October 17, 2006
By facsimile to (515) 323-8509 and U.S. Mail
Mr. Brian D. Kletscher
Chairman and President
Highwater Ethanol, LLC
205 South Main Street, P.O. Box 96
Lamberton, MN 56152
Re: Highwater Ethanol, LLC
Registration Statement on Form SB-2
Filed September 20, 2006
File No. 333-137482
Dear Mr. Kletscher:
We reviewed the filing and have the comments below.
Where indicated, we think that you should revise the document
in
response to the comments. If you disagree, we will consider your
explanation why a comment is inapplicable or a revision is
unnecessary. Be as detailed as necessary in your explanation. To
understand better your disclosure, we may ask you in some comments
to
provide us supplemental information. We may raise additional
comments after reviewing this information.
Our review`s purpose is to assist you in your compliance
with
applicable disclosure requirements and to enhance the overall
disclosure in your document. We look forward to working with you
to
achieve these objectives. We welcome any questions that you may
have
about comments or any other aspect of our review. You may call us
at
the telephone numbers listed at the end of this letter.
General
1. It is unclear when the promissory notes will become due and
payable. Please revise to establish a fixed time or set of
parameters upon the occurrence of which the notes will be due and
payable.
2. We note that Highwater Ethanol will receive and place only 10%
of
the subscription amount in the escrow account upon subscription by
investors. Please address the effect that receiving less than the
full subscription amount will have on individual ownership. We
note,
for example, that it appears units may not be "fully paid" upon
conclusion of the offering if 100% of the funds have not been
placed
in escrow. In addition, please clarify whether investors will
have
full voting and other rights as holders of the units after the
offering is closed and subscriptions are accepted and before the
time
that you have received all of the cash proceeds for the units.
Cover Page
3. Please revise the prospectus cover page to highlight, in bullet
point fashion, the most material risks associated with this
offering.
Examples you should consider include:
* The risk that Highwater Ethanol will be unable to collect the
full
minimum subscribed although escrow will be broken.
* That members will have no control over the management of
Highwater
Ethanol until after 2008.
* That Highwater Ethanol will need to obtain significant financing
for construction.
* That members of management have no experience in the ethanol or
energy business.
For additional examples of risks you should consider highlighting
on
the cover page, please see Part II.A.3.a of Securities Act Release
33-6900.
Table of Contents, page 3
4. The table of contents must show the page number of the
prospectus`
various sections or subsections. See Item 502(a) of Regulation S-
B,
and revise.
Our Financing Plan, page5
5. Please disclose the status of any negotiations to obtain the
debt
financing required to fully fund construction of the plant.
Membership in Highwater Ethanol and Our Member Control Agreement,
page 5
6. In the second paragraph, identify counsel giving the opinion
that
Highwater Ethanol will be treated as a partnership for federal
income
tax purposes. We note the disclosure in the federal income tax
consequences of owning our units section and exhibit 8.1.
Important Notice to Investors, page 7
7. The risk factors section must follow immediately the summary
section. See Item 503(c)(2) of Regulation S-B, and move this
section
so that it follows the summary and risk factors sections.
Risk Factors, page 7
8. The second risk factor`s statement that Highwater Ethanol`s
making
of the offering on a best efforts basis means that Highwater
Ethanol
will not use an underwriter or placement agent is imprecise.
Because
it is possible to conduct a best efforts offering using an
underwriter or placement agent, please revise.
9. In the fifth risk factor, state the per unit purchase price.
10. In the seventh risk factor, please quantify the amount paid
per
unit by the founders.
11. In the eighth risk factor`s fourth bullet point, explain
briefly
what the "qualifying matching services" requirements are. We note
the disclosure under "Publicly Traded Partnership Rules" in the
federal income tax consequences of owning our units section.
12. The tenth risk factor states that the units are unsecured
equity
interests and are subordinated in right of payment to all of
Highwater Ethanol`s current and future debt. Quantify the amount
of
Highwater Ethanol`s debt as of the most recent date practicable.
13. The eleventh risk factor`s statement that Highwater Ethanol`s
reporting obligations will be automatically suspended under
section
15(d) of the Exchange Act if Highwater Ethanol has less than 300
members is imprecise. Except for the fiscal year in which the
registration statement became effective, section 15(d) of the
Exchange Act provides an automatic suspension of the periodic
reporting obligation for any fiscal year if the issuer has fewer
than
300 securityholders of record at the beginning of the fiscal year.
Although Rule 12h-3 under the Exchange Act permits an issuer to
suspend its reporting obligation under section 15(d) of the
Exchange
Act if the requirements of the rule are met at any time during the
fiscal year, the situations exempted by the rule do not meet the
literal test of section 15(d) of the Exchange Act. Thus, Rule
12h-3
under the Exchange Act requires the filing of Form 15 as a
condition
of the suspension. See telephone interpretation 32 in section M
of
our July 1997 "Manual of Publicly Available Telephone
Interpretations" that is available on the Commission`s website,
and
revise.
14. The thirty-ninth risk factor makes reference to a corn
availability study. Clarify whether Highwater Ethanol conducted
the
study. If Highwater Ethanol did not conduct the study, identify
the
third party conducting the study and file its consent as an
exhibit
to the registration statement. Alternatively, delete all
reference
to the study if it was conducted by a third party. See Rule 436
of
Regulation C under the Securities Act. We note the disclosures
under
"Transaction with PRX Geographic, Inc." in the business section
and
exhibit 23.2.
15. In the fortieth risk factor, explain the meaning of the
abbreviation "MTBE." We note the disclosure in the fiftieth risk
factor.
16. The forty-first risk factor makes reference to the significant
dependence of Highwater Ethanol`s financial performance on corn
and
natural gas prices and market prices for ethanol and distillers
dried
grains. Expand the disclosure to include appropriate historical
data
on corn and natural gas prices and market prices for ethanol and
distillers dried grains. Alternatively, provide cross reference
to
the disclosures elsewhere in the registration statement. We note
the
disclosures in the business section.
Dilution, page 22
17. Revise your dilution calculations to exclude the estimated
offering expenses of $550,000 from the pro forma net tangible book
value at June 30, 2006.
Service agreement with Earth Tech, Inc., page 53
18. Advise what consideration you have given to filing the service
agreement as an exhibit to the registration statement. See Item
601(b)(10) of Regulation S-B.
Transaction with PRX Geographic, Inc., page 53
19. Disclosure states that PRX Geographic, Inc. conducted a corn
origination analysis and small area supply demand analysis and
provided Highwater Ethanol a report containing its findings.
Summarize the report`s findings.
Regulatory Permits, page 53
20. Please update your status within the approval process for all
material permits. If you have not begun the process, please so
state.
Permit for Industrial Activity, page 55
21. Disclosure states Highwater Ethanol`s engineers` assurances
that
the phosphorous emissions from the plant are very low and even if
the
Court of Appeals case is upheld that credits are available to
offset
any phosphorous emissions. Clarify whether the engineers are
Highwater Ethanol`s employees. If the engineers are not Highwater
Ethanol`s employees and are third parties, identify the engineers
and
file their consent as an exhibit to the registration statement.
See
Rule 436 of Regulation C under the Securities Act. Alternatively,
delete all reference to the engineers and their assurances. We
note
the disclosures under "Design-Build Team" in the business section.
Executive Compensation, page 60
22. Disclosure states that Highwater Ethanol has compensation
arrangements with three of its governors and officers. Tell us
why
you have not filed the arrangements as exhibits to the
registration
statement. See Item 601(b)(10)(ii)(A) of Regulation S-B.
Alternatively, file the arrangements as exhibits to the
registration
statement.
The Offering, page 61
23. Disclosure states that Highwater Ethanol`s governors will rely
on
the safe harbor from broker-dealer registration in Rule 3a4-1
under
the Exchange Act. Provide us an analysis of Highwater Ethanol`s
basis for reliance on the safe harbor.
Summary of Promotional and Sales Material, page 66
24. Disclosure states that Highwater Ethanol may use sales
materials.
Clarify whether Highwater Ethanol will file the sales materials
with
the Commission.
Federal Income Tax Consequences of Owning Our Units, page 73
25. Disclosure in the fourth paragraph of the form of tax opinion
filed as exhibit 8.1 that "all statements relating to the
Company`s
classification as a partnership for federal income tax purposes
and
the taxation of investors on their allocable share of the
Company`s
income, gains, losses and deductions recognized by the Company
without regard to cash distributions as described in the
Registration
Statement...constitute our opinion" is inconsistent with the
disclosures in this section`s third and fourth paragraphs. Please
revise the disclosures here in the third paragraph`s first
sentence
and the fourth paragraphs` first and third sentences to conform to
the disclosure in the fourth paragraph of the form of tax opinion.
26. Delete the word "general" in the fourth paragraph when
referring
to federal income tax consequences. As indicated in this
section`s
first paragraph, the section describes the material federal income
tax consequences of owning the units. Thus, the word "general"
may
imply that investors cannot rely on the disclosure. Similarly,
delete the word "general" in the fourth paragraph of the form of
tax
opinion filed as exhibit 8.1 when referring to the material
federal
income tax consequences of owning and disposing of the units.
Delete
also the word "generally" in the first sentence under "Tax
Treatment
of Distributions," in the first sentence under "Deductibility of
Losses; At-Risk and Passive Loss Limitations," in the third
sentence
under "Passive Loss Rules," and in the second sentence under
"Alternative Minimum Tax." The word "generally" may imply that
investors cannot rely on the disclosures.
Partnership Status, page 73
27. We note the phrase "assuming we do not elect to be treated as
a
corporation" in the first sentence. It is inappropriate for
counsel
to assume any legal conclusion underlying the opinion. Since the
tax
treatment depends upon the legal conclusion of whether Highwater
Ethanol is a partnership or a corporation, counsel must opine on
these matters as part of its tax opinion and cannot assume them.
Please revise.
Legal Matters, page 80
28. Include counsel`s address. See paragraph 23 of Schedule A of
the
Securities Act and Rule 436 of Regulation C under the Securities
Act.
29. Replace the word "principal" with the word "material" before
the
words "federal income tax consequences" to conform to the
disclosures
in the federal income tax consequences of owning our units section
and exhibit 8.1.
Exhibit Index
30. Include an exhibit index immediately before the exhibits filed
with the registration statement. See Rule 102(d) of Regulation S-
T.
This exhibit index and Item 27 of Form SB-2 are not synonymous.
Exhibits
31. We note the reference to various agreements under "Consulting
Contracts" in the financial statements` note 4 and the energy
management agreement filed as exhibit 10.2. Tell us what
consideration you have given to filing the other agreements as
exhibits to the registration statement. See Item 601(b)(10) of
Regulation S-K. Alternatively, file the agreements as exhibits to
the registration statement.
Exhibits 5.1 and 8.1
32. We note that you filed forms of opinion. You must file
executed
opinions before the registration statement`s effectiveness.
33. We note the statements "The opinions expressed herein shall be
effective as of the date of effectiveness of the Company`s
Registration Statement" and "The opinion expressed herein shall be
effective as of the date of effectiveness of the Company`s
Registration Statement." Please delete. Alternatively, you must
file new opinions immediately before the registration statement`s
effectiveness because the opinions must speak as of that time.
Exhibit 5.1
34. We note that Highwater Ethanol will receive only 10% of the
subscription amount upon subscription by members. Please address
on
a supplemental basis the effect that receiving less than the full
subscription amount will have on the validity of the membership
units. We note, for example, that it appears units will not be
fully
paid and non-assessable upon conclusion of the offering.
35. Counsel must consent also to being named under "Legal Matters"
in
the registration statement. See paragraph 23 of Schedule A of the
Securities Act and Rule 436 of Regulation C under the Securities
Act,
and revise.
Exhibit 8.1
36. We note the statement "Our opinion extends only to matters of
law
and does not extend to matters of fact." Since it is
inappropriate
for counsel to assume any fact that is known or readily
ascertainable, please revise.
37. Since the disclosure in the registration statement constitutes
the opinion, the short form tax opinion filed as the exhibit and
the
prospectus both must state clearly that the disclosure in the
prospectus` federal income tax consequences of owning our units
section is counsel`s opinion. Thus, revise the last paragraph of
the
short form tax opinion to make clear that the disclosure in the
prospectus is the opinion rather than a discussion of the opinion.
Exhibit 10.5
38. Absent an order granting confidential treatment, Item
601(b)(10)
of Regulation S-B requires the filing of material contracts,
including attachments, in their entirety. Attachments include,
for
example, annexes, appendices, exhibits, and schedules. Since you
did
not file exhibit A that is referenced in section 7.6.2 of the
exhibit, please refile the exhibit in its entirety.
Exhibit 23.2
39. Since you did not include a reference to PRX Geographic, Inc.
under "Experts" in the registration statement and are not required
to
do so, please revise the consent to delete the reference to that
section.
Other
40. We note that you submitted an application for confidential
treatment. We intend to process concurrently the application and
the
registration statement. Before requesting acceleration of the
registration statement`s effectiveness, you must resolve any issue
concerning the application and file publicly the portions for
which
you are not requesting confidential treatment.
Closing
File an amendment to the registration statement in response
to
the comments. To expedite our review, Highwater Ethanol may wish
to
provide us three marked courtesy copies of the amendment. Include
with the filing any supplemental information requested and a cover
letter tagged as correspondence that keys the responses to the
comments. If Highwater Ethanol thinks that compliance with any of
the comments is inappropriate, provide the basis in the letter.
We
may have additional comments after review of the amendment, the
responses to the comments, and any supplemental information.
We urge all persons responsible for the accuracy and adequacy
of
the disclosure in the registration statement reviewed by us to
ensure
that they have provided all information investors require for an
informed decision. Since Highwater Ethanol and its management are
in
possession of all facts relating to the disclosure in the
registration statement, they are responsible for the adequacy and
accuracy of the disclosures that they have made.
If Highwater Ethanol requests acceleration of the
registration
statement`s effectiveness, Highwater Ethanol should furnish a
letter
at the time of the request, acknowledging that:
* Should the Commission or the staff acting by delegated authority
declare the registration statement effective, it does not
foreclose
the Commission from taking any action on the filing.
* The action of the Commission or the staff acting by delegated
authority in declaring the registration statement effective does
not
relieve Highwater Ethanol from its full responsibility for the
adequacy and accuracy of the registration statement`s disclosures.
* Highwater Ethanol may not assert our comments or the declaration
of
the registration statement`s effectiveness as a defense in any
proceedings initiated by the Commission or any person under the
United States` federal securities laws.
The Commission`s Division of Enforcement has access to all
information that Highwater Ethanol provides us in our review of
the
registration statement or in response to our comments on the
registration statement.
We will consider a written request for acceleration of the
registration statement`s effectiveness under Rule 461 of
Regulation C
under the Securities Act as confirmation that those requesting
acceleration are aware of their responsibilities under the
Securities
Act and the Exchange Act as they relate to the proposed public
offering of the securities specified in the registration
statement.
We will act on the request and by delegated authority grant
acceleration of the registration statement`s effectiveness.
You may direct questions on accounting comments to Bret A.
Johnson, Staff Accountant, at (202) 551-3753 or W. John Cash,
Accounting Branch Chief, at (202) 551-3768. You may direct
questions
on other comments and disclosure issues to Edward M. Kelly, Senior
Counsel, at (202) 551- 3728 or Christopher B. Edwards, Special
Counsel, at (202) 551-3742.
Very truly yours,
Pamela A. Long
Assistant Director
cc: Harold N. Schneebeck, Esq.
Brown, Winick, Graves, Gross, Baskerville & Schoenebaum,
P.L.C.
666 Grand Avenue, Suite 2000
Des Moines, IA 50309-2510
Mr. Brian D. Kletscher
October 17, 2006
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE