40-APP: Marqeta Seeks SEC Order to Confirm Status as Operating Company Amid Cash Management Challenges

Marqeta has filed an application with the SEC to be declared an operating company, not an investment company, due to its significant cash reserves and investment in liquid assets.

Summary

• Marqeta, a payment card issuing platform, is seeking an order from the SEC to confirm its status as an operating company, not an investment company.
• The company's business is capital intensive, requiring significant cash reserves that are invested in liquid, low-risk instruments.
• Marqeta has at times exceeded the 40% threshold of investment securities as a percentage of total assets, triggering the definition of an investment company under the Investment Company Act of 1940.
• The company's investment securities holdings reached as high as 61% of total assets during the third fiscal quarter of 2023.
• Marqeta believes that a prudent investment strategy would result in investment securities comprising at least 50% of its total assets, excluding government securities and cash items.
• The company's primary business is providing a technology-based payment card issuing platform, and it generates revenue through transaction fees.
• Marqeta's revenue was $676.2 million in 2023, a decrease from $748.2 million in 2022, and $371.2 million for the nine months ended September 30, 2024, a decrease from $557.4 million for the same period in 2023.
• Net investment income was $44.1 million in 2023, an increase from $8.6 million in 2022, and $27.8 million for the nine months ended September 30, 2024, a decrease from $30.7 million for the same period in 2023.
• The company's operating expenses were $612.5 million in 2023, $530.5 million in 2022, $394.3 million in 2021, and $165.3 million in 2020.
• Marqeta's employee headcount was 771 as of December 31, 2023, down from 958 as of December 31, 2022.
• The company's compensation and benefits expenses were $446.381 million in 2023 and $299.120 million for the nine months ended September 30, 2024.
• Technology expenses were $55.612 million in 2023 and $44.204 million for the nine months ended September 30, 2024.
• Professional services expenses were $21.679 million in 2023 and $13.437 million for the nine months ended September 30, 2024.
• Capital expenditures were $16.599 million in 2023 and $24.510 million for the nine months ended September 30, 2024.

Sentiment

Score: 7

Explanation: The document is generally positive in that it seeks to clarify the company's regulatory status and ensure its ability to manage its cash effectively. However, it also acknowledges the company's net losses and the challenges of operating in a competitive industry. The sentiment is therefore cautiously optimistic.

Positives

• Marqeta is actively seeking to clarify its regulatory status, which will provide certainty for the company.
• The company's core business is generating substantial revenue through its payment card issuing platform.
• Marqeta has a clear strategy for growth, including platform innovation, partner network expansion, and international expansion.
• The company has a strong management team and board of directors with experience in the technology and payments industries.
• Marqeta's investment strategy focuses on capital preservation and liquidity, with investments in safe, highly liquid instruments.

Negatives

• Marqeta has experienced net losses despite revenue growth.
• The company's revenue decreased from $748.2 million in 2022 to $676.2 million in 2023.
• The company's employee headcount decreased from 958 as of December 31, 2022 to 771 as of December 31, 2023.
• Marqeta's investment securities holdings have at times exceeded the 40% threshold, triggering the Asset Test under the Investment Company Act of 1940.
• The company's operating expenses are substantial, impacting profitability.

Risks

• Marqeta faces intense competition in the payments technology industry.
• The company's ability to manage its cash reserves effectively is critical to its long-term success.
• Failure to obtain the requested SEC order could hinder Marqeta's business and impose significant costs.
• The company's reliance on third-party technology and services exposes it to potential disruptions.
• Changes in regulations could impact Marqeta's business and operations.

Future Outlook

Marqeta anticipates that it will continue to incur net losses for the foreseeable future as it continues to develop and market its services. The company expects to continue its investment in the development of improvements on and technological advances in its payment card and related infrastructure services. The company expects that technology expenses will continue to increase year-over-year, as it continues to build out its platform and services. The company expects that expenses relating to professional services will decline from 2023 to 2024. The company expects that expenses relating to compensation and benefits will decline from 2023 to 2024.

Management Comments

• Marqeta's management believes that the company is primarily engaged in the business of operating a payment card issuing platform and not in the business of investing in securities.
• Management has delegated the management of the company's Capital Preservation Instruments to third-party investment managers.
• Marqeta's management is focused on the development and support of the company's technology-based payment card issuing and infrastructure platform.

Industry Context

This application is consistent with other high-growth technology companies that maintain significant cash reserves and seek clarity on their status under the Investment Company Act of 1940. The payments technology industry is capital-intensive, requiring companies to hold substantial liquid assets to fund operations and growth.

Comparison to Industry Standards

• Marqeta's situation is similar to other technology companies like Confluent, Cloudflare, Snowflake, Lyft, Exact Sciences, Dolby Laboratories, RealNetworks, Hutchinson Technology, and Applied Materials, which have also sought similar orders under Section 3(b)(2) of the Investment Company Act of 1940.
• These companies, like Marqeta, have significant cash reserves due to their capital-intensive operations and have at times triggered the Asset Test under the Act.
• The common thread is that these companies are primarily engaged in operating businesses, not in the business of investing, and require flexibility in managing their cash reserves to support their operations and growth.
• The SEC has previously granted orders to these companies, recognizing that they are operating companies and not investment companies, despite their significant holdings of liquid assets.

Management Changes

Stakeholder Impact

• Shareholders will benefit from the clarity provided by the SEC order, allowing Marqeta to manage its cash more effectively.
• Employees will continue to be compensated and benefit from the company's growth and development.
• Customers will benefit from Marqeta's continued innovation and expansion of its payment card platform.
• Suppliers and creditors will continue to engage with Marqeta as a stable and growing business.

Next Steps

• The SEC will review Marqeta's application and determine whether to grant the requested order.
• Marqeta will continue to operate its payment card issuing platform and manage its cash reserves in accordance with its investment policy.
• The company will continue to develop and enhance its platform, expand its customer base, and pursue international growth opportunities.

Key Dates

Keywords

payment platform, investment company, operating company, SEC, Investment Company Act of 1940, capital preservation, payment cards, financial technology, fintech, cash management