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III. REASON FOR REQUESTING RELIEF
Zscaler is requesting relief because it believes that if it were to comply with the terms of the Asset Test, particularly without (consistent with GAAP) taking
into consideration the value of its intangible assets, including internally-generated intellectual property, it will compromise its ability to invest its significant cash holdings prudently.
Since its inception, Zscaler has, directly and through its wholly-owned subsidiaries, primarily engaged in the business of providing its Platform to
customers. Zscaler does not believe it is currently, or has ever in the past been, primarily engaged in the business of investing, reinvesting, owning, holding, or trading in securities. However, Zscaler invests a significant portion of its cash in
Capital Preservation Investments, which are investment securities for purposes of the Asset Test. As noted above, based on its current investment strategy of investing in Capital Preservation Investments, as of October 31, 2021, the value of
Zscalers investment securities constituted approximately 32.7% of the value of Zscalers total assets (exclusive of Government Securities and Cash Items), on an unconsolidated basis, without giving effect to certain fair valued assets
that are not recognized on Zscalers balance sheet, including a meaningful amount of internally generated intellectual property. As of October 31, 2021, 98.5% of Zscalers investment securities, on a consolidated basis, and 99.7% of
Zscalers investments in investment securities, on an unconsolidated basis, were in the form of Capital Preservation Investments. In order to compete and successfully innovate, Zscaler requires capital to finance its research and development,
secure intellectual property, scale its business, conduct its normal course sales and marketing activities, acquire and retain customers and commercialize its offerings. Because of Zscalers need to maintain substantial liquid capital, Zscaler
has determined that it is consistent with prudent investment management principles to maintain substantial investments in Capital Preservation Investments rather than maintaining all of its liquid assets as Government Securities and Cash Items.
Additionally, although Zscaler has determined that it would be exempt from the definition of investment company pursuant to Section 3(b)(1) (because it
is primarily engaged, directly and through its wholly-owned subsidiaries, in non-investment company business), it is possible that third parties may question whether it is an investment company on the basis of
its consolidated balance sheet prepared in accordance with GAAP. Zscaler is required to publicly disclose its balance sheet and is a public reporting company subject to Section 13 of the Securities and Exchange Act of 1934, as amended (the
Exchange Act). Further, Zscaler may be required to provide an unqualified opinion that it does not fall within the definition of investment company under the 1940 Act, which it may not be able to do unless it
retains a disproportionate amount of its cash in Government Securities and Cash Items with minimal returns on investment.
Zscaler therefore submits this
Application for an order pursuant to Section 3(b)(2) declaring that it is primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading in securities, and therefore that Zscaler is excluded from the
definition of investment company in Section 3(a)(1).
IV. DISCUSSION
Section 3(b)(2) of the 1940 Act authorizes the SEC to grant an order declaring that an issuer is primarily engaged in a business other than that of
investing, reinvesting, owning, holding, or trading in securities, either directly or through majority-owned subsidiaries or through controlled companies conducting similar types of business.
Zscaler qualifies for such an order because its business consists of providing customers access to its Platform. The Platform and activities directly related
to the Platform constitute substantially all of the Companys business. Accordingly, Zscaler is not primarily engaged in investing, reinvesting, owning, holding and trading in securities and will continue to be primarily engaged in the business
of providing customers access to its Platform.
The Companys need for liquid capital to conduct its business means that it, in part, makes
investments in Capital Preservation Investments, and that in the future such Capital Preservation Investments may make up a significant portion of the Companys total assets (exclusive of Government Securities and Cash Items) on either a
consolidated or unconsolidated basis. This, in combination with any future financings, means that the Company may not be able to pass the Asset Test at any given time without sacrificing its ability to manage its liquid assets in a prudent manner by
investing in Capital Preservation Investments.
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