ICA Section 3(c)(9) of the 40 Act provides that an entity that meets the following criteria is not an “investment company”: an entity “substantially all of whose business consists of owning or holding oil, gas, or other mineral royalties or leases, or fractional interests therein, or certificates of interest or participation in or investment contracts relative to such royalties, leases, or fractional interests.”
To determine whether this exception applies, there are four primary factors to consider:
The SEC has not directly addressed what is required by the “substantially all” standard. However, the SEC staff has granted no-action relief to entities relying on the exception to hold temporary investments (less than one year) in “certificates of deposit or other safe liquid, short-term, fixed-income investments, such as savings and time deposits and three and six month United States Treasury bills, in order to serve the value of those assets pending permanent investment…” McCulloch Oil and Gas Corp., SEC No-Action Letter (July 14, 1979).
The SEC staff has said that the 3(c)(9) exception is available only to entities that own or hold the assets. In a no-action letter to The Energy Group, the staff “emphasize[d]” that the 3(c)(9) exception depended on owning or holding “as opposed to dealing or trading in [the assets].” The Energy Group Inc., SEC No-Action Letter (Dec. 13, 1972). (An entity dealing or trading in the asset could potentially be subject to registration as a broker or dealer.)
Although the statute specifically references royalties and leases, the SEC staff has recognized other assets as acceptable for purposes of Section 3(c)(9). This has included ownership interests in oil and gas properties and working interests in oil and gas leases.
An excepted entity can also engage in related business activities, including acquiring, exploring, developing, drilling, operating oil and gas properties, and holding interests in ventures, partnerships, or corporations engaged in those activities.
In addition to the above assets, the 3(c)(9) exception allows entities to own or hold “certificates of interest or participation in or investment contracts relative to such royalties, leases, or fractional interests.” These so-called two-tier oil and gas companies have been exempted from registration under 3(c)(9) where they hold limited partnership interests and/or similar securities issued by companies that themselves own or hold oil, gas or mineral assets. Section 3(c)(9), however, has not been construed as covering the holding of debt securities related to oil, gas or other mineral royalties or leases.
It is also noted that, unlike the ownership interests in oil and gas properties of the type addressed in II.C above, the inclusion of participation interests and investment contracts indicates that certain “securities” activities are clearly contemplated by the 3(c)(9) exception. In fact, if 3(c)(9) did not capture these instruments, it could be read as more of a “safe harbor” for clarity, given that it is questionable whether the non-investment interests would be “securities” at all, and if they were not, the “investment company’ questions would be moot.
 See, e.g., id.; ConVest Energy Corp., SEC No-Action Letter (Apr. 22, 1985) (acquisition, exploration, development, and operation of oil and gas interests); Prof’l Consultants, Inc., SEC No-Action Letter (Dec. 19, 1980) (oil and gas drilling); Belco Petroleum Corp. Belco 1971 Oil and Gas Fund, Ltd., SEC No-Action Letter (July 15, 1971) (acquiring, drilling, and operating exploratory oil and gas interests in the U.S. and Canada, including drilling, equipping, and operating wells on those properties or contracting with others to do so).
 See, Damson Oil Corp., 2 SEC No-Action Letters (Apr. 18, 1974 and Apr. 11, 1974) (“[W]e do not believe a debt security with conditional royalties of the type proposed can be considered an ‘investment contract relative to’ an oil or gas property within the meaning of Section 3(c)(9) because it is basically a debt instrument with an equity ‘kicker’ of an indeterminate value”).