THE FEELING ISN’T MUTUAL

As one of the Web’s most successful portal sites, Yahoo has become quite the player in the Internet game. But that popularity may now carry a cost. Because the Santa Clara, CA-based company has stock holdings in other Web companies that represent three-quarters of Yahoo’s total assets, the Securities and Exchange Commission would like to reclassify Yahoo as a mutual fund. Yahoo has requested an exemption.

As with most regular operating companies, Yahoo would like to avoid being reclassified a mutual fund, because of the regulatory restrictions—such as limits on debt that can be incurred and a ban on issuing employee stock options—that go along with it. But Yahoo’s successful investments in new Web businesses might make that inevitable.

The 1940 Investment Company Act, which governs fund managers, defines a mutual fund as a company with at least 40 percent of its assets in investments rather than operating businesses. Yahoo holds a 34 percent stake in the Yahoo Japan Corp.—a venture with Softbank Corp.—that has grown to 75 percent of the company’s 1999 third quarter assets.

In arguing for exemption, Yahoo claims it has "strategic" stock holdings made to cement relationships with business partners and those types of holdings are different from mutual fund investments aimed at generating profit for fund investors. Therefore, as Yahoo’s logic goes, those assets shouldn’t be counted against the 40 percent threshold.

How the SEC rules on this issue could set a precedent for other Web businesses.

And if that wasn’t enough for the Yahoo folks to deal with, the nation’s three top-selling creators of video games are suing the site. Sega, Nintendo and Electronic Arts allege in U.S. District Court that counterfeit versions of their best-selling games are being sold on Yahoo! Auctions.

For the time being, it appears that Yahoo’s dance card will be quite full.