[Federal Register Volume 88, Number 47 (Friday, March 10, 2023)]
[Notices]
[Pages 15109-15111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[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 [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 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 
[email protected].

ADDRESSES: The Commission: [email protected]. Applicant: 
Steffan Tomlinson, Chief Financial Officer, and Melanie Vinson, Chief 
Legal Officer, Confluent Inc., at [email protected]; Amy Caiazza, at 
[email protected].

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 
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 
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,

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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


