Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Rule 3a-8 -- Certain Research and Development Companies

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1. Notwithstanding sections 3(a)(1)(A) and 3(a)(1)(C) of the Act, an issuer will be deemed not to be an investment company if:
   
   
   1. Its research and development expenses, for the last four fiscal quarters combined, are a substantial percentage of its total expense for the same period;
      
      
   2. Its net income derived from investments in securities, for the last four fiscal quarters combined, does not exceed twice the amount of its research and development expenses for the same period;
      
      
   3. Its expenses for investment advisory and management activities, investment research and custody, for the last four fiscal quarters, combined, do not exceed five percent of its total expenses for the same period;
      
      
   4. Its investments in securities are capital preservation investments, except that:
      
      
      1. No more than 10 percent of the issuer's total assets may consist of other investments, or
         
         
      2. No more than 25 percent of the issuer's total assets may consist of other investments, provided that at least 75 percent of such other investments are investments made pursuant to a collaborative research and development arrangement;
         
         
   5. It does not hold itself out as being engaged in the business of investing, reinvesting or trading in securities, and it is not a special situation investment company;
      
      
   6. It is primarily engaged, directly, through majority-owned subsidiaries, or through companies which it controls primarily, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities, as evidenced by:
      
      
      1. The activities of its officers, directors and employees;
         
         
      2. Its public representations of policies;
         
         
      3. Its historical development; and
         
         
      4. An appropriate resolution of its board of directors, which resolution or action has been recorded contemporaneously in its minute books or comparable documents; and
         
         
   7. Its board of directors has adopted a written investment policy with respect to the issuer's capital preservation investments.
      
      
2. For purposes of this section:
   
   
   1. All assets shall be valued in accordance with section 2(a)(41)(A) of the Act;
      
      
   2. The percentages described in this section are determined on an unconsolidated basis, except that the issuer shall consolidate its financial statements with the financial statements of any wholly-owned subsidiaries;
      
      
   3. Board of directors means the issuer's board of directors or an appropriate person or persons performing similar functions for any issuer not having a board of directors;
      
      
   4. Capital preservation investment means an investment that is made to conserve capital and liquidity until the funds are used in the issuer's primary business or businesses;
      
      
   5. Controlled primarily means controlled within the meaning of section 2(a)(9) of the Act with a degree of control that is greater than that of any other person;
      
      
   6. Investment made pursuant to a collaborative research and development arrangement means an investment in an investee made pursuant to a business relationship which:
      
      
      1. Is designed to achieve narrowly focused goals that are directly related to, and an integral part of, the issue's research and development activities;
         
         
      2. Calls for the issuer to conduct joint research and development activities with the investee or a company controlled primarily by, or which controls primarily, the investee; and
         
         
      3. Is not entered into for the purpose of avoiding regulation under the Act;
         
         
   7. Investments in securities means all securities other than securities issued by majority-owned subsidiaries and companies controlled primarily by the issuer that conduct similar types of businesses, through which the issuer is engaged primarily in a business other than that of investing, reinvesting, owning, holding, or trading in securities;
      
      
   8. Other investment means an investment in securities that is not a capital preservation investment; and
      
      
   9. Research and development expenses means research and development expenses as defined in FASB Statement of Financial Accounting Standards No. 2, Accounting for Research and Development Costs, as currently in effect or as it may be subsequently revised.
      
      

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