**Exhibit 4.9**

 

SHARE PURCHASE AGREEMENT

 

To:          The Person listed on the CounterpartSignature Page hereof (the “Seller”)

 

Re:          Purchase of shares post-dividend common stock thatare “free-trading” (the “Common Stock”) of Two Moons Kachinas Corp., a Nevadacorporation (“Two Moons”), pursuant to this Share Purchase Agreement (the “Agreement”)

 

To Whom it May Concern:

 

The undersigned (the “Buyer”) offers to purchaseCommon Stock of Two Moons from you (the “Seller”) as follows, to-wit:

 

RECITALS:

 

WHEREAS, the Buyer (as defined herein), along withcertain other persons, is acquiring Common Stock of Two Moons from certaincurrent stockholders of Two Moons (respectively, the “Change in Control Buyers”and the “Change in Control Transaction”); and

 

WHEREAS, the list of Change in Control Buyers isattached hereto as Exhibit A and incorporated herein by reference; and

 

WHEREAS, the Buyers that are participating in theChange in Control Transaction have identified a potential reorganization,merger or acquisition for Two Moons with Advanced Cell Technology, Inc., aDelaware corporation (“ACT”), that is intended to be completed at or about thesame time as the Change in Control Transaction, which may or may not bebeneficial to Two Moons and its stockholders (the “Reorganization Transaction”);and

 

WHEREAS, a dividend of 8.3 shares of Common Stock ofTwo Moons has been effected prior to the completion of this Agreement (the “Dividend”),and it is contemplated that the Seller will sell and the Buyer will purchasepost-dividend Common Stock of Two Moons; and

 

WHEREAS, the Seller and the Buyers agree that theclosing of this Agreement shall be subject to the closing of the ReorganizationTransaction on or before January 18, 2005, or this Agreement will be void;

 

NOW, THEREFORE, the parties hereto do hereby agreeas follows:

 

A.            The Seller is theowner of the shares of Common Stock of Two Moons indicated on the CounterpartSignature Page that the Seller wishes to sell to the Buyer at an aggregatepurchase price as indicated on the Counterpart Signature Page, and that theBuyer wishes to purchase from the Seller at an aggregate purchase price asindicated on the Counterpart Signature Page.

 

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B.            Two Moons is apublicly-held company, having previously and lawfully offered and sold a portionof its securities in accordance with applicable federal and state securitieslaws, rules and regulations. Two Moons files reports with the Securitiesand Exchange Commission under Section 13 of the Securities Exchange Act of1934, as amended (the “Exchange Act”), and the Seller and the Buyer have beenprovided with access to all reports of Two Moons via the EDGAR system of theSecurities and Exchange Commission that have been filed by or with respect toTwo Moons during the past 12 months and longer.

 

C.            The Seller and theBuyer are aware of all material information respecting the past, present andproposed business operations of Two Moons, its management, financial positionor otherwise; that there is no current “established trading market” for the CommonStock of Two Moons which Common Stock is quoted on the OTC Bulletin Board ofthe National Association of Securities Dealers, Inc. (the “NASD”) underthe symbol “TWMK,” and that it is uncertain at this time whether there will beany future market for the Common Stock of Two Moons; and that the purchaseprice being paid for the Two Moons Common Stock bears no relationship toassets, book value or other established criteria of value.

 

D.            The Seller and theBuyer are also aware of the potential reorganization, merger or acquisition byTwo Moons of ACT, as referenced in these Recitals above and as more particularlydescribed in the Disclosure Letter that is attached hereto as Exhibit Band incorporated herein by reference;

 

E.             The Buyerrepresents and warrants the following as an additional inducement for the offeroutlined in this Agreement to purchase the Common Stock of the Seller coveredby this Agreement, to-wit:

 

(i)         The Buyer is not relying on anyrepresentation or warranty of the Seller whatsoever, except thoserepresentations and warranties contained in this Agreement;

 

(ii)        The Buyer has conducted the Buyer’s owninvestigation of the risks and merits of an investment in Two Moons, and to theextent desired, including, but not limited to a review of Two Moons’ books andrecords, financial and otherwise, its annual, quarterly and current reports andany registration statements contained in the Edgar Archives of the Securitiesand Exchange Commission, and has had the opportunity, to the extent that theBuyer deemed reasonable or necessary, to discuss this documentation with thedirectors and executive officers of Two Moons; to ask questions of thesedirectors and executive officers; and that to the extent requested, all suchquestions have been answered satisfactorily;

 

(iii)       The Buyer is an “accredited investor” as thatterm is known or defined under applicable United States securities laws,rules and regulations, and/or is fully capable of evaluating the risks andmerits associated with

 

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the execution of this Agreement and the purchase ofthis Common Stock hereunder, without qualification;

 

(iv)       The Buyer has full power and authority toexecute and deliver this Agreement, without qualification;

 

(v)        The Buyer is purchasing the Common Stock forBuyer’s account only, and not for the account of or in concert with any otherperson or entity, and except as otherwise set forth immediately below, thereare no affiliations, arrangements, understandings or agreements, written ororal, respecting the subsequent resale of any of the Common Stock with anyperson or any of the other Change in Control Buyers
| except: |   | ** ** |
|---------|--------|------------|

 

(vi)       The Buyer will fully comply with allprovisions of United States and state securities laws, rules andregulations in the resale of any of the Common Stock acquired hereunder, andwill timely make all required filings regarding beneficial ownership of theCommon Stock with the Securities and Exchange Commission, as may be applicable;

 

(vii)      The Buyer is aware of the so-called “ WulffLetter” that is attached hereto as Exhibit C and incorporated herein byreference, and understands that if the Securities and Exchange Commission takesthe position in the future that the Common Stock being purchased hereunder issubject to resale under the Wulff Letter, that the Buyer may be required tohave the resale of such Common Stock registered with the Securities andExchange Commission prior to resale.

 

(viii)     Buyer is not an “affiliate” or an “associate”as those terms are defined under applicable United States securities laws,rules and regulations of Two Moons or ACT
| except: |   | ** ** |
|---------|--------|------------|

 

(ix)       Buyer (and its principals, if an entity) hasnot: (a) been party to any adverse proceeding brought by the Securitiesand Exchange Commission or any similar state agency; (b) any materialcriminal proceeding regarding the purchase or sale of securities or othercrimes, excluding only misdemeanor crimes; or (c) filed bankruptcyproceedings within the past five years, except:
|       |
|------------|
| ** ** |
| ** ** |

 

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(x)        The Buyer understands that the resale of theCommon Stock being purchased hereunder is subject to the Lock-Up/Leak-OutAgreement that is attached hereto as Exhibit D and incorporated herein byreference, and that the Buyer must execute and deliver such Lock-Up/Leak-OutAgreement as a condition to the closing of this Agreement;

 

(xi)       The Buyer is able to pay Buyer’s debts asthey become due, and the Buyer (a) is not currently insolvent;(b) has made no general or other assignment for the benefit of creditors;and (c) is not party to any material proceeding that would have an adverseeffect on Buyer’s assets;

 

(xii)      The funds that the Buyer is utilizing topurchase the Common Stock being acquired hereunder are lawful funds of theBuyer that were earned or acquired by or paid to the Buyer for lawful purposes;

 

(xiii)     The Buyer agrees and understands that theamount being paid by the Buyer as outlined in Exhibit A may be more orless than other Change in Control Buyers as indicated in Exhibit A andthat a portion of such amount may directly or indirectly benefit other Changein Control Buyers and/or will be utilized to pay expenses that are outlined inExhibit B.

 

Accordingly, the parties hereto (subject to theSeller’s acceptance hereof) agree as follows:

 

A.            The Buyer herebyoffers to purchase from the Seller the shares of Common Stock of Two Moons asindicated on the Counterpart Signature Page, free and clear of any liens, encumbrancesand/or other restrictions whatsoever, other than those outlined herein or inany attachment hereto, and the Seller agrees to sell to the Buyer the shares ofCommon Stock of Two Moons owned by the Seller as indicated on the CounterpartSignature Page, free and clear of any such liens, encumbrances and/orrestrictions whatsoever, other than those outlined herein or in any attachmenthereto.

 

B.            The purchase priceof the Common Stock shall be as indicated on the Counterpart Signature Page,payable on payment and delivery of the Common Stock by the Seller to the Buyerfor purchase and sale under this Agreement.

 

1.             Certificatesrepresenting the Common Stock shall be delivered to the Buyer in exchange forpayment by the Buyer to the Seller of the amounts required herein, by checkdrawn on the Trust Account of Branden T. Burningham, Esq. from funds to bedeposited by the Buyer for the purchase and sale of the Common Stock, whichpayment shall be subject to the transfer of the Common Stock into the Buyer’sname and delivery of the stock certificate or

 

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certificatesrepresenting the Common Stock to the Buyer by Federal Express, prioritydelivery, which stock certificate shall bear no restriction or notation exceptthose resale conditions of the Lock-Up/Leak-Out Agreement.

 

2.             By acceptance ofthis offer, the Seller hereby covenants and warrants:

 

(i)            That the Seller has the right to sell, transfer,convey and assign the Common Stock, without qualification; and

 

(ii)           That the Seller has done no act to encumber theCommon Stock;

 

C.            The Seller and theBuyer agree that any action based upon this Agreement or any of the matterscovered hereby shall be brought only in the federal and state courts situatedin the State of Utah, and that the non-defaulting party in any such actionshall be entitled to recover reasonable attorney’s fees and costs.

 

D.            The Buyer and theSeller agree that the Escrow Agent shall not be liable to either for anyactions taken in good faith, based upon this Agreement and the respectiveinstructions of the Buyer and the Seller; and that in the event of any actualor perceived dispute regarding the duties of the Escrow Agent hereunder of theinstructions of the Buyer and the Seller respecting this Agreement or thepurchase of the Common Stock hereunder, that the Escrow Agent may interpleadthe Common Stock into a civil action brought in the federal and state courtssituated in the State of Utah, and that the Escrow Agent shall be entitled torecover reasonable attorney’s fees and costs incurred in any such action, fromthe Buyer and the Seller, jointly and severally, which such fees and costsshall be a first lien on the Common Stock, in such event.

 
|   | BUYER: |
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| Dated: |   |   | By: |   |   |
|   |   | (Signature) |   |
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|        |        |  |  |  |  |

 

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ADDENDUM TOSHARE PURCHASE AGREEMENT

 

Re:          Purchase of shares ofpost-dividend common stock that are “free-trading” (the “Common Stock”) of TwoMoons Kachinas Corp., now known as A.C.T. Holdings, Inc., a Nevada corporation(“ACT”), pursuant to a Share Purchase Agreement (the “Agreement”)

 

To Whom it May Concern:

 

RECITALS:

 

WHEREAS, the undersigned Buyer, along with certainother persons, is acquiring Common Stock of ACT from certain currentstockholders of ACT (respectively, the “Change in Control Buyers” and the “Changein Control Transaction”); and

 

WHEREAS, the Buyers that are participating in theChange in Control Transaction have identified a potential reorganization,merger or acquisition for ACT with Advanced Cell Technology, Inc., aDelaware corporation, that was intended to be completed at or about the sametime as the Change in Control Transaction (the “Reorganization Transaction”);and

 

WHEREAS, the Seller and the Buyers agreed that theclosing of the Agreement would be subject to the closing of the ReorganizationTransaction and would take place on or before January 18, 2005, or thisAgreement would be void; and

 

WHEREAS, the closing date of the ReorganizationTransaction has been extended; and

 

WHEREAS, the undersigned, for their mutual benefit,desire to extend the January 18, 2005, date now set forth in the Agreementto January 31, 2005;

 

NOW, THEREFORE, the parties hereto do hereby agreeas follows:

 

1.             The Seller and the Buyer to this Agreement herebyagree to extend the date on which this Agreement and the ReorganizationTransaction shall be completed to January 31, 2005; and

 

2.             All other terms and conditions of the Agreementshall remain in full force and effect, including, but not limited to the Lock-Up/Leak-OutAgreement(s) that comprised an integral part of the Agreement.

 
|   | BUYER:      |
|--------|-------------|
|   |        |
|   |        |
|   |        |
|   |        |
|   |        |
|   |        |
| Dated: |        |   | ** ** |   |
|   | (Signature) |
|        |             |  |  |  |

 

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**EXHIBIT B**

 

DISCLOSURE LETTER

 

December 31, 2004

 

TO WHOM ITMAY CONCERN:

 

Re:                          Opportunity whereby Two Moons Kachinas Corp.,a Nevada corporation (the “Company,” now named A. C. T. Holdings, Inc.”effective December 31, 2004), will acquire 100% of a “start-up” companythat is presently a “going concern” (the “Reorganization Transaction”) that isconditioned upon a certain number of stockholders of the Company agreeing tosell a substantial interest in the Company (the “Selling Stockholders”) tocertain purchasers, some of whom were responsible for providing thisopportunity to the Company (respectively, the “Change in Control Transaction”the “Change in Control Buyers” )

 

Dear Selling Stockholder:

 

The following information is being presented foryour consideration as a potential Selling Stockholder of the Company:

 

The Change in Control Buyers have delivered a verbalproposal to the Company through their legal counsel indicating a desire toacquire a substantial interest in the Company as a condition to presenting theCompany with an opportunity to acquire Advanced Cell Technology, Inc., aDelaware corporation (“ACT”). ACT is a biotechnology company in the emergingfield of regenerative medicine. ACT’s current private placement memorandum isdated as of November 10, 2004, and was amended on December 24, 2004,(“ACT PPM”).  A copy of the ACT PPM isavailable for your prior review in considering whether to participate as aSelling Stockholder. The closing of the Reorganization Transaction is acondition to the closing of the Share Purchase Agreements that will be requiredto be executed by all Selling Stockholders.

 

This is not a solicitation to purchase any or yourshares of common stock, which, if made, will come from the Change in ControlBuyers in the form of a Share Purchase Agreement and related attachments; andyou have no obligation to sell any of your shares to anyone. This informationis given by us to the best of our knowledge and information only.

 

You should examine the annual and current reports ofthe Company on file with the Securities and Exchange Commission in its EdgarArchives at www.sec.gov prior to making any decision to become a SellingStockholder as defined herein.

 

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The proposal required the Company to effect an 8.3for one forward split of its 660,300 outstanding shares that resulted in4,980,490 shares being now outstanding. The Change in Control Buyers’ haveindicated that they must be able to acquire not less than about 4,980,000 ofthe post-split shares, more or less, before they will present the ACTreorganization to the Company or approximately 90% of the outstanding votingsecurities of the Company.

 

The Change in Control Buyers are agreeable to pay anaggregate of $435,000 for such shares, with some paying more than others andsome providing services. See the Change in Control Buyers list that isExhibit A to the Share Purchase Agreements. It is proposed that any of theSelling Stockholders who paid $1.00 for their pre-split shares on the Company’sinitial public offering (“IPO”) be paid $0.12 for every post-split share thatthey sell; and that they keep a portion of their shares that will be increasedby the 8.3 for one forward split that has already been effected. The Buyerswill get the forward split dividend of 8.3 shares on all shares that theypurchase. Owners of approximately 70,000 pre-split shares (or 581,000post-split shares) of the common stock sold on the Company’s IPO will berequired to sell shares to the Change in Control Buyers to satisfy thecondition of acquiring the number of shares sought to be purchased by theChange in Control Buyers. Certain principal stockholders of the Company havetentatively agreed to sell shares of their common stock to meet this proposalat their cost basis in their shares, even though there is a nominal bid priceof $1.00 pre-split or $0.12 post-split for the common stock of the Company onthe OTC Bulletin Board, as outlined below, as follows: David C. Merrell, ourcurrent President and sole director and executive officer who purchased 250,000pre-split shares for $12,500 or $0.05 per pre-split share prior to the IPO maybe willing to sell up to 232,139 pre-split shares (or 1,926,667 post-splitshares) at his purchase price of $0.05 per pre-split share (or $0.006024 perpost-split shares) or an aggregate of $11,606.24 (what shares he retains willbe subject to the Lock-Up/Leak-Out Agreement that is discussed below [he wouldbe retaining approximately 17,861 pre-split shares or 148,246 post-splitshares); R. Kip Paul, a founder of the Company, and his family members, whopurchased 250,000 pre-split shares for $12,500 or $0.05 per pre-split shareprior to the Company’s IPO may be willing to sell up to 246,988 pre-splitshares (or 2,050,000 post-split shares) at their purchase price of $0.05 perpre-split share (or $0.006024 per post-split shares) for aggregate grossproceeds of $12,350 (they would be retaining an aggregate of 3,000 pre-splitshares or approximately 25,000 post-split shares that would also be subject tothe Lock-Up/Leak-Out Agreement that is discussed below; Leonard W. Burningham, Esq.our legal counsel, who was issued pre-split shares of our common stock forservices valued at $0.25 per pre-split share, may be willing to sell 33,089pre-split shares (or 274,640 post-split shares) at his cost of $0.25 perpre-split share (or $0.030127 per post-split share) for aggregate grossproceeds of $8,274.08, and three of his employees and one of his sons to whomhe gave some of these shares will sell an aggregate of 9,537 of such pre-splitshares (or 79,155 post-split shares) for the $0.25 pre-split figure (or$0.030127 per post-split share) for aggregate gross proceeds of $2,384.70(these shareholders would be retaining an aggregate of approximately 4,863pre-split shares or 40,365 post-split shares); and Mark Johnson who alsoreceived pre-split shares for services valued at $0.25 per share may be willingto sell

 

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the entire 9,000 pre-splitshares (74,700 post-split shares) he received for $0.25 per pre-split share (or$0.030127 per post-split share) for $2,250.49.  Assuming that all of these shareholders agreeto sell their respective shares as outlined above, that would amount to anaggregate of $106,585.51. There is also a finder’s fee of $35,000 due to anon-affiliated party, payable by Mr. Merrell, bringing the total ofexpended funds to $141,585.50, and leaving a balance of the $435,000 of$293,414.49. The finder will also be purchasing 25,000 of the shares of SellingStockholders too for nominal consideration.

 

David C. Merrell will be required to deliver to theBuyers, the Company and ACT his agreement to pay and indemnify and hold theCompany harmless from and against all future claims and outstanding liabilitiesof the Company that arose prior to closing, including all costs and expensesincurred in connection with the closing of the Change in Control Transactionand the filing of the Company’s most recent 10-QSB Quarterly Report. Thosecosts and expenses are estimated at approximately $60,000, leaving a balance ofapproximately $233,414,49. Of this sum, Mr. Merrell has agreed to payMr. Burningham approximately $70,024.34 or approximately 30% of the netamount to be paid to Mr. Merrell, which is in addition toMr. Burningham’s legal fees. That would leave Mr. Merrell receiving anet fee of approximately $163,390.15 for his exposure on his agreement ofindemnification, along with the conveyance of the Company’s current inventoryof Kachina Dolls valued at approximately $50,500. Mr. Merrell has taken nosalary for managing the Company since its inception on May 19, 2000.Mr. Merrell and Mr. Burningham may allocate these additional fundsfor the sale of their respective shares of common stock or expenses, foraccounting purposes, as the Change in Control Buyers are each paying differingprices for their respective shares of common stock, and in some cases,services, and all of such consideration is being allocated as indicated herein,based upon agreement of the Change in Control Buyers and Mr. Merrell.

 

Certain warrants of the Company are required to beissued prior to closing, also; see the Change in Control Buyers list that isExhibit A to the Share Purchase Agreement for a description of thesewarrants. None are being issued to anyone affiliated with the Company.

 

If the ACT reorganization is completed, ACTstockholders will be issued between approximately 17,736,175 shares of theCompany’s post-split outstanding common stock, assuming the sale of all unitsof ACT in the offering outlined in the ACT PPM. ACT is required to raisecertain minimum proceeds to close the Reorganization Transaction, amounting tonot less than $3,000,000; ACT presently has in excess of $4,500,000 insubscriptions under the ACT PPM. You can review a copy of the Merger Agreementrespecting the Reorganization Transaction prior to determining whether you willparticipate as a Selling Stockholder, which is available on request.

 

There is a current limited market for the commonstock of the Company on the OTC Bulletin Board under the symbol of TMOO, of$1.00 per each pre-split share or $0.12 per each post-split shares (TWMK is thepost-split trading symbol). The price is essentially the same, regardless ofwhether the computation is post or pre-split, when

 

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times by the number of sharesrepresented. 1,000 pre-split shares at $1,000 equals $1,000; and 1,000 sharestimes 8.3 equals 8,300 post-split shares times $0.12 equals $996.

 

For the nine months ended September 30, 2004,the Company had revenues from operations of $2,500, with $2,000 in cost ofgoods sold for a gross profit of $500. It had $0 revenues from operations inthe nine months ended September 30, 2003. Its general and administrativeexpenses for the nine months ended September 30, 2004 and 2003, were$18,185 and $26,777, respectively, which resulted in a loss from operations of($17,685) and ($26,741), respectively. For the nine months endedSeptember 30, 2004 and 2003, it had interest income of $18 and $36 and anet loss of ($17,667) and ($26,741), respectively.

 

Please review the Company’s filings in the EdgarArchives, or if you do not have Internet access, copies of the reports and/orregistration statements filed during the past 12 months will be provided to youat no cost.

 

We have conducted “due diligence” on the Change inControl Buyers and ACT, and have had our questions satisfactorily answered;however, we are not responsible for the accuracy of any of the ACT information.

 

The closing of the Share Purchase Agreements requirethat unless the Reorganization Transaction closes by January 18, 2005, anyShare Purchase Agreements that have been executed will be void; and allwarrants issued as outlined in the Change in Control Buyers list will berepurchased for their $10,000 purchase price.

 

The following are the terms and provisions that theCompany has agreed upon and upon which the proposal was subject as conditionsof the Change in Control Transaction and the Reorganization Transaction:

 

1.             That the SellingStockholders be provided with a Disclosure Letter in substantially this form.

 

2.             That David C.Merrell and Leonard W. Burningham, Esq. execute and deliver theLock-Up/Leak-Out Agreement that shall cover all shares of common stock of theCompany that they retain following the Change in Control Transaction, whichLock-Up/Leak-Out Agreement that will limit them to resales of 1/12 of their respectiveshares per month for the 12 consecutive months from the closing of the Changein Control Transaction, among other conditions;

 

3.             That the Change inControl Buyers execute and deliver the Lock-Up/Leak-Out Agreement that shall coverall shares of common stock purchased by them in the Change in ControlTransaction that will limit them to resales of 1/12 of their respective sharesper month for the 12 consecutive months from the filing of the 8-K12g-3 CurrentReport for successor issuers from the closing of the Reorganization Transaction(a copy of that Lock-Up/Leak-Out Agreement will be attached to the SharePurchase

 

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Agreements to cover any sharesbeing sold by the Selling Stockholders), among other conditions;

 

4.             That there be a “quietperiod” for at least ninety (90) days from the date of the closing of theReorganization Transaction that would limit public press releases to the typeof information that a company in the registration process with the UnitedStates Securities and Exchange Commission can disseminate so that promotionaltypes of releases are avoided during that period; and

 

5              That theReorganization Transaction will have these terms in the requisite documents.

 

Copies of all of these documents are available foryour prior review on request.

 

If you have any questions or would like to reviewthe ACT PPM or any of these other documents or if you would like to know theminimum funding that ACT must have to close the Reorganization Transaction,please contact me at 801-942-0555 or Leonard W. Burningham, Esq. at801-363-7411.

 
|   | A.C.T.  Holdings, Inc.,        |
|--------|-------------------------------------|
|   | Formerly,  Two Moons Kachinas, Inc. |
|   |                                |
|   | David C.  Merrell, President        |

 

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**EXHIBIT “C”**

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 
|  |   | January 21, 2000 |   |
|--|--------|------------------|--------|

 

Mr. Ken Worm

Assistant Director

OTC Compliance Unit

NASD Regulation, Inc.

9513 Key West Avenue

Rockville, MD 20850

 

Re:    NASDRegulation, Inc.

Incomingletter dated November 1, 1999

 

Dear Mr. Worm:

 

You have raised a question regarding the “freetrading” status(1) of securities initially issued by so-called blank checkcompanies in a number of factual scenarios.

 

A blank check company is a development stage company that has nospecific business plan or purpose or has indicated its business plan is toengage in a merger or acquisition with an unidentified company or companies, orother entity or person.  In 1990, the U.S. Congress found that offerings by these kinds of issuers were common vehiclesfor fraud and manipulation in the market for penny stocks which underminesinvestor confidence and inhibits legitimate capital formation by small issuersand other companies.(2) The Commission has adopted several rules, as Congressdirected, to deter fraud in connection with registered offerings by blank checkcompanies.(3)  The Commission has alsoexcluded blank check companies from eligibility for several exemptions fromSecurities Act registration requirements.(4)

 

Each of your scenarios suggests the availability ofRule 144 or Section 4(1) of the Securities Act following thelapse of some period of time following the issuance of shares in the

 

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(1)           Because the SecuritiesAct of 1933 establishes the requirement to register securities for sale,subject to a series of exemptions, the concept of freely tradable securities is not atechnically accurate one.  In commonparlance, the term is used to describe securities subject to the exemptionprovided by section 4(1) when it is available because no issuer underwriter ordealer is engaged in the transaction.

 

(2)           Securities EnforcementRemedies and Penny Stock Reform Act of 1990, S. 647, Pub. L. 101-429, See H. R.Rep. No/ 101-617; 101 Cong., 2d Sess. at 23.

 

(3)           Rule419 under the Securities Act of 1933 and Rule 15g-8 under the SecuritiesExchange Act of 1934

 

(4)           Seee.g., Rule 504 under Regulation D and Regulation A.

 

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blank check company regardlessof whether a merger has occurred.  In anumber of cases, promoters of these issues appear to be in the business ofcreating blank check companies, then gifting or selling the securities of thecompanies without registration, either directly or through intermediaries.

 

Section 4(1)exempts transactions not involving issuers, underwriters or dealers.  The availability of the exemption dependsupon the facts and circumstances of each particular situation, which the staffgenerally is not in a position to determine. Nonetheless, transactions in blank check company securities by theirpromoters or affiliates, especially where they control or controlled the “float”of the “freely tradable” securities, are not the kind of ordinary tradingtransactions between individual investors of securities already issued thatSection 4(1) was designed to exempt.(5)

 

Furthermore,as the Commission has indicated, purchasers who are mere conducts for a widerdistribution of the securities are “underwriters.” When they do sell, thesepurchasers assume the risk of possible violation of the registrationrequirements of the Securities Act and consequent civil liabilities.  Persons engaged in the business of buying andselling securities who function in this capacity are subject to carefulscrutiny.(6)

 

It is our viewthat, both before and after the business combination or transaction with anoperating entity or other person, the promoters or affiliates of blank checkcompanies, as well as their transferees, are “underwriters” of the securitiesissued. Accordingly, we are also of the view that the securities involved canonly be resold through registration under the Securities Act.(7)  Similarly, Rule 144 would not be availablefor resale transactions in this situation, regardless of technical compliancewith that rule, because these resale transactions appear to be designed todistribute or redistribute securities to the public without compliance with theregistration requirements of the Securities Act.(8)

 

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(5)           SECv. Cavanagh. 1 F. Supp. 3d 337 (S.D.N.Y 1998).

 

(6)           ReleaseNo. 33-4552 (Nov. 6, 1962).

 

(7)           This view is analogousto the one the Commission has expressed with respect to business combinationsunder Rule 145 where affiliates of parties to the transaction are viewed to be “underwriters.”Further, the nature of these types of resale transactions are closely analogousto shares from an unsold allotment held by professional underwriters.  Generally, these securities are only resaleablethrough registration.  Shares purchasedby non-affiliates in a registered transaction such as one offered in compliancewith Rule 419, however, would not be subject to this restriction.

 

(8)           ReleaseNo. 33-5223 (Jan. 11, 1972).

 

In view of theobjectives and policies underlying the Act, the rule shall not be available toany individual or entity with respect to any transaction which, although intechnical compliance with the provisions of the rule, is part of a plan by suchindividual or entity to distribute or redistribute securities to thepublic.  In such case, registration isrequired.

 

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Each of your scenarios illustrates what we believe to be a schemeto evade the registration requirements of the Securities Act.  Consequently, it is our view that the resaleof the shares in scenarios 1 through 7 would require registration.

 

In addition, with regard toscenario 6, we are of the view that Rule 701 is not available for issuances tocompanies or entitles, but only to individuals. In view of the business of a blank check company which generally has fewor no employees, it seems unlikely that reliance upon this exemption would beappropriate.  It is our view that Rule701 would generally not be available to blank check companies for issuingshares to their consultants or advisors.

 

Moreover, we have beenadvised by staff of the Division of Market Regulation that Rules 101 and 102 ofRegulation M(9) impose restrictions on issuers, selling shareholders anddistribution participants when they effect transactions in securities that arepart of a distribution.  Generally, a distribution exists when a sufficientmagnitude of shares is being sold and special selling efforts are employed tosell these shares.  If a distributionexists, the persons involved in the distribution are prohibited from biddingfor or purchasing the securities in distribution.  The rule covers persons selling securities,their affiliates, and others participating in the distribution.  Persons selling in the manner described inyour letter should carefully analyze the facts surrounding the sales to determinewhether the security being sold is in distribution for purposes of RegulationM.  This analysis should specificallyconsider the actions taken by any persons assisting with the transactions.  In particular, selling through a market makerinto an illiquid market raises heightened concerns regarding compliance withRegulation M.(10) 

 

Because these positions arebased upon representations made in your letter, any different facts orconditions might require a different conclusion.

 
|   | Sincerely,               |
|--------|--------------------------|
|   |                     |
|   |                     |
|   | /s/ Richard K. Wulff     |   |
|   | Richard K. Wulff, Chief  |
|   | Office of Small Business |

 

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(9)           17 CFR 242.101 - 102.

 

(10)         See Release No. 34-38067 (Dec. 20. 1996).

 

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November 1, 1999

 

Richard K. Wulff

Assistant Director

Office of Small Business

Division of Corporation Finance

450 5thStreet, N.W.

Washington, D.C. 20549

 

Re:   Tradeabilityof Securities Distributed by Means Other than Public Offerings 

 

Dear Mr. Wulff:

 

The purpose of this letter isto request the guidance of the Division of Corporation Finance (“Division”) asto whether certain specific factual scenarios present potential violations ofSection 5 of the Securities Act of 1933 (“Securities Act”).  The Market Regulation Department’s OTC ComplianceUnit (“Unit”) reviews Form 211 filings submitted by potential market makers todetermine whether they are in compliance with SEC 15c2-11 and NASD Rule 6740before they are cleared to initiate or resume quotation of a non-Nasdaq securityin any quotation medium.  During thecourse of those reviews, the staff has been presented with certain factualscenarios that, based on the nature of the initial security distribution ofblank check shell company issuers, either the initial distribution or theredistribution of the shares in the aftermarket may constitute violations ofSection 5 of the Securities Act.  Setforth below are various scenarios that the Unit has encountered, or feels thatit may encounter, while reviewing Form 211 fillings.  The staff requests that the Division provideits opinion on the following scenarios with respect to potential violations ofthe securities rules:

 

1.             As a gift the issuertransferred a nominal amount of its shares (less than 10% of the total float)to between 20 and 50 individuals under Section 4(2) of the Securities Act.  After the gift recipients have held theirshares for two years, a broker/dealer submits a Form 211 citing the giftedshares as the only free-trading securities. The application does not disclose whether the recipients aresophisticated investors, although the individual who controls the issuerfrequently has gifted shares of other companies to the same individuals onother occasions.

 

2.             The issuertransferred a significant amount of its shares to one individual under Section4(2) of the Securities Act.  Then thatindividual in turn gifts a nominal amount of the shares to between 20 and 50individuals.  After the gift recipientshave held their shares for two years, a broker/dealer submits a Form 211 citingthe gifted shares as the only free-trading securities.  The application does not disclose whether therecipients are sophisticated investors, although the individual who gifted theshares frequently has gifted shares of other companies to the same individualson other occasions.

 

 

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3.             The issuertransferred a significant amount of its shares to one individual under Section4(2) of the Securities Act.  Thatindividual holds the shares for two years and then in turn gifts a nominalamount of the shares to between 20 and 50 individuals.  After the gift recipients have held theirshares a few months, a broker/dealer submits a Form 211 citing the giftedshares as the only free-trading securities. The application does not disclose whether the recipients are sophisticatedinvestors, although the individual who gifted the shares frequently has giftedshares of other companies to the same individuals on other occasions.

 

4.             A small number ofshareholders (less than ten) hold all of the free-trading shares.  A broker/dealer submits a Form 211 indicatingthat the concentration of ownership in the hands of so few shareholders willnot result in an ongoing distribution because it expects the market for thesecurity to develop slowly.

 

5.             A small number ofshareholders (less than ten) control nearly all (more than 90%) of the freetrading shares in the issuer.  Theremaining nominal amount of free-trading shares (less than 10%) are widely dispersedamong a larger number of shareholders (50 or more individuals).  A broker/dealer submits a Form 211 indicatingthat the concentration of ownership in the hands of so few shareholders willnot result in an ongoing distribution because it expects the market for thesecurity to develop slowly and considers the number of total shareholders to bedeterminative.

 

6.             An issuer controlledby one individual issued shares to another company controlled by the sameindividual pursuant to SEC Rule 701.  Theissuer filed a Form 10 with the SEC that became effective by default.  The second company then sells all its sharesin the issuer through a brokerage firm. A second broker/dealer submits a Form 211 indicating that the sharessold through the first broker/dealer are all free-trading securities.

 

7.             A reporting shellcompany merged with a private company and the former controlling shareholder ofthe reporting shell company sold his shares to numerous individuals more thanthree months after he ceased to be an affiliate of the post-mergercompany.  A market maker submits a Form211 citing the post-merger shares sold by the former control person as the onlyfree-trading shares.

 

Thank you for your attention tothis matter.  We look forward toreceiving the Division’s guidance on whether any of these scenarios are ofregulatory concern to the Division.  Ifyou have any questions, please do not hesitate to contact me at (301) 978-2097.

 
| Sincerely,           |
|----------------------|
|                 |
| /s/ Ken Worm         |   |
| Ken Worm             |
| Assistant  Director  |
| OTC  Compliance Unit |

 

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