SEC Weighs Exemption for Biotech Firm Income

In a decision that may help California’s burgeoning biotechnology industry, the Securities and Exchange Commission on Tuesday proposed allowing biotech firms to increase their income from investments without having to register as investment companies and comply with mutual fund regulations.

The proposed exemption, which the Biotechnology Industry Assn. asked for in May, would let companies earn twice as much from certain investments as they spend on research and development without having to register as an investment firm.

Currently, the companies can be exempted only if they spend more on research than they earn on investments.

“It means they can have a lot more investment income,” said Paul Roye, the SEC’s director of investment management.

The five-member SEC voted unanimously to float the proposal, setting Jan. 15 as the deadline for public comments.

The exemption would relieve biotech companies’ complaints that they are inhibited from spending on research projects, including joint ventures with other technology firms, that can produce income in the future.

“We are very pleased with the SEC’s action,” said Matthew Chambers, a lawyer representing the Biotechnology Industry Assn. “It will give biotechnology companies additional flexibility that will speed drug delivery and give smaller biotech companies sources of additional capital.”

The threat of having to register as an investment company is a handicap for biotech firms because, under federal law, investment companies face controls on their operations that other companies don’t.

Under the draft rule for biotech firms, a company could qualify for the investment company exemption if research and development were a “substantial percentage of its total expenses for its last four fiscal quarters combined, and equal at least half of its investment revenues for that period.”

The draft rule addresses a growing trend among biotechnology firms to make strategic investments in other companies in their field. Lawyers said the rapid pace of change in biotechnology and the high costs of research make joint ventures a necessity.

Biotech companies are at a disadvantage because many of the drugs and other products they develop are subject to numerous reviews and approvals by federal regulators, the SEC said. At the same time, they “have few tangible assets and often hold large amounts of capital in liquid instruments so that funds are readily accessible for research and development,” the agency said.

As a result, investment income at biotech companies often increases at a faster rate than research budgets.

In other action Tuesday, the SEC proposed to make permanent a rule change allowing U.S. companies to accelerate stock buyback programs in the aftermath of any market emergencies.

After last year’s terrorist attacks, U.S. stock markets closed for four days. When they reopened, the SEC implemented emergency rules letting public companies repurchase their stock without following normal restrictions on buybacks. The goal was to help support share prices amid heavy selling by panicked investors.

The proposed permanent change in the rules would allow companies to buy back their stock, in amounts up to 100% of the shares’ average daily trading volume, after any “market-wide trading suspension.”