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[Federal Register Volume 89, Number 225 (Thursday, November 21, 2024)]
[Notices]
[Pages 92226-92228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27158]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 35387; File No. 812-15188]

Zscaler, Inc.

November 15, 2024.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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    Notice of application for an order under Section 3(b)(2) of the 
Investment Company Act of 1940 (``Act'').

Applicant:  Zscaler, Inc.

Summary of Application:  Applicant 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 states that it is in the business of providing, 
improving, and developing cloud security solutions to businesses.

Filing Dates:  The application was filed on December 28, 2020, and 
amended on May 11, 2021, July 28, 2021, January 6, 2022, July 31, 2023, 
and September 13, 2024.

Hearing or Notification of Hearing:  An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by emailing the Commission's 
Secretary at [email protected] and serving applicants with a 
copy of the request, by email if an email address is listed for the 
relevant Applicant below, or personally or by mail, if a physical 
address is listed for the relevant Applicant below. Hearing requests 
should be received by the Commission by 5:30 p.m. on December 10, 2024, 
and should be accompanied by proof of service on the applicants, in the 
form of an affidavit, or for lawyers, a certificate of service. 
Pursuant to rule 0-5 under the Act, hearing requests should state the 
nature of the writer's interest, any facts bearing upon the 
desirability of a hearing on the matter, the reason for the request, 
and the issues contested. Persons who wish to be notified of a hearing 
may request notification by emailing the Commission's Secretary at 
[email protected].

ADDRESSES: The Commission: [email protected]. Applicant: Remo 
Canessa, Chief Financial Officer, and Robert Schlossman, Esq., Chief 
Legal Officer, Zscaler, Inc., at [email protected]; Kevin R. 
Bettsteller, Esq., at [email protected].

FOR FURTHER INFORMATION CONTACT: Adam Lovell, Senior Counsel, or Terri 
G. Jordan, Branch Chief, at (202) 551-6825 (Division of Investment 
Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. For Applicant's representations, legal analysis, and 
conditions, please refer to Applicant's fifth amended and restated 
application, dated September 13, 2024, which may be obtained via the 
Commission's website by searching for the file number at the top of 
this document, or for an Applicant using the Company name search field, 
on the SEC's EDGAR system. The SEC's EDGAR system may be searched at 
https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html. You 
may also call the SEC's Public Reference Room at (202) 551-8090.

Applicant's Representations

    1. Applicant states that it is a Delaware corporation formed in 
2007 that, directly and through its wholly-owned subsidiaries,\1\ is 
engaged in the business of providing, improving, and developing cloud 
security solutions to businesses.
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    \1\ Applicant states that its 28 wholly-owned subsidiaries 
generally engage in sales and marketing or research and development 
(``R&D'') activities in their respective jurisdictions.
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    2. Applicant states that its business is highly capital intensive, 
requires R&D of new technologies, and does not involve the Applicant 
acquiring or retaining significant ``hard'' operating assets. Applicant 
states that it maintains significant cash reserves that it seeks to 
invest for purposes of conserving capital and providing liquidity until 
the funds are used in its cloud-based services and technology business. 
As described more fully in the application, Applicant states that it 
requires significant liquid capital primarily to: (i) fund R&D for new 
products and services, (ii) advance the commercialization of its 
business, (iii) otherwise fund its operations, and (iv) make other 
capital expenditures in keeping with the growth of the

[[Page 92227]]

Applicant's cloud-based services and technology business.
    3. Applicant states that it has financed operations primarily 
through offerings of its debt and equity securities, but ultimately 
seeks to generate cash from its operations to support its business. 
Applicant states that it seeks to preserve capital and maintain 
liquidity, pending the use of such capital for its operations, by 
investing in ``Capital Preservation Instruments.'' \2\ Applicant states 
that it may in the future make strategic investments in ``other 
investments'' consistent with Rule 3a-8. Applicant states that such 
securities will not be acquired for speculative purposes.
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    \2\ As used in Applicant's application, Capital Preservation 
Instruments refers collectively to any cash items and securities 
that are held for the purpose of conserving Applicant's capital and 
liquidity until they are used by Applicant to support its business 
(as such business is described in Applicant's application). Such 
holdings are liquid (i.e., can be readily sold), earn competitive 
market returns and present a low level of credit risk, including 
short-term investment grade securities, Government securities (as 
defined in Section 2(a)(16) of the Act), securities of money-market 
funds registered under the Act, and other cash items; but excluding 
investments in equity or speculative instruments.
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Applicant's Legal Analysis

    1. Applicant seeks 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 is not an investment company as defined in the Act.
    2. Section 3(a)(1)(A) of the Act defines the term ``investment 
company'' to include an issuer that is or holds itself out as being 
engaged primarily, or proposes to engage primarily, in the business of 
investing, reinvesting or trading in securities. Section 3(a)(l)(C) of 
the Act further defines an investment company as an issuer that 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. Section 3(a)(2) 
of the Act defines ``investment securities'' to include all securities 
except Government securities, securities issued by employees' 
securities companies, and securities issued by majority-owned 
subsidiaries of the owner which (a) are not investment companies and 
(b) are not relying on the exclusions from the definition of investment 
company in Section 3(c)(1) or Section 3(c)(7) of the Act. Applicant 
states that it has never been, is not now, and does not propose to be, 
primarily engaged in the business of investing, reinvesting, owning, 
holding, or trading in securities. The Applicant states that it 
currently holds investment securities amounting to less than 40% of its 
total assets (exclusive of Government securities and cash items), but 
that its need for liquid capital to conduct its business means that it, 
in part, makes investments in certain securities exceeding 40% of the 
Company's total assets (exclusive of Government securities and cash 
items) on an unconsolidated basis. Applicant states that it therefore 
may be an ``investment company'' pursuant to Section 3(a)(l)(C) of the 
Act absent an exclusion or exemption.
    3. Rule 3a-8 under the Act provides an exclusion from the 
definition of investment company if, among other factors, a company's 
R&D expenses are a substantial percentage of its total expenses for the 
last four fiscal quarters combined. While Applicant states that it 
believes that it complies with the conditions of Rule 3a-8, Applicant 
states that it has concerns over (a) whether compliance is practical in 
light of changes to the Company's overall expenses in connection with 
the increase of customer subscriptions and support services, and (b) 
whether R&D expenses, while substantial in absolute terms, may not 
always be considered substantial as a ratio of overall expenses. 
Although Applicant states that it anticipates R&D expenses to increase 
in absolute terms, such expenses are not anticipated to increase 
proportionately with Applicant's overall expenses, particularly given 
increases in expenses related to sales and marketing, the 
administration of a rapidly expanding employee base, and other 
administrative expenses. Applicant states that its R&D expenses have 
fluctuated between 21% and 25% of total expenses over the past six 
years, and Applicant expects R&D expenses to decrease relative to total 
expenses over time.
    4. Section 3(b)(2) of the Act provides that, notwithstanding 
Section 3(a)(l)(C) of the Act, 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 directly, through majority-owned subsidiaries, or controlled 
companies conducting similar types of businesses. Applicant 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 is not an 
investment company as defined in the Act.
    5. In determining whether an issuer is ``primarily engaged'' in a 
non-investment company business under Section 3(b)(2) of the Act, the 
Commission considers the following factors: (a) the company's 
historical development, (b) its public representations of policy, (c) 
the activities of its officers and directors, (d) the nature of its 
present assets, and (e) the sources of its present income.\3\
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    \3\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    6. Applicant submits that it satisfies the criteria for issuance of 
an order under Section 3(b)(2) of the Act because Applicant is 
primarily engaged in the business of providing, improving, and 
developing cloud security solutions to businesses and is not in the 
business of investing, reinvesting, owning, holding or trading in 
securities.
    a. Historical Development. Applicant states that, since its 
inception in 2007, Applicant has actively engaged in the business of 
developing and providing cloud-based information security solutions. 
Applicant's business has focused on the development of new such 
products.
    b. Public Representations of Policy. Applicant states that it has 
consistently represented that it is engaged in the business of 
providing a cloud-based suite of information security solutions. 
Applicant further states that it has never held and does not now hold 
itself out as an investment company within the meaning of the Act or as 
engaging in the business of investing, reinvesting, owning, holding, or 
trading in securities. Applicant submits that its public 
representations make clear that shareholders invest in the Applicant's 
securities with the expectation of realizing gains from Applicant's 
development and sale of its suite of cloud security solutions and not 
from returns on an investment portfolio.
    c. Activities of Officers and Directors. Applicant represents that 
its officers and directors spend substantially all of their time 
overseeing the Applicant's business of providing its cloud platform to 
customers. Applicant states that its cash management activities are 
managed internally by its Chief Financial Officer and externally by an 
investment manager, whose activities are supervised by the Chief 
Financial Officer. Applicant states that none of its executive 
officers, other than the Chief Financial Officer, spend time monitoring 
cash balances and managing short-term investment securities. In 
addition, of the Applicant's 6,342 employees (as of October 31, 2023), 
Applicant states that fewer than five

[[Page 92228]]

employees spend time on matters relating to the management of 
Applicant's investment securities. Applicant states that none of its 
officers, directors or employees spends or proposes to spend of his or 
her time to the management of Capital Preservation Instruments on 
behalf of Applicant.
    d. Nature of Assets. Applicant states that, as of October 31, 2023, 
Applicant's investment securities constituted approximately 30.1% of 
its total assets (excluding Government securities and cash items) on an 
unconsolidated basis.\4\ Furthermore, Applicant states that as of 
October 31, 2023, 100% of its investment securities consist of Capital 
Preservation Instruments. Applicant states that it uses its Capital 
Preservation Instruments to finance its continued operations in 
connection with the development of the Company's software. Applicant 
states that it may in the future make strategic investments in ``other 
investments'' consistent with Rule 3a-8. Applicant states, however, 
that no more than 10% of its total assets (exclusive of Government 
securities and cash items, including securities issued by money market 
funds registered under the Act) will consist of investment securities 
other than Capital Preservation Instruments.\5\ Applicant states that 
it uses current assets, including its Capital Preservation Instruments, 
to finance its continued R&D program and operations in connection with 
the development of the Applicant's software.
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    \4\ Applicant states that one of its subsidiaries holds 
investment securities.
    \5\ Applicant states that it intends to calculate this 
percentage by consolidating its financial statements with the 
financial statements of its wholly-owned subsidiaries (but not with 
any majority-owned subsidiaries that may be acquired in the future).
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    e. Sources of Income and Revenue. Applicant represents that since 
its inception it has carried net operating losses. Applicant states 
that it does, however, derive income from its investment securities. 
Applicant states that a review of its current source of revenues 
provides a more accurate review of its operating company status, 
particularly, given the upward trend in recognizing substantially 
increased revenues due to sales of new subscriptions. Applicant states 
that it recognizes substantially all of its revenues from fees based on 
subscriptions and support. Applicant states that its revenues for the 
fiscal years ended July 31, 2020, 2021, 2022, and 2023 were $431.3 
million, $673.1 million, $1,090.9 million, and $1,671 million, 
respectively, on an unconsolidated basis. By contrast, Applicant states 
that its net investment income in its fiscal years of 2021, 2022, and 
2023 was $2.8 million, $4.6 million, and $60.5 million, respectively. 
Applicant states that all such income was derived from Capital 
Preservation Instruments.\6\ Applicant states that if net investment 
income were compared to its revenue, it would be less than 4% of 
revenue for the fiscal year ended July 31, 2023, and equal to less than 
0.5% of revenue for the fiscal year ended July 31, 2022.
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    \6\ Applicant states that is has not, and does not expect to, 
earn investment income from strategic investments.
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    For the fiscal three months ended October 31, 2023, Applicant 
states that it earned $25.9 million of net investment income, an 
increase compared to $7.9 million for the first three months ended 
October 31, 2022. Applicant states that this nonetheless represents 
less than 5.5% of revenue for the three months ended October 31, 2023. 
Applicant states that the increase in net investment income is due to 
the increase in interest rates in the fixed income markets.
    7. Applicant asserts that its historical development, its public 
representations of policy, the activities of its officers and 
directors, the nature of its assets and its sources of revenue and 
income, as discussed in the application, demonstrate that it is engaged 
primarily in a business other than that of investing, reinvesting, 
owning, holding or trading securities. Applicant thus asserts that it 
satisfies the criteria for issuing an order under Section 3(b)(2) of 
the Act.

Applicant's Conditions

    Applicant agrees that an order granted pursuant to the application 
will be subject to the following conditions:
    1. Applicant will continue to use its accumulated cash and 
securities to support its primary business (as such business is 
described in this Application);
    2. Applicant will refrain from investing or trading in securities 
for speculative purposes; and
    3. No more than 10% of Applicant's total assets will consist of 
investment securities other than Capital Preservation Instruments (as 
such capitalized term is defined in Applicant's application). For 
purposes of this condition, total assets excludes cash items (including 
securities issued by money market funds registered under the Act) and 
Government securities (as defined in Section 2(a)(16) of the Act). This 
percentage is to be determined on an unconsolidated basis, except that 
Applicant should consolidate its financial statements with the 
financial statements of any wholly-owned subsidiaries.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-27158 Filed 11-20-24; 8:45 am]
BILLING CODE 8011-01-P
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