The Securities and Exchange Commission on Tuesdayannounced a new policy exempting emerging biotechnologycompanies, as well as other research and developmentintensive companies, from the Investment Company Act of1940.
The new policy will enable biotechnology companies to investfunds in higher-yielding investments than previously allowed,without becoming regulated as investment companies, theIndustrial Biotechnology Association said.
The SEC made the announcement in a letter mailed Tuesday toIcos Corp. of Seattle. It allows other biotechnology companies todetermine that they are exempt from the act without needingto seek an SEC order, according to IBA. The letter is expected tobe published in the Federal Register next week.
IBA in November 1992 submitted a proposal to exemptbiotechnology companies from the 1940 act.
"Once they (SEC) understood the problem, they immediatelybegan efforts to rectify it," said Carl Feldbaum, president ofIBA.
Under the new policy, for example, a biotechnology companywith $65 million in cash obtained during a recent publicoffering could increase its annual interest income by as muchas $1 million, IBA said.
Prior to the new policy, SEC had taken the position thatcompanies that hold most of their assets in securities ratherthan plant and equipment, and derive most of their revenuesfrom interest on those securities rather than product saleswere "investment companies." As such, they would be requiredto be registered with and regulated by the SEC's Division ofInvestment Management and subjected to severe restrictionson company operations, as well as burdensome paperwork, IBAsaid. No biotechnology company had ever registered under theact.
The 1940 act was designed to regulate mutual funds, CydneyPosner, an attorney with Cooley Godward Castro Huddleson &Tatum, told BioWorld.
To avoid being defined as "investment companies,"biotechnology companies frequently placed most of the fundsraised in public offerings in U.S. Treasury securities rather thancorporate securities -- sacrificing the greater interest incomeopportunities associated with privately issued securities, about1.5 percent in interest payments.
The new policy will allow companies to diversify theirinvestments, Posner said. Her firm, along with the accountingfirm of Ernst & Young, assisted IBA in preparing its proposal toexempt biotechnology companies from the 1940 Act.
Biotechnology companies need no longer seek exemptions fromthe act, but will be allowed to self-determine their exemptstatus on the basis of their R&D investment, IBA said.
-- Chuck Lenatti Managing Editor
(c) 1997 American Health Consultants. All rights reserved.