[Federal Register Volume 65, Number 184 (Thursday, September 21, 2000)]
[Notices]
[Pages 57211-57213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24270]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-2462; 812-11962]


Bill Gross' idealab!; Notice of Application

September 15, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

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

-----------------------------------------------------------------------

SUMMARY: Applicant Bill Gross' idealab! (``idealab!'') 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 creates, launches, and 
operates a network of interactive communications businesses. Applicant 
also has received a temporary order issued pursuant to section 3(b)(2) 
of the Act exempting idealab! from all provisions of the Act until the 
Commission takes final action on the application or until October 24, 
2000, if earlier. Previously, on March 28, 2000 and July 26, 2000, 
temporary orders were issued pursuant to section 3(b)(2) of the Act 
exempting applicant from all provisions of the Act until September 25, 
2000.
    Filing Dates: The application was filed on January 28, 2000, and 
amended on March 14, 2000 and July 19, 2000.
    Hearing or 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 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 October 6, 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, N.W., Washington, D.C. 20549-0609; Applicant, 130 West Union 
Street, Pasadena, CA 91103.

FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Branch Chief, or 
Nadya B. Roytblat, Assistant Director, 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, N.W., 
Washington, D.C. 20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. Idealab!, a California corporation, was founded in 1996 by Bill 
Gross, its Chairman, Idealab! states that it was formed for the purpose 
of utilizing real-time interactive communications to satisfy market 
demand for goods and services through a network of companies (``Network 
Companies''). Idealab! represents that it is not in the business of 
investing, reinvesting or trading in securities.
    2. Idealab!'s Network Companies fall into two categories: (i) 
Interactive communications infrastructure and services, and (ii) 
Internet commerce and content. As of March 1, 2000, Idealab!'s network 
of interactive communications businesses consisted of 45 Network 
Companies, 28 of which were majority-owned subsidiaries of idealab! or 
companies which idealab! controlled within the meaning of section 
2(a)(9) of the Act (majority-owned and controlled subsidiaries of 
idealab!, collectively, ``Controlled Companies'').\1\ Idealab! states 
that it also holds non-controlling interests in 17 other operating 
companies and 3 companies that make investments in interactive 
communications companies.
---------------------------------------------------------------------------

    \1\ Section 2(a)(9) 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. The terms ``Controlled Companies'' and ``Network 
Companies'' do not include companies that are investment companies 
or are relying on section 3(c)(1) or 3(c)(7) of the Act.
---------------------------------------------------------------------------

    3. Idealab! states that it has structured its business operations 
by creating a network of interactive communications businesses, with 
each product or service provided by a separate company, rather than 
operating as one large company. Idealab! further states that its goal 
has been to retain 50-70% of the equity in each Network Company it 
created, but its interests in some have been diluted by strategic 
investors and, on occasion, by other investors when idealab! was unable 
to participate in successive rounds of financing. Although idealab! 
anticipates that it will continue to build important business 
relationships by permitting strategic investors to acquire equity 
stakes in some of its Controlled Companies, idealab! believes it will 
be able to maintain a 25% or greater equity interest in its current and 
future Controlled Companies.
    4. Idealab! represents that it does not provide capital to the 
Network Companies with a view to profit from the sale of securities, 
but has been building a network of synergistic interactive 
communications businesses that it intends to control and operate for 
the long term. As idealab! builds its network of companies, idealab! 
expects that it might have a need to sell its interest in certain 
companies that no longer fit or contribute to the network. Idealab! 
does not contemplate selling interests in Network Companies in the 
ordinary course of business. Additionally, idealab! intends to acquire 
more equity in certain of its Controlled Companies and expects to 
retain controlling interests in many of the Network Companies while 
creating and capitalizing more Controlled Companies. Idealab! 
represents that all of the Controlled Companies are currently 
``controlled primarily'' by idealab! within the meaning of rule 3a-1 
under the Act, and that all or

[[Page 57212]]

substantially all of the Controlled Companies will be ``controlled 
primarily'' by idealab! in the future.
    5. Idealab! states that it generates and tests ideas for new 
interactive communications businesses. Idealab! states that if testing 
results suggest that the idea could form the basis for a profitable 
interactive communications business, idealab! forms and capitalizes a 
new entity. Idealab! states that it then recruits a management team, 
provides space in its facilities, and provides on-going strategic 
guidance, creative design, web development, accounting, legal and 
administrative services to the business. Idealab! represents that it 
previously referred to itself as an ``incubator'' of Internet companies 
to connote its activities of creating and then nurturing the 
development of Internet companies.

Applicant's Legal Analysis

    1. Idealab! 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.
    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. Under 
section 3(a)(2) of the Act, investment securities 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 exclusions from the definition of 
investment company in section 3(c)(1) or 3(c)(7) of the Act.
    3. Idealab! states that, as of March 1, 2000, approximately 71% of 
its assets consists of investment securities as defined in section 
3(a)(2). Accordingly, idealab! may be deemed an investment company 
within the meaning of section 3(a)(1)(C) of the Act. Idealab! asserts 
that, as of March 1, 2000, approximately 29% of its total assets were 
comprised of interests in majority-owned subsidiaries and approximately 
46% of idealab!'s assets consisted of companies primarily controlled by 
idealab! for purposes of rule 3a-1 under the Act. 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. Idealab! states 
that it believes it will not be able to rely on rule 3a-1 because of 
the net income generated from the sale of a minority interest in 1999 
(discussed below) and because its Controlled Companies are not 
anticipated to have any significant income for some years and thus will 
not pay dividends or other distributions to idealab!.
    4. Section 3(b)(2) of the Act provides that, notwithstanding 
section 3(a)(1)(C), 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 either 
directly, through majority-owned subsidiaries, or through controlled 
companies conducting similar types of businesses. Idealab! submits that 
it meets the requirements of section 3(b)(2) because it is primarily 
engaged, through its Controlled Companies, in the business of 
identifying, creating and operating interactive communications 
businesses.
    5. In determining whether an applicant is ``primarily engaged'' in 
a non-investment company business under section 3(b)(2), the Commission 
considers the following factors: (i) applicant's historical 
development, (ii) applicant's public representations of policy, (iii) 
the activities of applicant's officers and directors, (iv) the nature 
of applicant's present assets, and (v) the sources of applicant's 
present income.\2\
---------------------------------------------------------------------------

    \2\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
---------------------------------------------------------------------------

    a. Historical Development. Idealab! states that it was incorporated 
in 1996 to act as an ``idea'' ``lab'' and to create and operate 
businesses that use the interactive communications to satisfy market 
demand for goods and services. Idealab! states that it has operated 
consistently with this business plan by creating, capitalizing and 
operating new interactive communications companies based on internally-
generated ideas and that it plans to create and capitalize more 
Controlled Companies in the future. Idealab! represents that it 
continues to have active involvement in the operation of the Network 
Companies after their early development stage and throughout their life 
cycles. Idealab! further states that it recently expended significant 
financial resources to maintain or increase its controlling positions 
in various Network Companies.
    b. Public Representations of Policy. Idealab! states that it has 
consistently held itself out as being engaged in the business of 
creating and operating interactive communications companies and has 
never referred to itself as an investment company. Idealab! states that 
it describes itself as engaged in the business of identifying, creating 
and operating interactive communications businesses. Idealab! states 
that its previous references to ``incubation'' were intended to connote 
activities of creating and then nurturing interactive communications 
companies and reflect the fact that idealab! brings companies into 
existence. Idealab! states that its use of the term ``incubator'' did 
not mean that idealab! intended to dispose of the Network Companies 
once they progressed beyond the initial development stage. Idealab! 
states that some in the press may have perceived idealab! as a venture 
capital investor. Idealab! asserts that its history of operations and 
business strategy are substantially distinct from that of a venture 
capital pool. Idealab! states that it does not provide capital with a 
view to profit from the sale of securities, but has been building a 
network of interactive communications businesses that idealab! intends 
to control and operate for the long-term. Idealab! states that its 
policy and goal is to be actively involved in operating its Network 
Companies, rather than investing or trading in securities.
    c. Activities of Officers and Directors. Idealab! states that the 
primary activities of its directors and officers are serving idealab!'s 
Network Companies and creating, testing and implementing ideas for new 
interactive communications companies. Idealab! states that 
approximately 85% of the idealab!'s officers' and directors' time is 
currently spent working with existing Network Companies or evaluating 
new company concepts, 12% of their time is allocated to assessing 
potential strategic acquisitions of companies formed by others, and 3% 
of their time is spent on matters relating to idealab!'s subsidiaries 
that manage venture capital funds. Idealab! asserts that its officers' 
and directors' educational and business backgrounds are predominately 
in the fields of computer technology and business management, and only 
four of idealab!'s seventeen senior officers and directors have a 
securities investment background or private equity experience. Idealab! 
states that its senior management hold positions in, and work closely 
with, management teams of the Network Companies. In addition, idealab! 
states that its personnel serve

[[Page 57213]]

and actively participate on the boards of directors of most of the 
Network Companies and all of the Controlled Companies. Idealab!'s 
approximately 200 employees, collectively, spend approximately 60% of 
their time working with the Network Companies, 25% of their time 
evaluating new company concepts, and 15% of their time on information 
systems, accounting and recruitment matters relative to idealab! 
itself.
    d. Nature of Assets. Idealab! states that, as of March 1, 2000, 
idealab!'s Controlled Companies represented 75% of idealab!'s total 
assets on an unconsolidated basis (excluding government securities and 
cash items). Idealab! represents that in the future at least 60% of its 
total assets on an unconsolidated basis (exclusive of Government 
securities and cash items) will consist of securities issued by 
Controlled Companies (``60% Test''). For purposes of determining 
whether the 60% Test has been met, interests in Controlled Companies 
that are not majority-owned subsidiaries of idealab! will only be 
included if they are conducting similar types of businesses within the 
meaning of section 3(b)(2) of the Act.
    e. Sources of Income. Idealab! states that its Network Companies 
are emerging interactive communications businesses that typically 
generate little or no income for idealab! in the form of dividends. 
Idealab! asserts that its activities as an operating company therefore 
are more appropriately analyzed by evaluating idealab!'s proportionate 
share of the revenues of its Controlled Companies as well as idealab!'s 
total revenues. Idealab! states that, for the four quarters ending 
October 31, 1999, idealab!'s revenues attributable to its Controlled 
Companies represented approximately 78% of idealab!'s total 
revenues.\3\ Idealab! states that this figure was derived by comparing 
(i) idealab!'s consolidated revenues, idealab!'s proportionate share of 
the revenues of its Controlled Companies that are not majority-owned, 
and idealab!'s income derived from interests in Controlled Companies to 
(ii) idealab!'s total revenues comprised of the items in (i) as well as 
income derived from sales of interests in non-controlled companies and 
interest income. Idealab! states that in late 1999 it received $193 
million of revenue from the sale of stock of eToys, Inc. (``eToys''), a 
Network Company. Applicant represents that idealab! originally formed 
eToys as a wholly-owned subsidiary in early 1997. Applicant states that 
its equity stake was diluted to below 25% as eToys went through 
successive financing rounds, including an initial public offering in 
May 1999. Applicant represents that it sold part of its interest in 
eToys in late 1999 to address applicant's status under the Act. As a 
result of this disposition, idealab! states that, for the four quarters 
ending January 31, 2000, idealab!'s revenues attributable to its 
Controlled Companies represented approximately 39% of idealab!'s total 
revenues. Idealab! represents that it does not intend to derive a 
significant percentage of its revenues from income derived from sales 
of interests in non-controlled companies in the future.
---------------------------------------------------------------------------

    \3\ Idealab! states that, for purposes of this analysis, 
revenues from idealab!'s majority-owned subsidiaries were 
consolidated, and revenues of other Controlled Companies were 
attributed to idealab! in proportion to idealab!'s interests in the 
Controlled Companies. Idealab! uses the equity method of accounting 
for Controlled Companies that are not majority-owned subsidiaries. 
Idealab! notes that idealab!'s revenues attributable to its 
Controlled Companies would represent approximately 76% of idealab!'s 
total revenues if the revenues of idealab!'s consolidated majority-
owned subsidiaries were attributed to idealab! in proportion to 
idealab!'s interests in the majority-owned subsidiaries.
---------------------------------------------------------------------------

    6. Idealab! thus asserts that it qualifies for an order under 
section 3(b)(2) of the Act.

Temporary Order

    In view of the circumstances set forth in the application, it is 
found that cause has been shown for granting an extension of the 
automatic exemption period provided by section 3(b)(2) upon the filing 
of an application. Accordingly,
    It Is Ordered, under section 3(b)(2) of the Act, that a temporary 
order exempting idealab! from all provisions of the Act until the 
Commission takes final action on the application or, if earlier, until 
October 24, 2000, the first business day following a thirty-day period 
after the automatic exemption, as previously extended, expires is 
hereby granted effective immediately.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24270 Filed 9-20-00; 8:45 am]
BILLING CODE 8010-01-M