As Of               Filer                 Filing     As/For/On Docs:Pgs

 1/26/06  Novastar Financial Inc            8-K{5,9}    1/20/06    2:4

Document/Exhibit                   Description                      Pages   Size 

 1: 8-K         Current Report                                      HTML     13K 
 2: EX-99       Miscellaneous Exhibit                               HTML      9K 

Memorandum

To:	Directors and Executive Officers of NovaStar Financial, Inc.
From:	Jeffrey D. Ayers
Date:	January 26, 2006
Re:	Notice of Blackout Period

On January 20, 2006, NovaStar Financial, Inc. (the “Company”) filed a registration statement on Form S-3 in connection with the Company’s offer to rescind (the “Rescission Offer”) the previous purchase of shares of Company common stock included in units in the NovaStar Common Stock Fund (the “NovaStar Fund”) purchased during the one-year period immediately preceding January 29, 2006. The NovaStar Fund was an alternative for new investments under the Company’s 401(k) Plan (the “Plan”) until June 17, 2005. Currently, Plan participants may only hold or sell units in the NovaStar Fund in their Plan account.

 

In order to process the Rescission Offer, the Company, as Plan administrator, must temporarily suspend (the “Blackout”) all transactions related to the NovaStar Fund for Plan participants that accept the Rescission Offer. The Blackout will begin at 5:00 p.m., Central time, on February 21, 2006 and is expected to end during the calendar week of February 26, 2006 (the “Blackout Period”) on the date that the proceeds for the Rescission Offer are credited to the 401(k) Plan accounts of such participants. You will be informed if the timing of the Blackout Period changes.

 

As the ability to make new investments in the NovaStar Fund was terminated on June 17, 2005, the Blackout only prevents Plan participants who accept the Rescission Offer from selling or otherwise transferring units in the NovaStar Fund during the Blackout Period. Participants will still be able to direct their existing account balances and new contributions and rollover amounts into or out of other investment options offered under the Plan.

 

If the Blackout affects the ability of 50% or more of the participants in individual account plans maintained by the Company to acquire or hold equity securities of the Company, the Company is required to notify its directors and executive officers that certain of their transactions in Company equity securities are prohibited during the Blackout Period. Because the Company does not know whether 50% or more of the participants in individual account plans maintained by the Company will be affected by the Blackout, the Company is providing this notice to you.

 

If 50% or more of the participants in individual account plans maintained by the Company will be affected by the Blackout you will be restricted, except in limited circumstances, from, directly or indirectly, purchasing, acquiring, exercising, selling or otherwise transferring during the Blackout Period those shares, or options to acquire shares, of Company common stock you acquired in connection with your service or employment as a director or executive officer of the Company.  Any Company common stock you purchase or dispose of during the Blackout Period is presumed to have been acquired in connection with your service or employment with the Company.  If you are scheduled or plan to purchase, acquire, exercise, sell or otherwise transfer of shares of Company common stock during the Blackout Period, whether pursuant to a 10b5-1(c) sales plan or otherwise, you must notify me at the number below to determine whether you are permitted to complete the transaction.

 

Because it may not be known until after 5:00 p.m., Central time, on February 21, 2006 whether the Blackout affects 50% or more of the participants in individual account plans maintained by the Company, you should suspend your trading activities in Company common stock at that time and await further notice by the Company as to the number of Plan participants affected by the Blackout.

 

If you have any questions regarding this notice, including whether the Blackout Period has ended, please contact me by phone at 816-237-7964 or by mail at NovaStar Financial, Inc., 8140 Ward Parkway, Suite 300, Kansas City, Missouri 64114.