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Sima Saran Ahuja | Bloomberg LawIn the Matter of Daxor Corp., SEC Initial Decision Release No. 428 (Aug. 31, 2001); Admin. Proceeding File No. 3-14055 The Securities and Exchange Commission (SEC) issued an initial decision against Daxor Corporation (Daxor) finding that Daxor is an investment company under Section 3(a)(1)(C) of the Investment Company Act of 1940 (Investment Company Act), and is not exempt from registration under Investment Company Act Section 3(b)(1). Accordingly, the SEC ordered Daxor to register under Section 8 of the Investment Company Act.
Daxor’s BusinessAs the SEC explained, Daxor is a publicly-traded medical device manufacturing company. Daxor’s primary product, the BVA-100, accurately measures human blood volume. Undeterred by sales challenges, Daxor continued to improve the BVA-100 and “hopes to make the BVA-100 the standard of care for certain ailments.” The SEC, however, found that despite Daxor’s sales and enhancement efforts, the BVA-100 did not achieve commercial success. For instance, according to the SEC, from 2000-2010, Daxor sold only 24 units of the device. The SEC further noted that since 1995, the BVA-100 has not covered Daxor’s operational costs nor has it generated any profits. In contrast to its manufacturing business, the SEC continued, from 1995 through 2010, Daxor’s investment securities business represented over 90 percent of its total assets. Moreover, the SEC explained that most of Daxor’s income increasingly came from its investment securities. Indeed, by September 2007 and through October 2010, Daxor averaged 424 trades per month. According to the SEC, Daxor’s CEO actively managed Daxor’s portfolio “to preserve its capital and provide income for the development of its products and operations, which continue to incur losses.” In testimony before the SEC, he stated that Daxor’s “baseline goal” was to earn 10 percent on its investment portfolio. In addition, Daxor paid over $5 million in dividends from money that Daxor’s investment portfolio generated.
Daxor Is an Investment CompanyThe SEC found that “Daxor constitutes an investment company under Section 3(a)(1)(C), because Daxor trades and invests in securities and more than 40 percent of its assets are investment securities.” The SEC rejected Daxor’s contention that it did not intend to be an investment company and held that “the test under Section 3(a)(1)(C) only considers an issuer’s actions and assets, not its intentions.”
— Investment Company Exemptions and the Tonopah TestThe Investment Company Act provides several exemptions to Section 8 registration requirements, including Section 3(b)(1) which requires a company to prove it is primarily engaged in a business other than investing in securities. To determine whether Daxor qualified for the Section 3(b)(1) exemption, the SEC relied on a qualitative and quantitative five-factor test previously established in Tonopah Mining Co. of Nevada, 26 S.E.C. 426 (1947), to determine an issuer’s primary engagement. According to the SEC, The five Tonopah factors are: (1) the issuer’s history; (2) its public representations of policy; (3) the activities of its officers and directors; (4) the nature of its assets; and (5) the source of its income. The two quantitative factors, of assets and income, are most important. This is especially true where the quantitative factors lean heavily in one direction. History To counter the first factor of the Tonopah test, Daxor argued that its lack of operational success as a medical device company should not convert it into an investment company, particularly in light of its plans and efforts to make Daxor operationally successful in the future. Finding this argument unconvincing, the SEC pointed to Daxor’s “actual and increasing” investment activity as well as its inability to estimate, or even predict, when demand for the BVA-100 would increase. Accordingly, the SEC held that Daxor’s history did not suggest that it was primarily engaged in a business other than investing in securities. Public Representations With respect to public representations of policy, the SEC found that Daxor’s press releases and periodic reports contained financial information demonstrating its large securities portfolio and income. According to the SEC, these public representations established “that Daxor’s assets are overwhelmingly investment securities, which generate the majority of its income” and that this factor in the Tonopah test weighed against Daxor qualifying for the Section 3(b)(1) exemption. Activities of Officers On the other hand, with respect to the third Tonopah factor, the SEC found that Daxor officers’ sales efforts, clinical studies, and manufacturing activities weighed in favor of Daxor functioning primarily as a medical device company. The SEC, however, noted that this factor is not dispositive. Assets Daxor’s investment securities comprise 90 percent of its total assets. As such, in analyzing the asset factor of the Tonopah test, the SEC found that Daxor was overwhelmingly engaged in the business of investing securities. Income Finally, the SEC considered income, the fifth factor of the Tonopah test. Given that 90 percent of Daxor’s gross income and 100 percent of its net income was from its investment securities, and that it consistently suffered operating losses, the SEC concluded that Daxor relied on its investment income for survival.
— Daxor Does Not Qualify for ExemptionAfter examining all five Tonopah factors, the SEC concluded that the qualitative and, more importantly, the quantitative factors established that Daxor does not fall within the Section 3(b)(1) exemption and, therefore, is an investment company under Section 3(a)(1)(C).
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