From Dustin Woodard,
Your Guide to Mutual Funds.
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In 2006, Google almost became a mutual fund. To a fund investor, the king of search hardly seems like anything that resembles a mutual fund. And for those who follow Google (GOOG), getting used to Google being labeled media company is hard enough--but a mutual fund? How can this be?

Why Was Google Almost Regulated as a Mutual Fund?
The answer is simple. Google has too much in cash reserves. With almost $10 billion in cash, Google broke the 40% mark, which subjects them to the Investment Company Act of 1940.

The Act regulates companies that are engaged in the business of investing in or trading securities, or have over 40% of its total non-controlling assets in other investments. Companies that meet either of those requirements are labeled as "investment companies" (more commonly known as "mutual funds").

Most companies do not hold such a significant amount of cash. It's really not an efficient way to run a company. Google's earning about four percent a year on their $10 billion. At that rate, the $10 billion would become a little over $12 billion in five years, but at a more respectable eight percent return, Google's cash would turn into $14.7 billion.

What Would Happen If Google Became a Mutual Fund?
Being regulated as a mutual fund by the SEC would spell disaster for Google. The company would face strict restrictions on investment options, be forced to disclose much more about the company and its objectives, would lose employee stocks options as compensation, and would be forced to distribute capital gains each year to their shareholders.

How Will Google Escape Becoming a Fund?
According to Google Investor Relations, Google filed an exemption with the SEC in August. In their exemption request, they pointed out the business that they are in, how they would like more flexibility in investment options, and that their failure to diversify and generate slightly higher cash yields could affect their ability to stay ahead of competitors. As of September 13th, 2006, the exemption hasn’t officially been granted, but is fully expected. Microsoft was granted the same exemption in 1988 and Yahoo in 2000.

Google made their intentions clear in this note to investors:

Since Google...isn’t in the business of investing, we do not believe that we should be considered an investment company...we do not and will not invest our money in speculative investments – we invest our money in treasuries, government agencies and money market funds. However, more flexibility in our investment choices will allow us to earn higher returns, preserve capital and help us to create sustainable competitive advantages for the long term.