[CATUITY LETTERHEAD]
May 1, 2007
Mr. Mark P. Shuman
Branch Chief - Legal
Securities and Exchange Commission
Mail Stop 4561
450 Fifth Street, N.W.
Washington D.C. 20549
RE: REGISTRATION STATEMENT ON FORM SB-2
FILED ON FEBRUARY 8, 2007 AND AMENDMENTS 1 & 2 FILED
ON APRIL 11 & MAY 1, 2007 RESPECTIVELY (FILE NO. 333-140533)
Dear Mr. Shuman:
We have reviewed your comment letter dated March 9, 2007 relating to
the Registration Statement on Form SB-2 filed with the Commission on February 8,
2007. Our responses are set forth in this letter. For your convenience, we have
included your comments with this letter. Our responses use the same numbering as
your letter.
Form SB-2
General
1. SEC COMMENT: Please clearly disclose the material terms of the
November 22, 2006 transaction(s) in which Catuity sold the
convertible debentures and the convertible preferred stock
which the common shares being registered herewith underlie.
COMPANY RESPONSE:
We have revised the disclosure of the terms of the financing,
per the Staff's suggestion. Reference is made to the section
titled "About The Offering and This Prospectus" starting on
page 5 of the registration statement.
2. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with the total dollar value of the
securities underlying the convertible debentures and the
convertible preferred stock that you have registered for
resale (using the number of underlying securities that you
have registered for resale and the market price per share for
those securities on the date of the sale of the convertible
debentures and the date of sale of the convertible preferred
stock).
- --------------------------------------------------------------------------------
AUSTRALIA NORTH AMERICA
Level 5, 140 Bourke Street 300 Preston Avenue, Suite 302
Melbourne, VIC 3000 Australia Charlottesville, Virginia 22902 USA
Phone +61 3.8663.3200 Phone +1 (434) 979-0724
ASX: CAT, CATN Nasdaq: CTTY
www.catuity.com
Catuity Inc. is a Delaware Corporation
COMPANY RESPONSE:
We have added tabular disclosure of the total dollar value of
the securities underlying the Convertible Debentures and
Preferred Stock that we have registered for resale, per the
Staff's suggestion. Reference is made to the table included on
page 37 of the registration statement titled "Value of
Securities Underlying the Convertible Debentures and Preferred
Stock".
3. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with tabular disclosure of the dollar
amount of each payment (including the value of any payments to
be made in common stock) in connection with the transaction
that you have made or may be required to make to any selling
shareholder, any affiliate of a selling shareholder, or any
person with whom any selling shareholder has a contractual
relationship regarding the transaction (including any interest
payments, liquidated damages, payments made to "finders" or
"placement agents," and any other payments or potential
payments). Please provide footnote disclosure of the terms of
each such payment. Please do not include any repayment of
principal on the convertible notes in this disclosure.
Further, please provide us, with a view toward disclosure in
the prospectus, with disclosure of the net proceeds to the
issuer from the sale of the convertible debentures and the
convertible preferred stock and the total possible payments to
all selling shareholders and any of their affiliates in the
first year following the sale of convertible notes.
COMPANY RESPONSE:
We have added tabular disclosures of the dollar amounts of the
payments we have made or may be required to make to any of the
Selling Security Holders, per the Staff's suggestion.
Reference is made to the table included on page 37 of the
registration statement titled "Payments to the Selling
Security Holders" and to the table included on page 39 of the
registration statement titled "Payments to the Selling
Security Holders during Initial Twelve Month Period".
4. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with tabular disclosure of:
the total possible profit the selling shareholders
could realize as a result of the conversion discount
for the securities underlying the convertible note,
presented in a table with the following information
disclosed separately [in this comment, the reference
to "securities underlying the convertible debenture
or convertible preferred stock" means the securities
underlying the debenture or preferred that may be
received by the persons identified as selling
shareholders]:
the market price per share of the securities
underlying the convertible debenture or preferred
stock on the date of the sale of the convertible
note;
Page 2
the conversion price per share of the underlying
securities on the date of the sale of the convertible
debenture or preferred stock, calculated as follows:
if the conversion price per share is set at
a fixed price, use the price per share
established in the convertible debenture or
preferred stock; and
if the conversion price per share is not set
at a fixed price and, instead, is set at a
floating rate in relationship to the market
price of the underlying security, use the
conversion discount rate and the market rate
per share on the date of the sale of the
convertible debenture or preferred stock and
determine the conversion price per share as
of that date;
the total possible shares underlying the convertible
debenture (assuming no interest payments and complete
conversion throughout the term of the note);
the combined market price of the total number of
shares underlying the convertible debenture,
calculated by using the market price per share on the
date of the sale of the convertible note and the
total possible shares underlying the convertible
debenture;
the total possible shares the selling shareholders
may receive and the combined conversion price of the
total number of shares underlying the convertible
debenture or preferred stock calculated by using the
conversion price on the date of the sale of the
convertible debenture or preferred stock and the
total possible number of shares the selling
shareholders may receive; and
the total possible discount to the market price as of
the date of the sale of the convertible debenture and
preferred stock, calculated by subtracting the total
conversion price on the date of the sale of the
convertible debenture or preferred stock from the
combined market price of the total number of shares
underlying the convertible debenture or preferred
stock on that date.
If there are provisions in the convertible debentures or in
the convertible preferred stock that could result in a change
in the price per share upon the occurrence of certain events,
please provide additional tabular disclosure as appropriate.
For example, if the conversion price per share is fixed unless
and until the market price falls below a stated price, at
which point the conversion price per share drops to a lower
price, please provide additional disclosure.
Page 3
COMPANY RESPONSE:
We have added tabular disclosure of the total possible profit
the Selling Security Holders could realize as a result of the
conversion discount for the securities underlying the
Convertible Debentures and Preferred Stock, per the Staff's
suggestion. Reference is made to the table included on page 41
of the registration statement titled "Total Profit Potentially
Realizable by the Selling Security Holders from the
Convertible Debentures and Preferred Stock".
5. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with tabular disclosure of:
the total possible profit to be realized as a result
of any conversion discounts for securities underlying
any other warrants, options, notes, or other
securities of the issuer that are held by the selling
shareholders or any affiliates of the selling
shareholders, presented in a table with the following
information disclosed separately:
market price per share of the underlying securities
on the date of the sale of that other security;
the conversion/exercise price per share as of the
date of the sale of that other security, calculated
as follows:
if the conversion/exercise price per share
is set at a fixed price, use the price per
share on the date of the sale of that other
security; and
if the conversion/exercise price per share
is not set at a fixed price and, instead, is
set at a floating rate in relationship to
the market price of the underlying security,
use the conversion/exercise discount rate
and the market rate per share on the date of
the sale of that other security and
determine the conversion price per share as
of that date;
the total possible shares to be received under the
particular securities (assuming complete
conversion/exercise);
the combined market price of the total number of
underlying shares, calculated by using the market
price per share on the date of the sale of that other
security and the total possible shares to be
received;
the total possible shares to be received and the
combined conversion price of the total number of
shares underlying that other security calculated by
using the conversion price on the date of the sale of
that other security and the total possible number of
underlying shares; and
Page 4
the total possible discount to the market price as of
the date of the sale of that other security,
calculated by subtracting the total
conversion/exercise price on the date of the sale of
that other security from the combined market price of
the total number of underlying shares on that date.
COMPANY RESPONSE:
We have added tabular disclosure of the total possible profit
the Selling Security Holders could realize as a result of the
conversion discount for the securities underlying the
Warrants, per the Staff's suggestion. Reference is made to the
table included on page 42 of the registration statement titled
"Total Profit Potentially Realizable by the Selling Security
Holders from the Warrants".
6. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with tabular disclosure of:
the gross proceeds paid or payable to the issuer in
the convertible debenture or convertible preferred
stock transaction;
all payments that have been made or that may be
required to be made by the issuer that are disclosed
in response to ["Comment Three"];
the resulting net proceeds to the issuer; and
the combined total possible profit to be realized as
a result of any conversion discounts regarding the
securities underlying the convertible debentures and
convertible preferred stock and any other warrants,
options, notes, or other securities of the issuer
that are held by the selling shareholders or any
affiliates of the selling shareholders that is
disclosed in response to ["Comment Four" and "Comment
Five"].
Further, please provide us, with a view toward disclosure in
the prospectus, with disclosure - as a percentage - of the
total amount of all possible payments [as disclosed in
response to "Comment Three"] and the total possible discount
to the market price of the shares underlying the convertible
note [as disclosed in response to "Comment Four"] divided by
the net proceeds to the issuer from the sale of the
convertible notes, as well as the amount of that resulting
percentage averaged over the term of the convertible notes.
COMPANY RESPONSE:
We have added tabular disclosure of the total possible profit
the Selling Security Holders could realize as a result of the
conversion discounts for the securities underlying the
Convertible Debentures, Preferred Stock and Warrants, per the
Staff's suggestion. Reference is made to the table included on
page 43 of the registration statement titled "Total Profit
Potentially Realizable by the Selling Security Holders from
the Convertible Debentures, Preferred Stock and Warrants". We
have also
Page 5
added tabular disclosure of the percentage of: the sum of (a)
the total amount of all possible payments and (b) the total
possible discount to market price of the shares underlying the
convertible debentures divided by the net proceeds to the
issuer from the sale of the convertible debentures, per the
Staff's suggestion. Reference is made to the table included on
page 43 of the registration statement titled "Potential Return
on the Convertible Debentures to the Selling Security
Holders".
7. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with tabular disclosure of all prior
securities transactions between the issuer (or any of its
predecessors) and the selling shareholders, any affiliates of
the selling shareholders, or any person with whom any selling
shareholder has a contractual relationship regarding the
transaction (or any predecessors of those persons), with the
table including the following information disclosed separately
for each transaction:
the date of the transaction;
the number of shares of the class of securities
subject to the transaction that were outstanding
prior to the transaction;
the number of shares of the class of securities
subject to the transaction that were outstanding
prior to the transaction and held by persons other
than the selling shareholders, affiliates of the
company, or affiliates of the selling shareholders;
the number of shares of the class of securities
subject to the transaction that were issued or
issuable in connection with the transaction;
the percentage of total issued and outstanding
securities that were issued or issuable in the
transaction (assuming full issuance), with the
percentage calculated by taking the number of shares
issued and outstanding prior to the applicable
transaction and held by persons other than the
selling shareholders, affiliates of the company, or
affiliates of the selling shareholders, and dividing
that number by the number of shares issued or
issuable in connection with the applicable
transaction;
the market price per share of the class of securities
subject to the transaction immediately prior to the
transaction (reverse split adjusted, if necessary);
and
the current market price per share of the class of
securities subject to the transaction (reverse split
adjusted, if necessary).
Page 6
COMPANY RESPONSE:
Prior to November 22, 2006, there had been no prior securities
transactions between Catuity (or any of its predecessors) and
the Selling Security Holders, any affiliates of the Selling
Security Holders, or any person(s) with whom any of the
Selling Security Holders had a contractual relationship
regarding the transaction.
8. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with tabular disclosure comparing:
the number of shares outstanding prior to the
convertible debenture and Preferred stock transaction
that are held by persons other than the selling
shareholders, affiliates of the company, and
affiliates of the selling shareholders;
the number of shares registered for resale by the
selling shareholders or affiliates of the selling
shareholders in prior registration statements;
the number of shares registered for resale by the
selling shareholders or affiliates of the selling
shareholders that continue to be held by the selling
shareholders or affiliates of the selling
shareholders;
the number of shares that have been sold in
registered resale transactions by the selling
shareholders or affiliates of the selling
shareholders; and
the number of shares registered for resale on behalf
of the selling shareholders or affiliates of the
selling shareholders in the current transaction.
In this analysis, the calculation of the number of outstanding
shares should not include any securities underlying any
outstanding convertible securities, options, or warrants.
COMPANY RESPONSE:
We have added tabular disclosure of the number of common
shares outstanding prior to the Convertible Debentures and
Preferred Stock transaction, the number of common shares
previously registered for resale by the Selling Security
Holders, and the number of common shares being registered on
behalf of the Selling Security Holders in the current
transaction, per the Staff's suggestion. Reference is made to
the table included on page 44 of the registration statement
titled "Supplemental Information Regarding Outstanding Common
Stock".
9. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with the following information:
Page 7
whether the issuer has the intention, and a
reasonable basis to believe that it will have the
financial ability, to make all payments on the
overlying securities; and
whether - based on information obtained from the
selling shareholders - any of the selling
shareholders have an existing short position in the
company's common stock and, if any of the selling
shareholders have an existing short position in the
company's stock, the following additional
information:
the date on which each such selling
shareholder entered into that short
position; and
the relationship of the date on which each
such selling shareholder entered into that
short position to the date of the
announcement of the convertible debenture
and convertible preferred stock transaction
and the filing of the registration statement
(e.g., before or after the announcement of
such transaction, before the filing or after
the filing of the registration statement,
etc.).
COMPANY RESPONSE:
In the short-term Catuity has the intention, and a reasonable
basis to believe that it will have the ability, to make all
payments on the overlying securities. However, as noted in
Catuity's 10-KSB filed April 2, 2007, and consistent with the
disclosures regarding the need for additional financing in
Catuity's second and third quarter 10-QSBs filed August 14,
2006 and November 14, 2006, respectively, additional financing
will be required, likely by mid-2007, in order to meet
liquidity needs. The liquidity needs include scheduled debt
service and dividend payments.
The Company has requested and has received, from each selling
security holder, confirmation that the selling security
holders do not have an existing short position in Catuity's
common stock.
10. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with:
a materially complete description of the
relationships and arrangements that have existed in
the past three years or are to be performed in the
future between the issuer (or any of its
predecessors) and the selling shareholders, any
affiliates of the selling shareholders, or any person
with whom any selling shareholder has a contractual
relationship regarding the transaction (or any
predecessors of those persons) - the information
provided should include, in reasonable detail, a
complete description of the rights and obligations of
the parties in connection with the sale of the
convertible notes; and
Page 8
copies of all agreements between the issuer (or any
of its predecessors) and the selling shareholders,
any affiliates of the selling shareholders, or any
person with whom any selling shareholder has a
contractual relationship regarding the transaction
(or any predecessors of those persons) in connection
with the sale of the convertible notes.
If it is your view that such a description of the
relationships and arrangements between and among those parties
already is presented in the prospectus and that all agreements
between and/or among those parties are included as exhibits to
the registration statement, please provide us with
confirmation of your view in this regard.
COMPANY RESPONSE: Other than the relationships and
arrangements described in the prospectus, Catuity has not had
any, and does not have any contracts for, relationships or
arrangements with the selling shareholders.
Please see the disclosure in the prospectus regarding the
financing and the rights and obligations of the parties in
connection with the sale of the convertible notes.
Copies of all agreement between Catuity and the selling
shareholders, any affiliates of the selling shareholders, and
any person with whom any selling shareholder has a contractual
relationship are included as exhibits to Catuity's Form 8-K
filed November 22, 2006, which is incorporated into the
registration statement by reference.
11. SEC COMMENT: Please provide us, with a view toward disclosure
in the prospectus, with a description of the method by which
the company determined the number of shares it seeks to
register in connection with this registration statement. In
this regard, please ensure that the number of shares
registered in the fee table is consistent with the shares
listed in the "Selling Shareholders" section of the
prospectus.
COMPANY RESPONSE:
This registration covers only a portion of the shares issuable
on conversion of the Convertible Debentures and Preferred
Stock. The warrant shares are not included in the registration
statement. The number of shares being registered was computed
based upon 30% of the total common shares outstanding held by
non-affiliates of the company as of March 31, 2007, and the
shares listed in the "Selling Security Holders" section
includes both the shares being registered as well as the
warrant shares.
The number of shares of common stock issuable under the
Convertible Debentures is equal to the original principal
amount of each debenture divided by the conversion price. The
original principal amounts of the Convertible Debentures are
$1,111,112.00 and $688,888.00, respectively, and the
conversion price is $3.25. Accordingly, the number of shares
of common stock issuable upon conversion of the
Page 9
Convertible Debentures equals (1,111,112/3.25) and
(688,888/3.25) or 341,881 and 211,966, respectively (rounded
to the nearest whole number). Therefore, a total of 553,847
shares of common stock are issuable upon conversion of the
Convertible Debentures.
Pursuant to the Certificate of Designations, the number of
shares of common stock issuable upon conversion of each of the
Preferred Shares is equal to the "Stated Value" of each of the
Preferred Shares, $1,000.00, divided by the conversion price,
$3.25. Thus, 307.6923 shares of common stock are issuable upon
conversion of each of the Preferred Shares. Gottbetter Capital
Master, Ltd. was issued 432.10 Preferred Shares and
BridgePointe Master Fund Ltd. was issued 267.90 Preferred
Shares. Upon conversion of the Preferred Shares, then,
Gottbetter Capital Master and BridgePointe Master Fund Ltd.
would be issued 132,954 and 82,431 shares of common stock,
respectively (rounded to the nearest whole number), or 215,385
shares collectively.
Accordingly, Catuity initially sought to register 553,847
shares of its common stock for issuance upon conversion of
the Senior Notes and 215,385 shares of its common stock for
issuance upon conversion of the Preferred Shares. However,
based on conversations with the SEC staff subsequent to
receipt of the comment letter, Catuity has decided to reduce
the total number of registered shares, such that the total
number of shares registered under the registration statement
would be equal or less than 30% of the total outstanding
shares of common stock held by non-affiliates. Thus, Catuity
seeks to register a total of 621,218 shares of its
common stock.
In our initial filing, we rounded "down" to the nearest whole
number, rather than rounding "up." Rounding up, we have 2 more
shares being registered. The additional registration fee for
these 2 additional shares is less than $0.01, so the
registration fee table should reflect the new number of
shares, but no change in the fee due and paid.
The table set forth in the "Selling Security Holders" section
of the prospectus beginning on page 44 of the registration
statement will be presented as follows:
<Table>
<Caption>
SHARES OF COMMON STOCK NUMBER OF SHARES OF SHARES OF COMMON
BENEFICIALLY OWNED COMMON STOCK TO BE STOCK BENEFICIALLY
SELLING SECURITY HOLDERS PRIOR TO OFFERING SOLD IN THE OFFERING OWNED AFTER THE
------------------------ ---------------------- -------------------- OFFERING
------------------
NUMBER PERCENT NUMBER PERCENT
------ ------- ------ -------
Gottbetter Capital Master, Ltd. 695,294(1) 23.08 383,468 311,826 9.59
BridgePointe Master Fund Ltd. 431,081(2) 15.68 237,750 193,331 6.17
TOTAL 1,126,375 32.71 621,218 505,157 14.67
- ----------
1 Comprised of 341,881 shares issuable upon conversion of the Senior
Notes; 132,954 shares issuable upon conversion of the Preferred Shares;
and 220,459 shares issuable upon exercise of the Warrants.
2 Comprised of 211,966 shares issuable upon conversion of the Senior
Notes; 82,431 shares issuable upon conversion of the Preferred Shares;
and 136,684 shares issuable upon exercise of the Warrants.
Page 10
Financial Statements
12. SEC COMMENT: Please file the audited financial statements for
its year ended December 31, 2006 with its amendment. Please
see Item 310(g)(2) of Regulation S-B in this regard.
COMPANY RESPONSE:
The audited financial statements of Catuity for the year ended
December 31, 2006 have been included in the registration
statement, as noted by the Staff. Reference is made to the
"Index to Financial Statements" on page F-1 of the
registration statement.
Part II
Undertakings
13. SEC COMMENT: The undertakings were revised effective December
1, 2005. Please see Securities Act Release 33-8591 of that
date and the revised Item 512 of Regulation S-B in that
regard.
COMPANY RESPONSE:
We have amended the undertakings as noted by the Staff.
Reference is made to "Item 28. Undertakings" beginning on page
49 of the registration statement.
Exhibit List
14. SEC COMMENT: We note that exhibits 10.21, 10.22, 10.23, 10.24,
10-25, and 10.26 are shown as being incorporated by reference
from a Form 8-K filed for September 22, 2006. That Form 8-K
was actually filed for November 22, 2006. Please revise.
COMPANY RESPONSE:
We have corrected the references as noted by the Staff.
Reference is made to the Exhibit List beginning on page 52 of
the registration statement.
Exhibit 5, Opinion of Jaffe, Raitt, Heuer & Weiss
15. SEC COMMENT: Counsel states that the 769,230 shares being
registered for resale "will have been duly authorized". If the
issuance of the shares has been duly authorized, please
express that as an action that has already been taken. If the
authorization has not yet occurred, clarify what remains to be
accomplished and the assumptions that are made in concluding
that the issuance "will have been duly authorized".
Page 11
COMPANY RESPONSE:
Counsel's intent was to express that authorization is
complete, by using the future-perfect tense. For clarity,
counsel has revised its opinion to clarify that the action
authorizing the issuance of the shares has already been taken.
16. SEC COMMENT: Please also confirm whether the opinion regarding
the common shares to be issued reflects the Delaware state
constitution, state code, state court decisions, and decisions
of the state supreme court.
COMPANY RESPONSE:
Counsel's opinion is not limited, and reflects the Delaware
state constitution, state code, state court decisions, and
decisions of the state supreme court.
In conversations with the Staff subsequent to the issuance of the
comment letter, Staff noted a concern as to the applicability of Rule 415 for
this registration. At the invitation of the Staff, we would like to take this
opportunity to explicitly address whether the offering is appropriately
characterized as a secondary offering that is eligible to be made on a shelf
basis under Rule 415(a)(1)(i).
We respectfully advise the Staff that we have analyzed and determined
that the offering being registered on Form SB-2 is appropriately characterized
as a secondary offering that is eligible to be made on a shelf basis under Rule
415(a)(1)(i) for the following reasons:
Rule 415(a)(1)(i) provides that:
"(a) Securities may be registered for an offering to be
made on a continuous or delayed basis in the future.
Provided, that:
(1) The registration statement pertains only to:
(i) Securities which are to be offered
or sold solely by or on behalf of a
person or persons other than the
registrant, a subsidiary of the
registrant or a person of which the
registrant is a subsidiary..."
We believe the SB-2 we seek to file to effect the offering satisfies
Rule 415(a)(1)(i) because it registers securities on behalf of persons other
than Catuity, a subsidiary of Catuity or a person of which Catuity is a
subsidiary.
Background: The Nature of the Transaction
The convertible notes and convertible preferred shares overlying the
shares being registered for resale under the SB-2 (the "Offered Shares") were
sold or issued to two accredited investors with passive investment intent in a
valid and customary Section 4(2) transaction negotiated at arms'
Page 12
length and consummated on November 22, 2006 (the "Private Placement"). The
Offered Shares are the shares that are issuable to the investors upon conversion
of the convertible notes and convertible preferred shares. Notably, none of the
Offered Shares were issued or are issuable pursuant to any form of equity line
arrangement. Further, the Private Placement has been completed and is not
ongoing -- the investors' funds were fully committed, at market risk and
irrevocably paid at closing.
Analysis: Secondary versus Primary Offering
Item D.29 of the SEC's 1997 Manual of Publicly Available Telephone
Interpretations sets forth six factors that an issuer should analyze to
determine whether an offering is a secondary offering within the meaning Rule
415. These factors include: how long the selling stockholders have held the
shares; the circumstances under which they received them; their relationship to
the issuer; the amount of shares involved; whether the sellers are in the
business of underwriting securities; and finally, whether under all the
circumstances, it appears that the seller is acting as a conduit for the issuer.
Our analysis of these factors is set forth below. We believe the
analysis confirms that the sale of the Offered Shares is appropriately
characterized as a secondary offering eligible to be made on a shelf basis under
Rule 415(a)(1)(i).
1. How long the selling stockholders have held the shares:
The 621,218 shares being registered on the SB-2 are issuable to the
selling stockholders pursuant to securities that have been held for
more than four months.
Except for days on or following a public announcement, the trading
volume for our common stock is generally very modest, and we
believe that the sale into the public market of any significant portion
of the 621,218 shares being registered would dramatically reduce the
price the selling stockholders would receive, thereby severely reducing
the value of their investment. Further, given that the conversion price
of the convertible notes and convertible preferred shares is currently
significantly above the recent trading price of our common stock, we
believe it is unlikely that the selling stockholders can or will
convert to common stock and sell shares pursuant to the registration
statement in the near future, thereby likely extending their holding
period with respect to the securities overlying the Offered Shares.
2. Circumstances under which the investors received their shares:
As described above, the investors received the convertible notes and
convertible preferred shares overlying the Offered Shares pursuant to a
valid and completed private placement transaction. The investors have
been at market risk for their entire investment since the date of the
closing of the Private Placement. None of the Offered Shares were
issued or are issuable pursuant to any form of equity line arrangement.
We will receive no proceeds from the sale of any of the Offered Shares
by the selling stockholders. The investors could not, after they paid
for and acquired the convertible notes and convertible preferred shares
in the
Page 13
Private Placement, immediately turn around and sell them in the public
market. The certificates representing the convertible notes and
convertible preferred shares all bear restrictive legends restricting
transfer absent registration or the availability of an exemption from
registration.
3. The Investors' relationship to the issuer:
The selling stockholders in the SB-2 are private investment funds.
Prior to the negotiations resulting in the consummation of the Private
Placement, we had no relationships or arrangements whatsoever with the
selling stockholders. Accordingly, we respectfully submit that none of
the shares being registered for resale under the SB-2 are being sold by
or on our behalf.
4. The amount of shares involved:
On March 31, 2007 2,317,486 shares of our common stock were
outstanding, 2,070,725 of which were held by investors deemed to be
non-affiliates. Therefore, the 621,218 shares we seek to register
pursuant to the SB-2 represent approximately:
- 30.0%, as a percentage of the total outstanding
shares held by non-affiliates at march 31, 2007;
- 26.81%, as a percentage of the total outstanding
shares held by all stockholders at March 31,2007;
and
- 21.14%, as a percentage of the total outstanding
shares at March 31, 2007 plus the Offered Shares
5. Whether the sellers are in the business of underwriting securities.
As mentioned above, the selling stockholders in the SB-2 are private
investment funds. To our knowledge and based on inquiry, none of the
selling stockholders is a registered broker-dealer or an affiliate of
a broker-dealer. Broadband Capital Management, LLC, the placement
agent for the Private Placement, is a registered broker-dealer. Each
of the selling stockholders has advised us that it purchased or
acquired the shares in the ordinary course of business and that at the
time of the purchase of the securities overlying the Offered Shares, it
had no agreements or understandings, directly or indirectly, with any
person to distribute the securities. To our knowledge, neither of the
selling stockholders is in the business of underwriting securities. The
sale of the convertible notes and convertible preferred shares was not
conditioned on the prior effectiveness of a registration statement or
on the selling stockholder's ability to sell the Offered Shares, the
convertible notes or the convertible preferred shares.
Moreover, Gottbetter Capital Master, Ltd., the lead investor in the
transaction, invests in a number of companies and, upon inquiry, has
confirmed to us that their historical practice has been to hold their
investment positions, rather than rapidly buy and sell in order to
take advantage of short-term price fluctuations. For this reason,
and the others discussed above, we respectfully
Page 14
submit that the selling stockholders are not underwriters and were not
acting as underwriters with respect to the Private Placement.
6. Whether under all the circumstances it appears that the seller is
acting as a conduit for the issuer:
Neither of the selling stockholders is acting as a conduit for Catuity.
Acting as a conduit for the offer and sale of our securities would not
be in the best interests of the selling stockholders, as they would
currently be unable to sell the shares of common stock issuable upon
conversion of their convertible securities for a comparable price in
the market. Further, even if a selling stockholder desired to act as a
conduit for Catuity, it would be difficult because the trading volume
of our common stock is generally very modest.
Each selling stockholder is an investor and made an independent
decision to acquire the securities overlying the Offered Shares. The
selling stockholders are not in the underwriting business. The Private
Placement was negotiated at arm's length terms with immediate and
continuing economic and market risks.
**********************************
Catuity acknowledges that (a) it is responsible for the adequacy and
accuracy of the disclosure in its filings; (b) should the Commission or the
Staff, acting pursuant to delegated authority, declare the filing effective, it
does not foreclose the Commission from taking any action with respect to the
filing; (c) the action of the Commission or the Staff, acting pursuant to
delegated authority, in declaring the filing effective, does not relieve Catuity
from its full responsibility for the adequacy and accuracy of the disclosures in
the filing; and (d) Catuity may not assert Staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
In preparing our letter we have endeavored to provide a comprehensive
response to your comments and questions. If you wish to discuss any aspects of
our response or require further clarification you may reach me at the address
below.
Sincerely,
/s/ Debra R. Hoopes
Debra R. Hoopes
Chief Financial Officer
Catuity, Inc.
300 Preston Avenue, Suite 302
Charlottesville, VA 22902
Page 15