Company Name: Harmony Trading Corp.
Public Availability Date: Nov. 22, 1999 

[LETTER OF INQUIRY]

November 12, 1999

Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re: Harmony Trading Corp.

Dear Sirs:

On behalf of our client, Harmony Trading Corp., a New York corporation ("Harmony"), we respectfully request that the staff confirm that it will not recommend enforcement action with respect to the resale of the shares of common stock of Harmony by certain shareholders provided such sales comply with the applicable volume and manner of resale restrictions of Rule 144 or the resale provisions of Rule 144(k).

Facts

Harmony was formed on August 13, 1996. Upon its organization, it issued 200 shares of the common stock, $.001 par value (the "Common Stock") to Paul Gottbetter, the founder, President and sole Director. In 1997, Harmony explored entering into the import/export business, but after preliminary investigation, management determined that such a business was not suitable.

In 1998, Harmonys management decided to enter the womens apparel business and become a direct seller of Doncaster brand apparel. A Christmas 1998 launch was planned and various friends and family members were contacted to assist Harmony in building a mailing list for the launch and attending various fashion and trunk shows.

In the Summer of 1998, Paul Gottbetter promised small amounts of his own shares in Harmony to 25 individuals (the "Paul Gottbetter Transferees") (Appendix A). In its most recent financial statements, Harmony has valued those shares at a total of approximately $375. The transferees were people who had done a variety of things that had been helpful to Harmony, such as attending fashion shows or providing suggested additions to Harmonys mailing list, without any other promise or expectation of being compensated for their help. Some were family members; others were friends and acquaintances. The shares were given in token amounts both as a thank you for help that had been given to date and with a view toward maintaining the interest of these people in Harmonys future success. Certificates for the shares were not issued until after the stock split described below for administrative and practical reasons. However receipt of the shares was not conditioned on performing any specific services, and the right of the Paul Gottbetter Transferees to receive the shares immediately vested at the time the promise was made. Harmony initially treated the promised shares as gifts which would have resulted in the Paul Gottbetter Transferees having holding periods measured from the date of Paul Gottbetters initial purchase more than two (2) years before. Accordingly, no investor representations were asked for or received, no stop-transfers were issued, and the certificates at the time of issuance did not bear any restrictive legends.

At the time Paul Gottbetter promised the shares, the Paul Gottbetter Transferees knew that Harmony was embarking on a new business and that there was no trading market for the Harmony Common Stock. Nor was the market expected to exist in the foreseeable future. Since July 1998, none of the Paul Gottbetter Transferees has disposed of any of his shares of Common Stock in any manner. Each transferee has agreed not to sell his shares of Common Stock unless the sale is in accordance with the terms and conditions of Rule 144.

In early April 1999, the stock was split 5,000 for 1 so that 25 million shares of capital stock were authorized and 1,555,000 shares of common stock were issued and outstanding. At this time, Harmony engaged the services of a transfer agent, to issue certificates for all of the shares outstanding, including the shares promised earlier by Paul Gottbetter to the Paul Gottbetter Transferees. At that time, each of the Paul Gottbetter Transferees received a certificate for 300 shares.

In January 1999, Paul Gottbetter made a gift of 25 shares of Common Stock to his son, Adam Gottbetter for estate planning purposes. In April 1999, Adam Gottbetter transferred 300 of his 125,000 post-split shares of common stock to each of ten (10) persons (the "Adam Gottbetter Transferees"). The Adam Gottbetter Transferees are employees of the law firm of Kaplan Gottbetter & Levenson, LLP and the shares were transferred to such persons in appreciation of work done for the firm.

In July 1999, the Company filed a registration statement on Form 10-SB which became effective under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") on September 20, 1999. In the Form 10-SB, Paul Gottbetters transfer of stock to the 25 Paul Gottbetter Transferees and Adam Gottbetters transfers of stock to the 10 Adam Gottbetter Transferees were characterized as "gifts". However, in the course of the proposed market makers submission to NASDR, the characterization of these transfers raised concerns because of a 1993 SEC consent judgment against Capital General Corp. which suggested that purported gifts by an issuer should be regarded as sales rather than gifts if, as a result of the gifts, value accrues to the issuer in the form of a more liquid market for its securities.

On September 16, 1999, the Company authorized a 2 for 1 split of its common stock and amended its certificate of incorporation to increase its authorized capital.

For purposes of this request, we have assumed that Paul Gottbetter, Adam Gottbetter and Harmony received value for all of the transfers described above other than the gift of shares from Paul Gottbetter to Adam Gottbetter, and that accordingly those transfers are sales for purposes of the Securities Act of 1933, as amended (the "Securities Act").

In our view, the staff should not recommend enforcement action because no useful purpose would have been served by registration of the transfers by Paul Gottbetter to the Paul Gottbetter Transferees, and neither those transfers themselves nor those transfers when considered together with the later transfers by Adam Gottbetter present risks to investors of the type the registration process was designed to prevent. In fact, if Harmony and Paul Gottbetter had known of the Commissions Capital General position at the time Paul Gottbetter promised the shares, they could have achieved exactly the same result by having the token numbers of shares issued by Harmony directly to the Paul Gottbetter Transferees in reliance upon Rule 504 in the Summer of 1998. Had that procedure been followed, the shares now held by the Paul Gottbetter Transferees would, under Rule 504 as then in effect, have been free of any restrictions on resale immediately upon issuance and free of restrictions today. The shares were not, of course, eligible for Rule 504 treatment when transferred by Paul Gottbetter rather than issued by Harmony. However, in our view those transfers are in the nature of gifts and de minimis transactions similar to those for which registration has historically not been required. These transfers by Paul Gottbetter should, under the circumstances, be treated as exempt from registration as transactions by a person other than an issuer, underwriter or dealer.

We note at the outset that while the transfer of shares by Paul Gottbetter may technically be sales for Securities Act purposes, they were certainly not sales in the traditional sense. Neither Harmony nor Paul Gottbetter received any money from the transferees, and the minor services that led Paul Gottbetter to make the transfers were not performed by the recipients in order to get the shares. If the transferees had been handed prospectuses at the time Paul Gottbetter promised the shares and asked to consider carefully whether they really wanted the shares, they would have questioned the requirement for delivery of such a weighty document for such a minor transaction. The aggregate value attributable to the shares given to all of the Paul Gottbetter Transferees was fixed by Harmony in its financial reports at $375. These people were not making an investment in Harmony. Nor were they working for Harmony in order to earn shares. They were simply helping Harmony and Paul Gottbetter out of family loyalty and personal friendship.

Analysis

Paul Gottbetter Transferees

Paul Gottbetter is unquestionably neither an issuer nor a dealer as those terms are defined in Sections 2(4) and 2(12), respectively, of the Securities Act. For purposes of Section 5 of the Securities Act, the transfers to the Paul Gottbetter Transferees would require registration only if Paul Gottbetter was an underwriter with respect to those transfers. He would be an underwriter if either (i) he purchased with a view to, or participated in, a distribution by Harmony, or (ii) without regard to Harmony, the transfers by Paul Gottbetter to the Paul Gottbetter Transferees represented a distribution by Mr. Gottbetter as an affiliate of Harmony.

We first consider whether Paul Gottbetter, in transferring shares to the Paul Gottbetter Transferees, was participating in a distribution by Harmony.

Section 2(11) of the Securities Act defines an underwriter as a "person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security." In Ackerberg v. Johnson, 892 F. 2d 1328 (C.A. 8(Minn) 1989), the Eighth Circuit addressed the application of the Section 4(1) exemption when an affiliate sells securities of the issuer. The affiliate in Ackerberg, was the chairman of the board, the largest individual shareholder and the founder of the corporation. The Eighth Circuit applied a two-prong analysis to determine whether such an affiliate could be considered an underwriter and lose the benefit of the Section 4(1) exemption. First, one must determine whether the securities have come to rest, and second, whether the securities were sold for an issuer in connection with a distribution.

The best objective evidence of whether a sale is "for an issuer" is whether the shares have come to rest. Ackerberg at 1336. At the time of his sales, Paul Gottbetter had owned the shares for two (2) years and the securities are considered to have come to rest. A two year holding period has been held sufficient by many courts to determine that the shares have come to rest. The two year holding period has also been adopted by the Commission in the safe-harbor provision governing the sale of unregistered securities. 17 C.F.R. §230.144 (1989) (Rule 144). It should be noted that in February 1997, the Commission amended Rule 144 to shorten the holding period from three years to two years for sales of unlimited amounts of unregistered securities by non-affiliates of an issuer, and from two years to one year for sales of limited amounts of unregistered securities by affiliates and non-affiliates. Therefore, there is no question that the securities are deemed to have come to rest.

Since the shares were transferred by Paul Gottbetter rather than being issued by Harmony, the transfer would, as a technical matter, have to comply with the so-called 4(1 1/2) exemption in order to avoid registration. In considering whether an affiliate is participating in a distribution by the issuer, it must be noted that the definition of "distribution" as used in Section 2(11) of the Securities Act is considered to be synonymous with a public offering. Ackerberg at 1336. While the matter is not free from doubt, a number of courts have applied the test of SEC v. Ralston Purina, 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953), in determining whether an affiliate may avail himself of the exemption of Section 4(1) in reselling shares. In that case the Supreme Court stated that "the applicability of the private placement exemption should turn on whether the particular class of persons affected needs the protection of the Securities Act. An offering to those who are shown to be able to fend for themselves is a transaction "not involving any public offering."

Under the circumstances, did the Paul Gottbetter Transferees need the protection of a prospectus prepared in accordance with the Securities Act? The question almost answers itself. All of the transferees knew that Harmony had been inactive, that Harmony was embarking on a new business venture, that there was no trading market for the shares of Common Stock, and that they were getting the shares essentially as token gifts for the help they were giving to Paul Gottbetter and Harmony. Stock worth $375 was being transferred to a total of 25 people--an aggregate value of about $15 per person. Would anyone seriously argue that Harmony should have spent thousands of dollars for preparation of an adequate prospectus to cover that transaction? Of course not.

Historically, the availability of the "4(1 1/2)" exemption seems to require that the transferor impose resale restrictions on the transferees substantially equivalent to those they would obtain if the transaction had been one by the issuer in a private offering. Paul Gottbetter did not impose such restrictions in this case because he was treating his transfers in layman fashion as gifts, rather than as technical sales. However the Paul Gottbetter Transferees have agreed to only sell the shares pursuant to the terms and conditions of Rule 144 and are aware that stop orders will be placed in the transfer agents books and records reciting that the shares are not registered under the Securities Act and may only be sold or transferred if registered under the Securities Act or pursuant to an exemption--from registration. The shares are more effectively tied up under this arrangement than they would have been if Harmony itself had issued the shares in Summer of 1998 in an offering exempt under Rule 504.

In summary, insofar as Paul Gottbetter might be deemed to have been participating in a distribution by Harmony, he should, as a policy matter, be treated as if he had properly availed himself on the exemption provided by Section 4(1 1/2), evidenced by the satisfaction of the two prong test set forth in Ackerberg. He did not comply with the requirements that transferees be subjected to restrictions on resale, but those restrictions have now effectively been imposed by agreement with the transferees.

Since the transfers to the Paul Gottbetter Transferees must be treated as sales, these shares are subject to a new holding period for purposes of resales. That holding period began in July 1998 for the Paul Gottbetter Transferees. Also, the additional shares of Common Stock that were issued to the Paul Gottbetter Transferees as a result of the stock splits are deemed to have been acquired as of the same date as the securities were originally issued (Rule 144(d)(3)(i)).

We next consider whether Paul Gottbetters transfer to the Paul Gottbetter Transferees should be deemed a separate distribution by Paul Gottbetter as an affiliate of Harmony.

Historically, the most significant factors in determining whether an affiliate is participating in a distribution are the number of shares being transferred by the affiliate in comparison to the number of shares outstanding, whether the shares are being transferred in transactions which involve the risks traditionally associated with an issuer distribution--extraordinary compensation to the selling agents and the opportunity for high-pressure tactics to be used in persuading the purchasers to buy the securities, and the availability of current public information about the issuer which might offset communications made in connection with the transfer. Under Rule 144, an affiliate is permitted in any three-month period to dispose of shares not exceeding 1% of the outstanding common stock provided that the sales are made in ordinary brokerage transactions and the issuer is current in its Exchange Act reports.

In the case of the Paul Gottbetter Transferees, there is no question that the number of shares being transferred was extremely small in relation to the issuers outstanding capital stock--less than 1%. The manner of sale, although not a brokers transaction, does not lend itself to the kinds of abuses that are generally associated with issuer distributions. We are talking about, for each transferee, approximately $15 worth of shares, mostly for things already done, and for which no money was being asked. Pressure to acquire the securities simply could not have been present under the circumstances.

Admittedly, Harmony did not at the time of the transfers meet the current public information requirements that would apply to a reporting company. However, this was not a transaction among strangers. All of the transferees were friends and acquaintances of Mr. Gottbetter. Moreover, Harmony is currently registered under the Exchange Act, and accordingly, current public information will be available at the time the shares might come into the hands of "strangers."

Based on the facts and circumstances presented, in our opinion the transfer to the Paul Gottbetter Transferees was not a distribution by Paul Gottbetter, as an affiliate of Harmony, for purposes of the Securities Act.

The Paul Gottbetter Transferees have now held the shares of common stock of Harmony for more than one (1) year and should be permitted to sell the shares pursuant to the terms and conditions of Rule 144, including its volume limitations and manner of sale requirements. In the aggregate, the Paul Gottbetter Transferees own less that one percent (1.0%) of the issued and outstanding shares of Harmony.

Adam Gottbetter Transferees

Adam Gottbetter received his shares by gift, and Rule 144(d)(3)(v) provides that "securities acquired from an affiliate of the issuer by gift shall be deemed to have been acquired by the donee when they were acquired by the donor." Therefore, Adam Gottbetter is deemed to have acquired his initial 25 shares of Common Stock as of August 1996 for purposes of Rule 144. The additional shares of Common Stock that were issued to Adam Gottbetter as a result of the stock split are deemed to have been acquired as of the same date as the securities were originally issued (Rule 144(d)(3)(i)). Paul Gottbetter is the father of Adam Gottbetter. Paul and Adam Gottbetter do not reside in the same residence and have not for the past fifteen (15) years. Paul Gottbetter is a resident of Hartsdale, New York, and Adam Gottbetter is a resident of New York, New York.

Adam Gottbetter has never been and is not an officer, director or a control person of Harmony and therefore he is not an "affiliate" as such term is defined in Rule 144, of Harmony. In addition to addressing sales by an affiliate, Rule 144 also addresses the sales of restricted securities by a non-affiliate. The shares, which Adam Gottbetter received from Paul Gottbetter as a gift were restricted securities but they may be disposed of by Adam Gottbetter under Rule 144(k) because Paul Gottbetter had owned the securities for over two (2) years at the time of the gift, the holding period of Paul Gottbetter is attributable to Adam Gottbetter under Rule 144(d)(3)(v) as noted above, and Adam Gottbetter was not and is not an affiliate of the Company. Adam Gottbetter and Paul Gottbetter are, however, required to aggregate any sales made by them in accordance with the aggregation rule discussed below.

We next consider whether the combined transfers by Paul Gottbetter to the Paul Gottbetter Transferees and by Adam Gottbetter to the Adam Gottbetter Transferees should, when considered together, be deemed to constitute a distribution requiring registration under the Securities Act.

The Commission in adopting Rule 144 was very much aware of the possibility that gifts might be a mechanism for carrying out an unregistered distribution of securities. Accordingly, it included in the Rule a mechanism to ensure that this would not occur. Under Section (e)(3)(iii) of Rule 144, a donor and donee are required to aggregate their sales for a period of one year from the date of the gift. As a result, Adam Gottbetter and Paul Gottbetter must aggregate any sales made by either of them every three months for a period of one (1) year from the date of the gift--January, 1999--until January, 2000. The Rule defines what does not constitute a "distribution in the context of affiliate gifts, and the Gottbetters fit squarely within that definition.

The number of shares transferred by Adam Gottbetter to the Adam Gottbetter Transferees was well within the 1% limit of Rule 144, and no dispositions were made by Paul Gottbetter during the applicable time frame for applying this limit. None of the Adam Gottbetter Transferees was at the time of the transfer an affiliate of Harmony and the transfer of the shares of Common Stock did not cause any of the Adam Gottbetter Transferees to become an affiliate of Harmony. At the time of the sales, the Adam Gottbetter Transferees received non-restricted shares of Common Stock of Harmony which may be freely sold without regard to any volume limitations.

"The requirement in Rule 144(e)(3)(iii) that aggregation by the donor and donee occur for two (2) years after the gift (absent the availability of the unlimited resale provision) was included in the rule for the purpose of preventing abuses (such as in a nonregistered distribution) that might be effected through the medium of a gift."

The transfers of stock made by Paul Gottbetter and Adam Gottbetter complied with the aggregation requirement of Rule 144(e)(3)(iii) because less than 1% of the Companys Common Stock was transferred by Paul Gottbetter to the Paul Gottbetter Transferees and by Adam Gottbetter to the Adam Gottbetter Transferees during the aggregation period. Accordingly, the combined transfers should not be deemed nonregistered distributions. Shares held by the Adam Gottbetter Transferees should be freely saleable by them.

Given the facts and circumstances regarding the transfers by Paul and Adam Gottbetter, we are of the opinion that: (i) the Paul Gottbetter Transferees may sell their shares pursuant to the terms and conditions of Rule 144; and (ii) the Adam Gottbetter Transferees received non-restricted shares pursuant to Rule 144(k), and such shares remain non-restricted. Accordingly, we request the issuance of a no-action letter advising that the Commission will not recommend enforcement action against Harmony, Paul Gottbetter or the Paul Gottbetter Transferees if the Paul Gottbetter Transferees resell any of the shares of Common Stock pursuant to the terms and conditions of Rule 144 or against Harmony, Paul Gottbetter, Adam Gottbetter or the Adam Gottbetter Transferees if the Adam Gottbetter Transferees resell any of the shares of the Common Stock without regard to the volume, manner of sale or public information requirements. If the staff should reach a conclusion different from that requested in this letter, we request the opportunity of a conference before a written response is issued.

Very truly yours,

KAPLAN GOTTBETTER & LEVENSON, LLP.

[APPENDIX]

APPENDIX A

HARMONY TRADING CORP.

PAUL B. GOTTBETTER TRANSFEREES

NAME NO. OF SHARES NAME NO. OF SHARES

Best, Ula 300
Harmony Lane
Hartsdale, New York
10530
SSI No.:
215-29-7090

Borofsky, Jeffrey
M. 300
121A Ocean Avenue
Massapequa, NY
11750

Bunton, Alfred 300
45 W. 132nd
New York, NY 10037

Coder, Kenneth 300
6 N. Wisconsin
Avenue
N. Massapequa, NY
11750

Cohen, Kenneth M. 300
200 East 75th
Street
NY, NY 10021
SSI No.:
055-54-3798

Coker, Sr., Peter 300
c/o Capital
Investment
Partners, LLC
17 Glenwood Ave.
Raleigh, NC 27603

Conte, Michael C. 300
18 Burdge Drive
Middletown, NJ
07748
SSI No.:
103-54-3491

Feifer, Fred 300
70-25 Yellowstone
Blvd.
Forrest Hills, NY
11375

Gottbetter, Daniel 300
3777 Independence
Avenue
Riverdale, NY 10463

Gottbetter,
Franklyn 300
4530 Briargrove
Drive
San Antonio, Texas
78217

Inemer, Steve 300
34 Remson Street
Brooklyn, NY 11201

Inemer, Ira H. 300
62 Joralemon Street
New York, NY 10014

Kass, Barbara 300
13 Northway
Hartsdale, NY 10530

Lande, Ted 300
1150 Hillsboro
Mile, Apt. 914
Hillsboro Beach, FL
33062

Levine, Pearl 300
108 Riegelman
Street
Staten Island, NY
10304

Miller, Jules 300
11881 Fountainside
Circle
Boyton Beach, FL
33437

Peate, Florence 300
860 Fifth Avenue
New York, NY 10021

Perry, Nicola 300
28 Bethune Street
New York, NY 10014

Rabuse, Nancy 300
20 Old Mamaronneck
Road
White Plains, NY
10625

Redlich, Meyer 300
162-35 73rd Avenue
Flushing, NY 11366

Rubenstein,
Florence 300
20 Sutton Place
South
New York, NY 10022

Schweitzer, Arthur 300
1885 George Court
Merrick, NY 11566

Vaswani, Rani 300
461 Riverdale
Avenue
Yonkers, NY 10705

Winley, Roberta 300
30 Park Avenue
New York, NY 10016

Zephir, Barbara 300
2186 5th Avenue,
Apt. 11H
New York, NY 10037
SSI No.:
074-42-4523

[STAFF REPLY LETTER]

November 22, 1999

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: Harmony Trading Corp.

Incoming letter dated November 12, 1999

Based on the facts presented, the Division declines to concur in your conclusions. Regarding the securities transferred by Paul Gottbetter to twenty five persons, you should note that, with the adoption of rule 144, the Commission stated that no-action advice concerning the rules application to particular transactions would be unavailable. The Division disagrees that the date of Paul Gottbetters acquisition of the issuers shares may be used under rule 144(d) to calculate the holding period on such shares by Adam Gottbetter or his transferees.

More generally, the Division is concerned over circumstances where, after a company is formed without either substantial capital or the prompt commencement of business, but in proximity to the companys efforts to have its securities traded in the public markets, its closely-held securities are transferred to significant numbers of persons. In situations of this kind, resales of such securities in claimed reliance on rule 144 raise questions whether the transfers involve an evasive scheme to avoid registration under the Securities Act of 1933.

This position is based on the representations made to the Division in your letter. Different facts or conditions might require another result.

Sincerely,

Michael Hyatte
Special Counsel