This excerpt taken from the DXR 10-Q filed Nov 15, 2006.
III. Cost-Benefit Analysis
The Commission is sensitive to the costs and benefits of its rules. New rule 3a-8 provides a nonexclusive safe harbor from the definition of investment company for R&D companies. Under the rule, an R&D company is eligible for the safe harbor if it: (a) has research and development expenses that are a substantial percentage of its total expenses for its last four fiscal quarters combined and that equal at least half of its net income derived from investments for that period; (b) has investment-related expenses that do not exceed five percent of its total expenses for its last four fiscal quarters combined; (c) makes its investments to conserve capital and liquidity until it uses the funds in its primary business, subject to certain exceptions; and (d) is primarily engaged, directly or through a company or companies that it controls primarily, in a noninvestment business, as evidenced by the activities of its officers, directors and employees, its public representations of policies, and its historical development.
New rule 3a-8 is designed largely to benefit R&D companies that currently are relying on the ICOS Order by updating and codifying the analysis in that order. The ICOS Order requires that an R&D company generally spend more on research and development than it earns on its investments. To allow R&D companies greater flexibility to raise and invest capital pending its use in research, development and other operations, the new rule modifies this requirement to require that an R&D companys net income derived from investments not exceed twice the amount of the companys research and development expenses.53 The new rule also clarifies the extent to which R&D companies may make investments in other companies pursuant to collaborative research and development arrangements. Under the analysis in the ICOS Order, an R&D company could make a limited amount of these investments so long as substantially all of its securities present limited credit risk.54 New rule 3a-8 specifies that an R&D company may make investments that are not made to conserve capital and liquidity, so long as these other investments do not exceed (a) 10 percent of the R&D companys total assets, or (b) 25 percent of the R&D companys total assets, so long as at least 75 percent of these other investments are investments made pursuant to a collaborative research and development arrangement.55
The new rule also imposes two conditions on R&D companies relying on the safe harbor that are not required under the ICOS Order. Under the new rule, the board of directors of an R&D company relying on the rules safe harbor must adopt and record a resolution that the company is primarily engaged in a non-investment business56 and adopt a written investment policy.57
Although we have identified certain costs and benefits that may result from the new rule, rule 3a-8 is exemptive, rather than prescriptive, and R&D companies are not required to rely on it. Therefore, we assume that R&D companies will rely on the rule only if the anticipated benefit from doing so exceeds the anticipated cost. In the Proposing Release, we requested comment and specific data regarding the costs and benefits of the proposed rule. We did not receive any comments or data regarding the costs and benefits of the rule from commenters.