Inadvertent Investment Companies (ICA Section 3(b))

Overview

Nothwithstanding ICA Section 3(a)(1)(C), an issuer is not an "investment company" if it is "primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities." See ICA Section 3(b)(1).

The above provision is self-executing; in addition, the SEC has the authority under ICA Section 3(b)(2) to issue an exemptive order from registration to an issuer that fails the ICA Section 3(a)(1) numeric test if the SEC determines that an issuer is, in fact, primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading in securities and, therefore, should not be regarded as an investment company. An issuer seeking such an exemption initially must establish that it is engaged in a non-investment business. If the issuer conducts such a non-investment business, the issuer must then demonstrate that this business is its “primary” business. The leading SEC order is Tonopah Mining Co, although the SEC’s conditions set out in Tonopah were arguably broadened further by the Seventh Circuit decision in SEC v. National Presto Industries. In that order, the SEC stated that its determination of an issuer’s primary business under Section 3(b)(2) would be based on five principal factors: (i) the issuer’s historical development; (ii) its public representations of policy; (iii) the activities of its officers and directors; (iv) the nature of its present assets; and (v) the sources of its present income.

See also the exemption provided by ICA Section 3(b)(3) for certain subsubidiaires of issuers that qualify for the exemptions in paragraphs (1) or (2) of Section 3(b).

See also the topic pages on Transient Investment Companies (ICA Rule 3a-2) and on Research and Development Companies (ICA Rule 3a-8).

For a comprehensive list of exemptions and exclusions from registration available to investment companies, see the topic page on Exemptions from Registration under the Investment Company Act.

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