Zscaler, Inc., 92226-92228 [2024-27158]
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92226
Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Board consents, the
Commission will:
(A) By order approve or disapprove
such proposed rules; or
(B) Institute proceedings to determine
whether the proposed rules should be
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rules
are consistent with the requirements of
Title I of the Act. Comments may be
submitted by any of the following
methods:
lotter on DSK11XQN23PROD with NOTICES1
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/pcaob); or
• Send an email to rule-comments@
sec.gov. Please include PCAOB–2024–
05 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to
PCAOB–2024–05. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/pcaob). Copies of the submission,
all subsequent amendments, all written
statements with respect to the proposed
rules that are filed with the
Commission, and all written
communications relating to the
proposed rules between the Commission
and any person, other than those that
may be withheld from the public in
accordance with the provisions of 5
U.S.C. 552, will be available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10 a.m. and 3 p.m. Copies of
such filing will also be available for
inspection and copying at the principal
office of the PCAOB. Do not include
personal identifiable information in
submissions; you should submit only
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available publicly.
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We may redact in part or withhold
entirely from publication submitted
material that is obscene or subject to
copyright protection. All submissions
should refer to PCAOB–2024–05 and
should be submitted on or before
December 12, 2024.
By the Commission.
Vanessa A. Countryman.
Secretary.
[FR Doc. 2024–27247 Filed 11–20–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
35387; File No. 812–15188]
Zscaler, Inc.
November 15, 2024.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of application for an order
under Section 3(b)(2) of the Investment
Company Act of 1940 (‘‘Act’’).
APPLICANT: Zscaler, Inc.
SUMMARY OF APPLICATION: Applicant
seeks an order under Section 3(b)(2) of
the Act declaring it to be primarily
engaged in a business other than that of
investing, reinvesting, owning, holding
or trading in securities. Applicant states
that it is in the business of providing,
improving, and developing cloud
security solutions to businesses.
FILING DATES: The application was filed
on December 28, 2020, and amended on
May 11, 2021, July 28, 2021, January 6,
2022, July 31, 2023, and September 13,
2024.
HEARING OR NOTIFICATION OF HEARING:
An order granting the requested relief
will be issued unless the Commission
orders a hearing. Interested persons may
request a hearing by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov and serving applicants
with a copy of the request, by email if
an email address is listed for the
relevant Applicant below, or personally
or by mail, if a physical address is listed
for the relevant Applicant below.
Hearing requests should be received by
the Commission by 5:30 p.m. on
December 10, 2024, and should be
accompanied by proof of service on the
applicants, in the form of an affidavit,
or for lawyers, a certificate of service.
Pursuant to rule 0–5 under the Act,
hearing requests should state the nature
of the writer’s interest, any facts bearing
upon the desirability of a hearing on the
matter, the reason for the request, and
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the issues contested. Persons who wish
to be notified of a hearing may request
notification by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov.
ADDRESSES: The Commission:
Secretarys-Office@sec.gov. Applicant:
Remo Canessa, Chief Financial Officer,
and Robert Schlossman, Esq., Chief
Legal Officer, Zscaler, Inc., at Treasury@
zscaler.com; Kevin R. Bettsteller, Esq.,
at kbettsteller@gibsondunn.com.
FOR FURTHER INFORMATION CONTACT:
Adam Lovell, Senior Counsel, or Terri
G. Jordan, Branch Chief, at (202) 551–
6825 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. For Applicant’s
representations, legal analysis, and
conditions, please refer to Applicant’s
fifth amended and restated application,
dated September 13, 2024, which may
be obtained via the Commission’s
website by searching for the file number
at the top of this document, or for an
Applicant using the Company name
search field, on the SEC’s EDGAR
system. The SEC’s EDGAR system may
be searched at https://www.sec.gov/
edgar/searchedgar/legacy/
companysearch.html. You may also call
the SEC’s Public Reference Room at
(202) 551–8090.
Applicant’s Representations
1. Applicant states that it is a
Delaware corporation formed in 2007
that, directly and through its whollyowned subsidiaries,1 is engaged in the
business of providing, improving, and
developing cloud security solutions to
businesses.
2. Applicant states that its business is
highly capital intensive, requires R&D of
new technologies, and does not involve
the Applicant acquiring or retaining
significant ‘‘hard’’ operating assets.
Applicant states that it maintains
significant cash reserves that it seeks to
invest for purposes of conserving capital
and providing liquidity until the funds
are used in its cloud-based services and
technology business. As described more
fully in the application, Applicant states
that it requires significant liquid capital
primarily to: (i) fund R&D for new
products and services, (ii) advance the
commercialization of its business, (iii)
otherwise fund its operations, and (iv)
make other capital expenditures in
keeping with the growth of the
1 Applicant states that its 28 wholly-owned
subsidiaries generally engage in sales and marketing
or research and development (‘‘R&D’’) activities in
their respective jurisdictions.
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Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
Applicant’s cloud-based services and
technology business.
3. Applicant states that it has financed
operations primarily through offerings
of its debt and equity securities, but
ultimately seeks to generate cash from
its operations to support its business.
Applicant states that it seeks to preserve
capital and maintain liquidity, pending
the use of such capital for its operations,
by investing in ‘‘Capital Preservation
Instruments.’’ 2 Applicant states that it
may in the future make strategic
investments in ‘‘other investments’’
consistent with Rule 3a–8. Applicant
states that such securities will not be
acquired for speculative purposes.
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Applicant’s Legal Analysis
1. Applicant seeks an order under
Section 3(b)(2) of the Act declaring that
it is primarily engaged in a business
other than that of investing, reinvesting,
owning, holding or trading in securities
and therefore is not an investment
company as defined in the Act.
2. Section 3(a)(1)(A) of the Act defines
the term ‘‘investment company’’ to
include an issuer that is or holds itself
out as being engaged primarily, or
proposes to engage primarily, in the
business of investing, reinvesting or
trading in securities. Section 3(a)(l)(C) of
the Act further defines an investment
company as an issuer that is engaged or
proposes to engage in the business of
investing, reinvesting, owning, holding
or trading in securities, and owns or
proposes to acquire investment
securities having a value in excess of
40% of the value of the issuer’s total
assets (exclusive of Government
securities and cash items) on an
unconsolidated basis. Section 3(a)(2) of
the Act defines ‘‘investment securities’’
to include all securities except
Government securities, securities issued
by employees’ securities companies,
and securities issued by majority-owned
subsidiaries of the owner which (a) are
not investment companies and (b) are
not relying on the exclusions from the
definition of investment company in
Section 3(c)(1) or Section 3(c)(7) of the
Act. Applicant states that it has never
been, is not now, and does not propose
2 As used in Applicant’s application, Capital
Preservation Instruments refers collectively to any
cash items and securities that are held for the
purpose of conserving Applicant’s capital and
liquidity until they are used by Applicant to
support its business (as such business is described
in Applicant’s application). Such holdings are
liquid (i.e., can be readily sold), earn competitive
market returns and present a low level of credit
risk, including short-term investment grade
securities, Government securities (as defined in
Section 2(a)(16) of the Act), securities of moneymarket funds registered under the Act, and other
cash items; but excluding investments in equity or
speculative instruments.
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to be, primarily engaged in the business
of investing, reinvesting, owning,
holding, or trading in securities. The
Applicant states that it currently holds
investment securities amounting to less
than 40% of its total assets (exclusive of
Government securities and cash items),
but that its need for liquid capital to
conduct its business means that it, in
part, makes investments in certain
securities exceeding 40% of the
Company’s total assets (exclusive of
Government securities and cash items)
on an unconsolidated basis. Applicant
states that it therefore may be an
‘‘investment company’’ pursuant to
Section 3(a)(l)(C) of the Act absent an
exclusion or exemption.
3. Rule 3a–8 under the Act provides
an exclusion from the definition of
investment company if, among other
factors, a company’s R&D expenses are
a substantial percentage of its total
expenses for the last four fiscal quarters
combined. While Applicant states that it
believes that it complies with the
conditions of Rule 3a–8, Applicant
states that it has concerns over (a)
whether compliance is practical in light
of changes to the Company’s overall
expenses in connection with the
increase of customer subscriptions and
support services, and (b) whether R&D
expenses, while substantial in absolute
terms, may not always be considered
substantial as a ratio of overall
expenses. Although Applicant states
that it anticipates R&D expenses to
increase in absolute terms, such
expenses are not anticipated to increase
proportionately with Applicant’s overall
expenses, particularly given increases in
expenses related to sales and marketing,
the administration of a rapidly
expanding employee base, and other
administrative expenses. Applicant
states that its R&D expenses have
fluctuated between 21% and 25% of
total expenses over the past six years,
and Applicant expects R&D expenses to
decrease relative to total expenses over
time.
4. Section 3(b)(2) of the Act provides
that, notwithstanding Section 3(a)(l)(C)
of the Act, the Commission may issue
an order declaring an issuer to be
primarily engaged in a business other
than that of investing, reinvesting,
owning, holding, or trading in securities
directly, through majority-owned
subsidiaries, or controlled companies
conducting similar types of businesses.
Applicant requests an order under
Section 3(b)(2) of the Act declaring that
it is primarily engaged in a business
other than that of investing, reinvesting,
owning, holding or trading in securities,
and therefore is not an investment
company as defined in the Act.
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92227
5. In determining whether an issuer is
‘‘primarily engaged’’ in a noninvestment company business under
Section 3(b)(2) of the Act, the
Commission considers the following
factors: (a) the company’s historical
development, (b) its public
representations of policy, (c) the
activities of its officers and directors, (d)
the nature of its present assets, and (e)
the sources of its present income.3
6. Applicant submits that it satisfies
the criteria for issuance of an order
under Section 3(b)(2) of the Act because
Applicant is primarily engaged in the
business of providing, improving, and
developing cloud security solutions to
businesses and is not in the business of
investing, reinvesting, owning, holding
or trading in securities.
a. Historical Development. Applicant
states that, since its inception in 2007,
Applicant has actively engaged in the
business of developing and providing
cloud-based information security
solutions. Applicant’s business has
focused on the development of new
such products.
b. Public Representations of Policy.
Applicant states that it has consistently
represented that it is engaged in the
business of providing a cloud-based
suite of information security solutions.
Applicant further states that it has never
held and does not now hold itself out
as an investment company within the
meaning of the Act or as engaging in the
business of investing, reinvesting,
owning, holding, or trading in
securities. Applicant submits that its
public representations make clear that
shareholders invest in the Applicant’s
securities with the expectation of
realizing gains from Applicant’s
development and sale of its suite of
cloud security solutions and not from
returns on an investment portfolio.
c. Activities of Officers and Directors.
Applicant represents that its officers
and directors spend substantially all of
their time overseeing the Applicant’s
business of providing its cloud platform
to customers. Applicant states that its
cash management activities are managed
internally by its Chief Financial Officer
and externally by an investment
manager, whose activities are
supervised by the Chief Financial
Officer. Applicant states that none of its
executive officers, other than the Chief
Financial Officer, spend time
monitoring cash balances and managing
short-term investment securities. In
addition, of the Applicant’s 6,342
employees (as of October 31, 2023),
Applicant states that fewer than five
3 Tonopah Mining Company of Nevada, 26 SEC
426, 427 (1947).
E:\FR\FM\21NON1.SGM
21NON1
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Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
employees spend time on matters
relating to the management of
Applicant’s investment securities.
Applicant states that none of its officers,
directors or employees spends or
proposes to spend of his or her time to
the management of Capital Preservation
Instruments on behalf of Applicant.
d. Nature of Assets. Applicant states
that, as of October 31, 2023, Applicant’s
investment securities constituted
approximately 30.1% of its total assets
(excluding Government securities and
cash items) on an unconsolidated basis.4
Furthermore, Applicant states that as of
October 31, 2023, 100% of its
investment securities consist of Capital
Preservation Instruments. Applicant
states that it uses its Capital
Preservation Instruments to finance its
continued operations in connection
with the development of the Company’s
software. Applicant states that it may in
the future make strategic investments in
‘‘other investments’’ consistent with
Rule 3a–8. Applicant states, however,
that no more than 10% of its total assets
(exclusive of Government securities and
cash items, including securities issued
by money market funds registered under
the Act) will consist of investment
securities other than Capital
Preservation Instruments.5 Applicant
states that it uses current assets,
including its Capital Preservation
Instruments, to finance its continued
R&D program and operations in
connection with the development of the
Applicant’s software.
e. Sources of Income and Revenue.
Applicant represents that since its
inception it has carried net operating
losses. Applicant states that it does,
however, derive income from its
investment securities. Applicant states
that a review of its current source of
revenues provides a more accurate
review of its operating company status,
particularly, given the upward trend in
recognizing substantially increased
revenues due to sales of new
subscriptions. Applicant states that it
recognizes substantially all of its
revenues from fees based on
subscriptions and support. Applicant
states that its revenues for the fiscal
years ended July 31, 2020, 2021, 2022,
and 2023 were $431.3 million, $673.1
million, $1,090.9 million, and $1,671
million, respectively, on an
unconsolidated basis. By contrast,
Applicant states that its net investment
4 Applicant states that one of its subsidiaries
holds investment securities.
5 Applicant states that it intends to calculate this
percentage by consolidating its financial statements
with the financial statements of its wholly-owned
subsidiaries (but not with any majority-owned
subsidiaries that may be acquired in the future).
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18:02 Nov 20, 2024
Jkt 265001
income in its fiscal years of 2021, 2022,
and 2023 was $2.8 million, $4.6 million,
and $60.5 million, respectively.
Applicant states that all such income
was derived from Capital Preservation
Instruments.6 Applicant states that if net
investment income were compared to its
revenue, it would be less than 4% of
revenue for the fiscal year ended July
31, 2023, and equal to less than 0.5% of
revenue for the fiscal year ended July
31, 2022.
For the fiscal three months ended
October 31, 2023, Applicant states that
it earned $25.9 million of net
investment income, an increase
compared to $7.9 million for the first
three months ended October 31, 2022.
Applicant states that this nonetheless
represents less than 5.5% of revenue for
the three months ended October 31,
2023. Applicant states that the increase
in net investment income is due to the
increase in interest rates in the fixed
income markets.
7. Applicant asserts that its historical
development, its public representations
of policy, the activities of its officers
and directors, the nature of its assets
and its sources of revenue and income,
as discussed in the application,
demonstrate that it is engaged primarily
in a business other than that of
investing, reinvesting, owning, holding
or trading securities. Applicant thus
asserts that it satisfies the criteria for
issuing an order under Section 3(b)(2) of
the Act.
Applicant’s Conditions
Applicant agrees that an order granted
pursuant to the application will be
subject to the following conditions:
1. Applicant will continue to use its
accumulated cash and securities to
support its primary business (as such
business is described in this
Application);
2. Applicant will refrain from
investing or trading in securities for
speculative purposes; and
3. No more than 10% of Applicant’s
total assets will consist of investment
securities other than Capital
Preservation Instruments (as such
capitalized term is defined in
Applicant’s application). For purposes
of this condition, total assets excludes
cash items (including securities issued
by money market funds registered under
the Act) and Government securities (as
defined in Section 2(a)(16) of the Act).
This percentage is to be determined on
an unconsolidated basis, except that
Applicant should consolidate its
6 Applicant states that is has not, and does not
expect to, earn investment income from strategic
investments.
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financial statements with the financial
statements of any wholly-owned
subsidiaries.
For the Commission, by the Division of
Investment Management, under delegated
authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024–27158 Filed 11–20–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101645; File No. SR–
FINRA–2024–007]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Partial
Amendment No. 1 to Proposed Rule
Change To Adopt the FINRA Rule 6500
Series (Securities Lending and
Transparency Engine (SLATETM))
November 15, 2024.
I. Introduction
On May 1, 2024, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
Rule 19b–4 thereunder,2 a proposed rule
change (SR–FINRA–2024–007) to adopt
the new FINRA Rule 6500 Series
(Securities Lending and Transparency
Engine (SLATETM)) to (1) require
reporting of securities loans; and (2)
provide for the public dissemination of
loan information. The proposed rule
change was published for comment in
the Federal Register on May 7, 2024.3
On June 10, 2024, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.5 On August 5, 2024, the
Commission instituted proceedings
under Section 19(b)(2)(B) of the Act 6 to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 100046
(May 1, 2024), 89 FR 38203 (May 7, 2024)
(‘‘Notice’’). Comments received on the proposed
rule change are available at: https://www.sec.gov/
comments/sr-finra-2024-007/srfinra2024007.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 100305
(June 10, 2024), 89 FR 50644 (June 14, 2024). The
Commission designated August 5, 2024, as the date
by which the Commission shall approve or
disapprove, or institute proceedings to determine
whether to disapprove, the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
2 17
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Agencies
[Federal Register Volume 89, Number 225 (Thursday, November 21, 2024)]
[Notices]
[Pages 92226-92228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27158]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 35387; File No. 812-15188]
Zscaler, Inc.
November 15, 2024.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice.
-----------------------------------------------------------------------
Notice of application for an order under Section 3(b)(2) of the
Investment Company Act of 1940 (``Act'').
Applicant: Zscaler, Inc.
Summary of Application: Applicant seeks an order under Section 3(b)(2)
of the Act declaring it to be primarily engaged in a business other
than that of investing, reinvesting, owning, holding or trading in
securities. Applicant states that it is in the business of providing,
improving, and developing cloud security solutions to businesses.
Filing Dates: The application was filed on December 28, 2020, and
amended on May 11, 2021, July 28, 2021, January 6, 2022, July 31, 2023,
and September 13, 2024.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by emailing the Commission's
Secretary at [email protected] and serving applicants with a
copy of the request, by email if an email address is listed for the
relevant Applicant below, or personally or by mail, if a physical
address is listed for the relevant Applicant below. Hearing requests
should be received by the Commission by 5:30 p.m. on December 10, 2024,
and should be accompanied by proof of service on the applicants, in the
form of an affidavit, or for lawyers, a certificate of service.
Pursuant to rule 0-5 under the Act, hearing requests should state the
nature of the writer's interest, any facts bearing upon the
desirability of a hearing on the matter, the reason for the request,
and the issues contested. Persons who wish to be notified of a hearing
may request notification by emailing the Commission's Secretary at
[email protected].
ADDRESSES: The Commission: [email protected]. Applicant: Remo
Canessa, Chief Financial Officer, and Robert Schlossman, Esq., Chief
Legal Officer, Zscaler, Inc., at [email protected]; Kevin R.
Bettsteller, Esq., at [email protected].
FOR FURTHER INFORMATION CONTACT: Adam Lovell, Senior Counsel, or Terri
G. Jordan, Branch Chief, at (202) 551-6825 (Division of Investment
Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. For Applicant's representations, legal analysis, and
conditions, please refer to Applicant's fifth amended and restated
application, dated September 13, 2024, which may be obtained via the
Commission's website by searching for the file number at the top of
this document, or for an Applicant using the Company name search field,
on the SEC's EDGAR system. The SEC's EDGAR system may be searched at
https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html. You
may also call the SEC's Public Reference Room at (202) 551-8090.
Applicant's Representations
1. Applicant states that it is a Delaware corporation formed in
2007 that, directly and through its wholly-owned subsidiaries,\1\ is
engaged in the business of providing, improving, and developing cloud
security solutions to businesses.
---------------------------------------------------------------------------
\1\ Applicant states that its 28 wholly-owned subsidiaries
generally engage in sales and marketing or research and development
(``R&D'') activities in their respective jurisdictions.
---------------------------------------------------------------------------
2. Applicant states that its business is highly capital intensive,
requires R&D of new technologies, and does not involve the Applicant
acquiring or retaining significant ``hard'' operating assets. Applicant
states that it maintains significant cash reserves that it seeks to
invest for purposes of conserving capital and providing liquidity until
the funds are used in its cloud-based services and technology business.
As described more fully in the application, Applicant states that it
requires significant liquid capital primarily to: (i) fund R&D for new
products and services, (ii) advance the commercialization of its
business, (iii) otherwise fund its operations, and (iv) make other
capital expenditures in keeping with the growth of the
[[Page 92227]]
Applicant's cloud-based services and technology business.
3. Applicant states that it has financed operations primarily
through offerings of its debt and equity securities, but ultimately
seeks to generate cash from its operations to support its business.
Applicant states that it seeks to preserve capital and maintain
liquidity, pending the use of such capital for its operations, by
investing in ``Capital Preservation Instruments.'' \2\ Applicant states
that it may in the future make strategic investments in ``other
investments'' consistent with Rule 3a-8. Applicant states that such
securities will not be acquired for speculative purposes.
---------------------------------------------------------------------------
\2\ As used in Applicant's application, Capital Preservation
Instruments refers collectively to any cash items and securities
that are held for the purpose of conserving Applicant's capital and
liquidity until they are used by Applicant to support its business
(as such business is described in Applicant's application). Such
holdings are liquid (i.e., can be readily sold), earn competitive
market returns and present a low level of credit risk, including
short-term investment grade securities, Government securities (as
defined in Section 2(a)(16) of the Act), securities of money-market
funds registered under the Act, and other cash items; but excluding
investments in equity or speculative instruments.
---------------------------------------------------------------------------
Applicant's Legal Analysis
1. Applicant seeks an order under Section 3(b)(2) of the Act
declaring that it is primarily engaged in a business other than that of
investing, reinvesting, owning, holding or trading in securities and
therefore is not an investment company as defined in the Act.
2. Section 3(a)(1)(A) of the Act defines the term ``investment
company'' to include an issuer that is or holds itself out as being
engaged primarily, or proposes to engage primarily, in the business of
investing, reinvesting or trading in securities. Section 3(a)(l)(C) of
the Act further defines an investment company as an issuer that is
engaged or proposes to engage in the business of investing,
reinvesting, owning, holding or trading in securities, and owns or
proposes to acquire investment securities having a value in excess of
40% of the value of the issuer's total assets (exclusive of Government
securities and cash items) on an unconsolidated basis. Section 3(a)(2)
of the Act defines ``investment securities'' to include all securities
except Government securities, securities issued by employees'
securities companies, and securities issued by majority-owned
subsidiaries of the owner which (a) are not investment companies and
(b) are not relying on the exclusions from the definition of investment
company in Section 3(c)(1) or Section 3(c)(7) of the Act. Applicant
states that it has never been, is not now, and does not propose to be,
primarily engaged in the business of investing, reinvesting, owning,
holding, or trading in securities. The Applicant states that it
currently holds investment securities amounting to less than 40% of its
total assets (exclusive of Government securities and cash items), but
that its need for liquid capital to conduct its business means that it,
in part, makes investments in certain securities exceeding 40% of the
Company's total assets (exclusive of Government securities and cash
items) on an unconsolidated basis. Applicant states that it therefore
may be an ``investment company'' pursuant to Section 3(a)(l)(C) of the
Act absent an exclusion or exemption.
3. Rule 3a-8 under the Act provides an exclusion from the
definition of investment company if, among other factors, a company's
R&D expenses are a substantial percentage of its total expenses for the
last four fiscal quarters combined. While Applicant states that it
believes that it complies with the conditions of Rule 3a-8, Applicant
states that it has concerns over (a) whether compliance is practical in
light of changes to the Company's overall expenses in connection with
the increase of customer subscriptions and support services, and (b)
whether R&D expenses, while substantial in absolute terms, may not
always be considered substantial as a ratio of overall expenses.
Although Applicant states that it anticipates R&D expenses to increase
in absolute terms, such expenses are not anticipated to increase
proportionately with Applicant's overall expenses, particularly given
increases in expenses related to sales and marketing, the
administration of a rapidly expanding employee base, and other
administrative expenses. Applicant states that its R&D expenses have
fluctuated between 21% and 25% of total expenses over the past six
years, and Applicant expects R&D expenses to decrease relative to total
expenses over time.
4. Section 3(b)(2) of the Act provides that, notwithstanding
Section 3(a)(l)(C) of the Act, the Commission may issue an order
declaring an issuer to be primarily engaged in a business other than
that of investing, reinvesting, owning, holding, or trading in
securities directly, through majority-owned subsidiaries, or controlled
companies conducting similar types of businesses. Applicant requests an
order under Section 3(b)(2) of the Act declaring that it is primarily
engaged in a business other than that of investing, reinvesting,
owning, holding or trading in securities, and therefore is not an
investment company as defined in the Act.
5. In determining whether an issuer is ``primarily engaged'' in a
non-investment company business under Section 3(b)(2) of the Act, the
Commission considers the following factors: (a) the company's
historical development, (b) its public representations of policy, (c)
the activities of its officers and directors, (d) the nature of its
present assets, and (e) the sources of its present income.\3\
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\3\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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6. Applicant submits that it satisfies the criteria for issuance of
an order under Section 3(b)(2) of the Act because Applicant is
primarily engaged in the business of providing, improving, and
developing cloud security solutions to businesses and is not in the
business of investing, reinvesting, owning, holding or trading in
securities.
a. Historical Development. Applicant states that, since its
inception in 2007, Applicant has actively engaged in the business of
developing and providing cloud-based information security solutions.
Applicant's business has focused on the development of new such
products.
b. Public Representations of Policy. Applicant states that it has
consistently represented that it is engaged in the business of
providing a cloud-based suite of information security solutions.
Applicant further states that it has never held and does not now hold
itself out as an investment company within the meaning of the Act or as
engaging in the business of investing, reinvesting, owning, holding, or
trading in securities. Applicant submits that its public
representations make clear that shareholders invest in the Applicant's
securities with the expectation of realizing gains from Applicant's
development and sale of its suite of cloud security solutions and not
from returns on an investment portfolio.
c. Activities of Officers and Directors. Applicant represents that
its officers and directors spend substantially all of their time
overseeing the Applicant's business of providing its cloud platform to
customers. Applicant states that its cash management activities are
managed internally by its Chief Financial Officer and externally by an
investment manager, whose activities are supervised by the Chief
Financial Officer. Applicant states that none of its executive
officers, other than the Chief Financial Officer, spend time monitoring
cash balances and managing short-term investment securities. In
addition, of the Applicant's 6,342 employees (as of October 31, 2023),
Applicant states that fewer than five
[[Page 92228]]
employees spend time on matters relating to the management of
Applicant's investment securities. Applicant states that none of its
officers, directors or employees spends or proposes to spend of his or
her time to the management of Capital Preservation Instruments on
behalf of Applicant.
d. Nature of Assets. Applicant states that, as of October 31, 2023,
Applicant's investment securities constituted approximately 30.1% of
its total assets (excluding Government securities and cash items) on an
unconsolidated basis.\4\ Furthermore, Applicant states that as of
October 31, 2023, 100% of its investment securities consist of Capital
Preservation Instruments. Applicant states that it uses its Capital
Preservation Instruments to finance its continued operations in
connection with the development of the Company's software. Applicant
states that it may in the future make strategic investments in ``other
investments'' consistent with Rule 3a-8. Applicant states, however,
that no more than 10% of its total assets (exclusive of Government
securities and cash items, including securities issued by money market
funds registered under the Act) will consist of investment securities
other than Capital Preservation Instruments.\5\ Applicant states that
it uses current assets, including its Capital Preservation Instruments,
to finance its continued R&D program and operations in connection with
the development of the Applicant's software.
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\4\ Applicant states that one of its subsidiaries holds
investment securities.
\5\ Applicant states that it intends to calculate this
percentage by consolidating its financial statements with the
financial statements of its wholly-owned subsidiaries (but not with
any majority-owned subsidiaries that may be acquired in the future).
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e. Sources of Income and Revenue. Applicant represents that since
its inception it has carried net operating losses. Applicant states
that it does, however, derive income from its investment securities.
Applicant states that a review of its current source of revenues
provides a more accurate review of its operating company status,
particularly, given the upward trend in recognizing substantially
increased revenues due to sales of new subscriptions. Applicant states
that it recognizes substantially all of its revenues from fees based on
subscriptions and support. Applicant states that its revenues for the
fiscal years ended July 31, 2020, 2021, 2022, and 2023 were $431.3
million, $673.1 million, $1,090.9 million, and $1,671 million,
respectively, on an unconsolidated basis. By contrast, Applicant states
that its net investment income in its fiscal years of 2021, 2022, and
2023 was $2.8 million, $4.6 million, and $60.5 million, respectively.
Applicant states that all such income was derived from Capital
Preservation Instruments.\6\ Applicant states that if net investment
income were compared to its revenue, it would be less than 4% of
revenue for the fiscal year ended July 31, 2023, and equal to less than
0.5% of revenue for the fiscal year ended July 31, 2022.
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\6\ Applicant states that is has not, and does not expect to,
earn investment income from strategic investments.
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For the fiscal three months ended October 31, 2023, Applicant
states that it earned $25.9 million of net investment income, an
increase compared to $7.9 million for the first three months ended
October 31, 2022. Applicant states that this nonetheless represents
less than 5.5% of revenue for the three months ended October 31, 2023.
Applicant states that the increase in net investment income is due to
the increase in interest rates in the fixed income markets.
7. Applicant asserts that its historical development, its public
representations of policy, the activities of its officers and
directors, the nature of its assets and its sources of revenue and
income, as discussed in the application, demonstrate that it is engaged
primarily in a business other than that of investing, reinvesting,
owning, holding or trading securities. Applicant thus asserts that it
satisfies the criteria for issuing an order under Section 3(b)(2) of
the Act.
Applicant's Conditions
Applicant agrees that an order granted pursuant to the application
will be subject to the following conditions:
1. Applicant will continue to use its accumulated cash and
securities to support its primary business (as such business is
described in this Application);
2. Applicant will refrain from investing or trading in securities
for speculative purposes; and
3. No more than 10% of Applicant's total assets will consist of
investment securities other than Capital Preservation Instruments (as
such capitalized term is defined in Applicant's application). For
purposes of this condition, total assets excludes cash items (including
securities issued by money market funds registered under the Act) and
Government securities (as defined in Section 2(a)(16) of the Act). This
percentage is to be determined on an unconsolidated basis, except that
Applicant should consolidate its financial statements with the
financial statements of any wholly-owned subsidiaries.
For the Commission, by the Division of Investment Management,
under delegated authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-27158 Filed 11-20-24; 8:45 am]
BILLING CODE 8011-01-P