WASHINGTON -- The Securities and Exchange Commission (SEC)has proposed for public comment a rule that would excludecertain research and development companies from beingdefined as investment companies, as per the InvestmentCompany Act of 1940.
Exemption would relieve research and development companies-- notably biotechnology companies -- from a variety ofonerous regulations.
Under the Investment Company Act, biotechnology companiesare prevented from attracting scientific talent bysupplementing pay with stock or other interests in thecompany's future to preserve scarce cash resources. The Actalso restricts the range of financial instruments a company canuse to raise capital. For example, certain preferred securitiesare prohibited.
Finally, the newrule would allow companies "greater flexibilityin how they can invest securities to preserve capital andliquidity," Bryce Stovell, senior special counsel of the Office ofRegulatory Policy, Division of Investment Management of theSEC, told BioWorld.
Although biotechnology companies currently can gainexemption from the Act, the new rule would "reduce regulatoryavoidance costs for the industry, or at least that's what weanticipate," Stovell said.
Criteria for the exemption include:
-- A company must be engaged primarily in a non-investmentbusiness.
-- R&D expenses must be "a substantial percentage of totalexpenses," and R&D expenses must exceed revenues frominvestments in securities. Investment expenses must be nogreater than 5 percent of total expenses.
-- The company's purpose in investing in securities must be topreserve capital and liquidity for use in operations.
"Otherwise, a rather flexible judgmental approach is usedthroughout in order to lend flexibility to the rule, in light of thedifficult circumstances of various research and developmentcompanies," said Stovell.
The SEC worked closely with Lisa Raines, then of the IndustrialBiotechnology Association (now BIO), as well as Icos Corp., theaccounting firm of Ernst & Young and the law firm of CooleyGodward Castro Huddleston & Tatum, to develop the rule.
Icos, with input from the others, sent a letter to the SEC seekingan exemption from the Investment Company Act. The requestoutlined concerns over investment uncertainties caused by theAct, which was originally designed to regulate mutual funds.
The SEC granted Icos the exemption in March and allowedother biotechnology companies to determine whether they areexempt from the Act without seeking an individual SEC order.
Attorney Cydney Posner of Cooley Godward said the currentproposal shows that the SEC is trying to address issues thatbiotechnology companies have or will have in the future,particularly strategic business relationships. "Most biotechcompanies benefited from Icos," she said, "and this has goneanother step further."
The rule will be open for public comment for 90 days followingpublication in the Federal Register. Written comments shouldbe sent in triplicate to Jonathan Katz, Secretary, Securities andExchange Commission, 450 5th St. NW, Washington, D.C. 20549,file No. S7-22-93.
-- David C. Holzman Washington Editor
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