Author: NashW at 03SEC Date: 06/21/2000 11:22 AM Normal TO: WEBINPUT at OIT1 TO: LewisRb Subject: S7-24-99 ------------------------------- Message Contents ______________________________ Forward Header __________________________________ Subject: =?UTF-8?B?RmlsZSBOby4gUzctMjQtOTku?= Author: =?UTF-8?B?S2V2aW4gUi4gUGluZWdhcg==?= at Internet Date: 06/07/2000 10:50 AM Medizone International, Inc. 144 Buena Vista Stinson Beach, CA 94970 June 7, 2000 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street Washington, D.C. 20549 Re: Release No. 34 42037 (File No. S72499), Short Sale Regulation Dear Mr. Katz: I am the CEO and Chairman of Medizone International, Inc. ("MZEI" on the OTCBB). The experience of my company over the past year suggests that rather than eliminate Rule 10a-1 or loosen the restrictions on short selling, the Commission should focus on more effectively enforcing the current short sale rules and should extend those rules to non-exchange listed securities. In our experience, the unchecked abuse of the current short sale rules deprive individual investors of essential investor protections and make it more expensive for companies to raise capital. In addition, exempting market makers and not extending the rules to non-exchange listed securities and the over-the-counter market deprive thousands of issuers and tens of thousands of investors from the protection of the rule that was adopted to curb a recognized abusive practice that has increased in recent years in these markets with the lack of regulation and the increased availability of enhanced communication and information technology such as the Internet. Because my company is an OTCBB issuer, I will focus my comments on the question of whether the short sale regulations should be extended to that market and other non-exchange listed securities markets. For the reasons stated in this letter we believe they should. A recent experience of our company illustrates this problem dramatically. This company has had a difficult past several years. Only in the last six months has the company been able to overcome serious difficulties created in large part by unscrupulous prior management. The current management, including an investment group led by myself, has secured funding and furthered research in the company since mid-1997 and it has only been in the last three months that the company has had its first positive developments in the past five years. On May 23, 2000 we were able to announce a long-awaited understanding for significant funding and scientific development in the company, that included an agreement for short and long term financing at prices significantly above the current market price of the company's common shares, a recently granted patent of the company's along with the filing of an additional patent application, and anticipated news of new human tests of our technology for treatment of certain viral diseases. These developments mark significant strides for a small research and development company and we expected that the news would be very favorably received by the market and our shareholders. Initially we were not disappointed and our expectations were confirmed. Response of shareholders and interested parties in Internet chat boards and contact with the company were most enthusiastic. In the first few hours of trading following the release, which was sent out with maximum distribution on PR Business Wire, the price of our shares rose nearly 70% on high buying volume. Suddenly, however, the price of the shares was obviously capped. By our estimation, the short position in our company's securities increased an estimated 2,500,000 shares that day alone. Certain of our market makers have informed us that they think the short position in the aggregate may have increased by nearly 25,000,000 shares (approximately 20% of our total issued and outstanding stock) since January 1, 2000. We do not see how a market maker or other short seller can make a legitimate market when they have put themselves in a naked position in which they cannot cover in the face of unexpected good news and positive developments except at significantly higher prices. Their economic interests are so adverse to the majority of the other shareholders, that they must control the price in order to protect their position. We believe that our experience is not unique and our position not isolated among our peer companies on the OTCBB or in the pink sheets. Based on information we have gathered in the past several months and based on the market activity of our shares as disclosed by that information, we believe that short selling in our company's securities has (a) artificially inflated the number of shares available in the market, perhaps even creating a short interest that exceeds 50% of the public float, and (b) artificially depressed the price of the shares in the face of the first positive corporate developments in many years. We have observed short-selling, price capping, buy-high-sell-low strategies, "painting the tape" trading and other actions that have served to limit our access to capital, diminished or suppressed the value of our shares and resulted in a volatile stock price for our securities on an almost daily basis. This short selling has proven extremely detrimental to our company and our shareholders. We firmly believe that the Commission can and should take steps to curb these abuses, beginning with the extension of short selling regulations to non-exchange listed securities and the markets in which they are traded. Specifically, we recommend that the Commission: 1. Extend regulation of short sales to all currently unregulated markets for non-exchange listed securities. 2. Permit regulated short selling, subject to the monitoring, reporting and volume limitations discussed below. We believe there is a place for legitimate short selling, provided it is not manipulative. We believe that imposing the limitations now used in the Nasdaq National Market and in the national exchanges would be a very strong step forward to curbing abuse in the OTC markets. 3. Require reporting and increased monitoring of short selling in the OTC markets. This would include imposing a requirement that all short sales be instantly reported in such a way that the net long position of each account participating in a short sale and flags naked shorting, down tick shorting and other "bear raid shorting." 4. Limit market maker short selling and permit short selling only to meet legitimate temporary intra-day needs to maintain an orderly market. 5. Implement velocity and volume limits on short sales. Prohibit the immediate re-lending of shares for further short sales that have been loaned to permit a short trade. Establish volume limits for aggregate short sales that include time limits for open short positions, volume limits on related accounts, and allocation of the volume limits among short selling participants. We urge the Commission to extend short selling regulations to non-exchange listed securities. I would be happy to discuss these issues with the Staff and can be reached at (415) 868-0300. Respectfully submitted, Medizone International, Inc. Edwin G. Marshall, Chief Executive Officer