Zscaler, Inc.

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Published

November 21, 2024

Issuing agencies

Securities and Exchange Commission

Full Text

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<title>Federal Register, Volume 89 Issue 225 (Thursday, November 21, 2024)</title>
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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 [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[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 <a href="/cdn-cgi/l/email-protection#c497a1a7b6a1b0a5b6bdb7e98ba2a2ada7a184b7a1a7eaa3abb2">[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 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
<a href="/cdn-cgi/l/email-protection#4b182e28392e3f2a39323866042d2d22282e0b382e28652c243d">[email&#160;protected]</a>.

ADDRESSES: The Commission: <a href="/cdn-cgi/l/email-protection#194a7c7a6b7c6d786b606a34567f7f707a7c596a7c7a377e766f">[email&#160;protected]</a>. Applicant: Remo
Canessa, Chief Financial Officer, and Robert Schlossman, Esq., Chief
Legal Officer, Zscaler, Inc., at <a href="/cdn-cgi/l/email-protection#23775146425056515a63595040424f46510d404c4e">[email&#160;protected]</a>; Kevin R.
Bettsteller, Esq., at <a href="/cdn-cgi/l/email-protection#167d747362626562737a7a736456717f74657978726378783875797b">[email&#160;protected]</a>.

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
<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
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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