[Federal Register Volume 65, Number 101 (Wednesday, May 24, 2000)]
[Notices]
[Pages 33591-33593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13002]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24459; 812-11976]


Yahoo! Inc.; Notice of Application

May 18, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 3(b)(2) of the 
Investment Company Act of 1940 (the ``Act'').

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SUMMARY: Applicant Yahoo! Inc. (``Yahoo!'') 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 is a global Internet new media company 
that offers a branded network of media, commerce and communication 
services. On April 5, 2000, a temporary order was issued pursuant to 
section 3(b)(2) of the Act exempting applicant from all provisions of 
the Act until July 10, 2000.
    Filing Dates: The application was filed on February 11, 2000 and 
amended April 5, 2000 and May 16, 2000.
    Hearing for Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving

[[Page 33592]]

applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the Commission by 5:30 p.m. on June 12, 
2000 and should be accompanied by proof of service on the applicant, in 
the form of an affidavit, or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the Commission's Secretary.


ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW, Washington, DC 20549-0609;
Applicant, 3420 Central Expressway, Santa Clara, CA 95051.

FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Attorney-
Adviser, at (202) 942-0526; or Mary Kay Frech, Branch Chief, at (202) 
942-0564 (Office of Investment Company Regulation, Division of 
Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Commission's Public Reference Branch, 450 Fifth Street NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. Yahoo!, a Delaware corporation , was formed in 1995. Yahoo! 
states that it is a global Internet new media company that offers a 
branded network of media, commerce and communication services. Yahoo! 
develops, operates and markets advertising-supported online properties, 
including Yahoo!, a branded Internet navigational service that is among 
the most widely used and recognized search guides on the World Wide 
Web. Yahoo! states that it conducts its Internet and new media business 
directly and through wholly-owned and majority-owned subsidiaries and 
Yahoo! Japan, a company that it controls within the meaning of section 
2(a)(9) of the Act.\1\ Yahoo! states that it is not in the business of 
investing, reinvesting or trading in securities.
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    \1\ Section 2(a)(9) of the Act defines ``control'' as the power 
to exercise a controlling influence over the management or policies 
of a company. That section creates a presumption that an owner of 
more than 25% of the outstanding voting securities of a company 
controls the company.
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    2. Yahoo! has expanded its Internet and new media business to Japan 
through Yahoo! Japan, which unlike Yahoo!'s other international 
subsidiaries, is not majority-owned or wholly-owned by Yahoo!. Yahoo! 
states that Yahoo! Japan was created in 1996 as a joint venture between 
Yahoo! and Softbank Corp. to establish and manage a Japanese version of 
the Yahoo! directory service, develop related Japanese online 
navigational services and conduct other related businesses. Yahoo! 
states that it currently owns 34% of the outstanding voting securities 
of Yahoo! Japan and Softbank Corp. owns 51%. Yahoo! states that Yahoo! 
Japan currently is a publicly traded company with shares listed on the 
Tokyo Stock Exchange. Yahoo! represents that Yahoo! Japan is not an 
investment company and is not relying on section 3(c)(1) or 3(c)(7) of 
the Act. As of December 31, 1999, Yahoo! states that the fair market 
value of Yahoo!'s interest in Yahoo! Japan was approximately $8.4 
billion, accounting for over 90% of the value of Yahoo!'s total assets 
(exclusive of government securities and cash items) on an 
unconsolidated basis.
    3. Yahoo! represents that it maintains a large cash position to 
help fund operations, research and development, and to take advantage 
of acquisition opportunities as they arise. Yahoo!'s cash position is 
currently invested in cash and government securities; Yahoo! plans to 
invest part of its cash position in higher-yielding corporate bonds and 
other high-quality debt securities that are consistent with the goal of 
capital preservation. Yahoo! represents that it has adopted a Corporate 
Investment Policy to ensure that its cash management investments 
consist of only certain high-quality predominately short-term debt 
instruments (together with cash items and government securities, ``Cash 
Management Investments''). Yahoo! represents that it needs sufficient 
cash for bona fide business purposes, such as funding operations, 
funding research and development and improvements to its network, and 
funding strategic acquisitions. Yahoo! also states that it does not 
engage in speculative short-term trading with its Cash Management 
Investments.
    4. Yahoo! states that it makes certain small strategic, non-
controlling investments in companies that can complement or enhance 
Yahoo!'s Internet and new media business (``Strategic Investments''). 
Yahoo! states that it carries these investments on its balance sheet as 
``long-term'' assets and does not invest or trade in such securities 
for short-term or speculative purposes. As of December 31, 1999, the 
value of the Strategic Investments was less than 5% of the value of 
Yahoo!'s total assets (exclusive of government securities and cash 
items) on an unconsolidated basis. Yahoo! states that it does not hold 
Strategic Investments because of the possibility of gain resulting from 
an increase in the market price of the securities, but primarily as a 
means to enter into or solidify business relationships with companies 
to expand Yahoo!'s business lines. Yahoo! further states that it uses 
Strategic Investments as a way of outsourcing research and development 
instead of developing technology internally.

Applicant's Legal Analysis

    1. Yahoo! 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 not an investment company as defined in the Act.
    2. Under section 3(a)(1)(C) of the Act, an issuer is an investment 
company if it 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: (i) Are not investment 
companies; and (ii) are not relying on the exclusive from the 
definition of investment company in section 3(c)(1) or 3(c)(7) of the 
Act.
    3. Yahoo! states that its interest in Yahoo! Japan represents over 
90% of its total assets (exclusive of government securities and cash 
items) on an unconsolidated basis. Yahoo! states that it cannot rely 
upon rule 3a-1 under the Act because, although it owns over 25% of the 
outstanding voting securities of Yahoo! Japan, it does not primarily 
control Yahoo! Japan because another entity owns a larger percentage of 
voting securities.\2\ If the interest in Yahoo! Japan is deemed to be 
an ``investment security'' (as that term is defined in section 3(a)(2) 
of the Act), Yahoo! may be deemed to be an investment company within 
the meaning of section 3(a)(1)(C) of the Act.
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    \2\ Rule 3a-1 provides an exemption from the definition of 
investment company if no more than 45% of a company's total assets 
consist of, and not more than 45% of its net income over the last 
four quarters is derived from, securities other than government 
securities and securities of majority-owned subsidiaries and 
companies primarily controlled by it.

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[[Page 33593]]

    4. Yahoo! states that it views its controlling interest in Yahoo! 
Japan as an operating asset. Yahoo! represents that it plays a 
significant role in the management of Yahoo! Japan and is fully 
involved both directly and indirectly, in the operations of Yahoo! 
Japan. Yahoo! states that it directly oversees the operations of Yahoo! 
Japan through its involvement with the board of directors of Yahoo! 
Japan. Yahoo! further states that Yahoo! Japan operates under various 
agreements with Yahoo! that give Yahoo! significant power to direct the 
operations of Yahoo! Japan, including a licensing agreement that, among 
other things, sets minimum content specifications and subjects Yahoo! 
Japan to an international pricing policy designed by Yahoo! to allocate 
sales revenue involving more than one Yahoo! entity. Yahoo! argues that 
these facts demonstrate not only that Yahoo! controls Yahoo! Japan, but 
also that it is involved in the management and operations of Yahoo! 
Japan.
    5. Section 3(b)(2) of the 1940 Act provides that, notwithstanding 
section 3(a)(1)(C) of the Act, the Commission may issue an order 
declaring an issuer to be primarily engaged in a business or businesses 
other than that of investing, reinvesting, owning, holding, or trading 
in securities either directly, through majority-owned subsidiaries, or 
controlled companies conducting similar types of business. Yahoo! 
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 
not an investment company as defined in the Act.
    6. In determining whether a company is primarily engaged in a non-
investment company business under section 3(b)(2), the Commission 
considers: (a) The applicant'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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    a. Historical Development. Yahoo! states that since its inception 
in 1995, it has considered itself to be a company engaged in the 
Internet and new media business of developing and providing Internet-
related products and services. Yahoo! represents that its business 
strategy has not changed since it outlined its business plan in its 
prospectus for the initial public offering of its securities in 1996. 
Yahoo! has used its revenue and raised capital to expand its operations 
into foreign countries, to expand its product and service lines and to 
acquire companies with complementary products or services.
    b. Public Representations of Policy. Yahoo! states that it has 
never represented that it is involved in any business other than the 
Internet and new media business that develops and provides Internet-
related products and services. Yahoo! asserts that it has consistently 
stated in its reports to stockholders, press releases and periodic 
reports filed with the Commission that it is an Internet and new media 
company. Yahoo! states that it emphasizes operating results and has 
never emphasized either its investment income or the possibility of 
significant appreciation from its Cash Management Investments or 
Strategic Investments as a material factor in its business or future 
growth.
    c. Activities of Officers and Directors. Yahoo! states that its 
board of directors and its officers spend almost all of their time on 
Yahoo!'s Internet and new media business. The board of directors' 
activities with respect to Yahoo!'s Cash Management Investments is 
minimal, limited to its adoption of the Corporate Investment Policy and 
periodically receiving reports. Yahoo! also states that only two of its 
approximately 2,000 employees spend any time with respect to its Cash 
Management Investments, and those employees spend only approximately 
20% of their time in this manner. Yahoo! states that the amount of time 
that the board of directors dedicates to the Strategic Investments is 
small relative to the amount of time dedicated to Yahoo!'s business 
activities.
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    \3\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    d. Nature of Assets. Yahoo! states that as of December 31, 1999, 
exclusive of cash items and government securities, over 90% of Yahoo!'s 
total assets, on an unconsolidated basis, was attributable to direct 
non-investment security assets and Yahoo!'s interests in wholly- and 
majority-owned subsidiaries and Yahoo! Japan. As of December 31, 1999, 
Yahoo represents that less than 5% of its total assets (exclusive of 
cash items and government securities), on an unconsolidated basis, were 
attributable to Strategic Investments. Yahoo further represents that 
Cash Management Investments comprised less than 10% of its total 
assets, as of December 31, 1999.
    e. Sources of Income. Yahoo! states that for the year ended 
December 31, 1999, Yahoo!'s investment income comprised approximately 
37% and its operating income comprised approximately 63% of Yahoo!'s 
gross income. Yahoo! further states that for the quarter ended March 
31, 2000, Yahoo!'s investment income comprised approximately 44%, and 
operating income comprised approximately 57% of Yahoo!'s gross income. 
Moreover, Yahoo! states that 70% of the approximately $57 million of 
investment income it reported in the quarter ended March 31, 2000, 
resulted from the consolidation of certain joint venture operations 
following Yahoo!'s acquisitions of Geocities and broadcast.com, not 
from speculation in securities. Yahoo! notes that in the past its 
income from operations has fluctuated widely and Yahoo! has incurred 
substantial non-recurring costs in connection with acquisitions and 
product development. Yahoo! notes that the composition of its income, 
at-times, is not representative of Yahoo!'s activities as an operating 
company. Yahoo! believes that the sources of its revenue are more 
representative of Yahoo!'s activities as an operating company. Yahoo! 
states that as far back as 1996, Yahoo! generated 83% of its total 
revenue from sales of advertisements and 14% from investment income. 
For the year ended December 31, 1999, Yahoo states that it generated 
94% of its total revenue from operating activities and the remaining 6% 
from investment income. Yahoo! expects that in the future the 
percentage of its total revenues derived from operating activities will 
ordinarily be over 90%.
    7. Yahoo! thus asserts that it satisfies the standards for an order 
under section 3(b)(2) of the Act.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. Yahoo! will continue to allocate and utilize its accumulated 
cash and Cash Management Investments for bona fide business purposes.
    2. Yahoo! will refrain from investing or trading in securities for 
short-term speculative purposes.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-13002 Filed 5-23-00; 8:45 am]
BILLING CODE 8010-01-M