Confluent, Inc.

Primary source

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Published

March 10, 2023

Issuing agencies

Securities and Exchange Commission

Full Text

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<title>Federal Register, Volume 88 Issue 47 (Friday, March 10, 2023)</title>
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[Federal Register Volume 88, Number 47 (Friday, March 10, 2023)]
[Notices]
[Pages 15109-15111]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-04867]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 34848; File No. 812-15437]

Confluent, Inc.

March 6, 2023.
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: Confluent, 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 to
its customers a data infrastructure platform focused on developing and
supporting technology designed to enable real-time data, from multiple
sources, to constantly stream across an organization.

Filing Dates: The application was filed on February 13, 2023 and
amended on March 2, 2023.

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 <a href="/cdn-cgi/l/email-protection#b6e5d3d5c4d3c2d7c4cfc59bf9d0d0dfd5d3f6c5d3d598d1d9c0">[email&#160;protected]</a> 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 March 31, 2023,
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
<a href="/cdn-cgi/l/email-protection#ca99afa9b8afbeabb8b3b9e785acaca3a9af8ab9afa9e4ada5bc">[email&#160;protected]</a>.

ADDRESSES: The Commission: <a href="/cdn-cgi/l/email-protection#dc8fb9bfaeb9a8bdaea5aff193babab5bfb99cafb9bff2bbb3aa">[email&#160;protected]</a>. Applicant:
Steffan Tomlinson, Chief Financial Officer, and Melanie Vinson, Chief
Legal Officer, Confluent Inc., at <a href="/cdn-cgi/l/email-protection#c1ada4a6a0ad81a2aeafa7adb4a4afb5efa8ae">[email&#160;protected]</a>; Amy Caiazza, at
<a href="/cdn-cgi/l/email-protection#137270727a7269697253646074613d707c7e">[email&#160;protected]</a>.

FOR FURTHER INFORMATION CONTACT: Rochelle Kauffman Plesset, Senior
Counsel or Terri 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 first amended and restated
application, dated March 2, 2023, 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
<a href="https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html">https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html</a>. 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
2014 that, directly and through its wholly-owned subsidiaries,\1\ is
engaged in the

[[Page 15110]]

business of providing to its customers a data infrastructure platform
focused on developing and supporting technology designed to enable
real-time data, from multiple sources, to constantly stream across an
organization. Applicant also states that it offers professional
services and educational services in support of its products.
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\1\ Applicant states that these subsidiaries conduct businesses
that are integrally related to the Applicant's business, such as
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 data infrastructure business. As described
more fully in the application, Applicant states that it requires
significant liquid capital primarily to: (i) advance the
commercialization of its products, (ii) make other capital expenditures
in keeping with the growth of the Company's operating business, and
(iii) fund R&D for new products and services.
3. Applicant states that it has financed operations primarily
through offerings of equity and debt 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 business 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 refer collectively to any cash items and securities that
are held for the purpose of conserving the Applicant's capital and
liquidity until they are used by the 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)(1)(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. Applicant states, however, that
during fiscal years 2019 and 2020 it held investment securities that
exceeded 40% of its total assets on an unconsolidated basis (exclusive
of government securities and cash items). Applicant states that during
this time period it may have met the definition of ``investment
company'' pursuant to Section 3(a)(1)(C) of the Act. Applicant states
that it has more recently limited its holdings of investment securities
to avoid meeting Section 3(a)(1)(C) but states that doing so on a
continuous basis may hinder its business over the long term.
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 believes that it
complies with the conditions of Rule 3a-8, Applicant states that it is
concerned that its 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
as a percentage of total expenses was 22.26% for the twelve months
ended December 31, 2021, and Applicant expects the percentage relative
to total expenses to decrease over time.
4. Section 3(b)(2) of the Act provides that, notwithstanding
Section 3(a)(1)(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 data infrastructure
services, 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 2014, Applicant has operated in the software and
technology sector to develop comprehensive, scalable data
infrastructure services for business use. Applicant states that in
March 2021, the number of its customers surpassed 2,500.
b. Public Representations of Policy. Applicant states that it has
consistently represented that it is engaged in the business of
providing data infrastructure services. 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 explains that in its annual reports, prospectuses, Commission
filings, press releases,

[[Page 15111]]

marketing materials, and on its investor website, Applicant's public
representations consistently state its mission of pioneering a
fundamentally new category of data infrastructure focused on data in
motion. 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
data infrastructure services, and not from returns on an investment
portfolio. Applicant states that its only public representations
regarding its investment securities are those required to be disclosed
in public filings with the Commission.
c. Activities of Officers and Directors. Applicant represents that
its officers and directors spend substantially all of their time
managing the Applicant's data infrastructure services business.
Applicant states that its cash management activities are managed
internally by its Chief Financial Officer and externally by three
investment managers, whose activities are supervised by the Chief
Financial Officer. In addition, of the Applicant's approximately 2,601
employees (as of September 30, 2022), Applicant states that only two
employees spend time on matters relating to the management of its
Capital Preservation Instruments. Applicant states that none of its
officers, directors, or employees devote or proposes to devote more
than 1% of his or her time, if even that, to management of Capital
Preservation Instruments on behalf of the Applicant.
d. Nature of Assets. Applicant states that, as of September 30,
2022, Applicant's investment securities constituted approximately 32%
its total assets (excluding Government securities and cash items) on an
unconsolidated basis.\4\ Furthermore, Applicant states that 100% of its
investment securities consist of Capital Preservation Instruments.
Applicant uses its Capital Preservation Instruments to finance its
continued operations. Applicant states that it needs the ability to
invest more than 40% of the total value of its assets (exclusive of
Government securities and cash items) on an unconsolidated basis in
Capital Preservation Instruments to ensure that funds are managed and
available to accommodate future growth of the business and general
corporate purposes. In addition, 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 of money market funds registered under the Act)
will consist of investment securities other than Capital Preservation
Instruments.\5\
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\4\ Applicant states that none of its subsidiaries hold any
investment securities.
\5\ Applicant states that it intends to calculate this
percentage by consolidating its financial statement with the
financial statements of its wholly-owned subsidiaries (but not with
any majority-owned subsidiary 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 derives substantially all of its revenue from subscriptions
and, to a lesser extent, services. Applicant states that its revenues
for the years ended December 31, 2020 and 2021 were $233.6 million and
$387.5 million respectively, on an unconsolidated basis. By contrast,
Applicant states that it earned $0.8 million in net investment income
in 2021 and $2.8 million in 2020. Applicant states that all such income
was derived from Capital Preservation Instruments. Applicant states
that if net investment income were compared to its revenue, it would be
equal to approximately 0.2% of revenue for the fiscal year ended
December 31, 2021 and to approximately 1.2% of revenue for the fiscal
year ended December 31, 2020.
For the fiscal nine months ended September 30, 2022, Applicant
earned $9.6 million of net investment income, representing
approximately 2.3% of revenue for that time period. Applicant explains
that the increase in net investment income is due to the deployment
into Capital Preservation Instruments of the proceeds of its June 2021
initial public offering and December 2021 convertible debt issuance and
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 income and
revenue, 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 any 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 Applicant's 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 described 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.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-04867 Filed 3-9-23; 8:45 am]
BILLING CODE 8011-01-P

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