CreateAI Holdings Inc Class A (TSPH) Risk Analysis

Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Our founders, Mo Chen and Xiaodi Hou (collectively, the "Founders"), are the only holders of our shares of Class B common stock. Mr. Chen beneficially holds, as of August 2023, approximately 58% of the voting power of the outstanding common stock as a result of a proxy and voting agreement between our Founders, as disclosed in our Current Report on Form 8-K, filed on November 16, 2022 with the SEC. See Item 10, under section "Voting Agreement." On November 10, 2022, pursuant to a written consent, the Founders consented to the removal of four members of our Board. Because of the ten-to-one voting ratio between Class B and Class A common stock and the proxy and voting agreement between our Founders, Mr. Chen continues to control a majority of the combined voting power of our common stock and therefore is able to control all matters submitted to our stockholders for approval. Our Founders have and may again in the future remove some or all of the members of our Board, in each case so long as the shares of Class B common stock represent at least 50% of all outstanding voting power of our Class A and Class B common stock. Further, the concentrated control of our common stock will limit or preclude your ability to influence corporate matters for the foreseeable future. Future transfers of Class B common stock by our Founders will generally result in those shares converting to Class A common stock, subject to limited exceptions, including the ability of each of our Founders to grant their voting proxy with respect to their Class B common stock to the other Founder. In addition, each share of our Class B common stock will automatically convert, on a one-for-one basis, into shares of Class A common stock on the earliest of (i) the date specified by a vote of the holders of Class B common stock representing 75% of the outstanding shares of Class B common stock, (ii) the date that is between 90 days and 270 days, as determined by the board of directors, after the death or incapacitation of the last Founder to die or become incapacitated, or (iii) the date that is between 61 and 180 days, as determined by the board of directors, after the date on which the number of outstanding shares of Class B common stock held by the Founders (or their permitted affiliates) represents less than 50% of the total number of shares of Class B common stock held collectively by the Founders (or their permitted affiliates) at 11:59 pm Pacific Time on April 19, 2021. For a description of the dual class structure, see the section titled "Common Stock" within Exhibit 4.1 of this Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

As disclosed in our Current Report on Form 8-K, filed on November 16, 2022 with the SEC, we are a "controlled company" under the Nasdaq Listing Rules due to the fact that Mr. Chen beneficially owns more than 50% of the Company's voting power. As of August 2023, Mr. Chen beneficially owns approximately 58% of the voting power of the outstanding common stock. Under these Nasdaq Listing Rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including the requirements that (i) a majority of the board of directors consist of independent directors and (ii) the board of directors have compensation and nominating and corporate governance committees composed entirely of independent directors. These exemptions do not modify the independence requirements for our Audit Committee and we are compliant with Nasdaq Listing Rules, as well as SEC rules, for our Audit Committee and our Nominating and Corporate Governance Committee. Currently, our Compensation Committee is not composed entirely of independent directors, as permitted under the exemption stated above. We maintain the option to fully utilize these exemptions as a "controlled company." In the event that we cease to be a "controlled company" and our shares continue to be listed on Nasdaq, we will be required to comply with these provisions within the applicable transition periods.

Our dual class structure, combined with the concentrated control of our Founders, directors, officers and employees, and their affiliates, may result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple class share structures in certain of their indexes. In July 2017, FTSE Russell and Standard & Poor's announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected. Prior to the listing of our Class A common stock, there was no public market for our Class A common stock. Since our IPO in April 2021, the stock price of our Class A common stock has experienced volatility and the market prices of securities of other newly public companies have historically been highly volatile. The public trading price of our Class A common stock could be subject to fluctuations in response to various factors, including those listed in this Annual Report on Form 10-K, some of which are beyond our control. Factors that could cause fluctuations in the public trading price of our Class A common stock include the following: - overall performance of the equity markets;- our operating performance and the performance of other similar companies;- changes in the estimates of our operating results that we provide to the public, our failure to meet these projections, or changes in recommendations by securities analysts that elect to follow our common stock;- announcements of technological innovations, new products, acquisitions, strategic alliances, or significant agreements by us or by our competitors;- rumors and market speculation involving us or other companies in our industry, which may include short seller reports;- any coordinated trading activities or large derivative positions in our Class A common stock, for example, a "short squeeze" (a short squeeze occurs when a number of investors take a short position in a stock and have to buy the borrowed securities to close out the position at a time that other short sellers of the same security also want to close out their positions, resulting in surges in stock prices, i.e., demand is greater than supply for the stock sold short);- detrimental adverse publicity about us, our services, or our industry;- recruitment or departure of key personnel, including through any future restructuring or reduction in workforce;- supply chain disruptions;- litigation involving us, our industry, or both, or actions, inquiries, or investigations by regulators into our operations or those of our competitors;- new laws or regulations or new interpretations of existing laws or regulations applicable to our business;- interest rates, the economy as a whole, market conditions in our industry, and the industries of our users;- trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock;- the expiration of market standoff or contractual lock-up agreements; and - sales of shares of our Class A common stock by us or our stockholders.

Future sales and issuances of our share capital or rights to purchase our share capital could result in substantial dilution to our existing stockholders. We may sell Class A common stock, convertible securities, and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our Class A common stock.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our financial statements, our intellectual property, or our share performance, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

Sales of substantial amounts of our Class A common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our Class A common stock and could materially impair our ability to raise capital through equity offerings in the future. Many of our existing security holders have substantial unrecognized gains on the value of the equity they hold, and may take, or attempt to take, steps to sell, directly or indirectly, their shares or otherwise secure, or limit the risk to, the value of their unrecognized gains on those shares.

Our amended and restated certificate of incorporation includes provisions that could limit the ability of others to acquire control of our company, could modify our structure or could cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our stockholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control in a tender offer or similar transaction. Among other things, the charter documents provide: - for a dual class common stock structure, which provides our Founders with the ability to control the outcome of matters requiring stockholders' approval;- until the first date on which the outstanding shares of Class B common stock represent less than 40% of the total voting power of our common stock, we shall not consummate any transaction that would result in a change in control of us without first obtaining the affirmative vote of the holders of a majority of the then-outstanding shares of Class B common stock voting as a separate class;- certain amendments to our restated certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;- at any time after our 2022 annual meeting of stockholders when the outstanding shares of our Class B common stock represent less than 40% of the total voting power of our common stock (the "Voting Threshold Date"), directors will be able to be removed only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of our common stock;- at any time after the Voting Threshold Date, our Board will be classified into three classes of directors with staggered three-year terms;- at any time after the Vesting Threshold Date, subject to the rights of any series of preferred stock then outstanding, stockholders will no longer be able to act by written consent in lieu of a meeting; and - our Board has the authority, without further action by our stockholders, to issue preferred stock in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional, or special rights, and the qualifications, limitations, or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption, and liquidation preferences, any or all of which may be greater than the rights associated with our Class A common stock.

Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware and federal court within the State of Delaware will be exclusive forums for any: - derivative action or proceeding brought on our behalf;- action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders;- action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or bylaws; or - other action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision does not apply to actions brought to enforce a duty or liability created under the Exchange Act. Our amended and restated certificate of incorporation also provides that the federal district courts of the United States are the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. We intend for this provision to apply to any complaints asserting a cause of action under the Securities Act despite the fact that Section 22 of the Securities Act creates concurrent jurisdiction for the federal and state courts over all actions brought to enforce any duty or liability created by the Securities Act or the rules and regulations promulgated thereunder. There is uncertainty as to whether a court would enforce such a provision with respect to claims under the Securities Act, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. These choice of forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.