[Federal Register Volume 64, Number 149 (Wednesday, August 4, 1999)]
[Notices]
[Pages 42421-42423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19950]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23923; 812-11202]
Internet Capital Group, Inc.; Notice of Application
July 28, 1999
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 Internet Capital Group, Inc. (``ICG'') 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 an operating
company engaged in business-to-business electronic commerce.
Filing Dates: The application was filed on June 26, 1998 and
amended on July 26, 1999.
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 August 20, 1999 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, 435 Devon Park Drive,
Building 800, Wayne, PA 19087.
FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Assistant Director,
at (202) 942-0693, Division of Investment Management, Office of
Investment Company Regulation.
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. ICG, a Delaware corporation, was formed in 1996.\1\ ICG's
initial investors were Safeguard Scientifics, Comcast Corporation, and
General Electric Corporation. ICG states that its goal from its
inception has been to become a premier business-to-business electronic
commerce company, primarily engaged in business-to-business electronic
commerce through a network of partner companies (``Partner
Companies''). ICG represents that it is not in the business of
investing, reinvesting or trading in securities.
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\1\ ICG was formed initially as a Delaware limited liability
company.
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2. The Partner Companies fall into two categories: (i) Companies
that bring buyers and sellers together by creating Internet-based
markets for the exchange of goods, services and information, and (ii)
companies that sell software and services to businesses engaged in
electronic commerce. As of June 15, 1999, ICG owned interests in 35
Partner Companies, 3 of which were majority-owned subsidiaries of ICG
and 16 of which were companies in which ICG owned more than 25% of the
outstanding voting securities and thus controlled within the meaning of
section 2(a)(9) of the Act (majority-owned and controlled subsidiaries
of ICG, collectively, ``Controlled Companies'').\2\ ICG states that it
also holds small minority interests in four other companies.
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\2\ 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.
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3. ICG states that many of the Partner Companies currently are
early development stage businesses, in which the entrepreneur seeks to
retain a large ownership stake. ICG further states that it invests in
the Partner Companies for the long term. As ICG builds its network of
companies, ICG expects that it might have a need to sell its interest
in certain companies that no longer fit or contribute to the network.
ICG does not contemplate selling interests in non-controlled companies
in the ordinary course of business. As a general matter, ICG expects
that it will seek to increase its ownership interests in Partner
Companies it considers strategically important to the network.
4. ICG states that it seeks to acquire and build business-to-
business market leaders in electronic commerce and integrate them into
the ICG network of companies. ICG states that its infrastructure
provides a framework for nurturing emerging companies and
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institutionalizing operating practices among the Partner Companies,
resulting in efficiencies and economies of scale. ICG also states that
the network provides an environment of information exchange and
innovation that gives ICG companies a competitive advantage over more
isolated Internet firms. ICG states that the network also provides
breadth in operations, technology and experience within a narrowly
defined but fast growing industrial segment. In addition, ICG states
that the network enables information and resources to be rapidly
allocated and reallocated among the participating companies with ICG
acting as the ``parent'' or hub or the network.
Applicant's Legal Analysis
1. ICG 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 sections 3(c)(1) or 3(c)(7) of the Act.
3. ICG states that approximately 96% of its assets consists of
investment securities as defined in section 3(a)(2). Accordingly, ICG
may be deemed an investment company within the meaning of section
3(a)(1)(C) of the Act.\3\ ICG asserts that, as of June 15, 1999, 90% of
its total assets was comprised of interests in majority-owned
subsidiaries and companies primarily controlled by ICG 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. ICG states that it is currently
unable to rely on rule 3a-1 because of the net income generated from
the sale of two minority interests in 1998.
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\3\ ICG currently is relying on rule 3a-2 under the Act. Rule
3a-2 provides a temporary exemption from the Act for companies with
``a bona fide intent to be primarily engaged * * * within a year in
a business other than that of investing, reinvesting, owning,
holding or trading in securities.''
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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. ICG states that it
meets the requirements of section 3(b)(2) because it is primarily
engaged in business-to-business electronic commerce through its
Controlled Companies.
5. In determining whether applicant is ``primarily engaged'' in a
non-investment company business under section 3(b)(2), the Commission
considers the following factors: (i) Applicants'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.\4\
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\4\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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a. Historical Development. ICG states that since its inception in
1996, it has considered itself to be an operating company engaged in
business-to-business electronic commerce. ICG states that its business
strategy has not changed since 1996, but has become more refined and
focused, and that ICG has taken increasingly larger stakes in Partner
Companies that ICG believes to be of strategic importance to its
network of business-to-business electronic commerce companies.
b. Public Representations of Policy. ICG states that it has
consistently held itself out as being engaged in the Internet business
and not in the investment company business. ICG states that it
describes itself as an operating company that holds interests in a
group of Internet-related companies and actively participates in the
management of those companies. ICG states that, as part of promoting
its business operations in building the network, ICG intends, among
other things, to pursue a strategy of ``branding'' its Partner
Companies.
c. Activities of Officers and Directors. ICG states that it has
three levels of operations: internal operations, Partner Company
operations, and acquisitions. ICG states that approximately 27% of the
ICG's officers' and employees' time (excluding administrative staff) is
currently being allocated to internal operations, 56% to Partner
Company operations, and 17% to acquisitions. ICG asserts that its
officers have extensive experience in the information technology and
Internet industries and are active board members for the Partner
Companies. Twenty two of ICG's 25 full-time employees devote the
majority of their time to issues involving the integration and
management of ICG's Network Companies and ICG's operations. ICG has
senior management dedicated exclusively to providing operational
support and services to the Partner Companies in the areas of human
resources, legal, finance, information technology, sales and marketing.
ICG also possesses an advisory board composed of leading information
technology executives who are actively involved in the affairs of ICG's
Partner Companies.
d. Nature of Assets. ICG states that, as of June 15, 1999, ICG's
three majority-owned subsidiaries represented 4.7%, and the other 16
controlled subsidiaries represented 90%, of ICG's total assets on an
unconsolidated basis. ICG states that the rest of its assets was
invested in Partner Companies in which ICG had an interest of below 25%
and small minority interests in other companies. ICG represents that at
least 60% of its total assets on an unconsolidated basis (exclusive of
Government securities and cash items) will continue to be invested in
Partner Companies that ICG controls within the meaning of the Act.
e. Sources of Income. ICG states that its Partner Companies are
emerging Internet businesses that typically generate little or no
income for ICG in the form of dividends. ICG also states that it may
generate net income from time to time as a result of sales or
dispositions of assets. ICG asserts that its activities as an operating
company therefore are more appropriately analyzed by evaluating ICG's
proportionate share of the revenues of its Controlled Companies as well
as ICG's total revenues. ICG states that, for the 12 month period
ending March 31, 1999, ICG's revenues attributable to its Controlled
Companies represented approximately 68% of ICG's total revenues.\5\ ICG
states that this figure
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was derived by comparing (i) ICG's consolidated revenues, ICG's
proportionate share of the revenues of its Controlled Companies, and
ICG's income derived from interests in Controlled Companies to (ii)
ICG'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. ICG represents that it does not intend to derive a
significant percentage of its revenues from income derived from sales
of interest in non-controlled companies.
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\5\ ICG states that, for purposes of this analysis, revenues
from ICG's majority-owned subsidiaries were consolidated, and
revenues of other Controlled Companies were attributed to ICG in
proportion to ICG's interests in the Controlled Companies. ICG uses
the equity method of accounting for these Controlled Companies,
which under Generally Accepted Accounting Principles means that the
Companies' income or losses, but not revenues, are attributed to ICG
based on its ownership interests in the Companies. ICG notes that
ICG's revenues attributable to its Controlled Companies would
represent approximately 66% of ICG's total revenues if the revenues
of ICG's consolidated majority-owned subsidiaries were attributed to
ICG in proportion to ICG's interests in the majority-owned
subsidiaries.
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6. ICG thus asserts that it satisfies the standards for an order
under section 3(b)(2) of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19950 Filed 8-3-99; 8:45 am]
BILLING CODE 8010-01-M