## Facts

- Yahoo! Inc. operated a global internet media business providing branded media, commerce, and communication services.
- Yahoo! filed an application (Feb. 11, 2000; amended Apr. 5 and May 16, 2000) for an order under Investment Company Act § 3(b)(2) declaring it primarily engaged in a non-investment business.
- A large equity interest in Yahoo! Japan (about 34%) accounted for more than 40% of Yahoo!’s total unconsolidated assets (excluding cash and government securities), potentially implicating the 40% asset test in § 3(a)(1)(C).
- Yahoo! represented that short-term investments were held mainly for cash management, not for trading profits.
- Yahoo! represented that other equity positions were small, noncontrolling “strategic investments” intended to support business relationships rather than investment gains; together with cash-management investments, these positions were less than 15% of total assets.
- Yahoo! represented that more than 90% of unconsolidated assets (excluding cash and government securities) consisted of operating assets, subsidiaries, and the Yahoo! Japan interest, which it characterized as tied to its operating business.
- Yahoo! represented that operating income predominated over investment income, that it held itself out as an operating internet company, and that management devoted minimal time to investment activities.
- The SEC issued a temporary § 3(b)(2) order (Apr. 5, 2000) exempting Yahoo! from the Act’s provisions for a limited period.
- This release (May 18, 2000) provided notice of the application, invited hearing requests and comments by a specified date, and stated that an order would issue absent a hearing order.

## Issues

1. Whether Yahoo! should be declared under Investment Company Act § 3(b)(2) to be primarily engaged in a business other than investing in securities, notwithstanding securities holdings (including the Yahoo! Japan stake) that could trigger § 3(a)(1)(C)’s 40% asset test.

## Decision

- The SEC issued notice of the application and opened a period for requests for hearing and public comment.
- The matter later resulted in an SEC order granting the requested § 3(b)(2) declaration that Yahoo! was primarily engaged in a non-investment business, subject to conditions stated in the application.

## Legal Principles

- Under § 3(a)(1)(C), an issuer may be treated as an investment company when investment securities exceed 40% of total assets (excluding cash and government securities).
- Under § 3(b)(2), the SEC may declare an issuer not to be an investment company if it is primarily engaged in a business other than investing in securities.
- In evaluating “primarily engaged” under § 3(b)(2), relevant considerations include asset composition, sources of income, public representations, and management’s activities.
- Securities positions characterized as incidental, cash-management, or strategically connected to operating activities may carry less weight than a diversified, return-driven investment portfolio when assessing investment-company status.

## Conclusion

The SEC’s notice described Yahoo!’s operating business and securities holdings and solicited comments on its request for § 3(b)(2) relief; the proceeding culminated in an order declaring Yahoo! primarily engaged in an operating internet business rather than investing in securities, despite a significant strategic equity stake that otherwise risked meeting the 40% asset test.


Yahoo! Inc., Investment Company Act Release No. 24459 (May 18, 2000)