[Federal Register Volume 83, Number 183 (Thursday, September 20, 2018)]
[Notices]
[Pages 47657-47659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20408]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33228; File No. 812-14875]


Exact Sciences Corporation

September 14, 2018.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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    Notice of application for an order under Section 3(b)(2) of the 
Investment Company Act of 1940 (``Act'').
    Applicant: Exact Sciences Corporation.
    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 is in the business of producing and developing 
screening and diagnostic tests for the early detection and prevention 
of certain cancers.
    Filing Dates: The application was filed on January 30, 2018 and 
amended on June 1, 2018, July 6, 2018 and August 24, 2018.
    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 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 10, 2018 and should be accompanied by proof of 
service on 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 who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090. Applicant, 441 Charmany Drive, Madison, 
Wisconsin 53719.

FOR FURTHER INFORMATION CONTACT: Rochelle Kauffman Plesset, Senior 
Counsel, at (202) 551-6840, or Nadya B. Roytblat, Assistant Chief 
Counsel, at (202) 551-6825 (Division of Investment Management, Chief 
Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website by searching for the file number, or applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicant's Representations

    1. Formed in 1995, Applicant is a Delaware corporation that is in 
the business of developing, clinical testing, marketing and 
commercializing cancer and pre-cancer screening and diagnostic tests. 
Applicant currently manufactures a non-invasive, patient-friendly 
screening test called Cologuard and provides it to patients on a 
prescription-only basis through its clinical laboratory. Applicant is 
also currently working on the development of additional tests for other 
types of cancers.
    2. Applicant states that companies in the heathcare sector such as 
itself generally need significant liquid capital to finance their 
operations and meet high production, commercialization and regulatory 
costs. Such companies often spend a significant proportion of their 
revenues on research and development (``R&D'') in order to bring a 
product to market and to bring products through the Food and Drug 
Administration's (``FDA'') approval process.
    3. Applicant states that it currently depends on raised capital to 
finance operations and continued growth but ultimately seeks to 
generate cash from its operations to support its business. Applicant 
states that it has successfully raised capital to finance its 
operations and commercialization of Cologuard in large part through 
various public offerings of its debt and equity securities. Applicant 
seeks to preserve its capital and maintain liquidity, pending the use 
of such capital to support its business operations, by investing in 
short-term investment grade and liquid fixed income and money market 
instruments that earn competitive market returns and provide a low 
level of credit risk (``Capital Preservation Investments''). Applicant 
also, to a limited extent, makes strategic investments in companies 
that are complementary to its core business. Applicant's board of 
directors oversees Applicant's investment practices and defines the 
parameters for investment activities. Applicant does not invest in 
securities for short-term speculative purposes.

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)(l)(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. While 
Applicant states that it does not hold itself out as being engaged 
primarily in the business of investing, reinvesting or trading in 
securities, Applicant states that it consistently holds investment 
securities that exceed 40% of its total assets on an unconsolidated 
basis (exclusive of Government securities and cash items). Applicant 
states that it therefore falls within the definition of investment 
company under Section 3(a)(l)(C) of the Act.
    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 believes that it 
complies with the conditions of Rule 3a-8, Applicant is concerned that 
its R&D expenses, while substantial in absolute terms, may not be 
substantial as a ratio of overall expenses, particularly given the 
expense increase in connection with the commercialization of Cologuard. 
Applicant's R&D expenses as a ratio of

[[Page 47658]]

total expenses have declined from a high of 74% of total expenses in 
2012 to approximately 11% of total expenses for year-end 2017 and 12% 
as of March 31, 2018. Applicant explains that since the FDA's approval 
of Cologuard, Applicant has devoted more resources to sales and 
marketing. Although Applicant's R&D expenses have generally increased 
or remained steady overtime, its overall expenses have 
disproportionately increased, causing a decline in the ratio of R&D 
expenses to overall expenses. While Applicant expects to increase 
funding for R&D for other products, it also expects to increase funding 
with respect to the commercialization of Cologuard. Thus, Applicant 
does not expect its additional funding for R&D to cause a significant 
increase in the ratio of R&D funding to overall expenses.
    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.\1\
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    \1\ 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 developing, testing, marketing and 
commercializing cancer and pre-cancer diagnostic screening tests and 
not in the business of investing, reinvesting, owning, holding or 
trading in securities.
    a. Historical Development. Applicant states that since its 
inception in 1995 it has operated in the healthcare sector to develop 
and commercialize cancer and pre-cancer screening and diagnostic tests. 
Applicant has focused its strategic opportunities in developing a 
screening test for colorectal cancer, culminating in the development of 
Cologuard, which received FDA approval in 2014. Since 2014, Applicant 
has been engaged in sales and marketing Cologuard and has begun 
research and development on testing related to other types of cancers. 
Applicant has nine wholly-owned subsidiaries, each of which is an 
operating company integrally related to Applicant's business. Applicant 
has never sold any of its subsidiaries since inception.
    b. Public Representations of Policy. Applicant states it has never 
made any public representations that would indicate that it is in any 
business other than developing and commercializing cancer screening 
technologies. Applicant represents that it has never held and does not 
now hold itself out as an investment company within the meaning of the 
Act. Applicant states that all annual reports, web postings, press 
releases and written communications issued by Applicant have related to 
its business as a cancer screening and diagnostics company. Applicant 
further states 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 commercialization 
of cancer-screening and diagnostic technologies and not from returns on 
an investment portfolio. Applicant's only public representations 
regarding its investment securities are those required to be disclosed 
in public filings with the Commission.
    c. Activities of Officers and Directors. Applicant represents that 
its board of directors and officers devote substantially all of their 
time managing Applicant's business as a cancer screening and 
diagnostics company. Applicant states that its management and corporate 
governance structure is comprised of professionals with expertise in 
technology, science, medicine, life science/biotechnology, and 
government. Applicant states that day-to-day management of the Capital 
Preservation Investments is handled by external asset managers 
consistent with investment guidelines adopted by the Applicant's board 
of directors on an annual basis. Applicant states that while the board 
of directors may review strategic investments in companies that are 
complementary to the Applicant's business, these reviews are made for 
long-term business, not speculative investment strategies. None of the 
members of management or the board of directors, even when reviewing 
strategic investments, spends or proposes to spend more than 1% of his 
or her time on any securities investment activities on behalf of the 
Applicant. They, along with the Applicant's approximately 1,268 full-
time employees, are dedicated to the production and commercialization 
of Cologuard and the development of new cancer screening and diagnostic 
products.
    d. Nature of Assets. Applicant states that as of March 31, 2018, 
Applicant's investment securities constituted approximately 79% of its 
total assets (excluding Government securities and cash items) on an 
unconsolidated basis.\2\ Furthermore, more than 99% of its investment 
securities consisted of Capital Preservation Investments. Applicant's 
remaining investment securities consist of a strategic investment in a 
company whose business is complementary to the Applicant's business. 
Applicant anticipates that its investment securities other than Capital 
Preservation Investments will not exceed 10% of its total 
unconsolidated assets (excluding Government securities and cash items) 
in the future. Applicant uses current assets, including its Capital 
Preservation Investments, to finance its continued R&D program and 
operations in connection with the commercialization of Cologuard.
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    \2\ Applicant states that none of its subsidiaries owns 
investment securities.
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    e. Sources of Income and Revenue. Applicant represents that since 
its inception it has had net operating losses. It does, however, derive 
income from its investment securities.
    Applicant states that, particularly given its commercialization of 
Cologuard, a review of its current sources of revenues provides a more 
accurate picture of its operating company status. Applicant states 
that, for the year ended December 31, 2017, Applicant had approximately 
$266 million of revenues attributable to Cologuard. For the three 
months ended March 31, 2018, Cologuard revenues were approximately 
$90.3 million. In contrast, Applicant earned $3.9 million in net 
investment income in 2017, and $3.7 million for the three months ended 
March 31, 2018, all derived from Capital Preservation Investments.\3\ 
Applicant states that if investment income were compared to its 
revenues from Cologuard, it would account for less than 2%. Applicant 
states it does not expect its net investment income to exceed 2% of its 
revenues over the long term.
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    \3\ Applicant states that it has not, and does not expect to, 
earn investment income from its strategic investment.

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[[Page 47659]]

    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 income and 
revenue, 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 any order granted pursuant to the application 
will be subject to the following conditions:
    1. Applicant will continue to allocate and use its accumulated cash 
and investment securities for bona fide business purposes; and
    2. Applicant will refrain from investing or trading in securities 
for short-term speculative purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-20408 Filed 9-19-18; 8:45 am]
 BILLING CODE 8011-01-P