## Facts

- ICOS Corporation was a privately held biotechnology start-up formed to discover and develop pharmaceuticals, including treatments for chronic inflammatory diseases.
- The company’s principal activities involved long-horizon biomedical research and development, including laboratory work and clinical trials, with little or no early operating revenue.
- To fund operations, ICOS raised capital through equity sales to investors.
- Pending use in its operating business, ICOS invested offering proceeds in high-quality, short-term debt instruments, including a substantial portion in nongovernment securities.
- Based on asset composition, ICOS risked meeting the Investment Company Act’s § 3(a)(1)(C) “40% asset test,” which can trigger investment company status.
- ICOS applied to the SEC under Investment Company Act § 3(b)(1) for an order declaring it was primarily engaged in a non-investment business and therefore not an investment company.

## Issues

1. Whether a research-stage operating company that temporarily holds a large percentage of assets in investment securities while awaiting operational use is “primarily engaged” in a non-investment business under Investment Company Act § 3(b)(1).
2. Whether ICOS’s cash-management investments functionally made it the type of pooled investment vehicle targeted by the Investment Company Act.

## Decision

- The SEC granted ICOS’s application for relief under Investment Company Act § 3(b)(1).
- The SEC determined ICOS was not an investment company because it was primarily engaged in biotechnology research and development, and its securities holdings were incidental to that operating business.
- The SEC treated ICOS’s asset composition as relevant but not determinative in light of the company’s operations, use of proceeds, and overall business purpose.

## Legal Principles

- An issuer that appears to meet the § 3(a)(1)(C) asset-based definition may be excluded from investment company status if the SEC finds under § 3(b)(1) that the issuer is primarily engaged in a business other than investing in securities.
- The § 3(b)(1) analysis is fact-intensive and evaluates the character of the issuer’s enterprise, including operations, management focus, intended use of capital, and public representations to investors.
- Temporary investment of operating-company cash (including offering proceeds) in conservative, short-term instruments for cash management does not by itself convert an operating company into an investment company when the investments support, rather than displace, the operating business.
- Investor expectations and how the company holds itself out are relevant to whether the company functions as an operating company or as a securities investment vehicle.

## Conclusion

The SEC concluded that ICOS’s primary business was pharmaceutical research and development and that its temporary, conservative securities portfolio served cash-management needs; accordingly, the SEC issued an order under § 3(b)(1) excluding ICOS from investment company status despite its asset mix.


In re ICOS Corp., 51 S.E.C. 322 (1993)