Unassociated Document


     

    SECURITIES
PURCHASE AGREEMENT

     

    Power
Efficiency Corporation

    3960
Howard Hughes Parkway

    Suite
460

    Las
Vegas, NV 89169

    


    Ladies
& Gentlemen:

    


    Each
undersigned investor set forth on the Schedule of Investors attached as Annex I
hereto (each, an “Investor” and, collectively, the “Investors”), hereby confirms
its agreement with you as follows:

     

    1. This
Securities Purchase Agreement (the “Agreement”) is made as of August 7, 2009
between Power Efficiency Corporation, a Delaware corporation (the “Company”),
and each of the Investors.

     

    2. The
Company has authorized the sale and issuance of up to 125,000 units (the
“Units”) to the Investors in a private placement offering (the “Offering”)
commencing as of the date hereof and continuing through December 30, 2009 (the
“Termination Date”).  Each Unit consists of one share of Series C
Convertible Preferred Stock of the Company, par value $0.001 per share (the
“Preferred Stock”) and 50 warrants in substantially the form attached hereto as
Annex III (each a “Warrant” and collectively for all Investors, the “Warrants”)
to purchase common stock of the Company, par value $0.001 per share (the “Common
Stock”) at $0.40 per share of Common Stock.  Initially, one share of
Preferred Stock shall be convertible into one hundred (100) shares of Common
Stock, subject to adjustment as set forth in the Certificate of Designation
setting forth the rights, preferences and privileges of the Preferred
Stock.  The Units, Preferred Stock, Warrants and shares of Common
Stock underlying the Warrants are referred to collectively herein as the
“Securities”.

     

    3. The
Company and the Investors agree that each Investor will, severally and not
jointly, purchase from the Company and the Company will issue and sell to the
Investors that number of Units as set forth opposite each Investor’s name on
Annex I attached hereto, for a purchase price of $40.00 per Unit, pursuant to
the Terms and Conditions for Purchase of Units attached hereto as Annex II and
incorporated herein by reference as if fully set forth herein (the “Terms and
Conditions”).  Notwithstanding the foregoing, certain Investors, as
well as certain officers and directors of the Company may purchase Units in the
Offering, with the purchase price therefore being paid through the cancellation
of deferred compensation owed, or promissory notes payable, to such Investors,
officers or directors.  Unless otherwise requested by the Investor,
certificates representing the Preferred Stock and the Warrants purchased by the
Investor will be registered in the Investor’s name and address as set forth on
Annex I.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    4. Each
Investor represents that, except as set forth below, (a) it has had no position,
office or other material relationship within the past three years with the
Company or persons known to it to be affiliates of the Company and (b) it has no
direct or indirect affiliation or association with any Financial Industry
Regulatory Authority (“FINRA”) member as of the date
hereof.  Exceptions:

     

    

      
        

      

    

    (If no
exceptions, write “none.” If left blank, response will be deemed to be
“none.”)

     

    
      
         

      

      
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    Please
confirm the foregoing correctly sets forth the agreement between us by signing
in the space provided below for that purpose. By executing this Agreement, you
acknowledge that the Company may use or rely upon (i) the information in
paragraph 4 above, (ii) the representations and warranties in Section 5 of the
Terms and Conditions, solely with respect to the Investors and (iii) the name
and address information below in preparation of the Registration Statement (as
defined in Annex II).

     

    
      
         

      

      
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    THE UNITS
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT, AND, UNLESS SO REGISTERED,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT.  THE UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS
CONFIDENTIAL SUMMARY OF TERMS AND CONDITIONS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.  THE UNITS ARE BEING OFFERED PURSUANT TO
EXEMPTIONS FROM REGISTRATION REQUIREMENTS PROVIDED BY SECTION 4(2) OF THE
SECURITIES ACT, REGULATION D AND RULE 506 THEREUNDER, CERTAIN STATE SECURITIES
LAWS AND CERTAIN RULES AND REGULATIONS PROMULGATED PURSUANT
THERETO.  THE UNITS MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.  THIS DOCUMENT DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.

     

    ANNEX
II

     

    TERMS
AND CONDITIONS FOR PURCHASE OF UNITS

     

    1. Authorization and Sale of
the Units. Subject to these Terms and Conditions, the Company has
authorized the sale and issuance of up to 125,000 Units.

     

    2. Agreement to Sell and
Purchase the Units. At each Closing (as defined in Section 3), the
Company will sell to each Investor, and such Investor will severally purchase
from the Company, upon the terms and conditions hereinafter set forth, the
number of Units set forth opposite such Investor’s name in Annex I to the
Securities Purchase Agreement (the “Agreement”) to which these Terms and
Conditions are attached as Annex II, at the purchase price set forth
thereon.

     

    3. Delivery of the Preferred
Stock and Warrants at Closing. A closing on the purchase and sale of the
Units (each, a “Closing”) shall occur at such time or times as the Company
determines at the offices of the Company’s counsel once subscriptions for at
least $500,000 have been received.  At each Closing, the Company shall
deliver to each Investor, versus payment therefor, (i) one or more stock
certificates representing the number of shares of Preferred Stock and (ii) one
or more Warrants underlying the number of Units set forth opposite such
Investor’s name in Annex I of the Agreement, each such certificate or Warrant to
be held in the name of such Investor or, if so indicated on the signature page
of the Agreement, in the name of a nominee designated by the Investor. The
Preferred Stock certificates and the Warrants shall bear an appropriate
restrictive legend as required by applicable securities laws.

     

    
      
         

      

      
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    The
Company’s obligation to issue the Units to the Investors shall be subject to the
following conditions, any one or more of which may be waived by the Company: (a)
receipt by the Company of a certified or official bank check or wire transfer of
funds in the full amount of the purchase price for the Units being purchased
hereunder, (b) receipt of aggregate investments for not less than 12,500 Units
and (c) the accuracy of the representations and warranties made by the Investors
and the fulfillment of those undertakings of the Investors.

     

    Each
Investor’s obligation to purchase the Units shall be subject to the following
conditions, any one or more of which may be waived by such Investor: (a) the
representations and warranties of the Company set forth herein shall be true and
correct as of the date of each Closing in all material respects and (b) the
Investor shall have received such documents as such Investor shall reasonably
have requested, including compliance and Secretary’s certificates and, subject
to the accuracy of the information and the representations and warranties
required to be provided by each Investor, as to exemption from the registration
requirements of the Securities Act of 1933, as amended (the “Securities
Act”).

     

    4. Representations, Warranties
and Covenants of the Company. Except as otherwise described in the
Disclosure Schedule delivered to the Investors prior to the execution of this
Agreement, the Company hereby represents and warrants to, and covenants with,
the Investors, as follows:

     

    4.1 Organization. The
Company is duly organized and validly existing under the laws of the
jurisdiction of its organization. Each of the Company and its Subsidiaries (as
defined in Rule 405 under the Securities Act) has full power and authority to
own, operate and occupy its properties and to conduct its business as presently
conducted and as described in the documents filed by the Company under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), since the end
of its most recently completed fiscal year through the date hereof, including,
without limitation, its most recent reports on Form 10-K and Form 10-Q
(collectively, the “Exchange Act Documents”) and is registered or qualified to
do business and in good standing in each jurisdiction in which the nature of the
business conducted by it or the location of the properties owned or leased by it
requires such qualification and where the failure to be so qualified would have
a material adverse effect upon the condition (financial or otherwise), earnings,
business or business prospects, properties or operations of the Company and its
Subsidiaries, considered as one enterprise (a “Material Adverse Effect”), and no
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification.

     

    4.2 Due Authorization and Valid
Issuance. The Company has all requisite power and authority to execute,
deliver and perform its obligations under the Agreement, and the Agreement has
been duly authorized and validly executed and delivered by the Company and
constitutes the legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except as rights to indemnity
and contribution may be limited by state or federal securities laws or the
public policy underlying such laws, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors’ and contracting parties’ rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
law).  Furthermore, the Company has complied with Delaware
Corporations Code Section 144(a).

     

    
      
         

      

      
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    4.3 Non-Contravention.
The execution and delivery of the Agreement, the issuance and sale of the Units
under the Agreement, the fulfillment of the terms of the Agreement and the
consummation of the transactions contemplated hereby will not (A) conflict with
or constitute a violation of, or default (with the passage of time or otherwise)
under, (i) any material bond, debenture, note or other evidence of indebtedness,
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any Subsidiary
is a party or by which it or any of its Subsidiaries or their respective
properties are bound, (ii) the charter, bylaws or other organizational documents
of the Company or any Subsidiary, or (iii) any law, administrative regulation,
ordinance or order of any court or governmental agency, arbitration panel or
authority applicable to the Company or any Subsidiary or their respective
properties other than in relation to any offering of securities under Section 5
of the Securities Act or (iv) any offering of securities under Section 5 of the
Securities Act, assuming compliance by the Investors with the terms and
conditions hereof and the truthfulness and accuracy of the Investors'
representations and warranties set forth in Section 5 hereof, except in the case
of clauses (i), (iii) and (iv) for any such conflicts, violations or defaults
which are not reasonably likely to have a Material Adverse Effect, individually
or in the aggregate, or (B) result in the creation or imposition of any lien,
encumbrance, claim, security interest or restriction whatsoever upon any of the
material properties or assets of the Company or any Subsidiary or an
acceleration of indebtedness pursuant to any obligation, agreement or condition
contained in any material bond, debenture, note or any other evidence of
indebtedness or any material indenture, mortgage, deed of trust or any other
agreement or instrument to which the Company or any Subsidiary is a party or by
which any of them is bound or to which any of the material property or assets of
the Company or any Subsidiary is subject. No consent, approval, authorization or
other order of, or registration, qualification or filing with, any regulatory
body, administrative agency, or other governmental body in the United States or
any other person is required for the execution and delivery of the Agreement and
the valid issuance and sale of the Units to be sold and issued pursuant to the
Agreement, other than such as have been made or obtained, and except for any
post-closing securities filings or notifications required to be made under
federal or state securities laws.

     

    4.4 Capitalization. As of
the date hereof and prior to giving effect to the issuance of the Units,
Disclosure Schedule 4.4 sets forth the capitalization of the Company on an
outstanding basis and on a fully-diluted basis.  Disclosure Schedule
4.4 also sets forth (i) any capital stock granted pursuant to an employee
benefit plan and (ii) any outstanding warrants, options or other
securities.  The Units to be sold and issued pursuant to the Agreement
have been duly authorized, and when issued and paid for in accordance with the
terms of the Agreement, will be duly and validly issued, fully paid and
nonassessable (other than as to a lawful offering of securities under Section 5
of the Securities Act) and as to a lawful offering of securities under Section 5
of the Securities Act, assuming the correctness of the representations and
warranties of the Investors set forth in Section 5 hereof. Except as set forth
in or contemplated by the Agreement or as described in the Disclosure Schedule,
no preemptive right, co-sale right, right of first refusal, registration right,
or other similar right exists with respect to the Units or the issuance and sale
thereof. No further approval or authorization of any stockholder, the Board of
Directors of the Company or others is required for the issuance and sale of the
Units.

     

    
      
         

      

      
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    4.5 Legal Proceedings.
Except as set forth on the Disclosure Schedule, there is no material legal or
governmental proceeding pending or, to the knowledge of the Company, threatened
(i) to which the Company or any Subsidiary is or may be a party or of which the
business or property of the Company or any Subsidiary is subject or (ii) which
adversely affects or challenges the legality, validity or enforceability of the
Agreement.

     

    4.6 Disclosure. The
representations and warranties of the Company contained in this Section 4 as of
the date hereof, do not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.

     

    4.7 Common Stock Listing.
The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and
is quoted on The Over-the-Counter Bulletin Board (the “OTCBB”), and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or removal of the
Common Stock from the OTCBB, nor has the Company received any notification that
the SEC is contemplating terminating such registration.

     

    4.8 Reporting Status. The
Company has filed in a timely manner all documents that the Company was required
to file under the Exchange Act during the 12 months preceding the date of this
Agreement. The following documents complied in all material respects with the
SEC’s requirements as of their respective filing dates, and the information
contained therein as of the date thereof did not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading:

     

    (a)
Annual Report on Form 10-K for the years ended December 31, 2007 and December
31, 2008;

     

    (b)
Definitive Proxy Statement for the Annual Meeting held on July 11,
2008;

     

    (c)
Quarterly Reports on Form 10-Q for the quarters ended June 30, 2008, September
30, 2008 and March 31, 2009; and

     

    (d) All
other documents, if any, filed by the Company with the SEC during the 12 months
preceding the date of this Agreement pursuant to the reporting requirements of
the Exchange Act.

     

    4.9 No Manipulation of
Stock. Neither the Company, nor any of its directors, officers or
controlling persons, has taken or will, in violation of applicable law, take,
any action designed to or that might reasonably be expected to cause or result
in, or which has constituted, stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Units.

     

    
      
         

      

      
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    4.10
Company not an
“Investment Company”. The Company has been advised of the rules and
requirements under the Investment Company Act of 1940, as amended (the
“Investment Company Act”). The Company is not, and immediately after receipt of
payment for the Units will not be, an “investment company” or an entity
“controlled” by an “investment company” within the meaning of the Investment
Company Act and shall conduct its business in a manner so that it will not
become subject to the Investment Company Act.

     

    4.11
Foreign Corrupt
Practices; Sarbanes-Oxley Act.

     

    (a)
Neither the Company, nor to the knowledge of the Company, any agent or other
person acting on behalf of the Company, has (i) directly or indirectly, used any
corrupt funds for unlawful contributions, gifts, entertainment or other unlawful
expenses related to foreign or domestic political activity, made any unlawful
payment to foreign or domestic government officials or employees or to any
foreign or domestic political parties or campaigns from corporate funds, (iii)
failed to disclose fully any contribution made by the Company (or made by any
person acting on its behalf of which the Company is aware) which is in violation
of law, or (iv) violated in any material respect any provision of the Foreign
Corrupt Practices Act of 1977, as amended.

     

    (b) The
Company is in compliance in all material respects with all provisions of the
Sarbanes-Oxley Act of 2002 that are applicable to it as of the date of each
Closing.

     

    4.12
Environmental.
Except as would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect (i) the Company and its Subsidiaries are in
compliance with and not subject to any known liability under applicable
Environmental Laws (as defined below), (ii) the Company has made all filings and
provided all notices required under any applicable Environmental Law, and has,
and is in compliance with, all permits required under any applicable
Environmental Laws and each of them is in full force and effect, (iii) (a) there
is no pending civil, criminal or administrative action, or pending hearing or
suit, (b) the Company has not received any demand, claim or notice of violation
and (c) to the knowledge of the Company, there is no investigation, proceeding,
notice or demand letter or request for information threatened against the
Company, in the case of each of (a), (b) and (c), under any Environmental Law,
(iv) no lien, charge, encumbrance or restriction has been recorded under any
Environmental Law with respect to any assets, facility or property owned,
operated, leased or controlled by the Company, (v) the Company has not received
notice that it has been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (“CERCLA”), or any comparable state law and (vi) no property or facility
of the Company is (a) listed or, to the knowledge of the Company, proposed for
listing on the National Priorities List under CERCLA or is (b) listed in the
Comprehensive Environmental Response, Compensation, Liability Information System
List promulgated pursuant to CERCLA, or on any comparable list maintained by any
state or local governmental authority.

     

    For
purposes of this Agreement, “Environmental Laws” means all applicable federal,
state and local laws or regulations, codes, orders, decrees, judgments or
injunctions issued, promulgated, approved or entered thereunder, relating to
pollution or protection of public or employee health and safety or the
environment, including, without limitation, laws relating to (i) emissions,
discharges, releases or threatened releases of Hazardous Materials (as defined
below) into the environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata), (ii) the manufacture,
processing, distribution, use, generation, treatment, storage, disposal,
transport or handling of Hazardous Materials and (iii) underground and above
ground storage tanks and related piping, and emissions, discharges, releases or
threatened releases therefrom. The term “Hazardous Material” means (a) any
“hazardous substance,” as defined in the Comprehensive Environmental Response,
the Resource Conservation and Recovery Act, as amended, (b) any “hazardous
waste,” as defined by the Resource Conservation and Recovery Act, as amended,
(c) any petroleum or petroleum product, (d) any polychlorinated biphenyl and any
pollutant or contaminant or hazardous, dangerous or toxic chemical, material,
waste or substance.

     

    
      
         

      

      
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    4.13
Accountants.
BDO Seidman, LLP are independent public accountants as required by the Exchange
Act and the rules and regulations thereunder.

     

    4.14
Taxes. Except
as set forth on the Disclosure Schedule, the Company has filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon, and the Company has no knowledge of a
tax deficiency which has been or might be asserted or threatened against it
which would have a Material Adverse Effect.

     

    4.15
Transfer Taxes.
On the date of each Closing, all securities transfer or other taxes (other than
income taxes) which are required to be paid in connection with the sale and
transfer of the Units to be sold to the Investors hereunder will be, or will
have been, fully paid or provided for by the Company and all laws imposing such
taxes will be or will have been fully complied with.

     

    4.16
Private
Offering. Assuming the correctness of the representations and warranties
of the Investors set forth in Section 5 hereof, the offer and sale of Units
hereunder is exempt from registration under the Securities Act. The Company will
not distribute prior to the final Closing, any offering materials in connection
with this Offering and sale of the Units other than the documents of which this
Agreement is a part, including the Disclosure Schedule, or the Exchange Act
Documents.  The Company has not in the past nor will it hereafter take
any action to sell, offer for sale or solicit offers to buy any securities of
the Company which would bring the offer, issuance or sale of the Units as
contemplated by this Agreement, within the provisions of Section 5 of the
Securities Act, unless such offer, issuance or sale was or shall be within the
exemptions of Section 4 of the Securities Act.

     

    4.17
Use of
Proceeds. The Company shall use the proceeds from the Offering for
working capital, sales and marketing, research and product development and
general corporate purposes.

     

    4.18
Transactions with
Affiliates. Other than as set forth on the Disclosure Schedule, as of the
date hereof, the Company has no current plans to enter into any, agreement,
contract or arrangement with any of its officers, directors or other
affiliates.

     

    
      
         

      

      
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    4.19
Brokers or
Finders. Except as disclosed in the Disclosure Schedule, the Company has
not dealt with any broker or finder in connection with the transactions
contemplated by the Agreement, and Company has not incurred, and shall not
incur, directly or indirectly, any liability for any brokerage or finders’ fees
or agents commissions or any similar charges in connection with the transactions
contemplated by the Agreement.

     

    4.20
Employee
Relations. Neither the Company nor any of its Subsidiaries is involved in
any union or labor dispute nor, to the knowledge of the Company or any of its
Subsidiaries, is any such dispute threatened.  None of the Company's
or its Subsidiaries is a party to a collective bargaining agreement, and the
Company and its Subsidiaries believe that their relations with their employees
are good.  No executive officer (as defined in Rule 501(f) of the
Securities Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer's employment with the
Company.  No executive officer, to the best knowledge of the Company
and its Subsidiaries, is, or is now expected to be, in violation of any material
term of any employment contract, confidentiality, nondisclosure or proprietary
information agreement, non-competition agreement, or any other contract or
agreement or any restrictive covenant, and the continued employment of each such
executive officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.

     

    4.21
No Misleading
Statements. The representations and warranties of the Company contained
in this Agreement, the Annexes, Exhibits and Disclosure Schedules hereto and all
other documents and information furnished to the Investors and their
representatives pursuant hereto are complete and accurate in all material
respects and do not include any untrue statement of a material fact or omit to
state any material fact necessary to make any statements made not
misleading.  There is no material fact relating to the Company or the
Units that has not been set forth or described in this Agreement or in the
Disclosure Schedules hereto or in the Exchange Act Documents.

     

    5. Representations Warranties
and Covenants of the Investors.

     

    5.1 Each
Investor, severally and not jointly, represents and warrants to, and covenants
with, the Company that: (i) the Investor is an “accredited investor” as defined
in Rule 501(a) of Regulation D under the Securities Act and the Investor is also
knowledgeable, sophisticated and experienced in making, and is qualified to
make, decisions with respect to investments in shares presenting an investment
decision like that involved in the purchase of the Units, including investments
in securities issued by the Company and investments in comparable companies, and
has requested, received, reviewed and considered all information it deemed
relevant in making an informed decision to purchase the Units; (ii) the Investor
is acquiring the Units set forth in Annex I to the Agreement in the ordinary
course of its business and for its own account for investment only and with no
present intention of distributing any of such Units or any arrangement or
understanding with any other persons regarding the distribution of such Units,
except in accordance with applicable securities law; (iii) the Investor will
not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose
of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Units except in compliance with the Securities Act, applicable
state securities laws and the respective rules and regulations promulgated
thereunder; (iv) the Investor has answered all questions in the Agreement and
the answers thereto are true, correct and complete in all material respects as
of the date hereof and will be true, correct and complete in all material
respects as of the date of each Closing; and (v) the Investor has, in connection
with its decision to purchase the Units set forth in Annex I to the Agreement,
relied only upon the Exchange Act Documents (which are incorporated herein by
reference and which Investor acknowledges it has reviewed), the representations
and warranties of the Company contained herein and the Disclosure Schedules.
Each Investor understands its acquisition of the Units has not been registered
under the Securities Act or registered or qualified under any state securities
law in reliance on specific exemptions therefrom, which exemptions may depend
upon, among other things, the bona fide nature of the Investor’s investment
intent as expressed herein.  Investor understands the Units purchased
hereunder have to be held indefinitely unless there is an effective Registration
Statement under the Securities Act with respect to the Units or an exemption
from registration available under the Securities Act and applicable state
securities laws, and the Investor is able to bear the economic risk of an
investment in the Units.

     

    
      
         

      

      
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    5.2 Each
Investor, severally and not jointly, acknowledges, represents and agrees that no
action has been or will be taken in any jurisdiction outside the United States
by the Company that would permit an offering of the Units, or possession or
distribution of offering materials in connection with the issue of the Units, in
any jurisdiction outside the United States where legal action by the Company for
that purpose is required. Each Investor outside the United States will comply
with all applicable laws and regulations in each foreign jurisdiction in which
it purchases, offers, sells or delivers Units or has in its possession or
distributes any offering material, in all cases at its own expense.

     

    5.3 Each
Investor, severally and not jointly, hereby covenants with the Company not to
make any sale of the Units, the Preferred Stock, the Warrants or the Common
Stock underlying either of the Preferred Stock or Warrants without complying
with the provisions of this Agreement and all securities laws, and the Investor
acknowledges that the certificates evidencing the Preferred Stock and the
Warrants will be imprinted with a legend that prohibits their transfer except in
accordance therewith. Upon the earlier of (i) a registration statement covering
Common Stock underlying the Preferred Stock and Warrants becoming effective and
(ii) Rule 144 becoming available, the Investors shall be entitled to exchange
their certificates representing the Common Stock and Warrants for certificates
that do not contain any restrictive legend.

     

    5.4 Each
Investor, severally and not jointly, further represents and warrants to, and
covenants with, the Company that (i) the Investor has full right, power,
authority and capacity to enter into this Agreement and to consummate the
transactions contemplated hereby and has taken all necessary action to authorize
the execution, delivery and performance of this Agreement, (ii) the execution
and delivery of this Agreement, the purchase of the Units under the Agreement,
the fulfillment of the terms of the Agreement and the consummation of the
transactions contemplated hereby will not conflict with or constitute a
violation of, or default (with the passage of time or otherwise) under the
charter, bylaws or other organizational documents of the Investor, and (iii)
this Agreement constitutes a valid and binding obligation of the Investor
enforceable against the Investor in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors’ and contracting
parties’ rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law) and except as the indemnification agreements
of the Investors herein may be legally unenforceable.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    5.5
Investor will not use any of the restricted Preferred Stock, Warrants or
underlying Common Stock acquired pursuant to this Agreement to cover any short
position in the Common Stock of the Company if doing so would be in violation of
applicable securities laws.

     

    5.6 Each
Investor understands that nothing in the Exchange Act Documents, this Agreement
or any other materials presented to the Investors in connection with the
purchase and sale of the Units constitutes legal, tax or investment advice. The
Investor has consulted such legal, tax and investment advisors as it, in its
sole discretion, has deemed necessary or appropriate in connection with its
purchase of Units.

     

    5.7
Except as disclosed in the Disclosure Schedule, the Investors have not dealt
with any broker or finder in connection with the transactions contemplated by
the Agreement, and the Investors have not incurred, and shall not incur,
directly or indirectly, any liability for any brokerage or finders’ fees or
agents commissions or any similar charges in connection with the transactions
contemplated by the Agreement.

     

    5.8
Investor is not purchasing the Units as a result of any advertisement, article,
notice or other communication regarding the Units published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general
advertisement.

     

    5.9 Each
Investor has independently evaluated the merits of its decision to purchase
Units, such decision has been independently made by such Investor and such
Investor confirms that it has only relied on the advice of its
own business and/or legal counsel and not on the advice of the Company’s or any
other Investor’s business and/or legal counsel in making such
decision.

     

    5.10 Each
Investor acknowledges that certain officers and directors of the Company may
purchase Units in the Offering, with the purchase price therefore being paid
through the cancellation of deferred compensation owed to such officers or
directors.

     

    6. Survival of Representations,
Warranties and Agreements. Notwithstanding any investigation made by any
party to this Agreement, all covenants, agreements, representations and
warranties made by the Company and the Investors herein shall survive the
execution of this Agreement, the delivery to the Investors of the Units being
purchased and the payment therefor.

     

    7. No Net-Cash
Settlement.

     

    7.1 No Net Cash
Settlement. In no event will any registered holder of the Securities be
entitled to receive a net-cash settlement in lieu of physical settlement in
shares of Common Stock.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    7.2 Transfer of Units;
Suspension. Each Investor agrees that it will not effect any disposition
of the Securities or its right to purchase the Securities that would constitute
a sale within the meaning of the Securities Act except as otherwise permitted by
law.

     

    8. Representation.  Each
Investor hereto acknowledges its interests may not necessarily coincide with the
interests of any other Investors (the “Other Investors”).  Each
Investor has consulted with, or has had the opportunity to consult with, their
own legal counsel in connection with this transaction.  For the
avoidance of doubt, it shall be expressly agreed and understood that as among
the Investors, each Investor intends to and is acting individually on its own
behalf only, making its own investment decisions, not in concert with or as a
group with any other Investor, and no beneficial or pecuniary interest of any
one Investor shall be attributed or attributable to any other
Investor.

     

    9. Participation in Future
Financing.

     

    9.1 From
the date hereof through December 30, 2009, upon any issuance by the Company of
Common Stock, debentures or any equity or debenture convertible into Common
Stock for cash consideration (a “Subsequent
Financing”), each Investor shall have the option to participate in such
Subsequent Financing, without any further investment, in the same dollar amount
as was invested by such Investor hereunder, on the same price, terms and
conditions provided for in the Subsequent Financing, in which such case all
shares of Preferred Stock issued to such Investor shall be cancelled and of no
further force or effect.  Notwithstanding the foregoing, in the event
any Investor has converted any portion of its Preferred Stock into Common Stock
prior to such Subsequent Financing, such Investors’ participation in any
Subsequent Financing shall be reduced by the dollar amount of Preferred Stock so
converted.

     

    9.2 At
least five (5) Trading Days prior to the closing of the Subsequent Financing,
the Company shall deliver to each Investor a written notice of its intention to
effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Investor if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing
Notice”).  Upon the request of an Investor, and only upon a
request by such Investor, for a Subsequent Financing Notice, the Company shall
promptly deliver a Subsequent Financing Notice to such Investor.  The
Subsequent Financing Notice shall describe in reasonable detail the proposed
terms of such Subsequent Financing, the amount of proceeds intended to be raised
thereunder and the Person or Persons through or with whom such Subsequent
Financing is proposed to be effected and shall include a term sheet or similar
document relating thereto as an attachment.

     

    9.3 Any
Investor desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City time)
on the fifth (5th)
Trading Day after receipt of the Pre-Notice that the Investor is willing to
participate in the Subsequent Financing.  If the Company receives no
such notice from an Investor as of such fifth (5th)
Trading Day, such Investor shall be deemed to have notified the Company that it
does not elect to participate.

     

    10. Notices. All notices,
requests, consents and other communications hereunder shall be in writing, shall
be mailed (A) if within the United States by first-class registered or certified
airmail, or nationally recognized overnight express courier, postage prepaid, or
by facsimile, or (B) if delivered from outside the United States, by
International Federal Express or facsimile, and shall be deemed given (i) if
delivered by first-class registered or certified mail, three business days after
so mailed, (ii) if delivered by nationally recognized overnight carrier, one
business day after so mailed, (iii) if delivered by International Federal
Express, two business days after so mailed, (iv) if delivered by facsimile, upon
electronic confirmation of receipt and shall be delivered as addressed as
follows:

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    
      	
            	
              (a)

            	
              if
      to the Company, to:

            


    

     

    Power
Efficiency Corporation

    3960
Howard Hughes Parkway

    Suite
460

    Las
Vegas, NV 89169

    
      Tel:
(702) 697-0377

    

    
      Fax:
(702) 697-0379

    

    
      Attn: BJ
Lackland

    

    


    
      	
            	
              (b)

            	
              with
      a copy to:

            


    

     

    Ellenoff
Grossman & Schole LLP

    370
Lexington Avenue

    New York,
New York 10017

    
      Tel: (212)
370-1300

    

    
      Fax: (212)
370-7889

    

    
      Attn:  Barry
Grossman, Esq.

    

    


    (c) if to the Investors, at their
respective addresses on the signature pages hereto, or at such other address or
addresses as may have been furnished to the Company in writing.

    


    11. Changes. This
Agreement may not be modified or amended except pursuant to an instrument in
writing signed by the Company and the majority in interest of the
Investors.

     

    12. Headings. The
headings of the various sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed to be part of this
Agreement.

     

    13. Severability. In case
any provision contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.

     

    14. Governing Law;
Arbitration.

     

    14.1 This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of Delaware, without giving effect to the principles of
conflicts of law.

     

    
      
         

      

      
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    14.2 In
the event any controversy or dispute shall arise between the parties under, out
of, in connection with, or relating to this Agreement or the breach thereof, the
party initiating such controversy or making such claim shall provide to the
other party notice containing a brief and concise statement of the initiating
party’s claims, together with relevant facts supporting them.  Following
the date of said notice, the parties shall make good faith efforts to settle the
dispute.  In the event the parties have been unable to reach accord
using the procedures set forth in this Section 13, either party may seek binding
arbitration before three (3) arbitrators in accordance with the rules of the
American Arbitration Association (“AAA”).  Each party shall appoint one
arbitrator and the appointed arbitrators shall in turn appoint the third
arbitrator.  In the event the two appointed arbitrators are unable to agree
upon the third arbitrator, the AAA shall designate the third arbitrator to
arbitrate the controversy or dispute.  The arbitration shall be held in Las
Vegas, Nevada.  Within thirty (30) days after initiation of arbitration,
the parties shall reach agreement upon and thereafter follow procedures assuring
that the arbitration will be concluded and the award rendered within no more
than six (6) months from selection of the three arbitrators.  Failing such
agreement, AAA will design, and the parties will follow, such procedures. 
THE ARBITRATORS SHALL NOT AWARD ANY PARTY PUNITIVE OR EXEMPLARY DAMAGES, AND
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO SEEK SUCH DAMAGES.  Each
party has the right before or during the arbitration to seek and obtain from the
appropriate court provisional remedies such as attachment, preliminary
injunction, replevin, etc., to avoid irreparable harm, maintain the status quo
or preserve the subject matter of the arbitration.

     

    15. Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
but one instrument, and shall become effective when one or more counterparts
have been signed by each party hereto and delivered to the other
parties.

     

    16. Expenses.  Each
of the Company and the Investors shall bear its own expenses, including fees and
costs of attorneys, accountants and financial advisors, incurred in connection
with the transactions contemplated hereunder; provided, however, that the
Company shall be responsible for the payment of legal fees that are related to
the issuance of legal opinions under Rule 144 or the registration of the issued
securities, if required.

     

    17. Confidential
Information. Each Investor represents to the Company that, at all times
during the Offering, the Investor has maintained in confidence the existence of
this Offering.

     

    
      
         

      

      
        15