Kenneth S. Goodwin, Esq.
Gottbetter & Partners, LLP
488 Madison Avenue, 12th Floor
New York, NY 10022
212-400-6900
212-400-6901
ksg@gottbetter.com
February 10, 2004
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: Optionable, Inc.
Registration Statement on Form SB-2
(File No. 333-121543)
Ladies and Gentlemen:
On behalf of our client, Optionable, Inc. (the "Company"), a Delaware
corporation, and pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), we hereby submit via EDGAR transmission, Amendment No. 1 (the
"Amendment") to the Registration Statement of the Company on Form SB-2 (File No.
333-121543) (the "Registration Statement"), including certain exhibits thereto.
Separately, we have delivered to the staff additional copies of the Amendment
marked to show changes from the Registration Statement as originally filed.
By letter dated January 19, 2005 (the "Comment Letter") from Elaine
Wolff, Branch Chief, the Company was informed of the comments of the staff with
respect to the Registration Statement. In addition to responding to the staff's
comments, the Company has amended the Registration Statement to update certain
other information contained in the Preliminary Prospectus. Set forth below is a
brief description of the responses to the Comment Letter. Numbered references
are to the numbered paragraphs of the Comment Letter, while captions refer to
the headings of the Comment Letter. Capitalized terms not defined in this
response letter shall have the meanings given to them in the Preliminary
Prospectus.
General
1. The Company does not intend to utilize any pictures, graphics or
artwork in the prospectus.
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2. Rule 300 of the Exchange Act defines an " alternative trading
system" in relevant part as "any organization, association, person, group of
persons, or system: that constitutes, maintains, or provides a market place or
facilities for bringing together purchasers and sellers of securities or for
otherwise performing with respect to securities the functions commonly performed
by a stock exchange within the meaning of Rule 3b-16 under the Securities
Exchange Act of 1934." OPEX is not intended to bring together purchasers and
sellers of "securities", as that term is defined in the federal securities laws.
Rather, OPEX when implemented will function as an electronic trading platform
for commodities transactions. Accordingly, we respectfully submit that OPEX is
not an "alternative trading system" as defined in Rule 300. Although the Company
may expand its operations beyond the energy options and swaps markets, it has no
current intention of constituting, maintaining, or providing "a market place or
facilities for bringing together purchasers and sellers of securities or for
otherwise performing with respect to securities the functions commonly performed
by a stock exchange," and therefore does not anticipate that Rule 300 will have
an impact on its operations in the foreseeable future.
3. Supplementally, please be advised that OPEX, when implemented, is
intended to function as an electronic trading facility providing for the
execution of principal-to-principal transactions between eligible commercial
entities in exempt commodities. It is qualified, therefore, to operate as exempt
commercial market under the Commodity Exchange Act (the "CEAct").
Participants Eligible to Trade on an Exempt Commercial Market
A facility operating as an ECM must limit trading to persons that are
"eligible commercial entities (ECEs)" at the time they enter a trade. Persons
qualifying as ECEs include those entities enumerated in Section 1a(11) of the
CEAct. The facility must require that each participant agree to comply with all
applicable laws, and the facility must have a reasonable basis for believing
that its participants are ECEs.
The CFTC has expanded the ECE definition to include professional
brokers and traders when acting in a proprietary trading capacity that are
either:
(1) CFTC-registered floor brokers or floor traders that
either: (a) are Eligible Contract Participants ("ECPs") as defined in
section 1a(12) of the Act; or (b) have their trades on the ECM
guaranteed by a clearing member that is a member of a CFTC-registered
Derivatives Clearing Organization and is an ECP, or
(2) International Petroleum Exchange ("IPE") brokers and
traders that are either authorized by the Financial Services Authority
("FSA") or registered with the IPE and that are either (a) ECPs as
defined in section 1a(12) of the Act, or (2) have their trades on the
ECM guaranteed by a clearing member that is a member of an
FSA-recognized derivatives clearing organization and is an ECP.
Please be advised that the Company will limit trading on OPEX to
persons that are ECEs at the time they enter a trade.
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Products Eligible for Trading on an Exempt Commercial Market
Only " exempt commodities" (any commodity other than an " excluded
commodity" or an agricultural commodity) are eligible to be traded on an ECM.
Exempt commodities include, among other things, energy products and metals. An
"excluded commodity" in general is any financial instrument such as a security,
currency, interest rate, debt instrument, or credit rating; any economic or
commercial index other than a narrow-based commodity index; or any other value
that is out of the control of participants and is associated with an economic
consequence.
The Company currently intends to permit only exempt commodities to be
traded on OPEX. To the extent the Company expands beyond the energy options and
swaps markets in the future, it does not currently intend to move beyond the
trading of other exempt commodities.
Based on the foregoing, the Company respectfully submits that OPEX when
implemented will function as an exempt commercial market.
Since ECMs may be subject to certain informational access rules
established by the CFTC, the Company has modified the disclosure in the
prospectus to that effect.
4. Complied with. A sentence has been added at the end of "Prospectus Summary -
Business" to disclose the Company's website.
Cover Page
5. Complied with. The cover page of the Prospectus has been revised to
include a price for the sale of the Company's securities by the selling
stockholders.
6. Complied with. The reference to the OTCBB has been revised to state
the Company intends to have its shares quoted on the bulletin board.
Prospectus Summary, page 1
Business, page 1
7. Complied with. A sentence has been added disclosing that the Company
is not a registered broker-dealer.
8. Complied with. The text has been revised to clarify how the Company
currently generates revenues, as well as how the Company anticipates it will
generate revenues after the launch of OPEX. In addition, disclosure has been
added regarding incentives paid from the two exchanges. The text has also been
revised to clarify the Company's activities do not constitute separate
businesses, but rather various means to provide related services.
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9. Complied with. Additional disclosure has been added describing
options, swaps, and futures, including financially settled energy options.
Similar disclosure has been added to the "Business" section.
10. Complied with. Disclosure has been added describing the nature and
mechanics of the Company's various services. The section has also been revised
to indicate that the Company's floor brokerage operations were launched in April
2004.
11. Complied with. Disclosure has been added regarding the beneficial
ownership of the Company's officers and directors.
Risk Factors, page 6
12. Complied with. A risk factor has been included regarding the
Company's indebtedness under "Risks Related to our Financial Condition."
13. Complied with. A risk factor has been added with respect to
regulatory risk.
14. Complied with. The heading and the risk factor have been revised to
focus on the risk regarding market acceptance of the OPEX system.
15. Complied with. This risk factor has been combined with the
preceding risk factor to eliminate repetitive disclosure. The Company has
disclosed in the prior risk factor that it anticipates launching OPEX during the
first six months of 2005.
16. Complied with. Please see response #15, above.
17. Complied with. The risk factor has been revised to focus on the
Company's history of losses and plans to enter a new line of business as the
reasons for possible difficulty in evaluating its business.
18. Complied with. The risk factor has been expanded to provide more
complete disclosure for each bullet point. In addition, the final paragraph of
this risk factor was duplicative of earlier disclosure and has been eliminated.
19. Complied with. The risk factor has been revised to eliminate
mitigating factors, and the heading has been revised to more accurately convey
the risk that the Company may have to curtail its current operations and the
implementation of OPEX.
20. Complied with. Disclosure has been added regarding the past
suspension of the development and implementation of OPEX. The risk has also been
combined with the risk factor formerly on page 13 regarding the risk that the
Company may not attain positive cash flow. See also the response to comment 19,
above.
21. Complied with. The risk factor has been revised to limit its scope
to the Company's proposed OPEX service.
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22. Complied with. The Company has revised this risk factor to disclose
that it primarily relies upon proprietary information such as customer lists, as
opposed to patents, to remain competitive in its business. The risk factor
discloses that the Company does not have confidentiality agreements with its
employees, and therefore may not be able to adequately protect its proprietary
information. The risk factor also discloses that the Company has patents pending
relating to its planned OPEX system. The disclosure has been further revised by
moving the material regarding possible claims by third parties for infringement
to a separate risk factor.
23. Complied with. The settlement with our former software developer
has been disclosed.
24. Complied with. The disclosure has been modified to more
specifically explain that the Company will need to establish technology-sharing
relationships with the exchanges to ensure the seamless meshing of its OPEX
system with the systems utilized by the exchanges. In addition, the use of the
term "partner" has been eliminated.
25. Complied with. The risk factor has been revised to disclose
management's affiliation with CES.
26. Complied with. The risk factor has been revised to provide more
detail about current and potential competitors.
27. Complied with. The mitigating language has been deleted from the
risk factor.
28. Complied with. The risk factor has been revised to disclose how the
Company's financial condition impacts its ability to attract and retain
employees.
29. Complied with. The risk factor has been revised to disclose that
Mr. Nordlicht has provided substantially all of the Company's past financing.
The risk factor also discloses the Company's inability to rely on Mr. Nordlicht
for future financings.
Use of Proceeds, page 16
30. Complied with. A clause has been added to the disclosure relating
to the use of proceeds from warrant exercises, if any, for continued development
of the OPEX product.
Selling Stockholders, page 18
31. The Company confirms that all material relationships between it and
the Selling Stockholders have been disclosed in the footnotes.
32. Complied with. The table has been revised to reflect the 1,300,000
shares underlying warrants which are being registered. Please note that the
Company is not registering any shares underlying options.
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33. The Company is in the process of accumulating the information
necessary to comply with this comment. When such information is obtained, the
table will be revised to identify natural persons with voting or investment
control over selling stockholders which are not natural. Supplementally, the
Company is seeking to ascertain whether any of the selling stockholders is a
broker-dealer or an affiliate of a broker-dealer. It currently appears that Ezra
Birnbaum, a beneficial owner of Colbart Birnet L.P., is an owner of Pond
Equities, which is a registered broker-dealer.
Plan of Distribution, page 21
34. Complied with. The disclosures regarding expenses required by Item
511 of Regulation S-B has been provided.
Management's Discussion and Analysis of Plan of Operations, page 23
35. Complied with. The section has been revised to include a Plan of
Operations.
36. Complied with. The disclosure regarding the development and launch
of OPEX has been added in the "overview" and "plan of operations" sections.
Results of Operations for Fiscal Year Ended December 31, 2003 and 2002, page 23
37. Complied with. The revised disclosure indicates that the decrease
was primarily attributable to market issues.
Results of Operations for the Nine-Month Period Ended September 30, 2004 and
2003, page 25
38. Complied with. The discussion under "Interest expense to related
parties" has been expanded to clarify the increase in the imputed rate.
39. Complied with. Language has been added to the disclosure to clarify
that resumption of development efforts on OPEX commenced during the second half
of 2004.
Liquidity and Capital Resources, page 27
40. Complied with. The parties have been identified by name and, where
applicable, title.
41. Complied with. The Company has disclosed the class of purchasers in
its $1 million private placement.
42. Complied with. The Company does not currently have any material
commitments for capital expenditures, and clarifying language has been added to
the disclosure.
43. Complied with. The Company has clarified the disclosure regarding
the increase in accounts and other receivables.
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44. Complied with. The accounting treatment and financial statement
impact for the forfeiture of compensation has been disclosed.
Description of Business, page 28
45. Complied with. Disclosure has been added regarding how the Company
markets its services and an overview of its strategy.
46. Complied with. Disclosure has been added regarding the material
terms of the agreements with the exchanges pursuant to which the Company earns
incentives.
47. Complied with. A section has been added entitled "How we generate
revenues" containing the requested disclosure.
Business Partners
48. Complied with. Additional disclosure as to why the Company entered
into the agreement with CES, as well as further detail regarding the services
provided by CES, has been included.
49. Complied with. The Company has disclosed what is included in "gross
receipts of the floor business."
Customer Concentration
50. Complied with. The identity of the customers has been disclosed.
Directors, Executive Officers, Promoters and Control Persons, page 33
51. Complied with. The dates have been provided.
Executive Compensation, page 35
52. Complied with. The Company has provided additional details on the
terms of Mr. O'Connor's amended employment agreement.
Certain Relationships and Related Party Transactions
53. Complied with. The section has been revised to disclose the basic
terms of the loans provided by Mr. Nordlicht.
54. Complied with. The disclosure has been expanded to indicate the
business in which Sleepy Hollow is engaged and why the Company provides it with
certain services.
55. Supplementally, please be advised that the prepaid commissions were
related to the requirement to provide a share of the commissions earned by the
Company for relevant brokerage services to be provided by Mark Nordlicht and
Platinum Partners, LP. These services have never materialized and as such, the
Company was still liable to Mark Nordlicht and Platinum Partners L.P. for those
funds. Furthermore, the prepaid commissions were made part of the loan
consolidation and modification of terms of the various amounts due to Mark
Nordlicht which was effective in March 2004. While such consolidation took place
shortly after the balance sheet date, it was effective prior to the issuance of
the financial statements. Accordingly, the Company believe that the amounts due
to Mark Nordlicht as part of the prepaid commission agreements with Mark
Nordlicht and Platinum Partners, LP were properly classified as a liability of
the Company as of December 31, 2003.
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56. Complied with. Mr. O'Conner's percentage ownership in CES is
disclosed.
57. Complied with. The material terms of the Consulting Agreement with
Mr. Cassidy and the warrants issued to Piepont Capital are discussed in this
section, rather than by cross reference to the Business section.
Market for Common Equity, page 41
58. Complied with. A 2004 compensation plan table has been included.
Legal Proceedings, page 43
59. Complied with. The Company's May 2004 settlement with its former
legal counsel is disclosed.
Financial Statements
Notes to the Financial Statements - December 31, 2003 and 2002, pages F-7 - F-16
60. Complied with. Disclosure has been added to footnote 3 to indicate
that the Company operates in one business segment (i.e., provision of brokerage
services via several methodologies), as well as the reason the Company has
reached this conclusion. Although the Comment Letter suggested a supplemental
response, the Company respectfully submits that it is more appropriate to
disclose to the reader of the financial statements how the "chief
operation-decision maker", as defined in FAS 131, evaluates the performance of
the Company.
61. Supplementally, please be advised that no value was attributed to
such patents and trademarks, therefore they are considered immaterial to the
financial statements and do not warrant disclosure pursuant to FAS 142.
Note 3 - Summary of Significant Accounting Policies, pages F-7 - F-12
Fair Value of Instruments, page F-8
62. Complied with. The note has been revised to clarify that the fair
value of the note was determined by reference to the Company's incremental
borrowing rate.
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Software Development Costs, page F-8 - -F-9
63. Complied with. The footnote has been expanded to explain how
technological feasibility is established. Supplementally, please be advised that
SFAS 86 paragraph 3 states that "All costs to establish technological
feasibility of a computer software product to be sold, leased or otherwise
marketed are research and developments costs". These costs shall be charged to
expense when incurred. Technological feasibility has been established when the
Company has completed all planning, designing, coding and testing activities to
establish that the product can be produced to meet its design specifications
including functions, features and technical performance requirements. Since the
Company has not reached this point all expenses incurred have thus far been
expensed, however when the Company does reach technological feasibility as
defined by SFAS 86 it will begin capitalizing its software productions costs
pursuant to SFAS 86 paragraph 5.
Revenue Recognition, page F-11
64. Complied with.. The footnote has been revised to provide greater
detail about when revenue is considered to be earned for transactions.
Note 6 - Commitments, page F-14
65. Complied with. Disclosure has been added regarding 2009 and
thereafter.
Balance Sheet for the Year Ended September 30, 2004, page F-17
66. Complied with. The line item has been revised to refer consistently
to the Chairman of the Board.
Notes to the Financial Statements - September 30, 2004 and 2003, pages F-20 -
F-33
Note 3 - Summary of Significant Accounting policies, pages F-21 - F-26
Revenue Recognition, page F-25
67. Supplementally, please be advised that the Company has agreements
with two exchanges, NYMEX and ICE. Under the incentive program offered by NYMEX,
50% of the revenues from NYMEX ClearPort is allocated to an intermediary
incentive pool. At the end of each month, the qualifying intermediaries,
including the Company, receive their pro-rata share based on the volume for
which they were responsible. There is no minimum volume requirement in order to
participate. Under the incentive program provided by ICE, ICE remits to the
Company 50% of its revenues generated by transactions submitted by the Company
during each quarter, so long as such transactions result in revenues to ICE in
excess of $180,000.
SAB 104 provides that revenue is realized or realizable and earned when all of
the following criteria are met:
1) Persuasive evidence of an arrangement exists. The Company has a
written separate agreement with ICE ("ICE Order Flow Agreement"). NYMEX has
published the terms of its incentive program in 2003 which is offered to all
intermediaries in the select transactions;
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2) delivery has occurred or services have been rendered. Under
arrangements with both exchanges, the incentives are earned on the day the
Company submits transactions to the respective exchanges based on the revenues
generated such from transactions. The Company accounts for all transactions
submitted to each exchange on a daily basis. Accordingly, the Company is able to
determine when the incentives are earned based on the date it submits
transactions to the exchanges. Also, in the case of ICE, the Company's
incentives are subject to certain minimum volumes ( i.e., ICE revenues generated
from transactions the Company submits in excess of $180,000 per quarter). Based
on the Company's transactions records, the Company is able to determine whether
it has met such minimum volumes in any given quarter. If the Company does not
meet the ICE minimum volumes during a quarter, it does not recognize the related
incentives. The Company has no other obligations to the exchanges to earn the
incentives;
3) "seller's" price to the buyer is fixed or determinable. Based on the
incentive program terms of each exchange, their published prices for the type of
transactions the Company submits to them, and the Company's transactions
records, the Company is able to determine the revenues each exchanges earn in
connection with the transactions it submits, and accordingly, the amount, if any
of the incentives the Company earns in connection with such transactions; and
4) collectibility is reasonably assured. NYMEX and ICE have paid the
Company during the fourth quarter of 2004 for incentives earned prior to
September 30, 2004. The Company has no knowledge that they do not intend to pay
these incentives, if earned, in the future. Furthermore, the Company intends to
enforce the payment of any incentives receivable under the incentive programs.
Accordingly, the Company believes that the incentives earned by the Company for
the nine-month period ended September 31, 2004 are accounted for in compliance
with SAB 104.
Please be advised that the Company does not pay transaction fees to ICE or
NYMEX.
Note 4 - Due to Stockholder, pages F-26 - F-27
68. Complied with. The note has been revised to describe in greater
detail the modification of the terms of the amount due its Chairman, as well as
to include information similar to that provided under "Certain Relationships and
Related Party Transactions."
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Note 5 - Other Related Party Transaction, page F-28
69. Complied with. The Company has expanded the note to disclose its
revenue recognition policies with respect to the revenue sharing agreement with
the related party.
Note 7: Stockholder's Deficit, page F-30
70. Complied with. The note has been revised to disclose the customer's
oral agreement to cancellation of the warrants.
Part II
Item 26
71. Complied with. The disclosure has been revised to indicate that the
Company relied on the exemption from registration provided by Section 4(2) of
the Securities Act in connection with the private placement of its shares to
Jackson Steinem, Inc.
Exhibits
72. Our opinion is filed with the Amendment. In addition, the Company's
Agreement with Intercontinental Exchange, Inc. is filed as an exhibit to the
Amendment.
* * *
We trust that the changes in the accompanying Amendment and the
explanations contained in this letter will be considered by the staff to be
satisfactory responses to the comments contained in the Comment Letter. If the
staff has any questions or comments with respect to the changes made to the
Registration Statement by the Amendment, please contact me at 212-400-6900.
Very truly yours,
/s/ Kenneth S. Goodwin
Kenneth S. Goodwin
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