management of USHO, USG, US12OF and US12NG. He received
a
Bachelor of Arts from the University of California at Berkeley in 1983.
Mr. Ngim has been the Managing Director and co-portfolio manager of
Ameristock Corporation since 1999, Trustee of the Ameristock ETF Trust since
February 2007, and a portfolio manager for the Ameristock/Ryan 1 Year, 2 Year,
5
Year, 10 Year and 20 Year Treasury ETF since June 2007. He was the co-portfolio
manager of the Ameristock Large Company Growth Fund from December 2000 to June
2002 and a Benefits Consultant with PricewaterhouseCoopers from 1994 to 1999.
Mr. Ngim is 47 years old.
Robert
L. Nguyen
has been
a Management Director of the General Partner since May 10, 2005. As a Management
Director of the General Partner, Mr. Nguyen is currently involved on the
management of USOF and USNG and will be involved in the management of USHO,
USG,
US12OF and US12NG. He received a Bachelor of Science from California State
University Sacramento in 1981. Mr. Nguyen has been the Managing Principal
of Ameristock Corporation since 2000. He was Co-Portfolio Manager of the
Ameristock Large Company Growth Fund from December 2000 to June 2002 and
Institutional Specialist with Charles Schwab & Company Inc. from 1995 to
1999. Mr. Nguyen is 48 years old.
Peter
M. Robinson
has been
an Independent Director of the General Partner since September 30,
2005 and,
as
such, serves on the boards of USOF and USNG and will serve on the boards of
US12OF, US12NG, USHO and USG, if such funds commence operations.
Mr. Robinson has been employed as a Research Fellow with the Hoover
Institution since 1993. Mr. Robinson graduated from Dartmouth College in
1979 and Oxford University in 1982. Mr. Robinson spent six years in the
White House, serving from 1982 to 1983 as chief speechwriter to Vice President
George Bush and from 1983 to 1988 as special assistant and speechwriter to
President Ronald Reagan. After the White House, Mr. Robinson received an
MBA from the Stanford University Graduate School of Business. Mr. Robinson
then spent a year in New York City with Fox Television. He spent a second year
in Washington, D.C., with the Securities and Exchange Commission, where he
served as the director of the Office of Public Affairs, Policy Evaluation,
and
Research. Mr. Robinson has also written three books and has been published
in the New
York Times, Red Herring
, and
Forbes
ASAP
and he
is the editor of Can
Congress Be Fixed?: Five Essays on Congressional Reform
(Hoover
Institution Press, 1995). Mr. Robinson is 50 years old.
Gordon
L. Ellis
has been
an Independent Director of the General Partner since September 30,
2005 and,
as
such, serves on the boards of USOF and USNG and will serve on the boards of
US12OF, US12NG, USHO and USG, if such funds commence operations. Mr. Ellis
has been Chairman of International Absorbents, Inc. since July 1988, President
and Chief Executive Officer since November 1996 and a Class I Director of the
company since July 1985. Mr. Ellis is also a director of Absorption Corp.,
International Absorbents, Inc.’s wholly-owned subsidiary. Mr. Ellis is a
director/trustee of Polymer Solutions, Inc., a former publicly-held company
that
sold all of its assets effective as of February 3, 2004 and is currently winding
down its operations and liquidating following such sale. Mr. Ellis is a
professional engineer with an MBA in international finance. Mr. Ellis is 60
years old.
Malcolm
R. Fobes III
has been
an Independent Director of the General Partner since September 30,
2005 and,
as
such, serves on the boards of USOF and USNG and will serve on the boards of
US12OF, US12NG, USHO and USG, if such funds commence operations. Mr. Fobes
is the founder, Chairman and Chief Executive Officer of Berkshire Capital
Holdings, Inc., a California-based investment adviser registered under the
Investment Advisers Act of 1940, that has been sponsoring and providing
portfolio management services to mutual funds since 1997. Since 1997,
Mr. Fobes has been the Chairman and President of The Berkshire Funds, a
mutual fund investment company registered under the Investment Company Act
of
1940. Mr. Fobes also serves as portfolio manager of the Berkshire Focus
Fund, a mutual fund registered under the Investment Company Act of 1940, which
concentrates its investments in the electronic technology industry. From April
2000 to July 2006, Mr. Fobes also served as co-portfolio manager of The
Wireless Fund, a mutual fund registered under the Investment Company Act of
1940, which concentrates its investments in companies engaged in the
development, production, or distribution of wireless-related products or
services. In these roles, Mr. Fobes has gained extensive experience in
evaluating and retaining third-party service providers, including custodians,
accountants, transfer agents, and distributors. Mr. Fobes was also
contributing editor of Start a Successful Mutual Fund: The Step-by-Step
Reference Guide to Make It Happen (JV Books, 1995). Prior to forming Berkshire
Capital Holdings, Inc., Mr. Fobes was employed by various
technology-related companies, including Adobe Systems, Inc., a leading provider
of digital publishing and imaging software technologies. Mr. Fobes holds a
B.S. degree in Finance and Economics from San Jose State University in
California. Mr. Fobes is 43 years old.
The
following individuals provide significant services to USOF but are employed
by
the entities noted below.
John
P. Love
acts as
the Portfolio Operations Manager for USOF and for USNG and is expected to be
the
Portfolio Operations Manager for USHO, USG, US12OF and US12NG. Mr. Love is
also
employed by the General Partner. Mr. Love has served as the operations
manager of Ameristock Corporation since 2002, where he was responsible for
back
office and marketing activities for the Ameristock Mutual Fund and Ameristock
Focused Value Fund and for the firm in general. From 1993 to September 2002,
Mr. Love was a project manager and managing director for IT and interactive
media development firms , including TouchVision Interactive and Digital
Boardwalk Inc. providing leadership to project teams from pre-contract through
deployment, while assisting with business and process development. As the
managing director of Jamison/Gold (Keane Interactive), he provided leadership
to
all departments including operations, production, technology, sales, marketing,
administration, recruiting, and finance. Mr. Love holds a Series 3 license
and is registered with the NFA as an Associated Person of the General Partner.
He holds a BFA in cinema-television from the University of Southern California.
Mr. Love is 36 years old.
John
T. Hyland, CFA
acts as
a Portfolio Manager and as the Director of Portfolio Research. Mr. Hyland is
employed by the General Partner. He registered with the NFA as an Associated
Person of the General Partner in December 2005, and as a Principal of the
General Partner in January 2006. In April 2006, Mr. Hyland became the
Portfolio Manager and Director of Portfolio Research for USOF and in March
2007
became the Portfolio Manager and Director of Portfolio Research for USNG. He
is
also expected to become the Portfolio Manager and Director of Portfolio Research
for USHO, USG, US12OF and US12NG. As part of his responsibilities for USOF
and
USNG, Mr. Hyland handles day-to-day trading, helps set investment policies,
and oversees USOF’s and USNG’s activities with its futures commission brokers,
custodian-administrator, and marketing agent. Mr. Hyland has an extensive
background in portfolio management and research with both equity and fixed
income securities, as well as in the development of new types of complex
investment funds. In July 2001, Mr. Hyland founded Towerhouse Capital
Management, LLC, a firm that provides portfolio management and new fund
development expertise to non-U.S. institutional investors. Mr. Hyland has
been, and remains, a Principal and Portfolio Manager for Towerhouse. From July
2001 to January 2002, Mr. Hyland was the Director of Global Property
Securities Research for Roulac International, where he worked on the development
of a hedge fund focused on global real estate stocks. From 1996 through 2001,
Mr. Hyland was the Director of Securities Research and Portfolio Manager
for the capital markets division of CB Richard Ellis, a global commercial real
estate services firm. His division provided portfolio management of equities
as
an advisor or sub-advisor for mutual funds and separate accounts focused on
real
estate investment trusts. In addition, his group conducted research in the
area
of structured commercial real estate debt (including Commercial Mortgage-Back
Securities, or “CMBS”), and lead the creation of one of the earliest
re-securitizations of multiple CMBS pool tranches into a Collateralized Debt
Obligation vehicle. In the ten years prior to working at CB Richard Ellis,
Mr. Hyland had worked as a portfolio manager or financial representative
for several other investment firms and mutual funds. Mr. Hyland received
his Chartered Financial Analyst (“CFA”) designation in 1994. From 1993 until
2003, Mr. Hyland was on the Board of Directors of the Security Analysts of
San Francisco (“SASF”), a not-for-profit organization of investment management
professionals. He served as the president of the SASF from 2001-2002.
Mr. Hyland is a member of the CFA Institute (formerly AIMR). He is also a
member of the National Association of Petroleum Investment Analysts, a
not-for-profit organization of investment professionals focused on the oil
industry. He serves as an arbitrator for the Financial Industry Regulatory
Authority (“FINRA”), as part of their dispute resolution program. He is a
graduate of the University of California, Berkeley and received a BA in
political science/international relations in 1982. Mr. Hyland is 47 years
old.
Kathryn
D. Rooney
acts as
a Marketing Manager and is employed by Ameristock Corporation and ALPS. Her
primary responsibilities include soliciting orders, customers and customer
funds. Currently, Ms. Rooney is the Director of Business Development for
Ameristock Mutual Fund. She has held this position since September of 2003.
Prior to working for Ameristock Mutual Fund, Ms. Rooney was the Regional
Director for Accessor Capital Management from November of 2002 to September
of
2003. Before working at Accessor Capital Management, Ms. Rooney worked at
ALPS Mutual Fund Services, Inc. as a National Sales Director. She held this
position from May of 1999 through November of 2002. Before working at ALPS
Mutual Fund Services, Inc., Ms. Rooney worked as a Trust Officer for Fifth
Third Bank from June of 1994 through May of 1999. Ms. Rooney is 34 years
old.
The
following are individual Principals, as that term is defined in CFTC Rule 3.1,
for the General Partner: Melinda Gerber, the Gerber Family Trust, Howard Mah,
Andrew Ngim, Robert Nguyen, Peter Robinson, Gordon Ellis, Malcolm Fobes, John
Love, and John Hyland. These individuals are principals due to their positions,
however, Nicholas Gerber and Melinda Gerber are also principals due to their
controlling stake in Wainwright. None of the principals owns or has any other
beneficial interest in USOF. Nicholas Gerber and John Hyland make trading and
investment decisions for USOF. Nicholas Gerber, John Love, and John Hyland
execute trades on behalf of USOF. In addition, Nicholas Gerber, John Love,
John
Hyland and Kathryn Rooney are registered with the CFTC as Associated Persons
of
the General Partner and are associate members of the NFA.
Prior
Performance of the General Partner and Affiliates
The
General Partner is currently the General Partner of USOF and USNG.
USOF’s
offering began on April 10, 2006 and is a continuous offering. As of September
30, 2007, the total amount of money raised by USOF from Authorized Purchasers
was $4,618,093,000; the total number of Authorized Purchasers was 12, the number
of baskets purchased by Authorized Purchasers was 851; and the aggregate amount
of units purchased was 85.1 million.
USNG
began trading on the American Stock Exchange on April 18, 2007 and is a
continuous offering. As of September 30, 2007, the total amount of money raised
by USNG from Authorized Purchasers was $798,947,000;
the
total number of Authorized Purchasers was 12; the number of baskets purchased
by
Authorized Purchasers was 206; and the aggregate amount of units purchased
was
20.6 million.
For
more
information on the performance of USOF and USNG, see the Performance Tables
below.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Experience
in Raising and Investing in Funds through September 30, 2007
|
|
TOTAL
|
|
|
|
|
|
|
Dollar
Amount Offered in USOF Offering*:
|
|
$
|
4,929,260,000
|
|
Dollar
Amount Raised in USOF Offering:
|
|
|
4,618,093,000
|
|
Organizational
Expenses in USOF Offering:
|
|
|
|
|
SEC
registration fee**:
|
|
$
|
525,709
|
|
NASD
Registration fee:**
|
|
$
|
226,500
|
|
AMEX
Listing Fee**:
|
|
$
|
5,000
|
|
Auditor’s
fees and expenses**:
|
|
$
|
59,000
|
|
Legal
fees and expenses**:
|
|
$
|
1,208,336
|
|
Printing
expenses**:
|
|
$
|
240,000
|
|
Length
of USOF Offering:
|
|
|
Continuous
|
|
|
* |
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
** |
Through
December 31, 2006, these expenses were paid for by an affiliate
of the
General Partner in connection with the initial public offering.
Following
December 31, 2006, USOF has recorded these expenses.
|
Experience
in Raising and Investing in Funds through September 30, 2007
Dollar
Amount Offered in USNG Offering*:
|
|
$
|
1,500,000,000
|
|
Dollar
Amount Raised in USNG Offering:
|
|
$
|
798,947,000
|
|
Organizational
Expenses in USNG Offering:
|
|
|
|
|
SEC
registration fee**:
|
|
$
|
44,575
|
|
NASD
Registration fee:**
|
|
$ |
75,500 |
|
AMEX
Listing Fee**:
|
|
$
|
5,000
|
|
Auditor’s
fees and expenses**:
|
|
$
|
29,000
|
|
Legal
fees and expenses**:
|
|
$
|
485,926
|
|
Printing
expenses**:
|
|
$
|
40,323
|
|
Length
of USOF Offering:
|
|
|
Continuous |
|
|
* |
Reflects
the offering price per unit set forth on the cover page of the
registration statement registering such units filed with the
SEC.
|
|
** |
These
expenses were paid for by the General Partner.
|
Compensation
to the General Partner and Other Compensation
USOF:
Expenses
Paid by USOF through September 30, 2007 in dollar terms
(unaudited):
Expense
|
|
Amount
in
Dollar
Terms
|
|
Amount
Paid to General Partner in USOF Offering:
|
|
|
4,467,537
|
|
Amount
Paid in Portfolio Brokerage Commissions in USOF offering:
|
|
|
1,429,762
|
|
Other
Amounts Paid in USOF Offering:
|
|
|
1,103,287
|
|
Total
Expenses Paid in USOF Offering:
|
|
|
7,000,586
|
|
Expenses
Paid by USOF through September 30, 2007 as a Percentage of Average Daily Net
Assets (unaudited):
Expenses
in USOF Offering:
|
|
Amount
As a Percentage of
Average
Daily Net Assets
|
General
Partner:
|
|
0.50%
annualized
|
Portfolio
Brokerage Commissions:
|
|
0.16%
annualized
|
Other
Amounts Paid in USOF Offering
|
|
0.12%
annualized
|
Total
Expense Ratio:
|
|
0.78%
annualized
|
USOF
Performance:
|
|
|
Name
of Commodity Pool:
|
|
USOF
|
Type
of Commodity Pool:
|
|
Exchange
traded security
|
Inception
of Trading:
|
|
April
10, 2006
|
Aggregate
Subscriptions (from inception through September 30, 2007):
|
|
$4,618,093,000
|
Total
Net Assets as of September 30, 2007:
|
|
$394,783,637
|
Initial
NAV Per Unit as of Inception:
|
|
$67.39
|
NAV
per Unit as of September 30, 2007:
|
|
$62.66
|
Worst
Monthly Percentage Draw-down:
|
|
September
2006 (11.71%)
|
Worst
Peak-to-Valley Draw-down:
|
|
June
2006-January 2007 (30.60%)
|
USNG:
Expenses
Paid by USNG through September 30, 2007 in dollar terms
(unaudited):
Expense
|
|
Amount
in
Dollar
Terms
|
|
Amount
Paid to General Partner in USNG Offering:
|
|
$
|
445,777
|
|
Amount
Paid in Portfolio Brokerage Commissions in USNG offering:
|
|
$
|
158,534
|
|
Other
Amounts Paid in USNG Offering:
|
|
$
|
97,051
|
|
Total
Expenses Paid in USNG Offering:
|
|
$
|
700,962
|
|
Expenses
Paid by USNG through September 30, 2007 as a Percentage of Average Daily Net
Assets (unaudited):
Expenses
in USNG Offering:
|
|
Amount As a Percentage of
Average Daily Net Assets
|
General
Partner:
|
|
0.60%
annualized
|
Portfolio
Brokerage Commissions:
|
|
0.21%
annualized
|
Other
Amounts Paid in USNG Offering
|
|
0.13%
annualized |
Total
Expense Ratio:
|
|
0.94%
annualized
|
USNG
Performance:
|
|
|
Name
of Commodity Pool:
|
|
USNG
|
Type
of Commodity Pool:
|
|
Exchange
traded security
|
Inception
of Trading:
|
|
April
18, 2007
|
Aggregate
Subscriptions (from inception through September 30, 2007):
|
|
$798,947,000
|
Total
Net Assets as of September 30, 2007:
|
|
$450,909,643
|
Initial
NAV Per Unit as of Inception:
|
|
$67.39
|
NAV
per Unit as of September 30, 2007
|
|
$38.21
|
Worst
Monthly Percentage Draw-down:
|
|
June
2007 (15.90%)
|
Worst
Peak-to-Valley Draw-down:
|
|
April
-August 2007 (34.74%)
|
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Month
|
|
Rates of Return
For the Year 2006
|
|
|
|
|
|
April
|
|
|
3.47
|
%
|
May
|
|
|
(2.91
|
)%
|
June
|
|
|
3.16
|
%
|
July
|
|
|
(0.50
|
)%
|
August
|
|
|
(6.97
|
)%
|
September
|
|
|
(11.71
|
)%
|
October
|
|
|
(8.46
|
)%
|
November
|
|
|
4.73
|
%
|
December
|
|
|
(5.21
|
)%
|
Annual
Rate of Return (since inception through December 31, 2006)
|
|
|
(23.03
|
)%
|
Month
|
|
Rates of Return
For the Year 2007
|
|
|
|
|
|
January
|
|
|
(6.55
|
)%
|
February
|
|
|
5.63
|
)%
|
March
|
|
|
4.61
|
%
|
April
|
|
|
(4.26
|
)%
|
May
|
|
|
(4.91
|
)%
|
June
|
|
|
9.06
|
%
|
July
|
|
|
10.55
|
%
|
August
|
|
|
(4.93
|
)%
|
September
|
|
|
12.11
|
%
|
Annual
Rate of Return (through September 30, 2007)
|
|
|
20.80
|
%
|
COMPOSITE
PERFORMANCE DATA FOR USNG
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Month
|
|
Rates of Return
For the Year 2007
|
|
|
|
|
|
April*
|
|
|
4.30
|
%
|
May
|
|
|
(0.84
|
)%
|
June
|
|
|
(15.90
|
)%
|
July
|
|
|
(9.68
|
)%
|
August
|
|
|
(13.37
|
)%
|
September
|
|
|
12.28
|
%
|
Annual
Rate of Return (through September 30, 2007)
|
|
|
(23.58
|
)%
|
|
*
|
Partial
from April 17, 2007.
|
Draw-down:
Losses experienced over a specified period. Draw-down is measured on the basis
of monthly returns only and does not reflect intra-month figures.
Worst
Monthly Percentage Draw-down: The largest single month loss sustained since
inception of trading.
Worst
Peak-to-Valley Draw-down: The largest percentage decline in the NAV per unit
over the history of a USOF and USNG. 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 Draw-down represents
the
greatest percentage decline from any month-end NAV per unit that occurs without
such month-end NAV per unit being equaled or exceeded as of a subsequent
month-end. For example, if the NAV per unit declined by $1 in each of January
and February, increased by $1 in March and declined again by $2 in April, a
“peak-to-valley drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February drawdown
would have ended as of the end of February at the $2 level.
Nicholas
Gerber, the president and CEO of the General Partner, ran the Marc Stevens
Futures Index Fund over 10 years ago. This fund combined commodity futures
with
equity stock index futures. It was a very small private offering, which had
under $1 million in assets. The Marc Stevens Futures Index Fund was a commodity
pool and Mr. Gerber was the CPO. Ameristock Corporation is an affiliate of
the General Partner and it is a California-based registered investment advisor
registered under the Investment Advisors Act of 1940 that has been sponsoring
and providing portfolio management services to mutual funds since 1995.
Ameristock Corporation is the investment adviser to the Ameristock Mutual Fund,
Inc., a mutual fund registered under the Investment Company Act of 1940 that
focuses on large cap U.S. equities that, as of September 30, 2007, had
approximately $482 million in assets.
How
Does USOF Operate?
The
net
assets of USOF consist primarily of investments in futures contracts for light,
sweet crude oil, but may also consist of other types of crude oil, heating
oil,
gasoline, natural gas and other petroleum-based fuels that are traded on the
New
York Mercantile Exchange, ICE Futures or other U.S. and foreign exchanges
(collectively, “Oil Futures Contracts”). USOF may also invest in other crude
oil-related investments such as cash-settled options on Oil Futures Contracts,
forward contracts for crude oil, and over-the-counter transactions that are
based on the price of crude oil, other petroleum-based fuels, Oil Futures
Contracts and indices based on the foregoing (collectively, “Other Oil
Interests”). For convenience and unless otherwise specified, Oil Futures
Contracts and Other Oil Interests collectively are referred to as “oil
interests” in this prospectus.
USOF
invests in oil interests to the fullest extent possible without being leveraged
or unable to satisfy its current or potential margin or collateral obligations
with respect to its investments in Oil Futures Contracts and Other Oil
Interests. In pursuing this objective, the primary focus of the General Partner,
is the investment in Oil Futures Contracts and the management of its investments
in short-term obligations of the United States of two years or less
(“Treasuries”), cash and/or cash equivalents for margining purposes and as
collateral.
The
investment objective of USOF is to have changes in percentage terms of the
units’ NAV reflect the changes in percentage terms of the spot price of light,
sweet crude oil delivered to Cushing, Oklahoma, as measured by changes in the
price of the futures contract on light, sweet crude oil as traded on the New
York Mercantile Exchange that is the near month contract to expire, except
when
the near month contract is within two weeks of expiration, in which case the
futures contract will be the next month contract to expire. It is not the intent
of USOF to be operated in a fashion such that its NAV will equal, in dollar
terms, the spot price of light, sweet crude oil or any particular futures
contract based on light, sweet crude oil.
USOF
seeks to achieve its investment objective by investing in a mix of Oil Futures
Contracts and Other Oil Interests such that changes in USOF’s NAV will closely
track the changes in the price of a specified Oil Futures Contract (“Benchmark
Oil Futures Contract”). The General Partner believes changes in the price of the
Benchmark Oil Futures Contract historically exhibited a close correlation with
the changes in the spot price of light, sweet crude oil. On any valuation day
(a
valuation day is any day as of which USOF calculates its NAV), the Benchmark
Oil
Futures Contract is the near month contract for light, sweet crude oil traded
on
the New York Mercantile Exchange unless the near month contract will expire
within two weeks of the valuation day, in which case the Benchmark Oil Futures
Contract is the next month contract for light, sweet crude oil traded on the
New
York Mercantile Exchange.
As
a
specific benchmark, the General Partner endeavors to place USOF’s trades in Oil
Futures Contracts and Other Oil Interests and otherwise manage USOF’s
investments so that A will be within plus/minus 10 percent of B,
where:
|
·
|
A
is the average daily change in USOF’s NAV for any period of 30 successive
valuation days; i.e
.,
any day as of which USOF calculates its NAV,
and
|
|
·
|
B
is the average daily change in the price of the Benchmark Oil Futures
Contract over the same period.
|
The
General Partner believes that market arbitrage opportunities cause daily changes
in USOF’s unit price on the American Stock Exchange to closely track daily
changes in USOF’s NAV. The General Partner further believes that the daily
changes in prices of the Benchmark Oil Futures Contract have historically
closely tracked the daily changes in the spot prices of light, sweet crude
oil.
The General Partner believes that the net effect of these two relationships
and
the expected relationship described above between USOF’s NAV and the Benchmark
Oil Futures Contract, will be that the daily changes in the price of USOF’s
units on the American Stock Exchange will closely track the daily changes in
the
spot price of a barrel of light, sweet crude oil, less USOF’s expenses. The
following two graphs demonstrates the correlation between the daily changes
in
the NAV of USOF and the daily changes in the Benchmark Oil Futures Contracts
both since the initial public offering of our units on April 10, 2006 and
for the thirty days ending September 28th,
2007.
An
investment in the units allows both retail and institutional investors to easily
gain exposure to the crude oil market in a cost-effective manner. In addition,
the units also provide additional means for diversifying an investor’s
investments or hedging exposure to changes in crude oil prices.
The
Benchmark Oil Futures Contract will be changed or “rolled” from the near month
contract to expire to the next month to expire during one day.
These
relationships are illustrated in the following diagram:
|
The
Price of USOF’s Units Is Expected to Correlate Closely With USOF’s
NAV
USOF’s
units are traded on the American Stock Exchange. The price of units
fluctuates in response to USOF’s
NAV
and the supply and demand pressures of the Exchange. Because of certain
arbitrage opportunities, the
General
Partner believes the price of USOF’s units traded on the Exchange will
correlate closely with USOF’s
NAV.
|
|
Daily
Changes in USOF’s NAV Are Expected to Correlate Closely With Daily Changes
in the Price of the
Benchmark
Oil Futures Contract
The
General Partner endeavors to invest USOF’s assets as fully as possible in
Oil Futures Contracts and Other Oil
Interests
so that the changes in the NAV closely correlate with changes in
the price
of the Benchmark Oil Futures
Contract.
|
|
Daily
Changes in the Price of the Benchmark Oil Futures Contract Are Expected
to
Correlate closely With
Daily
Changes in the Spot Price of Light, Sweet Crude Oil
The
General Partner believes that changes in the price of the Benchmark
Oil
Futures Contract will closely
correlate
with changes in the cash or spot price of light, sweet crude
oil.
|
The
General Partner employs a “neutral” investment strategy intended to track
changes in the price of the Benchmark Oil Futures Contract regardless of whether
the price goes up or goes down. USOF’s “neutral” investment strategy is designed
to permit investors generally to purchase and sell USOF’s units for the purpose
of investing indirectly in oil in a cost-effective manner, and/or to permit
participants in the oil or other industries to hedge the risk of losses in
their
oil-related transactions. Accordingly, depending on the investment objective
of
an individual investor, the risks generally associated with investing in crude
oil and/or the risks involved in hedging may exist. In addition, an investment
in USOF involves the risk that the changes in the price of USOF’s units will not
accurately track the changes in the Benchmark Oil Futures Contract.
USOF’s
total portfolio composition is disclosed, each business day that the American
Stock Exchange is open for trading, on USOF’s website at
http://www.unitedstatesoilfund.com and through the American Stock Exchange’s
website at http://www.amex.com. The website disclosure of portfolio holdings
is
made daily and includes, as applicable, the name and value of each oil interest,
the specific types of Other Oil Interests and characteristics of such Other
Oil
Interests, Treasuries, and amount of cash and cash equivalents held in USOF’s
portfolio. USOF’s website is publicly accessible at no charge. USOF’s assets are
held in segregation pursuant to Commodity Exchange Act and CFTC
regulations.
The
units
issued by USOF may only be purchased by Authorized Purchasers only in blocks
of
100,000 units called Creation Baskets. The amount of the purchase payment for
a
Creation Basket is equal to the aggregate NAV of units in the Creation Basket.
Similarly, Authorized Purchasers may redeem units only in blocks of 100,000
units called Redemption Baskets. The amount of the redemption proceeds for
a
Redemption Basket is equal to the aggregate NAV of units in the Redemption
Basket. The purchase price for Creation Baskets, and the redemption price for
Redemption Baskets is the actual NAV calculated at the end of the business
day
when notice for a purchase or redemption is received by USOF. The American
Stock
Exchange publishes an approximate NAV intra-day based on the prior day’s NAV and
the current price of Benchmark Oil Futures Contracts, but the basket price
is
determined based on the actual NAV at the end of the day.
While
USOF only issues units in large blocks called Creation Baskets, units may also
be purchased and sold in much smaller increments on the American Stock Exchange.
These transactions, however, are effected at the bid and ask prices established
by specialist firm(s). Like any listed security, units can be purchased and
sold
at any time a secondary market is open.
Graph
A
and Graph B
on the
following page illustrate the historical correlation between the monthly average
spot price of light, sweet crude oil and the monthly average price of futures
contracts for light, sweet crude oil delivered to Cushing, Oklahoma traded
on
the New York Mercantile Exchange. In addition, Graph C illustrates the
historical correlation between the Benchmark Oil Futures Contract and certain
other fuel-based commodity futures contracts in which USOF may
invest.
These
correlations are relevant because the General Partner endeavors to invest USOF’s
assets in Oil Futures Contracts and Other Oil Interests so that daily changes
in
USOF’s NAV correlate as closely as possible with daily changes in the price of
the Benchmark Oil Futures Contract. If certain other fuel-based commodity
futures contracts do not closely correlate with the Oil Futures Contracts than
their use could lead to greater tracking error. As noted, the General Partner
also believes that the changes in price of the Benchmark Oil Futures Contract
will closely correlate with changes in the spot price of light, sweet crude
oil.
Assuming that the units’ value tracks the Benchmark Oil Futures Contract as
intended because of the correlations illustrated by the following charts, the
stated objective of USOF for the units’ NAV to reflect the performance of the
spot price of light, sweet crude oil would be met if the trend reflected over
the past ten years were to continue. However, there is no guarantee that such
trend will continue. To obtain the monthly average prices presented below,
USOF
added the closing prices for every day in each month and then divided that
number by the total number of days in that month.
GRAPH
A
GRAPH
B
GRAPH
C
What
is USOF’s Investment Strategy?
In
managing USOF’s assets the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs
a
quantitative methodology whereby each time a Creation Basket is sold, the
General Partner purchases oil interests, such as an Oil Futures Contract for
light, sweet crude oil traded on the New York Mercantile Exchange, that have
an
aggregate face amount that approximates the amount of Treasuries and/or cash
received from the sale of the Creation Basket.
As
an
example, assume that a Creation Basket purchase order is placed on January
2,
2007. If one were to assume USOF’s closing NAV per unit for January 2 is $63.76,
USOF would receive $6,376,000 for the Creation Basket ($63.76 NAV per unit
times
100,000 units, and ignoring the Creation Basket fee of $1,000). Assume that
the
price of an Oil Futures Contract for light, sweet crude oil on January 3, 2007
is $63,770. Because the price of oil reflected in these Near Month futures
contracts on January 3, 2007 is different (in this case, higher) than the price
of oil reflected in USOF’s NAV calculated as of January 2, 2007 (the day the
corresponding Creation Basket was sold), USOF cannot invest the entire purchase
amount corresponding to the Creation Basket in futures contracts — i.e.,
it can
only invest in 99 Oil Futures Contracts with an aggregate value of $6,313,230
($63,770 per contract times 99 contracts). Assuming a margin requirement equal
to 10% of the value of the Oil Futures Contracts which would require $631,323
in
Treasuries to be deposited as margin with the futures commission merchant
through which the contract was purchased. The remainder of the proceeds from
the
sale of the Creation Basket, $5,744,677, would remain invested
in Treasuries, cash, and/or cash equivalents as determined by the
General Partner from time to time based on factors such as potential calls
for
margin or anticipated redemptions.
The
specific Oil Futures Contracts purchased depends on various factors, including
a
judgment by the General Partner as to the appropriate diversification of USOF’s
investments in futures contracts with respect to the month of expiration, and
the prevailing price volatility of particular contracts. While the General
Partner has made significant investments in New York Mercantile Exchange Oil
Futures Contracts, as USOF reaches certain position limits on the New York
Mercantile Exchange, or for other reasons, it has also and may continue to
invest in Oil Futures Contracts traded on other exchanges or invest in other
Oil
Interests such as contracts in the “over-the-counter” market.
The
General Partner does not anticipate letting its Oil Futures Contracts expire
and
taking delivery of the underlying crude oil. Instead, the General Partner will
close existing positions when it is determined appropriate to do so and reinvest
the proceeds in new Oil Futures Contracts. Positions may also be closed out
to
meet orders for Redemption Baskets.
By
remaining invested as fully as possible in Oil Futures Contracts or Other Oil
Interests, the General Partner believes that the changes in percentage terms
of
USOF’s NAV will continue to closely track the changes in percentage terms in the
prices of the futures contracts in which USOF invests. The General Partner
believes that certain arbitrage opportunities result in the price of the units
traded on the American Stock Exchange closely tracking the NAV of USOF.
Additionally, as discussed above, the General Partner has conducted research
that indicates that oil futures contracts traded on the New York Mercantile
Exchange have closely tracked the spot price of the underlying oil. Based on
these expected interrelationships, the General Partner believes that the changes
in the price of USOF’s units as traded on the American Stock Exchange will
continue to closely track the changes in the spot price of light, sweet crude
oil.
What
are Oil Futures Contracts?
Oil
Futures Contracts are agreements between two parties. One party agrees to buy
crude oil from the other party at a later date at a price and quantity
agreed-upon when the contract is made. Oil Futures Contracts are traded on
futures exchanges, including the New York Mercantile Exchange. For example
the
Benchmark Oil Futures Contract is traded on the New York Mercantile Exchange
in
units of 1,000 barrels. The price of crude oil futures contracts traded on
the
New York Mercantile Exchange are priced by floor brokers and other exchange
members both through an “open outcry” of offers to purchase or sell the
contracts and through an electronic, screen-based system that determines the
price by matching electronically offers to purchase and sell.
Certain
typical and significant characteristics of Oil Futures Contracts are discussed
below. Additional risks of investing in Oil Futures Contracts are included
in
“What are the Risk Factors Involved with an Investment in USOF?”
Impact
of Accountability Levels, Position Limits and Price Fluctuation
Limits.
Futures
contracts include typical and significant characteristics. Most significantly,
the CFTC and U.S. designated contract markets such as the New York Mercantile
Exchange have established accountability levels and position limits on the
maximum net long or net short futures contracts in commodity interests that
any
person or group of persons under common trading control (other than as a hedge,
which an investment in USOF is not) may hold, own or control. The net position
is the difference between an individual or firm’s open long contracts and open
short contracts in any one commodity. In addition, most U.S. futures exchanges,
such as the New York Mercantile Exchange, limit the daily price fluctuation
for
futures contracts.
The
accountability levels for the Benchmark Oil Futures Contract and other Oil
Futures Contracts traded on the New York Mercantile Exchange are not a fixed
ceiling, but rather a threshold above which the New York Mercantile Exchange
may
exercise greater scrutiny and control over an investor’s positions. The current
accountability level for investments at any one time in the Benchmark Oil
Futures Contract is 20,000 contracts. If USOF exceeds this accountability level
for investments in the Benchmark Oil Futures Contract, the New York Mercantile
Exchange will monitor USOF’s exposure and ask for further information on USOF’s
activities including the total size of all positions, investment and trading
strategy, and the extent of USOF’s liquidity resources. If deemed necessary by
the New York Mercantile Exchange, it could also order USOF to reduce its
position back to the accountability level.
If
the
New York Mercantile Exchange orders USOF to reduce its position back to the
accountability level, or to an accountability level that the New York Mercantile
Exchange deems appropriate for USOF, such an accountability level may impact
the
mix of investments in oil interests made by USOF. To illustrate, assume that
the
price of the Benchmark Oil Futures Contract and the unit price of USOF are
each
$10, and that the New York Mercantile Exchange has determined that USOF may
not
own more than 20,000 contracts in Benchmark Oil Futures Contracts. In such
case,
USOF could invest up to $2 billion of its daily net assets in the Benchmark
Oil
Futures Contract (i.e., $10 per contract multiplied by 1,000 (a Benchmark Oil
Futures Contract is a contract for 1,000 barrels oil multiplied by 20,000
contracts)) before reaching the accountability level imposed by the New York
Mercantile Exchange. Once the daily net assets of the portfolio exceed $2
billion in the Benchmark Oil Futures Contract, the portfolio may not be able
to
make any further investments in the Benchmark Oil Futures Contract, depending
on
whether the New York Mercantile Exchange imposes limits. If the New York
Mercantile Exchange does impose limits at the $2 billion level (or another
level), USOF anticipates that it will invest the majority of its assets above
that level in a mix of other Oil Futures Contracts or Other Oil
Interests.
In
addition to accountability levels, the New York Mercantile Exchange imposes
position limits on contracts held in the last few days of trading in the near
month contract to expire. It is unlikely that USOF will run up against such
position limits because USOF’s investment strategy is to change or “roll” from
the near month contract beginning two weeks prior to expiration of the
contract.
U.S.
futures exchanges, including the New York Mercantile Exchange, also limit the
amount of price fluctuation for Oil Futures Contracts. For example, the New
York
Mercantile Exchange imposes a $10.00 per barrel ($10,000 per contract) price
fluctuation limit for Oil Futures Contracts. This limit is initially based
off
the previous trading day’s settlement price. If any Oil Futures Contract is
traded, bid, or offered at the limit for five minutes, trading is halted for
five minutes. When trading resumes it begins at the point where the limit was
imposed and the limit is reset to be $10.00 per barrel in either direction
of
that point. If another halt were triggered, the market would continue to be
expanded by $10.00 per barrel in either direction after each successive
five-minute trading halt. There is no maximum price fluctuation limit during
any
one trading session.
USOF
anticipates that to the extent it invests in Oil Futures Contracts other than
light, sweet crude oil contracts (such as futures contracts for Brent crude
oil,
natural gas, heating oil, and gasoline) and Other Oil Interests, it will invest
in various non-exchange-traded derivative contracts to hedge the short-term
price movements of such Oil Futures Contracts and Other Oil Interests against
the current Benchmark Oil Futures Contract.
Examples
of the position and price limits imposed are as follows:
Futures Contract
|
|
Position Accountability
Levels and Limits
|
|
Maximum Daily
Price Fluctuation
|
|
|
|
|
|
New
York Mercantile Exchange Light, Sweet Crude Oil
|
|
Any
one month/all months: 20,000 net futures, but not to exceed 3,000
contracts in the last three days of trading in the spot
month.
|
|
$10.00
per barrel ($10,000 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading is
halted
for five minutes. When trading resumes, the limit is expanded by
$10.00
per barrel in either direction. If another halt were triggered, the
market
would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There will be no
maximum
price fluctuation limits during any one trading
session.
|
|
|
|
|
|
ICE
Futures Brent Crude Futures
|
|
There
are no position limits.
|
|
There
is no maximum daily price fluctuation limit.
|
|
|
|
|
|
ICE
WTI Crude Futures
|
|
There
are no position limits.
|
|
There
is no maximum daily price fluctuation.
|
|
|
|
|
|
New
York Mercantile Exchange Heating Oil
|
|
Any
one month/all months: 7,000 net futures, but not to exceed 1,000
contracts
in the last three days of trading in the spot month
|
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading is
halted
for five minutes. When trading resumes, the limit is expanded by
$0.25 per
gallon in either direction. If another halt were triggered, the market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no
maximum
price fluctuation limits during any one trading
session.
|
|
|
|
|
|
New
York Mercantile Exchange Gasoline
|
|
Any
one month/all months: 7,000 net futures, but not to exceed 1,000
contracts
in the last three days of trading in the spot month.
|
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading is
halted
for five minutes. When trading resumes, the limit is expanded by
$0.25 per
gallon in either direction. If another halt were triggered, the market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no
maximum
price fluctuation limits during any one trading
session.
|
|
|
|
|
|
New
York Mercantile Exchange Natural Gas
|
|
Any
one month/all months: 12,000 net futures, but not to exceed 1,000
in the
last three days of trading in the spot month.
|
|
$3.00
per mmBtu ($30,000 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading is
halted
for five minutes. When trading resumes, the limit is expanded by
$3.00 per
mmBtu in either direction. If another halt were triggered, the market
would continue to be expanded by $3.00 per mmBtu in either direction
after
each successive five-minute trading halt. There will be no maximum
price
fluctuation limits during any one trading
session.
|
Price
Volatility.
Despite
daily price limits, the price volatility of Oil Futures Contracts generally
has
been historically greater than that for traditional securities such as stocks
and bonds. Price volatility often is greater day-to-day as opposed to intra-day.
Oil Futures Contracts tend to be more volatile than stocks and bonds because
price movements for crude oil are more currently and directly influenced by
economic factors for which current data is available and are traded by crude
oil
futures traders throughout the day. These economic factors include changes
in
interest rates; governmental, agricultural, trade, fiscal, monetary and exchange
control programs and policies; weather and climate conditions; changing supply
and demand relationships; changes in balances of payments and trade; U.S. and
international rates of inflation; currency devaluations and revaluations; U.S.
and international political and economic events; and changes in philosophies
and
emotions of market participants. Because USOF invests a significant portion
of
its assets in Oil Futures Contracts, the assets of USOF, and therefore the
prices of USOF units, may be subject to greater volatility than traditional
securities.
Term
Structure of Crude Oil Futures Prices and the impact on total
returns.
Several
factors determine the total return from investing in a futures contract
position. One factor that impacts the total return that will result in investing
in near month crude oil futures contracts and “rolling” those contracts forward
each month is the price relationship between the current near month contract
and
the next month contract. If the price of near month contract is higher than
the
next month contract (a situation referred to as “backwardation” in the futures
market), then absent any other change there is a tendency for the price of
a
next month contract to rise in value as it becomes the near month contract
and
approaches expiration. Conversely, if the price of a near month contract is
lower than the next month contract (a situation referred to as “contango” in the
futures market), than absent any other change there is a tendency for the price
of a next month contract to decline in value as it becomes near month contract
and approaches expiration.
As
an
example, assume that the price of crude oil for immediate delivery (the “spot”
price), was $50 per barrel, and the value of a position in the near month
futures contract was also $50. Over time the price of the barrel of crude oil
will fluctuate up and down based on a number of market factors, including demand
for oil relative to its supply. The value of the near month contract will
likewise fluctuate up and down in reaction to a number of market factors. If
investors seeks to maintain their holding in a near month contract position
and
not take delivery of the oil, every month they must sell their current near
month as it approaches expiration and invest in the next month
contract.
If
the
futures market is in backwardation, e.g., when the expected price of oil in
the
future would be less, the investor would be buying next month contracts for
a
lower price than the current near month contract. Hypothetically, and assuming
no other changes to either prevailing crude oil prices or the price relationship
between the spot price, the near month contract and the next month contract
(and
ignoring the impact of commission costs and the interest earned on cash), the
value of the next month contract would rise as it approaches expiration and
becomes the new near month contract. In this example, the value of the $50
investment would tend to rise faster than the spot price of crude oil, or fall
slower. As a result, it would be possible in this hypothetical example for
the
price of spot crude oil to have risen to $60 after some period of time, while
the value of the investment in the futures contract will have risen to $65,
assuming backwardation is large enough or enough time has elapsed. Similarly,
the spot price of crude oil could have fallen to $40 while the value of an
investment in the futures contract could have fallen to only $45. Over time
if
backwardation remained constant the difference would continue to
increase.
If
the
futures market is in contango, the investor would be buying next month contracts
for a higher price than the current near month contract. Hypothetically, and
assuming no other changes to either prevailing crude oil prices or the price
relationship between the spot price, the near month contract and the next month
contract (and ignoring the impact of commission costs and the interest earned
on
cash), the value of the next month contract would fall as it approaches
expiration and becomes the new near month contract. In this example, it would
mean that the value of the $50 investment would tend to rise slower than the
spot price of crude oil, or fall faster. As a result, it would be possible
in
this hypothetical example for the price of spot crude oil to have risen to
$60
after some period of time, while the value of the investment in the futures
contract will have risen to only $55, assuming contango is large enough or
enough time has elapsed. Similarly, the spot price of crude oil could have
fallen to $45 while the value of an investment in the futures contract could
have fallen to $50. Over time if contango remained constant the difference
would
continue to increase.
Historically
the futures oil markets have experienced periods of contango and backwardation,
with backwardation being in place more often than contango. During the past
two
years, including 2006, these markets have experienced contango. This has
impacted the total return on an investment in USOF units during the past year
relative to a hypothetical direct investment in crude oil. For example an
investment made in USOF units on April 10 and held to December 31, 2006
decreased, based upon the changes in the closing market prices for USOF units
on
those days, by 23.03%, while the spot price of crude oil for immediate delivery
during the same period decreased 11.18% (note: this comparison ignores the
potential costs associated with physically owning and storing crude oil).
However, the investment objective of USOF is not to have the market price of
its
units match, dollar for dollar, changes in the spot price of oil, or changes
in
the price of the Benchmark Contract. This period of contango did not
meaningfully impact USOF’s investment objective of having percentage changes in
its per unit price track percentage changes in the price of the Benchmark
Contract since the impact of backwardation and contango tended to equally impact
the percentage changes in price of both USOF’s units and the Benchmark Contract.
It is impossible to predict with any degree of certainty whether backwardation
or contango will occur in the future. It is likely that both conditions will
occur during different periods.
Marking-to-Market
Futures Positions.
Oil
Futures Contracts are marked to market at the end of each trading
day and
the
margin required with respect to such contracts is adjusted accordingly. This
process of marking-to-market is designed to prevent losses from accumulating
in
any futures account. Therefore, if USOF’s futures positions have declined in
value, USOF may be required to post additional variation margin to cover this
decline. Alternatively, if USOF futures positions have increased in value,
this
increase will be credited to USOF’s account.
What
is the Crude Oil Market and the Petroleum-Based Fuel
Market?
USOF
may
purchase Oil Futures Contracts traded on the New York Mercantile Exchange that
are based on light, sweet crude oil. It may also purchase contracts on other
exchanges, including the ICE Futures and the Singapore Exchange. The contract
provides for delivery of several grades of domestic and internationally traded
foreign crudes, and, among other things, serves the diverse needs of the
physical market.
Light,
Sweet Crude Oil.
Light,
sweet crudes are preferred by refiners because of their low sulfur content
and
relatively high yields of high-value products such as gasoline, diesel fuel,
heating oil, and jet fuel. The price of light, sweet crude oil has historically
exhibited periods of significant volatility.
Demand
for petroleum products by consumers, as well as agricultural, manufacturing
and
transportation industries, determines demand for crude oil by refiners. Since
the precursors of product demand are linked to economic activity, crude oil
demand will tend to reflect economic conditions. However, other factors such
as
weather also influence product and crude oil demand.
Crude
oil
supply is determined by both economic and political factors. Oil prices (along
with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development
spending, which influence output capacity with a lag. In the short run,
production decisions by OPEC also affect supply and prices. Oil export embargoes
and the current conflict in Iraq represent other routes through which political
developments move the market. It is not possible to predict the aggregate effect
of all or any combination of these factors.
In
Europe, Brent crude oil is the standard for futures contracts traded on the
ICE
Futures, an electronic marketplace for energy trading and price discovery.
Brent
crude oil is the price reference for two-thirds of the world’s traded
oil.
Heating
Oil.
Heating
oil, also known as No. 2 fuel oil, accounts for 25% of the yield of a barrel
of
crude oil, the second largest “cut” from oil after gasoline. The heating oil
futures contract, listed and traded at the New York Mercantile Exchange, trades
in units of 42,000 gallons (1,000 barrels) and is based on delivery in New
York
harbor, the principal cash market center. The price of heating oil has
historically been volatile.
Gasoline.
Gasoline is the largest single volume refined product sold in the U.S. and
accounts for almost half of national oil consumption. The gasoline futures
contract, listed and traded on the New York Mercantile Exchange, trades in
units
of 42,000 gallons (1,000 barrels) and is based on delivery at petroleum products
terminals in the New York harbor, the major East Coast trading center for
imports and domestic shipments from refineries in the New York harbor area
or
from the Gulf Coast refining centers. The price of gasoline has historically
been volatile.
Natural
Gas.
Natural
gas accounts for almost a quarter of U.S. energy consumption. The natural gas
futures contract, listed and traded on the New York Mercantile Exchange, trades
in units of 10,000 million British thermal units and is based on delivery at
the
Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas
pipeline systems that draw supplies from the region’s prolific gas deposits. The
pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the
Midwest, and up to the Canadian border. The price of natural gas has
historically been volatile.
Why
Does USOF Purchase and Sell Oil Futures Contracts?
USOF’s
investment objective is for the changes in percentage terms of the units’ net
asset value to reflect the changes in percentage terms of the Benchmark Oil
Futures Contract, less USOF’s expenses. USOF invests primarily in Oil Futures
Contracts. USOF seeks to have its aggregate NAV approximate at all times the
aggregate face amount of the Oil Futures Contracts (or Other Oil Interests)
it
holds.
Other
than investing in Oil Futures Contracts and Other Oil Interests, USOF may also
invest in assets to support these investments in oil interests. At any given
time, most of USOF’s investments will be in Treasuries, cash and/or cash
equivalents that serve as segregated assets supporting USOF’s positions in Oil
Futures Contracts and Other Oil Interests. For example, the purchase of an
Oil
Futures Contract with a stated value of $10 million would not require USOF
to
pay $10 million upon entering into the contract; rather, only a margin deposit,
generally of 5%-10% of the stated value of the Oil Futures Contract, would
be
required. To secure its Oil Futures Contract obligations, USOF would deposit
the
required margin with the futures commission merchant and would separately hold,
through its Custodian, Treasuries, cash and/or cash equivalents in an amount
equal to the balance of the current market value of the contract, which at
the
contract’s inception would be $10 million minus the amount of the margin
deposit, or $9.5 million (assuming a 5% margin).
As
a
result of the foregoing, approximately 5% to 10% of USOF’s assets are held as
margin in segregated accounts with a futures commission merchant. In addition
to
the Treasuries it posts with the futures commission for the Oil Futures
Contracts it owns, USOF holds through the Custodian Treasuries, cash and/or
cash
equivalents that can be posted as margin or as collateral to support its
over-the-counter contracts. USOF earns interest income from the Treasuries
and
cash equivalents that it purchases, and on the cash it holds through the
Custodian. It anticipates that the earned interest income will increase the
NAV
and limited partners’ capital contribution accounts. USOF reinvests the earned
interest income, hold it in cash, or use it to pay its expenses. If USOF
reinvests the earned interest income, it will make investments that are
consistent with its investment objectives.
What
is the Flow of Units?
What
are the Trading Policies of USOF?
Liquidity
USOF
invests only in Oil Futures Contracts and Other Oil Interests that are traded
in
sufficient volume to permit, in the opinion of the General Partner, ease of
taking and liquidating positions in these financial interests.
Spot
Commodities
While
crude oil contracts traded on the New York Mercantile Exchange can be physically
settled, USOF does not intend to take or make physical delivery. USOF may from
time to time trade in Other Oil Interests, including contracts based on the
spot
price of crude oil.
Leverage
While
USOF’s historical ratio of variation margin to total assets has generally ranged
from 0% to 5%, the General Partner endeavors to have the value of USOF’s
Treasuries, cash and cash equivalents whether held by USOF or posted as margin
or collateral at all times approximate the aggregate face value of its
obligations under USOF’s Oil Futures Contracts and Other Oil
Interests.
Borrowings
Borrowings
are not used by USOF unless USOF is required to borrow money in the event of
physical delivery, USOF trades in cash commodities, or for short-term needs
created by unexpected redemptions. USOF maintains the value of its Treasuries,
cash and cash equivalents, whether held by USOF or posted as margin or
collateral, to at all times approximate the aggregate face value of its
obligations under USOF’s Oil Futures Contracts and Other Oil Interests. USOF has
not established and does not plan to establish credit lines
Over-the-Counter
Derivatives (Including Spreads and Straddles)
In
addition to Oil Futures Contracts, there are also a number of listed options
on
the Oil Futures Contracts on the principal futures exchanges. These contracts
offer investors and hedgors another set of financial vehicles to use in managing
exposure to the crude oil market. Consequently, USOF may purchase options on
crude oil futures contracts on these exchanges in pursuing its investment
objective.
In
addition to the Oil Futures Contracts and options on the Oil Futures Contracts,
there also exists an active non-exchange-traded market in derivatives tied
to
crude oil. These derivatives transactions (also known as over-the-counter
contracts) are usually entered into between two parties. Unlike most of the
exchange-traded Oil Futures Contracts or exchange-traded options on the Oil
Futures Contracts, each party to such contract bears the credit risk that the
other party may not be able to perform its obligations under its
contract.
Some
crude oil-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other crude
oil-based derivatives have highly customized terms and conditions and are not
as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of crude oil- or petroleum-based fuels that
have terms similar to the Oil Futures Contracts. Others take the form of “swaps”
in which the two parties exchange cash flows based on pre-determined formulas
tied to the crude oil spot price, forward crude oil price, the Benchmark Oil
Futures Contract price, or other crude oil futures contract price. For example,
USOF may enter into over-the-counter derivative contracts whose value will
be
tied to changes in the difference between the crude oil spot price, the
Benchmark Oil Futures Contract price, or some other futures contract price
traded on the New York Mercantile Exchange or ICE Futures and the price of
other
Oil Futures Contracts that may be invested in by USOF.
To
protect itself from the credit risk that arises in connection with such
contracts, USOF may enter into agreements with each counterparty that provide
for the netting of its overall exposure to its counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USOF also may require that the counterparty be highly rated and/or provide
collateral or other credit support to address USOF’s exposure to the
counterparty.
USOF
may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Oil
Futures Contract. USOF would use a spread when it chooses to take simultaneous
long and short positions in futures written on the same underlying asset, but
with different delivery months. The effect of holding such combined positions
is
to adjust the sensitivity of USOF to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
USOF would use such a spread if the General Partner felt that taking such long
and short positions, when combined with the rest of its holdings, would more
closely track the investment goals of USOF, or if the General Partner felt
it
would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in crude oil prices. USOF would enter into a
straddle when it chooses to take an option position consisting of a long (or
short) position in both a call option and put option. The economic effect of
holding certain combinations of put options and call options can be very similar
to that of owning the underlying futures contracts. USOF would make use of
such
a straddle approach if, in the opinion of the General Partner, the resulting
combination would more closely track the investment goals of USOF or if it
would
lead to an overall lower cost of trading to achieve a given level of economic
exposure to movements in crude oil prices.
USOF
has
not employed any hedging methods since all of its investments have been made
over an exchange. Therefore, USOF has not been exposed to counterparty
risk.
Pyramiding
USOF
does
not and will not employ the technique, commonly known as pyramiding, in which
the speculator uses unrealized profits on existing positions as variation margin
for the purchase or sale of additional positions in the same or another
commodity interest.
Who
are the Service Providers?
Brown
Brothers Harriman & Co. is the registrar and transfer agent for the units.
Brown Brothers Harriman & Co. is also the custodian for USOF. In this
capacity, Brown Brothers Harriman & Co. holds USOF’s Treasuries, cash
and/or cash equivalents pursuant to a custodial agreement. In addition, Brown
Brothers Harriman & Co. performs certain administrative and accounting
services for USOF and prepares certain SEC and CFTC reports on behalf of USOF.
The General Partner pays Brown Brothers Harriman & Co.’s fees for these
services.
USOF
also
employs ALPS Distributors, Inc. as a Marketing Agent, which is further discussed
under “What is USOF’s Plan of Distribution?” The General Partner pays ALPS
Distributors, Inc.’s fees.
UBS
Securities LLC (“UBS Securities”) is USOF’s futures commission merchant. USOF
and UBS Securities have entered into an Institutional Futures Client Account
Agreement. This Agreement requires UBS Securities to provide services to USOF
in
connection with the purchase and sale of oil interests that may be purchased
or
sold by or through UBS Securities for USOF’s account. USOF pays the fees of UBS
Securities.
The
principal business address of UBS Securities is 677 Washington Blvd, Stamford,
CT 06901. UBS Securities is a futures clearing broker for USOF.
UBS
Securities is registered in the U.S. with the FINRA as a Broker- Dealer and
with
the CFTC as a Futures Commission Merchant. UBS Securities is a member of various
US futures and securities exchanges.
UBS
Securities was involved in the 2003 Global Research Analyst Settlement. This
settlement is part of the global settlement that UBS Securities and nine other
firms have reached with the SEC, FINRA, New York Stock Exchange and various
state regulators. As part of the settlement, UBS Securities has agreed to pay
$80,000,000 divided among retrospective relief, for procurement of independent
research and for investor education. UBS Securities has also undertaken to
adopt
enhanced policies and procedures reasonably designed to address potential
conflicts of interest arising from research practices.
On
June
27, 2007, the Office of the Secretary of the Commonwealth of Massachusetts
filed
an administrative complaint (the “Complaint”) and notice of adjudicatory
proceeding, captioned In The Matter of UBS Securities, LLC, Docket No.
E-2007-0049, which alleges, in sum and substance, that UBS Securities has been
violating the Massachusetts Uniform Securities Act (the “Act”) and related
regulations by providing the advisers for certain hedge funds with gifts and
gratuities in the form of below market office rents, personal loans with below
market interest rates, event tickets, and other perks, in order to induce those
hedge fund advisers to increase or retain their level of prime brokerage fees
paid to UBS Securities. The Secretary seeks to require UBS Securities to
permanently cease and desist from conduct that violates the Act and regulations,
to censure UBS Securities, to require UBS Securities to pay an administrative
fine of an unspecified amount, and to find as fact the allegations of the
Complaint.
Further,
UBS Securities, like most full service investment banks and broker-dealers,
receives inquiries and is sometimes involved in investigations by the SEC,
New
York Stock Exchange and various other regulatory organizations and government
agencies. UBS Securities fully cooperates with the authorities in all such
requests. UBS Securities regularly discloses to FINRA arbitration awards,
disciplinary action and regulatory events. These disclosures are publicly
available on FINRA’s website at www.finra.org.
Actions
with respect to UBS Securities LLC’s futures commission merchant business are
publicly available on the website of the National Futures Association
(http://www.nfa.futures.org/).
UBS
Securities acts only as clearing broker for USOF and as such is paid commissions
for executing and clearing trades on behalf of USOF. UBS Securities has not
passed upon the adequacy or accuracy of this prospectus. UBS Securities neither
acts in any supervisory capacity with respect to the General Partner nor
participates in the management of the General Partner or USOF.
Currently,
the General Partner does not employ commodities trading advisors. If, in the
future, the General Partner does employ commodities trading advisors, it will
choose each advisor based on arms-length negotiations and will consider the
advisor’s experience, fees, and reputation.
Fees
of USOF [UPDATE]
Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*
Service
Provider
|
|
Compensation
Paid by the General Partner
|
|
|
|
Brown
Brothers Harriman & Co., Custodian and Administrator
|
|
A
$25,000 annual fee for its transfer agency services; and for its
custody,
fund accounting and fund administration services, the greater of
a minimum
amount of $125,000 annually or an asset charge of (a) 0.06% for the
first
$500 million of USOF’s net assets, (b) 0.0465% for USOF’s net assets
greater than $500 million but less than $1 billion, and (c) and 0.035%
of
USOF’s net assets that exceed $1 billion.
|
ALPS
Distributors, Inc., Marketing Agent
|
|
425,000
per annum plus an incentive fee as follows: 0.0% on USOF’s assets from
$0-500 million; 0.04% on USOF’s assets from $500 million-$4 billion; 0.03%
on USOF’s assets in excess of $4
billion.
|
*
|
The
General Partner pays this
compensation.
|
Compensation
to the General Partner
USOF
pays
a management fee to the General Partner as follows:
Assets
|
|
Management Fee
|
|
|
|
|
|
First
$1,000,000,000
|
|
|
0.50%
of NAV
|
|
After
the first $1,000,000,000
|
|
|
0.20%
of NAV
|
|
Fees
are
calculated on a daily basis (accrued at 1/365 of the applicable percentage
of
NAV on that day) and paid on a monthly basis.
Fees
and Compensation Arrangements with USOF and Non-Affiliated Service
Providers**
Service
Provider
|
|
Compensation Paid by USOF
|
|
|
|
|
|
UBS
Securities LLC, Futures Commission Merchant
|
|
|
Approximately
$3.50 per buy or sell
|
|
Non-Affiliated
Brokers
|
|
|
Approximately
.16% of assets
|
|
**
|
USOF
pays this compensation.
|
New
York Mercantile Exchange Licensing Fee***
Assets
|
|
Management Fee
|
|
|
|
|
|
First
$1,000,000,000
|
|
|
0.04%
of NAV
|
|
After
the first $1,000,000,000
|
|
|
0.02%
of NAV
|
|
***
Fees
are
calculated on a daily basis (accrued at 1/365 of the applicable percentage
of
NAV on that day) and paid on a monthly basis. USOF is responsible for its pro
rata share of the assets held by USOF, USNG as well as other funds managed
by
the General Partner, including US12OF, US12NG, USHO and USG, when and if such
funds commence operations.
Expenses
Paid by USOF through September 30, 2007 in dollar terms
(unaudited):
Expenses
|
|
Amount in
Dollar Terms
|
|
|
|
|
|
Amount
Paid to General Partner:
|
|
$
|
4,467,537
|
|
Amount
Paid in Portfolio Brokerage Commissions:
|
|
$
|
1,429,762
|
|
Other
Amounts Paid or Accrued:
|
|
$
|
1,103,287
|
|
Total
Expenses Paid or Accrued:
|
|
$
|
7,000,586
|
|
Expenses
Paid by USOF through September 30, 2007 as a Percentage of Average Daily Net
Assets (unaudited)
Expenses
|
|
Amount as a
Percentage
of Average Daily
Net Assets
|
|
|
|
|
|
General
Partner
|
|
|
0.50% annualized
|
|
Portfolio
Brokerage Commissions
|
|
|
0.16% annualized
|
|
Other Amounts
Paid
or Accrued |
|
|
0.12% annualized
|
|
Total
Expense Ratio
|
|
|
0.78% annualized
|
|
Form
of Units
Registered
Form.
Units
are issued in registered form in accordance with the LP Agreement. The
Administrator has been appointed registrar and transfer agent for the purpose
of
transferring units in certificated form. The Administrator keeps a record of
all
holders of the units in the registry (“Register”). The General Partner
recognizes transfers of units in certificated form only if done in accordance
with the LP Agreement. The beneficial interests in such units are held in
book-entry form through participants and/or accountholders in DTC.
Book
Entry.
Individual certificates will not be issued for the units. Instead, units will
be
represented by one or more global certificates, which will be deposited by
the
Administrator with DTC and registered in the name of Cede & Co., as nominee
for DTC. The global certificates will evidence all of the units outstanding
at
any time. Unitholders are limited to (1) participants in DTC such as banks,
brokers, dealers and trust companies (DTC Participants), (2) those who maintain,
either directly or indirectly, a custodial relationship with a DTC Participant
(Indirect Participants), and (3) those banks, brokers, dealers, trust companies
and others who hold interests in the units through DTC Participants or Indirect
Participants, in each case who satisfy the requirements for transfers of units.
DTC participants acting on behalf of investors holding units through such
participants’ accounts in DTC will follow the delivery practice applicable to
securities eligible for DTC’s Same-Day Funds Settlement System. Units will be
credited to DTC Participants’ securities accounts following confirmation of
receipt of payment.
DTC.
DTC is
a limited purpose trust company organized under the laws of the State of New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” register pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (“Exchange Act”). DTC holds securities for DTC
Participants and facilitates the clearance and settlement of transaction between
DTC Participants through electronic book-entry changes in accounts of DTC
Participants.
Transfer
of Units
Transfers
of Units Only Through DTC.
The
units are only transferable through the book-entry system of DTC. Limited
partners who are not DTC Participants may transfer their units through DTC
by
instructing the DTC Participant holding their units (or by instructing the
Indirect Participant or other entity through which their units are held) to
transfer the units. Transfers are made in accordance with standard securities
industry practice.
Transfers
of interests in units with DTC will be made in accordance with the usual rules
and operating procedures of DTC and the nature of the transfer. DTC has
established procedures to facilitate transfers among the participants and/or
accountholders of DTC. Because DTC can only act on behalf of DTC Participants,
who in turn act on behalf of Indirect Participants, the ability of a person
or
entity having an interest in a global certificate to pledge such interest to
persons or entities that do not participate in DTC, or otherwise take actions
in
respect of such interest, may be affected by the lack of a definitive security
in respect of such interest.
DTC
has
advised us that it will take any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate for
exchange) only at the direction of one or more DTC Participants in whose account
with DTC interests in global certificates are credited and only in respect
of
such portion of the aggregate principal amount of the global certificate as
to
which such DTC Participant or Participants has or have given such
direction.
Transfer/Application
Requirements.
All
purchasers of USOF’s units, and potentially any purchasers of limited partner
interests in the future, who wish to become limited partners or other record
holders and receive cash distributions, if any, or have certain other rights,
must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by USOF’s LP Agreement and is eligible to purchase USOF’s securities. Each
purchaser of units offered by this Prospectus must execute a transfer
application and certification. The obligation to provide the form of transfer
application will be imposed on the seller of units or, if a purchase of units
is
made through an exchange, the form may be obtained directly through USOF.
Further, the General Partner may request each record holder to furnish certain
information, including that holder’s nationality, citizenship or other related
status. A record holder is a unitholder that is, or has applied to be, a limited
partner. An investor who is not a U.S. resident may not be eligible to become
a
record holder or one of the USOF’s limited partners if that investor’s ownership
would subject USOF to the risk of cancellation or forfeiture of any of USOF’s
assets under any federal, state or local law or regulation. If the record holder
fails to furnish the information or if the General Partner determines, on the
basis of the information furnished by the holder in response to the request,
that such holder is not qualified to become one of USOF’s limited partners, the
General Partner may be substituted as a holder for the record holder, who will
then be treated as a non-citizen assignee, and USOF will have the right to
redeem those securities held by the record holder.
A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. USOF may, at its discretion, treat
the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.
A
person
purchasing USOF’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the General
Partner obtained, our units will be securities and will be transferable
according to the laws governing transfers of securities.
Any
transfer of units will not be recorded by the transfer agent or recognized
by
the General Partner unless a completed transfer application is delivered to
the
General Partner or the Administrator. When acquiring units, the transferee
of
such units that completes a transfer application will:
|
·
|
be
an assignee until admitted as a substituted limited partner upon
the
consent and sole discretion of the General Partner and the recording
of
the assignment on the books and records of the
partnership;
|
|
·
|
automatically
request admission as a substituted limited
partner;
|
|
·
|
agree
to be bound by the terms and conditions of, and execute, our LP
Agreement;
|
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represent
that such transferee has the capacity and authority to enter into
our LP
Agreement;
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grant
powers of attorney to our General Partner and any liquidator of us;
and
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make
the consents and waivers contained in our LP
Agreement.
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An
assignee will become a limited partner in respect of the transferred units
upon
the consent of our General Partner and the recordation of the name of the
assignee on our books and records. Such consent may be withheld in the sole
discretion of our General Partner.
If
consent of the General Partner is withheld such transferee shall be an assignee.
An assignee shall have an interest in the partnership equivalent to that of
a
limited partner with respect to allocations and distributions, including,
without limitation, liquidating distributions, of the partnership. With respect
to voting rights attributable to units that are held by assignees, the General
Partner shall be deemed to be the limited partner with respect thereto and
shall, in exercising the voting rights in respect of such units on any matter,
vote such units at the written direction of the assignee who is the recordholder
of such units. If no such written direction is received, such units will not
be
voted. An assignee shall have no other rights of a limited partner.
Until
a
unit has been transferred on our books, we and the transfer agent may treat
the
record holder of the unit as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations.
Withdrawal
of Limited Partners
As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal of
all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited partner’s
ownership of units would result in the violation of any law or regulations
applicable to the partnership or a partner. In these circumstances, the General
Partner without notice may require the withdrawal at any time, or retroactively.
The limited partner thus designated shall withdraw from the partnership or
withdraw that portion of its partner capital account specified, as the case
may
be, as of the close of business on such date as determined by the General
Partner. The limited partner thus designated shall be deemed to have withdrawn
from the partnership or to have made a partial withdrawal from its partner
capital account, as the case may be, without further action on the part of
the
limited partner and the provisions of the LP Agreement shall apply.
What
is the Plan of Distribution?
Buying
and Selling Units
Most
investors buy and sell units of USOF in secondary market transactions through
brokers. Units trade on the American Stock Exchange under the ticker symbol
“USO.” Units are bought and sold throughout the trading day like other publicly
traded securities. When buying or selling units through a broker, most investors
incur customary brokerage commissions and charges. Investors are encouraged
to
review the terms of their brokerage account for details on applicable
charges.
Marketing
Agent and Authorized Purchasers
The
offering of USOF’s units is a best efforts offering. USOF is continuously
offering Creation Baskets consisting of 100,000 units through the Marketing
Agent, to Authorized Purchasers. KV Execution Services, LLC was the initial
Authorized Purchaser. The initial Authorized Purchaser purchased the initial
Creation Basket of 100,000 units at USOF’s NAV on April 10, 2006. All Authorized
Purchasers pay a $1,000 fee for the creation of Creation Baskets. The Marketing
Agent receives, for its services as marketing agent to USOF, a marketing fee
$425,000 per annum plus an incentive fee as follows: 0.0% on USOF’s assets from
$0-500 million; .04% on USOF’s assets from $500 million-$4 billion; .03% on
USOF’s assets in excess of $4 billion; provided, however, that in no event may
the aggregate compensation paid to the Marketing Agent and any affiliate of
the
General Partner for distribution-related services in connection with this
offering of Units exceed ten percent (10%) of the gross proceeds of this
offering.
Kathryn
D. Rooney, a registered representative of the Marketing Agent, solicits orders,
customers and customer funds in connection with the offering of the Units.
Ms. Rooney is also the Director of Business Development for Ameristock
Corporation, an affiliate of the General Partner, and is not an employee of
the
General Partner. As a consequence, she receives no compensation from the General
Partner even though she is designated as the Marketing Manager of USOF. Any
compensation she receives for her efforts on behalf of USOF is paid by the
Marketing Agent. Previously, she worked at ALPS Mutual Fund Services, Inc.
as a
National Sales Director. She is also registered with the NFA as an Associated
Person of the General Partner.
The
offering of baskets is being made in compliance with Conduct Rule 2810 of FINRA.
Accordingly, Authorized Purchasers will not make any sales to any account over
which they have discretionary authority without the prior written approval
of a
purchaser of units.
The
per
unit price of units offered in Creation Baskets on any subsequent day will
be
the total NAV of USOF calculated shortly after the close of the American Stock
Exchange on that day divided by the number of issued and outstanding units.
An
Authorized Purchaser is not required to sell any specific number or dollar
amount of units.
By
executing an Authorized Purchaser Agreement, an Authorized Purchaser becomes
part of the group of parties eligible to purchase baskets from, and put baskets
for redemption to, USOF. An Authorized Purchaser is under no obligation to
create or redeem baskets, and an Authorized Purchaser is under no obligation
to
offer to the public units of any baskets it does create.
A
list of
Authorized Purchasers is available from the Marketing Agent and can be found
on
our website at www.unitedstatesoilfund.com. Because new units can be created
and
issued on an ongoing basis, at any point during the life of USOF, a
“distribution”, as such term is used in the 1933 Act, will be occurring.
Authorized Purchasers, other broker-dealers and other persons are cautioned
that
some of their activities may result in their being deemed participants in a
distribution in a manner that would render them statutory underwriters and
subject them to the prospectus-delivery and liability provisions of the 1933
Act. Authorized Purchasers will comply with the prospectus-delivery requirements
in connection with the sale of units to customers. For example, an Authorized
Purchaser, other broker-dealer firm or its client will be deemed a statutory
underwriter if it purchases a basket from USOF, breaks the basket down into
the
constituent units and sells the units to its customers; or if it chooses to
couple the creation of a supply of new units with an active selling effort
involving solicitation of secondary market demand for the units. Authorized
Purchasers may also engage in secondary market transactions in units that would
not be deemed “underwriting”. For example, an Authorized Purchaser may act in
the capacity of a broker or dealer with respect to units that were previously
distributed by other Authorized Purchasers. A determination of whether a
particular market participant is an underwriter must take into account all
the
facts and circumstances pertaining to the activities of the broker-dealer or
its
client in the particular case, and the examples mentioned above should not
be
considered a complete description of all the activities that would lead to
designation as an underwriter and subject them to the prospectus-delivery and
liability provisions of the 1933 Act.
Dealers
who are neither Authorized Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with units that are part of an “unsold
allotment” within the meaning of Section 4 (3)(C)
of
the 1933 Act, would be unable to take advantage of the prospectus-delivery
exemption provided by Section 4(3) of the 1933 Act.
The
General Partner may qualify the units in states selected by the General Partner
and intends that sales be made through broker-dealers who are members of FINRA.
Investors intending to create or redeem baskets through Authorized Purchasers
in
transactions not involving a broker-dealer registered in such investor’s state
of domicile or residence should consult their legal advisor regarding applicable
broker-dealer or securities regulatory requirements under the state securities
laws prior to such creation or redemption.
While
the
Authorized Purchasers may be indemnified by the General Partner, they will
not
be entitled to receive a discount or commission from USOF for their purchases
of
Creation Baskets. The difference between the price paid by Authorized Purchasers
as underwriters and the price paid to such Authorized Purchasers by investors
will be deemed underwriting compensation.
Calculating
NAV
USOF’s
NAV is calculated by:
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Taking
the current market value of its total
assets
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Subtracting
any liabilities
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The
Administrator calculates the NAV of USOF once each trading day. The NAV for
a
particular trading day is released after 4:15 p.m. New York time. It calculates
NAV as of the earlier of the close of the New York Stock Exchange or 4:00 p.m.
New York time. Trading on the American Stock Exchange typically closes at 4:15
p.m. New York time. USOF uses the New York Mercantile Exchange closing price
(determined at the earlier of the close of that exchange or 2:30 p.m. New York
time) for the contracts held on the New York Mercantile Exchange, but calculates
or determines the value of all other USOF investments as of the earlier of
the
close of the New York Stock Exchange or 4:00 p.m. New York time.
In
addition, in order to provide updated information relating to USOF for use
by
investors and market professionals, the American Stock Exchange calculates
and
disseminates throughout the trading day an updated indicative fund value. The
indicative fund value is calculated by using the prior day’s closing NAV per
unit of USOF as a base and updating that value throughout the trading day to
reflect changes in the most recently reported trade price for the active light,
sweet Oil Futures Contract on the New York Mercantile Exchange. The prices
reported for the active Oil Futures Contract month are adjusted based on the
prior day’s spread differential between settlement values for that contract and
the spot month contract. In the event that the spot month contract is also
the
active contract, the last sale price for the active contract is not adjusted.
The indicative fund value unit basis disseminated during American Stock Exchange
trading hours should not be viewed as an actual real time update of the NAV,
because NAV is calculated only once at the end of each trading day.
The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular American Stock Exchange trading hours of 9:30 a.m. New York
time
to 4:15 p.m. New York time. The normal trading hours of the New York Mercantile
Exchange are 10:00 a.m. New York time to 2:30 p.m. New York time. This means
that there is a gap in time at the beginning and the end of each day during
which USOF’s units are traded on the American Stock Exchange, but real-time New
York Mercantile Exchange trading prices for oil futures contracts traded on
such
Exchange are not available. As a result, during those gaps there will be no
update to the indicative fund value.
The
American Stock Exchange disseminates the indicative fund value through the
facilities of CTA/CQ High Speed Lines. In addition, the indicative fund value
is
published on the American Stock Exchange’s website and is available through
on-line information services such as Bloomberg and Reuters.
Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of USOF units on the American
Stock
Exchange. Investors and market professionals are able throughout the trading
day
to compare the market price of USOF and the indicative fund value. If the market
price of USOF units diverges significantly from the indicative fund value,
market professionals will have an incentive to execute arbitrage trades. For
example, if USOF appears to be trading at a discount compared to the indicative
fund value, a market professional could buy USOF units on the American Stock
Exchange and sell short oil future contracts. Such arbitrage trades can tighten
the tracking between the market price of USOF and the indicative fund value
and
thus can be beneficial to all market participants.
In
addition, other Oil Futures Contracts, Other Oil Interests and Treasuries held
by USOF are valued by the Administrator, using rates and points received from
client approved third party vendors (such as Reuters and WM Company) and advisor
quotes. These investments are not included in the indicative value. The
indicative fund value is based on the prior day’s NAV and moves up and down
solely according to changes in Near Month Oil Futures Contracts for light,
sweet
oil crude traded on the New York Mercantile Exchange.
Creation
and Redemption of Units
USOF
creates and redeems units from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets are only
made in exchange for delivery to USOF or the distribution by USOF of the amount
of Treasuries and any cash represented by the baskets being created or redeemed,
the amount of which is based on the combined NAV of the number of units included
in the baskets being created or redeemed determined as of 4:00 p.m. New York
time on the day the order to create or redeem baskets is properly
received.
Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery
of
the Treasuries and any cash required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached thereto
may
be amended by USOF, without the consent of any limited partner or unitholder
or
Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000
to
USOF for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with USOF in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of
any
kind from either USOF or the General Partner, and no such person will have
any
obligation or responsibility to the General Partner or USOF to effect any sale
or resale of units.
Certain
Authorized Purchasers are expected to have the facility
to
participate directly in the physical crude oil market and the crude oil futures
market. In some cases, an Authorized Purchaser or its affiliates may from time
to time acquire crude oil or sell crude oil and may profit in these instances.
The General Partner believes that the size and operation of the crude oil market
make it unlikely that an Authorized Purchaser’s direct activities in the crude
oil or securities markets will impact the price of crude oil, Oil Futures
Contracts, or the price of the units.
Each
Authorized Purchaser is required to be registered as a broker-dealer under
the
Exchange Act and is a member in good standing with FINRA, or exempt from being
or otherwise not required to be licensed as a broker-dealer or a member of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate
in
light of its own regulatory regime.
Under
the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify
the
Authorized Purchasers against certain liabilities, including liabilities under
the Securities Act, and to contribute to the payments the Authorized Purchasers
may be required to make in respect of those liabilities.
The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is attached as an exhibit to the registration
statement of which this Prospectus is a part.
Creation
Procedures
On
any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the American Stock Exchange, the New York Mercantile Exchange or the New York
Stock Exchange is closed for regular trading. Purchase orders must be placed
by
12:00 p.m. New York time or the close of regular trading on the New York Stock
Exchange, whichever is earlier; except in the case of the initial Authorized
Purchaser’s or any other Authorized Purchaser’s initial order to purchase one or
more Creation Baskets on the first day the baskets are to be offered and sold,
when such orders shall be placed by 9:00 a.m. New York time on the day agreed
to
by the General Partner and the initial Authorized Purchaser. The day on which
the Marketing Agent receives a valid purchase order is the purchase order
date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries
with USOF, or a combination of Treasuries and cash, as described below. Prior
to
the delivery of baskets for a purchase order, the Authorized Purchaser must
also
have wired to the Custodian the non-refundable transaction fee due for the
purchase order. Authorized Purchasers may not withdraw a creation
request.
Determination
of Required Deposits
The
total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasuries and/or cash that is in the same proportion to the total assets
of
USOF (net of estimated accrued but unpaid fees, expenses and other liabilities)
on the date the order to purchase is accepted as the number of units to be
created under the purchase order is in proportion to the total number of units
outstanding on the date the order is received. The General Partner determines,
directly in its sole discretion or in consultation with the Administrator,
the
requirements for Treasuries and the amount of cash, including the maximum
permitted remaining maturity of a Treasury and proportions of Treasury and
cash
that may be included in deposits to create baskets. The Marketing Agent
publishes such requirements at the beginning of each business day. The amount
of
cash deposit required is the difference between the aggregate market value
of
the Treasuries required to be included in a Creation Basket Deposit as of 4:00
p.m. New York time on the date the order to purchase is properly received and
the total required deposit.
Delivery
of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for transferring
to USOF’s account with the Custodian the required amount of Treasuries and cash
by the end of the third business day following the purchase order date. Upon
receipt of the deposit amount, the Administrator directs DTC to credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk of delivery
and ownership of Treasuries until such Treasuries have been received by the
Custodian on behalf of USOF shall be borne solely by the Authorized
Purchaser.
Because
orders to purchase baskets must be placed by 12:00 p.m., New York time, but
the
total payment required to create a basket during the continuous offering period
will not be determined until 4:00 p.m., New York time, on the date the purchase
order is received, Authorized Purchasers will not know the total amount of
the
payment required to create a basket at the time they submit an irrevocable
purchase order for the basket. USOF’s NAV and the total amount of the payment
required to create a basket could rise or fall substantially between the time
an
irrevocable purchase order is submitted and the time the amount of the purchase
price in respect thereof is determined.
Rejection
of Purchase Orders
The
General Partner acting by itself or through the Marketing Agent may reject
a
purchase order or a Creation Basket Deposit if:
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it
determines that the investment alternative available to USOF at that
time
will not enable it to meet its investment
objective;
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it
determines that the purchase order or the Creation Basket Deposit
is not
in proper form;
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it
believes that the purchase order or the Creation Basket Deposit would
have
adverse tax consequences to USOF or its
unitholders;
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the
acceptance or receipt of the Creation Basket Deposit would, in the
opinion
of counsel to the General Partner, be unlawful;
or
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circumstances
outside the control of the General Partner, Marketing Agent or Custodian
make it, for all practical purposes, not feasible to process creations
of
baskets.
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None
of
the General Partner, Marketing Agent or Custodian will be liable for the
rejection of any purchase order or Creation Basket Deposit.
Redemption
Procedures
The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the Marketing Agent to redeem
one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York time
or
the close of regular trading on the New York Stock Exchange, whichever is
earlier. A redemption order so received will be effective on the date it is
received in satisfactory form by the Marketing Agent. The redemption procedures
allow Authorized Purchasers to redeem baskets and do not entitle an individual
unitholder to redeem any units in an amount less than a Redemption Basket,
or to
redeem baskets other than through an Authorized Purchaser. By placing a
redemption order, an Authorized Purchaser agrees to deliver the baskets to
be
redeemed through DTC’s book-entry system to USOF not later than 3:00 p.m. New
York time on the third business day following the effective date of the
redemption order. Prior to the delivery of the redemption distribution for
a
redemption order, the Authorized Purchaser must also have wired to USOF’s
account at the Custodian the non-refundable transaction fee due for the
redemption order. Authorized Purchasers may not withdraw a redemption
request.
Determination
of Redemption Distribution
The
redemption distribution from USOF consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and cash that is in the same
proportion to the total assets of USOF (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the date the order to redeem is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the date
the
order is received. The General Partner, directly or in consultation with the
Administrator, determines the requirements for Treasuries and the amounts of
cash, including the maximum permitted remaining maturity of a Treasury, and
the
proportions of Treasuries and cash that may be included in distributions to
redeem baskets. The Marketing Agent publishes such requirements as of 4:00
p.m.
New York time on the redemption order date.
Delivery
of Redemption Distribution
The
redemption distribution due from USOF will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following the
redemption order date if, by 3:00 p.m. New York time on such third business
day,
USOF’s DTC account has been credited with the baskets to be redeemed. If USOF’s
DTC account has not been credited with all of the baskets to be redeemed by
such
time, the redemption distribution will be delivered to the extent of whole
baskets received. Any remainder of the redemption distribution will be delivered
on the next business day to the extent of remaining whole baskets received
if
USOF receives the fee applicable to the extension of the redemption distribution
date which the General Partner may, from time to time, determine and the
remaining baskets to be redeemed are credited to USOF’s DTC account by 3:00 p.m.
New York time on such next business day. Any further outstanding amount of
the
redemption order shall be cancelled. Pursuant to information from the General
Partner, the Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are not credited
to
USOF’s DTC account by 3:00 p.m. New York time on the third business day
following the redemption order date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the General Partner may from time to time
determine.
Suspension
or Rejection of Redemption Orders
The
General Partner may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during which the
American Stock Exchange or the New York Mercantile Exchange is closed other
than
customary weekend or holiday closings, or trading on the American Stock Exchange
or the New York Mercantile Exchange is suspended or restricted, (2) for any
period during which an emergency exists as a result of which delivery, disposal
or evaluation of Treasuries is not reasonably practicable, or (3) for such
other
period as the General Partner determines to be necessary for the protection
of
the limited partners. None of the General Partner, the Marketing Agent, the
Administrator, or the Custodian will be liable to any person or in any way
for
any loss or damages that may result from any such suspension or
postponement.
The
General Partner will reject a redemption order if the order is not in proper
form as described in the Authorized Purchaser Agreement or if the fulfillment
of
the order, in the opinion of its counsel, might be unlawful.
Creation
and Redemption Transaction Fee
To
compensate USOF for its expenses in connection with the creation and redemption
of baskets, an Authorized Purchaser is required to pay a transaction fee to
USOF
of $1,000 per order to create or redeem baskets. An order may include multiple
baskets. The transaction fee may be reduced, increased or otherwise changed
by
the General Partner. The General Partner shall notify DTC of any change in
the
transaction fee and will not implement any increase in the fee for the
redemption of baskets until 30 days after the date of the notice.
Tax
Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such
tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and USOF if they are required by law to pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.
Secondary
Market Transactions
As
noted,
USOF will create and redeem units from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
will only be made in exchange for delivery to USOF or the distribution by USOF
of the amount of Treasuries and cash represented by the baskets being created
or
redeemed, the amount of which will be based on the aggregate NAV of the number
of units included in the baskets being created or redeemed determined on the
day
the order to create or redeem baskets is properly received.
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under
no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the American Stock
Exchange, the NAV of USOF at the time the Authorized Purchaser purchased the
Creation Baskets and the NAV of the units at the time of the offer of the units
to the public, the supply of and demand for units at the time of sale, and
the
liquidity of the Oil Futures Contract market and the market for Other Oil
Interests. The prices of units offered by Authorized Purchasers are expected
to
fall between USOF’s NAV and the trading price of the units on the American Stock
Exchange at the time of sale. Units initially comprising the same basket but
offered by Authorized Purchasers to the public at different times may have
different offering prices. An order for one or more baskets may be placed by
an
Authorized Purchaser on behalf of multiple clients. Authorized Purchasers who
make deposits with USOF in exchange for baskets receive no fees, commissions
or
other form of compensation or inducement of any kind from either USOF or the
General Partner, and no such person has any obligation or responsibility to
the
General Partner or USOF to effect any sale or resale of units. Units are
expected to trade in the secondary market on the American Stock Exchange. Units
may trade in the secondary market at prices that are lower or higher relative
to
their NAV per unit. The amount of the discount or premium in the trading price
relative to the NAV per unit may be influenced by various factors, including
the
number of investors who seek to purchase or sell units in the secondary market
and the liquidity of the Oil Futures Contracts market and the market for Other
Oil Interests. While the units trade on the American Stock Exchange until 4:15
p.m. New York time, liquidity in the market for Oil Futures Contracts and Other
Oil Interests may be reduced after the close of the New York Mercantile Exchange
at 2:30 p.m. New York time. As a result, during this time, trading spreads,
and
the resulting premium or discount, on the units may widen.
Use
of Proceeds
The
General Partner applies substantially all of USOF’s assets toward trading in Oil
Futures Contracts and other Oil Interests and investments in Treasuries, cash
and/or cash equivalents. The General Partner has sole authority to determine
the
percentage of assets that are:
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held
on deposit with the futures commission merchant or other custodian;
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used
for other investments, and
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held
in bank accounts to pay current obligations and as
reserves.
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The
General Partner deposits substantially all of USOF’s net assets with the
Custodian or other custodian. When USOF purchases an Oil Futures Contract and
certain exchange traded Other Oil Interests, USOF is also required to deposit
with the futures commission merchant on behalf of the exchange a portion of
the
value of the contract or other interest as security to ensure payment for the
obligation under oil interests at maturity. This deposit is known as “margin.”
USOF invests the remainder of its assets equal to the difference between the
margin deposited and the face value of the futures contract in Treasuries,
cash
and/or cash equivalents.
The
General Partner believes that all entities that hold or trade USOF’s assets are
based in the United States and will be subject to United States
regulations.
Approximately
5% to 10% of USOF’s assets are normally committed as margin for commodity
futures contracts. However, from time to time, the percentage of assets
committed as margin may be substantially more, or less, than such range. The
General Partner invests the balance of USOF’s assets not invested in oil
interests or held in margin as reserves to be available for changes in margin.
All interest income is used for USOF’s benefit.
The
futures commission merchant, a government agency or a commodity exchange could
increase margins applicable to USOF to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions taken.
USOF’s
assets are held in segregation pursuant to the Commodity Exchange Act and CFTC
regulations.
Limited
Partnership Agreement
The
following paragraphs are a summary of certain provisions of our LP Agreement.
The following discussion is qualified in its entirety by reference to our LP
Agreement.
Authority
of the General Partner
Our
General Partner is generally authorized to perform all acts deemed necessary
to
carry out these purposes and to conduct our business. Our partnership existence
will continue into perpetuity, until terminated in accordance with our LP
Agreement. Our General Partner has a power of attorney to take certain actions,
including the execution and filing of documents, on our behalf and with respect
to our LP Agreement. However, our partnership agreement limits the authority
of
our General Partner as follows:
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Other
than in connection with the issuance or redemption of units, or upon
termination of the partnership as contemplated by the LP Agreement,
the
General Partner may not sell, exchange or otherwise dispose of all
or
substantially all of the partnership’s assets in a single transaction or a
series of related transactions (including by way of merger, consolidation
or other combination with any other person) or approve on behalf
of the
partnership, the sale, exchange or other disposition of all or
substantially all of the assets of all of the partnership, taken
as a
whole, without the approval of at least a majority of the limited
partners; provided, however, that this provision shall not preclude
or
limit the General Partner’s ability to mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the partnership’s
assets and shall not apply to any forced sale of any or all of the
partnership’s assets pursuant to the foreclosure of, or other realization
upon, any such encumbrance.
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The
General Partner is not authorized to institute or initiate on behalf
of,
or otherwise cause, the partnership to (a) make a general assignment
for
the benefit of creditors; (b) file a voluntary bankruptcy petition;
or (c)
file a petition seeking for the partnership a reorganization, arrangement,
composition, readjustment liquidation, dissolution or similar relief
under
any law.
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The
General Partner may not, without written approval of the specific
act by
all of the limited partners or by other written instrument executed
and
delivered by all of the limited partners subsequent to the date of
the LP
Agreement, take any action in contravention of the LP Agreement,
including, without limitation, (i) any act that would make it impossible
to carry on the ordinary business of the partnership, except as otherwise
provided in the LP Agreement; (ii) possess partnership property,
or assign
any rights in specific partnership property, for other than a partnership
purpose; (iii) admit a person as a partner, except as otherwise provided
in the LP Agreement; (iv) amend the LP Agreement in any manner, except
as
otherwise provided in the LP Agreement or applicable law; or (v)
transfer
its interest as General Partner of the partnership, except as otherwise
provided in the LP Agreement.
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In
general, unless approved by a majority of the limited partners, our
General Partner shall not take any action, or refuse to take any
reasonable action, the effect of which would be to cause us, to the
extent
it would materially and adversely affect limited partners, to be
taxable
as a corporation or to be treated as an association taxable as a
corporation for federal income tax
purposes.
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Withdrawal
or Removal of Our General Partner
The
General Partner shall be deemed to have withdrawn from the partnership upon
the
occurrence of any one of the following events:
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the
General Partner voluntarily withdraws from the partnership by giving
written notice to the other
partners;
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the
General Partner transfers all of its rights as General
Partner;
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the
General Partner is removed;
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the
General Partner (A) makes a general assignment for the benefit of
creditors; (B) files a voluntary bankruptcy petition; (C) files a
petition
or answer seeking for itself a reorganization, arrangement, composition,
readjustment liquidation, dissolution or similar relief under any
law; (D)
files an answer or other pleading admitting or failing to contest
the
material allegations of a petition filed against the General Partner
in a
proceeding of the type described in clauses (A) - (C) of this sentence;
or
(E) seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator of the General Partner or of all or any substantial
part of its properties;
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a
final and non-appealable judgment is entered by a court with appropriate
jurisdiction ruling that the General Partner is bankrupt or insolvent
or a
final and non-appealable order for relief is entered by a court with
appropriate jurisdiction against the General Partner, in each case
under
any federal or state bankruptcy or insolvency laws as now or hereafter
in
effect; or
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a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General
Partner
of revocation of its charter without a reinstatement of its charter,
under
the laws of its state of
incorporation.
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The
General Partner may be removed with or without cause if such removal is approved
by at least 66 2/3% of the units (excluding for this purpose units held by
the
General Partner and its affiliates).
Meetings
All
acts
of the limited partners should be done in accordance with the Delaware Revised
Uniform Limited Partnership Act (“DRULPA”). Upon the written request of 20% or
more in interest of the limited partners, the General Partner may, but is not
required to, call a meeting of the limited partners. Notice of such meeting
shall be given within 30 days after, and the meeting shall be held within 60
days after, receipt of such request. The General Partner may also call a meeting
not less than 20 and not more than 60 days prior to the meeting. Any such notice
shall state briefly the purpose of the meeting, which shall be held at a
reasonable time and place. Any limited partner may obtain a list of names,
addresses, and interests of the limited partners upon written request to the
General Partner.
Limited
Liability
Assuming
that a limited partner does not take part in the control of our business, and
that he otherwise acts in conformity with the provisions of our LP Agreement,
his liability under Delaware law will be limited, subject to certain possible
exceptions, generally to the amount of capital he is obligated to contribute
to
us in respect of his units or other limited partner interests plus his share
of
any of our undistributed profits and assets. In light of the fact that a limited
partner’s liability may extend beyond his capital contributions, a limited
partner may lose more money than he contributed.
Under
Delaware law, a limited partner might be held liable for USOF’s obligations as
if it were a General Partner if the limited partner participates in the control
of the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
Under
the
LP Agreement, a limited partner is not liable for assessments in addition to
its
initial capital investment in any of USOF’s capital securities representing
limited partnership interests. However, a limited partner still may be required
to repay to USOF any amounts wrongfully returned or distributed to it under
some
circumstances. Under Delaware law, USOF may not make a distribution to limited
partners if the distribution causes USOF’s liabilities (other than liabilities
to partners on account of their partnership interests and nonrecourse
liabilities) to exceed the fair value of USOF’s assets. Delaware law provides
that a limited partner who receives such a distribution and knew at the time
of
the distribution that the distribution violated the law will be liable to the
limited partnership for the amount of the distribution for three years from
the
date of the distribution.
The
General Partner Has Conflicts of Interest
There
are
present and potential future conflicts of interest in USOF’s structure and
operation you should consider before you purchase units. The General Partner
will use this notice of conflicts as a defense against any claim or other
proceeding made.
The
General Partner’s officers, directors and employees, do not devote their time
exclusively to USOF. These persons are directors, officers or employees of
other
entities which may compete with USOF for their services. They could have a
conflict between their responsibilities to USOF and to those other entities.
The
General Partner believes that it has sufficient personnel, time, and working
capital to discharge its responsibilities in a fair manner and that these
persons’ conflicts should not impair their ability to provide services to
USOF.
The
General Partner’s principals, officers, directors and employees may trade
futures and related contracts for their own account. Limited partners and other
unitholders will not be permitted to inspect the trading records of the
principals. A conflict of interest may exist if their trades are in the same
markets and at the same time as USOF trades using the clearing broker to be
used
by USOF. A potential conflict also may occur when the General Partner’s
principals trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by USOF. The
General Partner has adopted a Code of Ethics to ensure that the officers,
directors, and employees of the General Partner and its affiliates do not engage
in trades that will harm the fund or the unitholders. The Code of Ethics may
be
found on USOF’s website at www.unitedstatesoilfund.com.
The
General Partner has sole current authority to manage the investments and
operations of USOF, and this may allow it to act in a way that furthers its
own
interests which may create a conflict with your best interests. Limited partners
have limited voting control, which will limit the ability to influence matters
such as amendment of the LP Agreement, change in USOF’s basic investment policy,
dissolution of this fund, or the sale or distribution of USOF’s
assets.
The
General Partner serves as the general partner to both USNG and USOF. In
addition, the General Partner will serve as the general partner for USHO, USG,
US12OF and US12NG, if such other funds offer their securities to the public
or
begin operations. The General Partner may have a conflict to the extent that
its
trading decisions for USOF may be influenced by the effect they would have
on
the other funds it manages. In addition, the General Partner is required to
indemnify the officers and directors of USNG, if the need for indemnification
arises. This potential indemnification will cause the General Partner’s assets
to decrease. If the General Partner’s other sources of income are not sufficient
to compensate for the indemnification, then the General Partner may terminate
and you could lose your investment.
No
Resolution of Conflicts Procedures
Whenever
a conflict of interest exists or arises between the General Partner on the
one
hand, and the partnership or any limited partner, on the other hand, any
resolution or course of action by the General Partner in respect of such
conflict of interest shall be permitted and deemed approved by all partners
and
shall not constitute a breach of the LP Agreement or of any agreement
contemplated hereby or of a duty stated or implied by law or equity, if the
resolution or course of action is, or by operation of the LP Agreement is deemed
to be, fair and reasonable to the partnership. If a dispute arises, under the
LP
Agreement it will be resolved either through negotiations with the General
Partner or by courts located in the State of Delaware.
Under
the
LP Agreement, any resolution is deemed to be fair and reasonable to the
partnership if the resolution is:
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approved
by the audit committee, although no party is obligated to seek approval
and the General Partner may adopt a resolution or course of action
that
has not received approval;
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on
terms no less favorable to the limited partners than those generally
being
provided to or available from unrelated third parties;
or
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fair
to the limited partners, taking into account the totality of the
relationships of the parties involved including other transactions
that
may be particularly favorable or advantageous to the limited
partners.
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The
previous risk factors and conflicts of interest are complete as of the date
of
this prospectus; however, additional risks and conflicts may occur which are
not
presently foreseen by the General Partner. You may not construe this prospectus
as legal or tax advice. Before making an investment in this fund, you should
read this entire prospectus, including the LP Agreement. You should also consult
with your personal legal, tax, and other professional advisors.
Interests
of Named Experts and Counsel
The
General Partner has employed Sutherland Asbill & Brennan LLP to prepare this
prospectus. Neither the law firm nor any other expert hired by USOF to give
advice on the preparation of this offering document have been hired on a
contingent fee basis. Nor do any of them have any present or future expectation
of interest in the General Partner, Marketing Agent, Authorized Purchasers,
Custodian, Administrator or other service providers to USOF.
The
General Partner’s Responsibility and Remedies
Pursuant
to the DRULPA, parties may contractually modify or even eliminate fiduciary
duties in a partnership agreement to the limited partnership itself, or to
another partner or person otherwise bound by the partnership agreement. Parties
may not, however, eliminate the implied covenant of good faith and fair dealing.
Where parties unambiguously provide for fiduciary duties in a partnership
agreement, those expressed duties become the standard courts will use to
determine whether such duties were breached. For this reason, USOF’s limited
partnership agreement does not explicitly provide for any fiduciary duties
so
that common law fiduciary duty principles will apply to measure the General
Partner’s conduct.
A
prospective investor should be aware that the General Partner has a
responsibility to limited partners of USOF to exercise good faith and fairness
in all dealings. The fiduciary responsibility of a general partner to limited
partners is a developing and changing area of the law and limited partners
who
have questions concerning the duties of the General Partner should consult
with
their counsel. In the event that a limited partner of USOF believes that the
General Partner has violated its fiduciary duty to the limited partners, he
may
seek legal relief individually or on behalf of USOF under applicable laws,
including under DRULPA and under commodities laws, to recover damages from
or
require an accounting by the General Partner. Limited partners may also have
the
right, subject to applicable procedural and jurisdictional requirements, to
bring class actions in federal court to enforce their rights under the federal
securities laws and the rules and regulations promulgated thereunder by the
SEC.
Limited partners who have suffered losses in connection with the purchase or
sale of the units may be able to recover such losses from the General Partner
where the losses result from a violation by the General Partner of the federal
securities laws. State securities laws may also provide certain remedies to
limited partners. Limited partners should be aware that performance by the
General Partner of its fiduciary duty to is measured by the terms of the LP
Agreement as well as applicable law. Limited partners are afforded certain
rights to institute reparations proceedings under the Commodity Exchange Act
for
violations of the Commodity Exchange Act or of any rule, regulation or order
of
the CFTC by the General Partner.
Liability
and Indemnification
Under
the
LP Agreement, neither a General Partner nor any employee or other agent of
USOF
nor any officer, director, stockholder, partner, employee or agent of a General
Partner (a “ Protected
Person”)
shall
be liable to any partner or USOF for any mistake of judgment or for any action
or inaction taken, nor for any losses due to any mistake of judgment or to
any
action or inaction or to the negligence, dishonesty or bad faith of any officer,
director, stockholder, partner, employee, agent of USOF or any officer,
director, stockholder, partner, employee or agent of such General Partner,
provided that such officer, director, stockholder, partner, employee, or agent
of the partner or officer, director, stockholder, partner, employee or agent
of
such General Partner was selected, engaged or retained by such General Partner
with reasonable care, except with respect to any matter as to which such General
Partner shall have been finally adjudicated in any action, suit or other
proceeding not to have acted in good faith in the reasonable belief that such
Protected Person’s actions was in the best interests of USOF and except that no
Protected Person shall be relieved of any liability to which such Protected
Person would otherwise be subject by reason of willful misfeasance, gross
negligence or reckless disregard of the duties involved in the conduct of the
Protected Person’s office.
USOF
shall, to the fullest extent permitted by law, but only out of USOF assets,
indemnify and hold harmless a General Partner and each officer, director,
stockholder, partner, employee or agent thereof (including persons who serve
at
the USOF’s request as directors, officers or trustees of another organization in
which USOF has an interest as a unitholder, creditor or otherwise) and their
respective Legal Representatives and successors (hereinafter referred to as
a “
Covered
Person”
against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by any Covered Person in connection with the defense
or
disposition of any action, suit or other proceedings, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in office or thereafter,
by reason of an alleged act or omission as a General Partner or director or
officer thereof, or by reason of its being or having been such a General
Partner, director or officer, except with respect to any matter as to which
such
Covered Person shall have been finally adjudicated in any such action, suit
or
other proceeding not to have acted in good faith in the reasonable believe
that
such Covered Person’s action was in the best interest of USOF, and except that
no Covered Person shall be indemnified against any liability to USOF or limited
partners to which such Covered Person would otherwise be subject by reason
of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person’s office. Expenses,
including counsel fees so incurred by any such Covered Person, may be paid
from
time to time by USOF in advance of the final disposition of any such action,
suit or proceeding on the condition that the amounts so paid shall be repaid
to
USOF if it is ultimately determined that the indemnification of such expenses
is
not authorized hereunder.
Provisions
of Law
According
to applicable law, indemnification of the General Partner is payable only if
the
General Partner determined, in good faith, that the act, omission or conduct
that gave rise to the claim for indemnification was in the best interest of
USOF
and the act, omission or activity that was the basis for such loss, liability,
damage, cost or expense was not the result of negligence or misconduct and
such
liability or loss was not the result of negligence or misconduct by the General
Partner, and such indemnification or agreement to hold harmless is recoverable
only out of the assets of USOF and not from the members,
individually.
Provisions
of Federal and State Securities Laws
This
offering is made pursuant to federal and state securities laws. If any
indemnification of the General Partner arises out of an alleged violation of
such laws, it is subject to the following legal conditions.
Those
conditions require that no indemnification may be made in respect of any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws unless: there has been a successful adjudication on
the
merits of each count involving alleged securities law violations as to the
General Partner or other particular indemnitee, or such claim has been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
General Partner or other particular indemnitee, or a court of competent
jurisdiction approves a settlement of the claims against the General Partner
or
other agent of USOF and finds that indemnification of the settlement and related
costs should be made, provided, before seeking such approval, the General
Partner or other indemnitee must apprise the court of the position held by
regulatory agencies against such indemnification. These agencies are the SEC
and
the securities administrator of the State or States in which the plaintiffs
claim they were offered or sold membership interests.
Provisions
of the Securities Act of 1933 and NASAA Guidelines
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to the General Partner or its directors, officers, or persons
controlling USOF, USOF has been informed that SEC and the various State
administrators believe that such indemnification is against public policy as
expressed in the Securities Act of 1933 and the North American Securities
Administrators Association, Inc. (NASAA) commodity pool guidelines and is
therefore unenforceable.
Books
and Records
USOF
will
keep proper books of record and account of USOF at its office located at 1320
Harbor Bay Parkway, Suite 145, Alameda, California 94502 or such office,
including of an administrative agent, as it may subsequently designate upon
notice. These books and records are open to inspection by any person who
establishes to USOF’s satisfaction that such person is a limited partner upon
reasonable advance notice at all reasonable times during the usual business
hours of USOF.
USOF
will
keep a copy of USOF’s LP Agreement on file in its office which will be available
for inspection on reasonable advance notice at all reasonable times during
its
usual business hours by any limited partner.
Statements,
Filings, and Reports
At
the
end of each fiscal year, USOF will furnish to DTC Participants for distribution
to each person who is a unitholder at the end of the fiscal year an annual
report containing USOF’s audited financial statements and other information
about USOF. The General Partner is responsible for the registration and
qualification of the units under the federal securities laws and federal
commodities laws and any other securities and blue sky laws of the United States
or any other jurisdiction as the General Partner may select. The General Partner
is responsible for preparing all reports required by the SEC and the CFTC,
but
has entered into an agreement with Brown Brother Harriman & Co. to prepare
these reports as required by the SEC, CFTC and the American Stock Exchange
on
USOF’s behalf.
The
financial statements of USOF will be audited, as required by law and as may
be
directed by the General Partner, by an independent registered public accounting
firm designated from time to time by the General Partner. The accountants report
will be furnished by USOF to unitholders upon request. USOF will make such
elections, file such tax returns, and prepare, disseminate and file such tax
reports, as it is advised by its counsel or accountants are from time to time
required by any applicable statute, rule or regulation.
Reports
to Limited Partners
In
addition to periodic reports filed with the SEC, including annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
all
of which can be accessed on the SEC’s website at www.sec.gov or on USOF’s
website at www.unitedstatesoilfund.com, USOF, pursuant to the LP Agreement,
will
provide the following reports to limited partners in the manner prescribed
below:
Annual
Reports.
Within
90 days after the end of each fiscal year, the General Partner shall cause
to be
delivered to each limited partner who was a limited partner at any time during
the fiscal year, an annual report containing the following:
(i)
financial statements of the partnership, including, without limitation, a
balance sheet as of the end of the partnership’s fiscal year and statements of
income, partners’ equity and changes in financial position, for such fiscal
year, which shall be prepared in accordance with accounting principles generally
accepted in the United States of America consistently applied and shall be
audited by a firm of independent certified public accountants registered with
the Public Company Accounting Oversight Board,
(ii)
a
general description of the activities of the partnership during the period
covered by the report, and
(iii)
a
report of any material transactions between the partnership and the General
Partner or any of its affiliates, including fees or compensation paid by the
partnership and the services performed by the General Partner or any such
affiliate of or such fees or compensation.
Monthly
Reports.
Within
30 days after the after the end of each month, the General Partner shall cause
to be posted on its website and, upon request, to be delivered to each limited
partner who was a limited partner at any time during the month then ended,
a
monthly report containing an account statement, which will include a statement
of income (loss) and a statement of changes in NAV, for the prescribed period.
In addition, the account statement will disclose any material business dealings
between the partnership, General Partner, commodity trading advisor (if any),
futures commission merchant, or the principals thereof that previously have
not
been disclosed in this Prospectus or any amendment thereto, other account
statements or annual reports.
USOF
will
provide information to its unitholders to the extent required by applicable
SEC,
CFTC, and American Stock Exchange requirements. An issuer, such as USOF, of
exchange-traded securities may not always readily know the identities of the
investors who own those securities. USOF will post the same information that
would otherwise be provided in USOF’s reports to limited partners described
above including its monthly account statements, which will include, without
limitation, USOF’s NAV, on USOF’s website
(www.unitedstatesoilfund.com).
Fiscal
Year
The
fiscal year of USOF is the calendar year. The General Partner may select an
alternate fiscal year at a later date.
Governing
Law; Consent to Delaware Jurisdiction
The
rights of the General Partner, USOF, DTC (as registered owner of USOF’s global
certificate for units) and the unitholders, are governed by the laws of the
State of Delaware. The General Partner, USOF and DTC and, by accepting units,
each DTC Participant and each unitholder, consents to the jurisdiction of the
courts of the State of Delaware and any federal courts located in Delaware.
Such
consent in not required for any person to assert a claim of Delaware
jurisdiction over the General Partner or USOF.
Legal
Matters
Litigation
and Claims
Within
the past 5 years of the date of this prospectus, there have been no material
administrative, civil or criminal actions against the General Partner,
underwriter, or any principal or affiliate of either of them. This includes
any
actions pending, on appeal, concluded, threatened, or otherwise known to
them.
Legal
Opinion
Sutherland
Asbill & Brennan LLP is counsel to advise USOF and the General Partner with
respect to the preparation of units being offered hereby and has passed upon
the
validity of the units being issued hereunder. Sutherland Asbill & Brennan
LLP has also provided the General Partner with its opinion with respect to
federal income tax matters addressed herein.
Experts
The
General Partner, with the approval of its audit committee, engaged an
independent registered public accounting firm to audit USOF. Spicer Jeffries
LLP
an independent registered public accounting firm, has audited the financial
statements of United States Oil Fund, LP, at December 31, 2005 and December
31,
2006 that appear in the annual report on Form 10-K that is incorporated by
reference. The financial statements in the 10-K were included in reliance upon
the report of Spicer Jeffries LLP, given on its authority of such firm as
experts in accounting and auditing.
Privacy
Policy
USOF
and
the General Partner collect certain nonpublic personal information about
investors from the information provided by them in certain documents, as well
as
in the course of processing transaction requests. None of this information
is
disclosed except as necessary in the course of processing creations and
redemptions and otherwise administering USOF — and then only subject to
customary undertakings of confidentiality. USOF and the General Partner do
not
disclose nonpublic personal information about investors to anyone, except as
required by law. USOF and the General Partner restrict access to the nonpublic
personal information they collect from investors to those employees who need
access to this information to provide products and services to investors. USOF
and the General Partner each maintain physical, electronic and procedural
controls to safeguard this information. These standards are reasonably designed
to (1) ensure the security and confidentiality of investors’ records and
information, (2) protect against any anticipated threats or hazards to the
security or integrity of investors’ records and information, and (3) protect
against unauthorized access to or use of investors’ records or information that
could result in substantial harm or inconvenience to any investor.
U.S.
Federal Income Tax Considerations
The
following discussion summarizes the material U.S. federal income tax
consequences of the purchase, ownership and disposition of units in USOF, and
the U.S. federal income tax treatment of USOF, as of the date hereof. This
discussion is applicable to a beneficial owner of units who purchases units
in
the offering to which this Prospectus relates, including a beneficial owner
who
purchases units from an Authorized Purchaser. Except where noted otherwise,
it
deals only with units held as capital assets and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, tax-exempt entities, insurance companies, persons holding units
as
a part of a position in a “straddle” or as part of a “hedging,” “conversion” or
other integrated transaction for federal income tax purposes, traders in
securities or commodities that elect to use a mark-to-market method of
accounting, or holders of units whose “functional currency” is not the U.S.
dollar. Furthermore, the discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the “Code”), and regulations
(“Treasury Regulations”), rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as
to
result in U.S. federal income tax consequences different from those discussed
below.
Persons
considering the purchase, ownership or disposition of units should consult
their
own tax advisors concerning the United States federal income tax consequences
in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction. As used herein, a “U.S. unitholder”
of a unit means a beneficial owner of a unit that is, for United States federal
income tax purposes, (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of
its
source or (iv) a trust (X) that is subject to the supervision of a court within
the United States and the control of one or more United States persons as
described in section 7701(a)(30) of the Code or (Y) that has a valid election
in
effect under applicable Treasury Regulations to be treated as a United States
person. A “Non-U.S. unitholder” is a holder that is not a U.S. unitholder. If a
partnership holds our units, the tax treatment of a partner will generally
depend upon the status of the partner and the activities of the partnership.
If
you are a partner of a partnership holding our units, you should consult your
own tax advisor regarding the tax consequences.
The
General Partner of USOF has received the opinion of Sutherland Asbill &
Brennan LLP, counsel to USOF, that the material U.S. federal income tax
consequences to USOF and to U.S. unitholders and Non-U.S. unitholders will
be as
described below. In rendering its opinion, Sutherland Asbill & Brennan LLP
has relied on the facts described in this Prospectus as well as certain factual
representations made by USOF and the General Partner. The opinion of Sutherland
Asbill & Brennan LLP is not binding on the Internal Revenue Service (“IRS”),
and as a result, the IRS may not agree with the tax positions taken by USOF.
If
challenged by the IRS, USOF’s tax positions might not be sustained by the
courts. No ruling has been requested from the IRS with respect to any matter
affecting USOF or prospective investors.
EACH
PROSPECTIVE INVESTOR IS ADVISED TO CONSULT ITS OWN TAX ADVISOR AS TO HOW THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN USOF APPLY TO YOU
AND
AS TO HOW APPLICABLE STATE, LOCAL OR FOREIGN TAXES APPLY TO YOU.
Tax
Status of USOF
USOF
is
organized and operated as a limited partnership in accordance with the
provisions of the LP Agreement and applicable state law. Under the Code, an
entity classified as a partnership that is deemed to be a “publicly traded
partnership” is generally taxable as a corporation for federal income tax
purposes. The Code provides an exception to this general rule for a publicly
traded partnership whose gross income for each taxable year of its existence
consists of at least 90% “qualifying income” (“qualifying income exception”).
For this purpose, section 7704 defines “qualifying income” as including, in
pertinent part, interest (other than from a financial business), dividends
and
gains from the sale or disposition of capital assets held for the production
of
interest or dividends. In addition, in the case of a partnership a principal
activity of which is the buying and selling of commodities (other than as
inventory) or of futures, forwards and options with respect to commodities,
“qualifying income” includes income and gains from such commodities and futures,
forwards and options with respect to commodities. USOF and the General Partner
have represented the following to Sutherland Asbill & Brennan
LLP:
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At
least 90% of USOF’s gross income for each taxable year will constitute
“qualifying income” within the meaning of Code section 7704 (as described
above);
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USOF
will be organized and operated in accordance with its governing
agreements
and applicable law;
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USOF
has not elected, and will not elect, to be classified as a corporation
for
U.S. federal income tax purposes.
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Based
in
part on these representations, Sutherland Asbill & Brennan LLP is of the
opinion that USOF will be classified as a partnership for federal income tax
purposes and that it will not be taxable as a corporation for such
purposes.
If
USOF
failed to satisfy the qualifying income exception in any year, other than a
failure that is determined by the IRS to be inadvertent and that is cured within
a reasonable time after discovery, USOF would be taxable as a corporation for
federal income tax purposes and would pay federal income tax on its income
at
regular corporate rates. In that event, unitholders would not report their
share
of USOF’s income or loss on their returns. In addition, distributions to
unitholders would be treated as dividends to the extent of USOF’s current and
accumulated earnings and profits. To the extent a distribution exceeded USOF’s
earnings and profits, the distribution would be treated as a return of capital
to the extent of a unitholder’s basis in its units, and thereafter as gain from
the sale of units. Accordingly, if USOF were to be taxable as a corporation,
it
would likely have a material adverse effect on the economic return from an
investment in USOF and on the value of the units.
The
remainder of this summary assumes that USOF will be classified as a partnership
for federal income tax purposes and that it will not be taxable as a
corporation.
U.S.
Unitholders
Tax
Consequences of Ownership of Units
Taxation
of USOF’s Income.
No U.S.
federal income tax will be paid by USOF on its income. Instead, USOF will file
annual information returns, and each U.S. unitholder will be required to report
on its U.S. federal income tax return its allocable share of the income, gain,
loss and deduction of USOF. For example, unitholders will take into account
their share of ordinary income realized by USOF from accruals of interest on
Treasuries and other investments, and their share of gain from Oil Futures
Contracts and Other Oil Interests. These items must be reported without regard
to the amount (if any) of cash or property the unitholder receives as a
distribution from USOF during the taxable year. Consequently, a unitholder
may
be allocated income or gain by USOF but receive no cash distribution with which
to pay its tax liability resulting from the allocation, or may receive a
distribution that is insufficient to pay such liability. Because the General
Partner currently does not intend to make distributions, it is likely that
in
any year USOF realizes net income and/or gain that a U.S. unitholder will be
required to pay taxes on its allocable share of such income or gain from sources
other than USOF distributions.
Allocations
of USOF’s Profit and Loss.
Under
Code section 704, the determination of a partner’s distributive share of any
item of income, gain, loss, deduction or credit is governed by the applicable
organizational document unless the allocation provided by such document lacks
“substantial economic effect.” An allocation that lacks substantial economic
effect nonetheless will be respected if it is in accordance with the partners’
interests in the partnership, determined by taking into account all facts and
circumstances relating to the economic arrangements among the
partners.
In
general, USOF will apply a monthly closing-of-the-books convention in
determining allocations of economic profit or loss to unitholders. Income,
gain,
loss and deduction will be determined on a monthly “mark-to-market” basis,
taking into account our accrued income and deductions and realized and
unrealized gains and losses for the month. These items will be allocated among
the holders of units in proportion to the number of units owned by them as
of
the close of business on the last business day of the month. Items of taxable
income, deduction, gain, loss and credit recognized by USOF for federal income
tax purposes for any taxable year will be allocated among holders in a manner
that equitably reflects the allocation of economic profit or loss. USOF intends
to make the election permitted by section 754 of the Code, which election will
be irrevocable without the consent of the Service. The effect of this election
will be that when a secondary market sale of our units occur, we will adjust
the
purchaser’s proportionate share of the tax basis of our assets to fair market
value, as reflected in the price paid for the units, as if the purchaser had
directly acquired an interest in our assets. The section 754 election is
intended to eliminate disparities between a partner’s basis in its partnership
interest and its share of the tax bases of the partnership’s assets, so that the
partner’s allocable share of taxable gain or loss on a disposition of an asset
will correspond to its share of the appreciation or depreciation in the value
of
the asset since it acquired its interest. Depending on the price paid for units
and the tax bases of USOF’s assets at the time of the purchase, the effect of
the section 754 election on a purchaser of units may be favorable or
unfavorable.
USOF
will
apply certain assumptions and conventions in determining and allocating items
for tax purposes in order to reduce the complexity and costs of administration.
The General Partner believes that application of these assumptions and
conventions will be consistent with the intent of the partnership provisions
of
the Code, and that the resulting allocations will have substantial economic
effect or otherwise will be respected as being in accordance with unitholders’
interests in USOF for federal income tax purposes. However, the Code and
Treasury Regulations do not expressly permit adoption of these assumptions
and
conventions, and Sutherland Asbill & Brennan LLP is therefore unable to
opine on the validity of our allocation method. It is possible that the IRS
could successfully challenge this method and require a unitholder to report
a
greater or lesser share of items of income, gain, loss, deduction, or credit
than if our method were respected. The General Partner is authorized to revise
our allocation method to conform to any method permitted under future Treasury
Regulations.
The
assumptions and conventions used in making tax allocations may cause a
unitholder to be allocated more or less income or loss for federal income tax
purposes than its proportionate share of the economic income or loss realized
by
USOF during the period it held its units. This “mismatch” between taxable and
economic income or loss in some cases may be temporary, reversing itself in
a
later year when the units are sold, but could be permanent. For example, a
unitholder could be allocated income accruing before it purchased its units,
resulting in an increase in the basis of the units (see “Tax basis in units”,
below). On a subsequent disposition of the units, the additional basis might
produce a capital loss the deduction of which may be limited (see “ Limitations
on Deductibility of Losses and Certain Expenses”,
below).
Mark
to market of certain exchange-traded contracts.
For
federal income tax purposes, USOF generally will be required to use a
“mark-to-market” method of accounting under which unrealized gains and losses on
instruments constituting “section 1256 contracts” are recognized currently. A
section 1256 contract is defined as: (1) a futures contract that is traded
on or
subject to the rules of a national securities exchange which is registered
with
the SEC, a domestic board of trade designated as a contract market by the CFTC,
or any other board of trade or exchange designated by the Secretary of the
Treasury, and with respect to which the amount required to be deposited and
the
amount that may be withdrawn depends on a system of “marking to market”; (2) a
forward contract on exchange-traded foreign currencies, where the contracts
are
traded in the interbank market; (3) a non-equity option traded on or subject
to
the rules of a qualified board or exchange; (4) a dealer equity option; or
(5) a
dealer securities futures contract.
Under
these rules, section 1256 contracts held by USOF at the end of each taxable
year, including for example Oil Futures Contracts and options on Oil Futures
Contracts traded on a U.S. exchange or board of trade or certain foreign
exchanges, will be treated as if they were sold by USOF for their fair market
value on the last business day of the taxable year. A unitholder’s distributive
share of USOF’s net gain or loss with respect to each section 1256 contract
generally will be treated as long-term capital gain or loss to the extent of
60
percent thereof, and as short-term capital gain or loss to the extent of 40
percent thereof, without regard to the actual holding period.
Limitations
on Deductibility of Losses and Certain Expenses.
A
number of different provisions of the Code may defer or disallow the deduction
of losses or expenses allocated to you by USOF, including but not limited to
those described below.
A
unitholder’s deduction of its allocable share of any loss of USOF will be
limited to the lesser of (1) the tax basis in its units or (2) in the case
of a
unitholder that is an individual or a closely held corporation, the amount
which
the unitholder is considered to have “at risk” with respect to our activities.
In general, the amount at risk will be your invested capital plus your share
of
any recourse debt of USOF for which you are liable. Losses in excess of the
amount at risk must be deferred until years in which USOF generates additional
taxable income against which to offset such carryover losses or until additional
capital is placed at risk.
Noncorporate
taxpayers are permitted to deduct capital losses only to the extent of their
capital gains for the taxable year plus $3,000 of other income. Unused capital
losses can be carried forward and used to offset capital gains in future years.
In addition, a noncorporate taxpayer may elect to carry back net losses on
section 1256 contracts to each of the three preceding years and use them to
offset section 1256 contract losses in those years, subject to certain
limitations. Corporate taxpayers generally may deduct capital losses only to
the
extent of capital gains, subject to special carryback and carryforward
rules.
Otherwise
deductible expenses incurred by noncorporate taxpayers constituting
“miscellaneous itemized deductions,” generally including investment-related
expenses (other than interest and certain other specified expenses), are
deductible only to the extent they exceed 2 percent of the taxpayer’s adjusted
gross income for the year. Although the matter is not free from doubt, we
believe management fees we pay to the General Partner and other expenses we
incur will constitute investment-related expenses subject to the miscellaneous
itemized deduction limitation, rather than expenses incurred in connection
with
a trade or business.
Noncorporate
unitholders generally may deduct “investment interest expense” only to the
extent of their “net investment income.” Investment interest expense of a
unitholder will generally include any interest accrued by USOF and any interest
paid or accrued on direct borrowings by a unitholder to purchase or carry its
units, such as interest with respect to a margin account. Net investment income
generally includes gross income from property held for investment (including
“portfolio income” under the passive loss rules but not, absent an election,
long-term capital gains or certain qualifying dividend income) less deductible
expenses other than interest directly connected with the production of
investment income.
To
the
extent that we allocate losses or expenses to you that must be deferred or
disallowed as a result of these or other limitations in the Code, you may be
taxed on income in excess of your economic income or distributions (if any)
on
your units. As one example, you could be allocated and required to pay tax
on
your share of interest income accrued by USOF for a particular taxable year,
and
in the same year allocated a share of a capital loss that you cannot deduct
currently because you have insufficient capital gains against which to offset
the loss. As another example, you could be allocated and required to pay tax
on
your share of interest income and capital gain for a year, but be unable to
deduct some or all of your share of management fees and/or margin account
interest incurred by you with respect to your units. Unitholders are urged
to
consult their own professional tax advisors regarding the effect of limitations
under the Code on your ability to deduct your allocable share of USOF’s losses
and expenses.
Tax
Basis of Units
A
unitholder’s tax basis in its units is important in determining (1) the amount
of taxable gain it will realize on the sale or other disposition of its units,
(2) the amount of non-taxable distributions that it may receive from USOF and
(3) its ability to utilize its distributive share of any losses of USOF on
its
tax return. A unitholder’s initial tax basis of its units will equal its cost
for the units plus its share of USOF’s liabilities (if any) at the time of
purchase. In general, a unitholder’s “share” of those liabilities will equal the
sum of (i) the entire amount of any otherwise nonrecourse liability of USOF
as
to which the unitholder or an affiliate is the creditor (a “partner nonrecourse
liability”) and (ii) a pro
rata
share of
any nonrecourse liabilities of USOF that are not partner nonrecourse liabilities
as to any unitholder.
A
unitholder’s tax basis in its units generally will be (1) increased by (a) its
allocable share of USOF’s taxable income and gain and (b) any additional
contributions by the unitholder to USOF and (2) decreased (but not below zero)
by (a) its allocable share of USOF’s tax deductions and losses and (b) any
distributions by USOF to the unitholder. For this purpose, an increase in a
unitholder’s share of USOF’s liabilities will be treated as a contribution of
cash by the unitholder to USOF and a decrease in that share will be treated
as a
distribution of cash by USOF to the unitholder. Pursuant to certain IRS rulings,
a unitholder will be required to maintain a single, “unified” basis in all units
that it owns. As a result, when a unitholder that acquired its units at
different prices sells less than all of its units, such unitholder will not
be
entitled to specify particular units ( e.g. , those with a higher basis) as
having been sold. Rather, it must determine its gain or loss on the sale by
using an “equitable apportionment” method to allocate a portion of its unified
basis in its units to the units sold.
Treatment
of Fund Distributions.
If USOF
makes non-liquidating distributions to unitholders, such distributions generally
will not be taxable to the unitholders for federal income tax purposes except
to
the extent that the sum of (i) the amount of cash and (ii) the fair market
value
of marketable securities distributed exceeds the unitholder’s adjusted basis of
its interest in USOF immediately before the distribution. Any cash distributions
in excess of a unitholder’s tax basis generally will be treated as gain from the
sale or exchange of units.
Constructive
Termination of the Partnership.
We will
be considered to have been terminated for tax purposes if there is a sale or
exchange of 50 percent or more of the total interests in our units within a
12-month period. A termination would result in the closing of our taxable year
for all unitholders. In the case of a unitholder reporting on a taxable year
other than a fiscal year ending December 31, the closing of our taxable year
may
result in more than 12 months of our taxable income or loss being includable
in
its taxable income for the year of termination. We would be required to make
new
tax elections after a termination. A termination could result in tax penalties
if we were unable to determine that the termination had occurred. Moreover,
a
termination might either accelerate the application of, or subject us to, any
tax legislation enacted before the termination.
Tax
Consequences of Disposition of Units
If
a
unitholder sells it units, it will recognize gain or loss equal to the
difference between the amount realized and its adjusted tax basis for the units
sold. A unitholder’s amount realized will be the sum of the cash or the fair
market value of other property received plus its share of any USOF debt
outstanding.
Gain
or
loss recognized by a unitholder on the sale or exchange of units held for more
than one year will generally be taxable as long-term capital gain or loss;
otherwise, such gain or loss will generally be taxable as short-term capital
gain or loss. A special election is available under the Treasury Regulations
that will allow unitholders to identify and use the actual holding periods
for
the units sold for purposes of determining whether the gain or loss recognized
on a sale of units will give rise long-term or short-term capital gain or loss.
It is expected that most unitholders will be eligible to elect, and generally
will elect, to identify and use the actual holding period for units sold. If
a
unitholder fails to make the election or is not able to identify the holding
periods of the units sold, the unitholder will have a split holding period
in
the units sold. Under such circumstances, a unitholder will be required to
determine its holding period in the units sold by first determining the portion
of its entire interest in USOF that would give rise to long-term capital gain
or
loss if its entire interest were sold and the portion that would give rise
to
short-term capital gain or loss if the entire interest were sold. The unitholder
would then treat each unit sold as giving rise to long-term capital gain or
loss
and short-term capital gain or loss in the same proportions as if it had sold
its entire interest in USOF.
Under
Section 751 of the Code, a portion of a unitholder’s gain or loss from the sale
of units (regardless of the holding period for such units), will be separately
computed and taxed as ordinary income or loss to the extent attributable to
“unrealized receivables” or “inventory” owned by USOF. The term “unrealized
receivables” includes, among other things, market discount bonds and short-term
debt instruments to the extent such items would give rise to ordinary income
if
sold by USOF.
If
some
or all of your units are lent by your broker or other agent to a third party
—
for example, for use by the third party in covering a short sale — you may be
considered as having made a taxable disposition of the loaned units, in which
case —
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you
may recognize taxable gain or loss to the same extent as if you had
sold
the units for cash;
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any
of USOF’s income, gain, loss or deduction allocable to those units during
the period of the loan will not be reportable by you for tax purposes;
and
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any
distributions you receive with respect to the units will be fully
taxable,
most likely as ordinary income.
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Unitholders
desiring to avoid these and other possible consequences of a deemed disposition
of their units should consider modifying any applicable brokerage account
agreements to prohibit the lending of their units.
Other
Tax Matters
Information
Reporting.
We
intend to report tax information to the beneficial owners of units. Unitholders
who have become additional limited partners will be treated as partners for
federal income tax purposes. The IRS has ruled that assignees of partnership
interests who have not been admitted to a partnership as partners but who have
the capacity to exercise substantial dominion and control over the assigned
partnership interests will be considered partners for federal income tax
purposes. On the basis of such ruling, except as otherwise provided herein,
we
intend to treat the following persons as partners for federal income tax
purposes: (1) assignees of units who are pending admission as limited partners,
and (2) unitholders whose units are held in street name or by another nominee
and who have the right to direct the nominee in the exercise of all substantive
rights attendant to the ownership of their units. USOF will furnish unitholders
each year with tax information on IRS Schedule K-1 (Form 1065), which will
be
used by the unitholders in completing their tax returns.
Persons
who hold an interest in USOF as a nominee for another person are required to
furnish to us the following information: (1) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (2) whether
the
beneficial owner is (a) a person that is not a U.S. person, (b) a foreign
government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (c) a tax-exempt entity; (3)
the
amount and description of units acquired or transferred for the beneficial
owner; and (4) certain information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales. Brokers and
financial institutions are required to furnish additional information, including
whether they are U.S. persons and certain information on units they acquire,
hold or transfer for their own account. A penalty of $50 per failure, up to
a
maximum of $100,000 per calendar year, is imposed by the Internal Revenue Code
of 1986, as amended for failure to report such information to us. The nominee
is
required to supply the beneficial owner of the units with the information
furnished to us.
Partnership
Audit Procedures.
The IRS
may audit the federal income tax returns filed by USOF. Adjustments resulting
from any such audit may require each unitholder to adjust a prior year’s tax
liability and could result in an audit of the unitholder’s own return. Any audit
of a unitholder’s return could result in adjustments of non-partnership items as
well as USOF items. Partnerships are generally treated as separate entities
for
purposes of federal tax audits, judicial review of administrative adjustments
by
the IRS, and tax settlement proceedings. The tax treatment of partnership items
of income, gain, loss and deduction are determined at the partnership level
in a
unified partnership proceeding rather than in separate proceedings with the
unitholders. The Code provides for one unitholder to be designated as the “tax
matters partner” and represent the partnership purposes of these proceedings.
The LP Agreement appoints the General Partner as the tax matters partner of
USOF.
Tax
Shelter Disclosure Rules.
In
certain circumstances the Code and Treasury Regulations require that the IRS
be
notified of taxable transactions through a disclosure statement attached to
a
taxpayer’s United States federal income tax return. In addition, certain
“material advisers” must maintain a list of persons participating in such
transactions and furnish the list to the IRS upon written request. These
disclosure rules may apply to transactions irrespective of whether they are
structured to achieve particular tax benefits. They could require disclosure
by
USOF or unitholders (1) if a unitholder incurs a loss in excess a specified
threshold from a sale or redemption of its units, (2) if USOF engages in
transactions producing differences between its taxable income and its income
for
financial reporting purposes, or (3) possibly in other circumstances. While
these rules generally do not require disclosure of 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), they apply to a loss recognized with respect to interests in a
passthrough entity, such as the units, even if the taxpayer’s basis in such
interests is equal to the amount of cash it paid. In addition, under recently
enacted legislation, significant penalties may be imposed in connection with
a
failure to comply with these reporting requirements. Investors
should consult their own tax advisors concerning the application of these
reporting requirements to their specific situation
.
Tax-Exempt
Organizations.
Subject
to numerous exceptions, qualified retirement plans and individual retirement
accounts, charitable organizations and certain other organizations that
otherwise are exempt from federal income tax (collectively “exempt
organizations”) nonetheless are subject to the tax on unrelated business taxable
income (“UBTI”). Generally, UBTI means the gross income derived by an exempt
organization from a trade or business that it regularly carries on, the conduct
of which is not substantially related to the exercise or performance of its
exempt purpose or function, less allowable deductions directly connected with
that trade or business. If USOF were to regularly carry on (directly or
indirectly) a trade or business that is unrelated with respect to an exempt
organization unitholder, then in computing its UBTI, the unitholder must include
its share of (1) USOF’s gross income from the unrelated trade or business,
whether or not distributed, and (2) USOF’s allowable deductions directly
connected with that gross income.
UBTI
generally does not include dividends, interest, or payments with respect to
securities loans and gains from the sale of property (other than property held
for sale to customers in the ordinary course of a trade or business).
Nonetheless, income on, and gain from the disposition of, “debt-financed
property” is UBTI. Debt-financed property generally is income-producing property
(including securities), the use of which is not substantially related to the
exempt organization’s tax-exempt purposes, and with respect to which there is
“acquisition indebtedness” at any time during the taxable year (or, if the
property was disposed of during the taxable year, the 12-month period ending
with the disposition). Acquisition indebtedness includes debt incurred to
acquire property, debt incurred before the acquisition of property if the debt
would not have been incurred but for the acquisition, and debt incurred
subsequent to the acquisition of property if the debt would not have been
incurred but for the acquisition and at the time of acquisition the incurrence
of debt was foreseeable. The portion of the income from debt-financed property
attributable to acquisition indebtedness is equal to the ratio of the average
outstanding principal amount of acquisition indebtedness over the average
adjusted basis of the property for the year. USOF currently does not anticipate
that it will borrow money to acquire investments; however, USOF cannot be
certain that it will not borrow for such purpose in the future. In addition,
an
exempt organization unitholder that incurs acquisition indebtedness to purchase
its units in USOF may have UBTI.
The
federal tax rate applicable to an exempt organization unitholder on its UBTI
generally will be either the corporate or trust tax rate, depending upon the
unitholder’s form of organization. USOF may report to each such unitholder
information as to the portion, if any, of the unitholder’s income and gains from
USOF for any year that will be treated as UBTI; the calculation of that amount
is complex, and there can be no assurance that USOF’s calculation of UBTI will
be accepted by the Service. An exempt organization unitholder will be required
to make payments of estimated federal income tax with respect to its
UBTI.
Regulated
Investment Companies.
Under
recently enacted legislation, interests in and income from “qualified publicly
traded partnerships” satisfying certain gross income tests are treated as
qualifying assets and income, respectively, for purposes of determining
eligibility for regulated investment company (“RIC”) status. A RIC may invest up
to 25% of its assets in interests in a qualified publicly traded partnership.
The determination of whether a publicly traded partnership such as USOF is
a
qualified publicly traded partnership is made on an annual basis. USOF expects
to be a qualified publicly traded partnership in each of its taxable years.
However, such qualification is not assured.
Non-U.S.
Unitholders
Generally,
non-U.S. persons who derive U.S. source income or gain from investing or
engaging in a U.S. business are taxable on two categories of income. The first
category consists of amounts that are fixed, determinable, annual and periodic
income, such as interest, dividends and rent that are not connected with the
operation of a U.S. trade or business (“FDAP”). The second category is income
that is effectively connected with the conduct of a U.S. trade or business
(“ECI”). FDAP income (other than interest that is considered “portfolio
interest”) is generally subject to a 30 percent withholding tax, which may be
reduced for certain categories of income by a treaty between the U.S. and the
recipient’s country of residence. In contrast, ECI is generally subject to U.S.
tax on a net basis at graduated rates upon the filing of a U.S. tax return.
Where a non-U.S. person has ECI as a result of an investment in a partnership,
the ECI is subject to a withholding tax at a rate of 35 percent for both
individual and corporate unitholders.
Withholding
on Allocations and Distributions.
The
Code provides that a non-U.S. person who is a partner in a partnership that
is
engaged in a U.S. trade or business during a taxable year will also be
considered to be engaged in a U.S. trade or business during that year.
Classifying an activity by a partnership as an investment or an operating
business is a factual determination. Under certain safe harbors in the Code,
an
investment fund whose activities consist of trading in stocks, securities,
or
commodities for its own account generally will not be considered to be engaged
in a U.S. trade or business unless it is a dealer is such stocks, securities,
or
commodities. This safe harbor applies to investments in commodities only if
the
commodities are of a kind customarily dealt in on an organized commodity
exchange and if the transaction is of a kind customarily consummated at such
place. Although the matter is not free from doubt, USOF believes that the
activities directly conducted by USOF will not result in USOF being engaged
in a
trade or business within in the United States. However, there can be no
assurance that the IRS would not successfully assert that USOF’s activities
constitute a U.S. trade or business.
In
the
event that USOF’s activities were considered to constitute a U.S. trade or
business, USOF would be required to withhold at the highest rate specified
in
Code section 1 (currently 35 percent) on allocations of our income to non-U.S.
unitholders. A non-U.S. unitholder with ECI will generally be required to file
a
U.S. federal income tax return, and the return will provide the non-U.S.
unitholder with the mechanism to seek a refund of any withholding in excess
of
such unitholder’s actual U.S. federal income tax liability. Any amount withheld
by USOF will be treated as a distribution to the non-U.S.
unitholder.
If
USOF
is not treated as engaged in a U.S. trade or business, a non-U.S. unitholder
may
nevertheless be treated as having FDAP income, which would be subject to a
30
percent withholding tax (possibly subject to reduction by treaty), with respect
to some or all of its distributions from USOF or its allocable share of USOF
income. Amounts withheld on behalf of a non-U.S. unitholder will be treated
as
being distributed to such unitholder.
To
the
extent any interest income allocated to a non-U.S. unitholder that otherwise
constitutes FDAP is considered “portfolio interest,” neither the allocation of
such interest income to the non-U.S. unitholder nor a subsequent distribution
of
such interest income to the non-U.S. unitholder will be subject to withholding,
provided that the non-U.S. unitholder is not otherwise engaged in a trade or
business in the U.S. and provides USOF with a timely and properly completed
and
executed IRS Form W-8BEN or other applicable form. In general, “portfolio
interest” is interest paid on debt obligations issued in registered form, unless
the “recipient” owns 10 percent or more of the voting power of the
issuer.
USOF
expects that most of its interest income will qualify as “portfolio interest.”
In order for USOF to avoid withholding on any interest income allocable to
non-U.S. unitholders that would qualify as “portfolio interest,” it will be
necessary for all non-U.S. unitholders to provide USOF with a timely and
properly completed and executed Form W-8BEN (or other applicable form). If
a
non-U.S. unitholder fails to provide a properly completed Form W-8BEN, the
General Partner may request that the non-U.S. unitholder provide, within 15
days
after the request by the General Partner, a properly completed Form W-8BEN.
If a
non-U.S. unitholder fails to comply with this request, the units owned by such
non-U.S. unitholder will be subject to redemption.
Gain
from Sale of Units.
Gain
from the sale or exchange of the units may be taxable to a non-U.S. unitholder
if the non-U.S. unitholder is a nonresident alien individual who is present
in
the U.S. for 183 days or more during the taxable year. In such case, the
nonresident alien individual will be subject to a 30 percent withholding tax
on
the amount of such individual’s gain.
Branch
Profits Tax on Corporate Non-U.S. Unitholders.
In
addition to the taxes noted above, any non-U.S. unitholders that are
corporations may also be subject to an additional tax, the branch profits tax,
at a rate of 30 percent. The branch profits tax is imposed on a non-U.S.
corporation’s dividend equivalent amount, which generally consists of the
corporation’s after-tax earnings and profits that are effectively connected with
the corporation’s U.S. trade or business but are not reinvested in a U.S.
business. This tax may be reduced or eliminated by an income tax treaty between
the United States and the country in which the non-U.S. unitholder is a
“qualified resident.”
Prospective
non-U.S. unitholders should consult their tax advisor with regard to these
and
other issues unique to non-U.S. unitholders.
Backup
Withholding
USOF
may
be required to withhold U.S. federal income tax (“backup withholding”) at a rate
of 28 percent from all taxable distributions payable to: (1) any unitholder
who
fails to furnish USOF with his, her or its correct taxpayer identification
number or a certificate that the unitholder is exempt from backup withholding,
and (2) any unitholder with respect to whom the IRS notifies USOF that the
unitholder has failed to properly report certain interest and dividend income
to
the IRS and to respond to notices to that effect. Backup withholding is not
an
additional tax and may be returned or credited against a taxpayer’s regular
federal income tax liability if appropriate information is provided to the
IRS.
Other
Tax Considerations
In
addition to federal income taxes, unitholders may be subject to other taxes,
such as state and local income taxes, unincorporated business taxes, business
franchise taxes, and estate, inheritance or intangible taxes that may be imposed
by the various jurisdictions in which USOF does business or owns property or
where the unitholders reside. Although an analysis of those various taxes is
not
presented here, each prospective unitholder should consider their potential
impact on its investment in USOF. It is each unitholder’s responsibility to file
the appropriate U.S. federal, state, local, and foreign tax returns. Sutherland
Asbill & Brennan LLP has not provided an opinion concerning any aspects of
state, local or foreign tax or U.S. federal tax other than those U.S. federal
income tax issues discussed herein.
Investment
By ERISA Accounts
General
Most
employee benefit plans and individual retirement accounts (“IRAs”) are subject
to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or
the Internal Revenue Code of 1986, as amended (the “Code”), or both. This
section discusses certain considerations that arise under ERISA and the Code
that a fiduciary of an employee benefit plan as defined in ERISA or a plan
as
defined in Section 4975 of the Code who has investment discretion should take
into account before deciding to invest the plan’s assets in USOF. Employee
benefit plans and plans are collectively referred to below as plans, and
fiduciaries with investment discretion are referred to below as plan
fiduciaries.
This
summary is based on the provisions of ERISA and the Code as of the date hereof.
This summary is not intended to be complete, but only to address certain
questions under ERISA and the Code likely to be raised by your advisors. The
summary does not include state or local law.
Potential
plan investors are urged to consult with their own professional advisors
concerning the appropriateness of an investment in USOF and the manner in which
units should be purchased.
Special
Investment Considerations
Each
plan
fiduciary must consider the facts and circumstances that are relevant to an
investment in USOF, including the role that an investment in USOF would play
in
the plan’s overall investment portfolio. Each plan fiduciary, before deciding to
invest in USOF, must be satisfied that the investment is prudent for the plan,
that the investments of the plan are diversified so as to minimize the risk
of
large losses and that an investment in USOF complies with the terms of the
plan.
USOF
and Plan Assets
A
regulation issued under ERISA contains rules for determining when an investment
by a plan in an equity interest of a limited partnership will result in the
underlying assets of the partnership being deemed plan assets for purposes
of
ERISA and Section 4975 of the Code. Those rules provide that assets of a limited
partnership will not be plan assets of a plan that purchases an equity interest
in the partnership if the equity interest purchased is a publicly-offered
security. If the underlying assets of a partnership are considered to be assets
of any plan for purposes of ERISA or Section 4975 of the Code, the operations
of
that partnership would be subject to and, in some cases, limited by, the
provisions of ERISA and Section 4975 of the Code.
The
publicly-offered security exception described above applies if the equity
interest is a security that is:
1.
freely
transferable (determined based on the relevant facts and
circumstances);
2.
part
of a class of securities that is widely held (meaning that the class of
securities is owned by 100 or more investors independent of the issuer and
of
each other); and
3.
either
(a) part of a class of securities registered under Section 12(b) or 12(g) of
the
Exchange Act or (b) sold to the plan as part of a public offering pursuant
to an
effective registration statement under the Securities Act of 1933 and the class
of which such security is a part is registered under the Exchange Act within
120
days (or such later time as may be allowed by the SEC) after the end of the
fiscal year of the issuer in which the offering of such security
occurred.
The
plan
asset regulations under ERISA state that the determination of whether a security
is freely transferable is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of an offering in which
the minimum investment is $10,000 or less, the following requirements, alone
or
in combination, ordinarily will not affect a finding that the security is freely
transferable: (1) a requirement that no transfer or assignment of the security
or rights relating to the security be made that would violate any federal or
state law, (2) a requirement that no transfer or assignment be made without
advance written notice given to the entity that issued the security, and (3)
any
restriction on the substitution of assignee as a limited partner of a
partnership, including a general partner consent requirement, provided that
the
economic benefits of ownership of the assignor may be transferred or assigned
without regard to such restriction or consent (other than compliance with any
of
the foregoing restrictions).
The
General Partner believes that the conditions described above will be satisfied
with respect to the units. The General Partner believes that the units should
therefore constitute publicly-offered securities, and the underlying assets
of
USOF should not be considered to constitute plan assets of any plan that
purchases units.
Prohibited
Transactions
ERISA
and
the Code generally prohibit certain transactions involving the plan and persons
who have certain specified relationships to the plan.
In
general, units may not be purchased with the assets of a plan if the General
Partner, the clearing brokers, the trading advisors (if any), or any of their
affiliates, agents or employees either:
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exercise
any discretionary authority or discretionary control with respect
to
management of the plan;
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exercise
any authority or control with respect to management or disposition
of the
assets of the plan;
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render
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of the
plan;
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have
any authority or responsibility to render investment advice with
respect
to any monies or other property of the plan;
or
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have
any discretionary authority or discretionary responsibility in the
administration of the plan.
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Also,
a
prohibited transaction may occur under ERISA or the Code when circumstances
indicate that (1) the investment in a unit is made or retained for the purpose
of avoiding application of the fiduciary standards of ERISA, (2) the investment
in a unit constitutes an arrangement under which USOF is expected to engage
in
transactions that would otherwise be prohibited if entered into directly by
the
plan purchasing the unit, (3) the investing plan, by itself, has the authority
or influence to cause USOF to engage in such transactions, or (4) a person
who
is prohibited from transacting with the investing plan may, but only with the
aid of certain of its affiliates and the investing plan, cause USOF to engage
in
such transactions with such person.
Special
IRA Rules
IRAs
are
not subject to ERISA’s fiduciary standards, but are subject to their own rules,
including the prohibited transaction rules of Section 4975 of the Code, which
generally mirror ERISA’s prohibited transaction rules. For example, IRAs are
subject to special custody rules and must maintain a qualifying IRA custodial
arrangement separate and distinct from USOF and its custodial arrangement.
Otherwise, if a separate qualifying custodial arrangement is not maintained,
an
investment in the units will be treated as a distribution from the IRA. Second,
IRAs are prohibited from investing in certain commingled investments, and the
General Partner makes no representation regarding whether an investment in
units
is an inappropriate commingled investment for an IRA. Third, in applying the
prohibited transaction provisions of Section 4975 of the Code, in addition
to
the rules summarized above, the individual for whose benefit the IRA is
maintained is also treated as the creator of the IRA. For example, if the owner
or beneficiary of an IRA enters into any transaction, arrangement, or agreement
involving the assets of his or her IRA to benefit the IRA owner or beneficiary
(or his or her relatives or business affiliates) personally, or with the
understanding that such benefit will occur, directly or indirectly, such
transaction could give rise to a prohibited transaction that is not exempted
by
any available exemption. Moreover, in the case of an IRA, the consequences
of a
non-exempt prohibited transaction are that the IRA’s assets will be treated as
if they were distributed, causing immediate taxation of the assets (including
any early distribution penalty tax applicable under Section 72 of the Code),
in
addition to any other fines or penalties that may apply.
Exempt
Plans
Certain
employee benefit plans may be governmental plans or church plans. Governmental
plans and church plans are generally not subject to ERISA, nor do the
above-described prohibited transaction provisions described above apply to
them.
These plans are, however, subject to prohibitions against certain related-party
transactions under Section 503 of the Code, which operate similar to the
prohibited transaction rules described above. In addition, the fiduciary of
any
governmental or church plan must consider any applicable state or local laws
and
any restrictions and duties of common law imposed upon the plan.
No
view
is expressed as to whether an investment in USOF (and any continued investment
in USOF), or the operation and administration of USOF, is appropriate or
permissible for any governmental plan or church plan under Code Section 503,
or
under any state, county, local or other law relating to that type of
plan.
Allowing
an investment in USOF is not to be construed as a representation by USOF, its
General Partner, any trading advisor, any clearing broker, the Marketing Agent
or legal counsel or other advisors to such parties or any other party that
this
investment meets some or all of the relevant legal requirements with respect
to
investments by any particular plan or that this investment is appropriate for
any such particular plan. The person with investment discretion should consult
with the plan’s attorney and financial advisors as to the propriety of an
investment in USOF in light of the circumstances of the particular plan, current
tax law and ERISA.
INFORMATION
YOU SHOULD KNOW
This
prospectus contains information you should consider when making an investment
decision about the units. You may rely on the information contained in this
prospectus. Neither USOF nor its General Partner has authorized any person
to
provide you with different information and, if anyone provides you with
different or inconsistent information, you should not rely on it. This
prospectus is not an offer to sell the units in any jurisdiction where the
offer
or sale of the units is not permitted.
The
information contained in this prospectus was obtained from us and other sources
believed by us to be reliable.
You
should rely only on the information contained in this prospectus or any
applicable prospectus supplement or any information incorporated by reference
to
this prospectus. We have not authorized anyone to provide you with any
information that is different. If you receive any unauthorized information,
you
must not rely on it. You should disregard anything we said in an earlier
document that is inconsistent with what is included in this prospectus or any
applicable prospectus supplement or any information incorporated by reference
to
this prospectus. Where the context requires, when we refer to this “prospectus,”
we are referring to this prospectus and (if applicable) the relevant prospectus
supplement.
You
should not assume that the information in this prospectus or any applicable
prospectus supplement is current as of any date other than the date on the
front
page of this prospectus or the date on the front page of any applicable
prospectus supplement.
We
include cross references in this prospectus to captions in these materials
where
you can find further related discussions. The table of contents tells you where
to find these captions.
SUMMARY
OF PROMOTIONAL AND SALES MATERIAL
USOF
has
used the following sales material it has prepared:
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USOF’s
website,
www.unitedstatesoilfund.com;
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Press
release dated the effective date of USOF’s initial registration statement;
and
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Brochure
dated April 3, 2006.
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The
materials described above are not a part of this prospectus or the registration
statement of which this prospectus is a part and have been submitted to the
staff of the Securities and Exchange Commission for their review pursuant to
Industry Guide 5.
PATENT
APPLICATION PENDING
A
patent
application by the General Partner directed to the creation and operation of
the
United States Oil Fund, LP is pending and the General Partner’s registration of
USOF’s trademarks is in process at the United States Patent and Trademark
Office.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the Securities and Exchange Commission Form S-3 under the Securities
Act, with respect to the units offered hereby. This prospectus is part of such
registration statement. This prospectus does not contain all the information
set
forth in the registration statement and the exhibits and schedules thereto,
to
which reference is hereby made for further information. This prospectus does
not
contain all the information included in a registration statement because we
have
omitted parts of the registration statement as permitted by the SEC’s rules and
regulations. For further information about us, you should refer to the
registration statement and the exhibits filed with the registration statement.
You may inspect and copy all or any portion of the registration statement or
any
reports, proxy statements, or other information at the Securities and Exchange
Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. You can request copies of these documents by writing to the Securities
and Exchange Commission and paying a fee for the copying cost. Please call
the
Securities and Exchange Commission at 1-800-SEC-0330 for more information about
the operation of the public reference room. In addition, such information may
be
accessed electronically at the Securities and Exchange Commission’s web site on
the Internet at www.sec.gov.
INCORPORATION
BY REFERENCE OF CERTAIN INFORMATION
We
are a
reporting company and file annual, quarterly and current reports and other
information with the Securities and Exchange Commission. The rules of the
Securities and Exchange Commission allow us to “incorporate by reference”
information that we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the Securities and Exchange Commission
will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings we will make with the
Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d)
of
the Securities Exchange Act of 1934 from the date of this Post-Effective
Amendment until our offering is completed:
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Annual
Report on Form 10-K for the year ended December 31, 2006 filed March
30,
2007 and amended September 20,
2007;
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Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2007 and June
30,
2007, filed May 15, 2007 and August 9, 2007,
respectively.
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Current
Reports on Form 8-K filed January 19, 2007 (as amended on January
19,
2007), January 29, 2007, February 14, 2007, March 19, 2007, April
4, 2007,
April 20, 2007, April 26, 2007, May 30, 2007, June 4, 2007, June 15,
2007, July 20, 2007, August 29, 2007, September 27, 2007 and October
26,
2007; and
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The
description of our units contained in the registration statement
on Form
8-A filed with the Securities and Exchange Commission on March 13,
2006
pursuant to Section 12(b) of the Securities Exchange Act of 1934,
together
with all amendments or reports filed for the purpose of updating
such
description.
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We
will
provide to each person to whom a prospectus is delivered, including any
beneficial owner, a copy of these filings at no cost, upon written or oral
request at the following address or telephone number:
United
States Oil Fund, LP
Attention:
Nicholas D. Gerber
1320
Harbor Bay Parkway, Suite 145
Alameda,
CA 94502
(510)
522-3336
STATEMENT
OF ADDITIONAL INFORMATION
UNITED
STATES OIL FUND, LP
Before
you decide whether to invest, you should read this entire prospectus carefully
and consider the risk factors beginning on page 10.
This
prospectus is in two parts: a disclosure document and a statement of additional
information. These parts are bound together, and both parts contain important
information.
This
statement of additional information and accompanying disclosure document are
both dated October 31, 2007.
TABLE
OF CONTENTS
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The
Commodity Interest Markets
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SAI-3
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Potential
Advantages of Investment
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SAI-10
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CFTC
Annual Report
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SAI-12
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The
Commodity Interest Markets
General
The
Commodity Exchange Act or CEA governs the regulation of commodity interest
transactions, markets and intermediaries. In December 2000, the CEA was amended
by the Commodity Futures Modernization Act of 2000, or CFMA, which substantially
revised the regulatory framework governing certain commodity interest
transactions and the markets on which they trade. The CEA, as amended by the
CFMA, now provides for varying degrees of regulation of commodity interest
transactions depending upon the variables of the transaction. In general, these
variables include (1) the type of instrument being traded (e.g., contracts
for
future delivery, options, swaps or spot contracts), (2) the type of commodity
underlying the instrument (distinctions are made between instruments based
on
agricultural commodities, energy and metals commodities and financial
commodities), (3) the nature of the parties to the transaction (retail, eligible
contract participant, or eligible commercial entity), (4) whether the
transaction is entered into on a principal-to-principal or intermediated basis,
(5) the type of market on which the transaction occurs, and (6) whether the
transaction is subject to clearing through a clearing organization. Information
regarding commodity interest transactions, markets and intermediaries, and
their
associated regulatory environment, is provided below.
Futures
Contracts
A
futures
contract such as an Oil Futures Contract is a standardized contract traded
on,
or subject to the rules of, an exchange that calls for the future delivery
of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of commodities, including
agricultural products, bonds, stock indices, interest rates, currencies, energy
and metals. The size and terms of futures contracts on a particular commodity
are identical and are not subject to any negotiation, other than with respect
to
price and the number of contracts traded between the buyer and
seller.
The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying of commodity or by making
an offsetting sale or purchase of an identical futures contract on the same
or
linked exchange before the designated date of delivery. The difference between
the price at which the futures contract is purchased or sold and the price
paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts, such
as
stock index contracts, settle in cash (reflecting the dif