December 8, 2006
By facsimile to (310) 552-5001 and U.S. Mail
Mr. Luo Ken Yi
China Architectural Engineering, Inc.
105 Baishi Road
Jiuzhou West Avenue
Zhuhai, People`s Republic of China
Re: China Architectural Engineering, Inc.
Registration Statement on Form SB-2
Filed November 13, 2006
File No. 333-138603
Annual Report on Form 10-KSB for the fiscal year ended December
31,
2005 and
Subsequent Exchange Act Reports
File No. 333-114622
Dear Mr. Luo:
We reviewed the filings and have the comments below.
Where indicated, we think that you should revise the
documents
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 documents. 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.
SB-2
General
1. We consider reverse acquisitions with non-operating public
shells
to be capital transactions in substance rather than business
combinations and look to the accounting acquirer`s eligibility as
a
small business issuer. Here, Full Art International, Ltd. or Full
Art is the accounting acquirer and does not satisfy the definition
of
a small business issuer because its revenues are more than $25
million. See Item 10(a)(1)(i) of Regulation S-B. Based on the
above, please revise this filing to provide three years of audited
financial statements and related disclosures for Full Art.
2. Consistent with the above comment regarding eligibility as a
small
business issuer, please file your amendment on Form S-1, and
include
all additional disclosures required by that form. Ensure that
the
amendment is tagged on the EDGAR system as a pre-effective
amendment
on Form S-1 to the registration statement on Form SB-2. In the
calculation of registration fee table on the registration
statement`s
facing page, indicate by footnote or in some other manner that the
fee was paid previously when you filed initially the registration
statement on Form SB-2. The file number shown above will not
change.
3. Disclosure indicates that China Architectural Engineering, Inc.
or
CAEI was a reporting "blank check" shell company with no
operations
before closing the share exchange transaction on October 17, 2006.
Our view is that both before and after the transaction CAEI`s
promoters or affiliates and their transferees are underwriters of
the
securities issued. Our view also is that Rule 144 would be
unavailable for resale transactions in this situation, regardless
of
technical compliance with the rule. See our Worm no-action
letter,
publicly available January 21, 2000. As appropriate, revise the
disclosure throughout the registration statement, including the
thirty-fourth risk factor and the shares eligible for future sale
section in the IPO prospectus and the resale prospectus` outside
front cover page and the selling stockholders and plan of
distribution sections, to make clear that:
* CAEI`s promoters or affiliates and their transferees "are"
underwriters of the securities issued. Language such as "may be
deemed to be" an underwriter is unacceptable.
* Rule 144 is unavailable for resale transactions in this
situation.
4. Please update your financial statements, as necessary, to
comply
with Rule 3-12 of Regulation S-X at the effective date.
5. Please provide updated consents from your independent
accountants
in each amendment to your registration statement.
Registration Statement`s Facing Page
6. Since CAEI is relying on Rule 415 of Regulation C under the
Securities Act for the securities being offered under the resale
prospectus, check the applicable box.
IPO Prospectus
7. We note that non-Rule 430A information, including the number of
shares being registered, is omitted throughout the IPO prospectus.
To the extent practicable, complete the information before
amending
the registration statement.
Outside Front Cover Page
8. We note that you omit an estimated price range for the
offering.
You may omit an estimated price range in the first amendment,
provided you give us adequate time to review the registration
statement with the estimated price range in it before requesting
acceleration of the registration statement`s effectiveness. We
consider estimated price ranges of up to $2.00 if under $20.00 or
10%
if over $20.00 to be a good faith estimate for purposes of
requirements under the Securities Act. Further, confirm that you
will include an estimated price range in the form of preliminary
prospectus distributed to prospective purchasers. See Item
501(a)(8)
of Regulation S-B.
Principal Terms of the Share Exchange, page 3
9. We note your disclosures here and on page 52 concerning your
registration rights agreement in which you committed to file a
registration statement for 2.9 million shares within 10 days after
the end of the six month period that immediately follows November
10,
2006. Please tell us whether this registration agreement includes
any financial penalties for your company if you do not meet this
May
20, 2007 deadline. If so, please tell us what consideration you
have
given to the guidance in EITF 05-4 and which of the three views in
this EITF`s Issue Summary No. 1 you have adopted. You can access
this Issue Summary on the EITF`s website at
http://www.fasb.org/eitf/IS0504WW.pdf.
Summary Financial Data, page 5
10. We read that you will expense the two million shares issued to
FirstAlliance Financial Group, Inc., and as a result, your
earnings
will be reduced for the quarter and year ended December 31, 2005.
Given the October 2006 date of your merger, we assume that this is
a
typo and you meant to say that you will reduce your earnings for
the
quarter and year ended December 31, 2006. Also see your similar
disclosure in the middle of page 17. Please advise or revise.
Risk Factors, page 6
11. Your filing contains a large number of risk factors, some of
which do not appear to be current and material. Please note that
you
should not discuss any possible risk, no matter how remote, but
rather focus on current, material risks to the company, its
business
and shareholders. Please review your risk factors and remove
remote,
immaterial risks.
12. Disclosure in the eighth risk factor states that CAEI`s
business
is dependent on the prices of steel and aluminum and that steel
and
aluminum prices have been volatile in recent years. Provide
quantitative data on the range of steel and aluminum prices during
a
recent period in support of the statement.
13. Disclosure in the eleventh risk factor states that CAEI has
employees working in high security risk countries located in the
Middle East and Southwest Asia. Identify the high security risk
countries in which CAEI has employees working. We may have
additional comments upon review of your response.
Cautionary Statement Regarding Forward-Looking Statements, page 19
14. Since this is CAEI`s initial public offering, CAEI is
ineligible
to rely on the safe harbor for forward-looking statements. See
section 27A(b)(2)(D) of the Securities Act and section
21E(b)(2)(D)
of the Exchange Act. To avoid confusion on the applicability of
the
Private Litigation Reform Act of 1995, delete the reference to the
act. Alternatively, explain that CAEI is ineligible to rely on
the
safe harbor provisions under the Securities Act and the Exchange
Act
for forward-looking statements.
Capitalization, page 21
15. We note that you are reflecting 50 million shares of common
stock
outstanding in your actual June 30, 2006 information. Please
revise
so that the actual shares presented agrees to the historical
equity
statement of Full Art at June 30, 2006, with the number of shares
restated for the recapitalization in a manner similar to a stock
split. The shares effectively issued to the former shareholders
of
CAEI, for services on the merger date, and for the private
placement
on the merger date may be included in your "as adjusted"
information
but should not be presented as actual for dates prior to the
merger.
Also see our related comment on your historical equity statement,
included below.
Pro Forma Financial Information, page 23
16. We do not object to your narrative disclosure in this section
of
the filing, but it is unclear to us why you have labeled this
narrative as "pro forma." Instead, this narrative appears to
present
your accounting policy for how the October 2006 merger has
impacted
and is presented within your historical financial statements.
Please
tell us if you intend to provide pro forma financial statements,
as
defined by Article 11 of Regulation S-X, within this filing. If
not,
please revise the title of this section, as it may be confusing to
your readers.
Management`s Discussion and Analysis, page 24
Critical Accounting Policies - Contract Receivable, page 25
17. You state that you "record an allowance for doubtful
collections
for our outstanding contract receivable at the end of the period
in
accordance with generally accepted principles in the PRC." Please
revise your disclosure to state, if true, that your allowance for
doubtful collections is recorded in accordance with U.S. GAAP.
Description of Business, page 32
18. We note your risk factor entitled "Our business is
characterized
by long periods for collection from our customers . . ." on page
8.
Please elaborate on your practices with regard to working capital
items in the Business section, as required by Item 101(c)(vi) of
Regulation S-K.
19. Disclosure in the third risk factor states that CAEI generally
enters into three principal types of contracts with its clients:
cost plus, fixed price, and time and materials. Please discuss
the
material terms of each type of contract in the Business section,
and
quantify the percentage of contracts attributable to each
principal
type of contract during the most recently completed year.
Facilities, page 41
20. Disclosure states that all of CAEI`s buildings and land are
leased. Advise what consideration you have given to the filing of
the leases as exhibits to the registration statement. See Item
601(b)(10)(i)(D) of Regulation S-B.
Employment Agreements, page 44
21. State each employment agreement`s term or duration.
Shares Eligible for Future Sale, page 51
22. In the narrative opposite the second entry in your table,
please
explain where the 3,733,550 shares come from. We assume that this
number includes all shares being registered for resale at this
time
except for the shares underlying the warrants. In addition, it
appears that you are registering shares for resale by existing
securityholders as well as shares in the underwritten offering by
the
company on this registration statement. The disclosure currently
refers to a separate registration statement. We believe that you
mean to refer to a separate prospectus. Please revise as
necessary.
Underwriting, page 53
23. Disclosure in the second paragraph that the underwriters`
obligations are conditional and may be terminated at their
discretion
appears inconsistent with disclosure that this is a firm
commitment
underwriting agreement. Please reconcile the disclosures.
24. Please include the disclosure regarding syndicate short
positions
that is discussed in Section VIII.A.3 of the Division of
Corporation
Finance`s Current Issues Outline dated November 14, 2000. The
outline is available on our website at www.sec.gov.
Financial Statements, page F-1
Report of Independent Registered Public Accounting Firm, page F-16
25. Please note that the audit opinion should contain both the
city
and state from which the auditor`s report has been issued. Refer
to
Article 2-02(a)(3) of Regulation S-X.
Consolidated Statements of Income, page F-19
26. Please revise your historical statements of income to present
earnings per share information as required by SFAS 128, Earnings
per
Share. The earnings per share information should be retroactively
restated to present the effects of the recapitalization since the
transaction is essentially a stock split. In addition, please
revise
the notes to your consolidated financial statements to include the
disclosures required by paragraph 40 of SFAS 128.
Consolidated Statements of Stockholders` Equity, page F-20
27. Please revise your statement of stockholders` equity or your
disclosures in Note 10 to reflect the number of shares of common
stock outstanding and changes in this number for each period for
which you present an income statement. The face of your balance
sheet should also be revised to state the number of shares issued
or
outstanding at each balance sheet date. Refer to paragraph 10 of
APB
12 and Article 5-02(30) of Regulation S-X.
28. Please be advised that all share and per share disclosures
throughout the filing should be retroactively restated for the
October 2006 recapitalization in a manner similar to a stock
split.
In this regard, we believe that the equity of Full Art prior to
the
merger date should be restated such that the number of shares
outstanding immediately prior to the merger equals the 43,304,125
shares received by Full Art in the merger. When you update to
financial statements that include the merger date, we believe that
the 2,275,000 shares held by CAEI immediately prior to the merger
should be reflected on a separate line item titled "Shares
effectively issued to former CAEI shareholders as part of the
October
17, 2006 recapitalization," presented as though this were an
issuance
of stock on October 17, 2006. Similarly, the shares issued for
services on the merger date and the private placement on the
merger
date should be reflected as separate line items and presented as
issuances of stock on October 17, 2006. Changes in equity
subsequent
to the merger date should be presented in accordance with U.S.
GAAP.
Refer to SAB Topic 4C and paragraph 54 of SFAS 128.
Note 1 - Organization and Principal Activities, page F-22
29. Based on the description of your business elsewhere in this
filing, it appears that you are primarily a design-and-build
construction contractor. We read that you also manage, for a fee,
the construction projects of others. Please tell us your revenues
from such management fees for each of 2005, 2004, and 2003. If
the
revenue from these fees exceeds 10% of your total revenues, please
tell us what consideration you gave to Article 5-03(b)(1) of
Regulation S-X.
30. We read that you undertake construction contracts through your
wholly owned subsidiary alone or in partnership with other
contractors through joint ventures. Please tell us how you
account
for these joint ventures, and tell us your revenues from joint
ventures for each of 2005, 2004, and 2003. If these joint
ventures
are significant to your operations, please tell us why you have
not
provided the disclosures required by APB 18.
Note 2(m) - Revenue and Cost Recognition, page F-25
31. We note that you account for revenues from construction
contracts
under the percentage of completion method. Please also disclose
how
you calculate gross profit on these contracts. Refer to
paragraphs
79-81 of SOP 81-1.
32. Please tell us if your construction contracts have change
orders
or claims. If so, please disclose your accounting policy for
change
orders and claims. Refer to paragraphs 61-67 of SOP 81-1.
Note 10 - Common Stock, page F-31
33. Please confirm to us, if true, that through the date of your
response you have not issued any stock or stock equivalents as
compensation to employees.
Resale Prospectus
Selling Stockholders, page 54A
34. If a selling stockholder is a broker-dealer, tell us whether
the
selling stockholder acquired its securities as compensation for
underwriting activities. Unless a broker-dealer acquired the
securities as compensation for underwriting activities, CAEI must
identify the broker-dealer as an underwriter in the prospectus.
Language such as "may be deemed to be" an underwriter is
unacceptable
if the selling stockholder is a broker-dealer.
35. If a selling stockholder is a broker-dealer`s affiliate,
include
disclosure that this broker-dealer`s affiliate:
* Purchased the securities to be resold in the ordinary course of
business.
* Had no agreements or understandings, directly or indirectly,
with
any person to distribute the securities at the time of their
purchase.
If CAEI is unable to make the representations noted above in the
prospectus, CAEI must state in the prospectus that the selling
stockholder is an underwriter. Language such as "may be deemed to
be" an underwriter is unacceptable if the selling stockholder is
an
affiliate of an underwriter that cannot make these
representations.
Exhibits
36. We note that you intend to file by amendment some exhibits,
including the underwriting agreement and the legality opinion.
Allow
us sufficient time to review the exhibits before requesting
acceleration of the registration statement`s effectiveness.
8-K dated October 17, 2006 and filed October 20, 2006
Exhibit 10.1
37. 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 to the exhibit, please refile the exhibit in
its
entirety.
Exhibits 10.6, 10.7, 10.8, 10.9, and 10.10
38. This disclosure appears in section 2(1) of the employment
agreements: "The Employer agrees to employ Mr. Luoyi as
Director."
Please confirm that this is an accurate translation of the
employment
agreements. We note the same disclosure in section 2(1) of
exhibit
10.3 that is Mr. Luo`s employment agreement.
Form 10-QSB for the Fiscal Quarter Ended September 30, 2006
Exhibit 31 - Certification
39. We note the following errors or omissions related to your
certification required by Exchange Act Rule 13a-14(a):
* paragraph four replaces the words "the small business issuer`s
other certifying officer and I are" with "I am";
* paragraph 4(d) omits the language "(the small business issuer`s
fourth fiscal quarter in the case of an annual report)"; and
* paragraph five replaces the words "the small business issuer`s
other certifying officer and I" with "I".
In future filings, please revise your certification to use the
exact
wording as provided in Item 601(b)(31) of Regulation S-B.
Closing
File amendments to the SB-2 and the 8-K in response to the
comments. To expedite our review, CAEI may wish to provide us
three
marked courtesy copies of the amendments. Include with the filing
any supplemental information requested and a cover letter tagged
as
correspondence that keys the responses to the comments. If CAEI
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 amendments, 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 CAEI 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 CAEI requests acceleration of the registration
statement`s
effectiveness, CAEI 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 CAEI from its full responsibility for the adequacy and
accuracy of the registration statement`s disclosures.
* CAEI 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 CAEI 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 Dale
Welcome,
Staff Accountant, at (202) 551-3865 or Jennifer K. Thompson, Staff
Accountant, at (202) 551-3737. You may direct questions on other
comments and disclosure issues to Edward M. Kelly, Senior Counsel,
at
(202) 551- 3728 or me at (202) 551-3760.
Very truly yours,
Pamela A. Long
Assistant Director
cc: Thomas J. Poletti, Esq.
Anh Q. Tran, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
10100 Santa Monica Boulevard, 7th Floor
Los Angeles, CA 90067
Joseph V. Stubbs, Esq.
Scott Galer, Esq.
Stubbs Alderton & Markiles, LLP
15260 Ventura Boulevard, 20th Floor
Sherman Oaks, CA 91403
Mr. Luo Ken Yi
December 8, 2006
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE