[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56271-56274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28168]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23486; International Series Release No. 1162; 812-10998]
Formus Communications, Inc., et al.; Notice of Application
October 14, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'').
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SUMMARY OF APPLICATION: The order would permit applicants and certain
of their controlled companies to participate in certain foreign
telecommunication ventures without being subject to the provisions of
the Act.
APPLICANTS: Forums Communications, Inc. (``Formus'') and Formus
International, Inc. (``FII'').
FILING DATES: The application was filed on February 6, 1998. Applicants
have agreed to file an amendment during the notice period, the
substance of which is included in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 9,
1998, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 720 South Colorado
[[Page 56272]]
Boulevard, Suite 600N, Denver, Colorado 80246.
FOR FURTHER INFORMATION CONTACT:
J. Amanda Machen, Senior Counsel, at (202) 942-7120, or Christine Y.
Greenlees, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulations).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. 202-942-8090).
Applicants' Representations
1. Formus, a Delaware corporation, was organied in 1996 to acquire
local multipoint distribution services (``LMDS'') licenses in the
United States and comparable spectrum in certain international markets,
and to build, own, and operate telecommunications systems based on
these licenses. Formus conducts its foreign operations primarily
through FII, a wholly-owned subsidiary. In the future, Formus may
acquire and hold interests in foreign telecommunications ventures
through subsidiaries other than FII.
2. FII, a Delaware corporation, is engaged through its subsidiaries
in the acquisition, development, operation, and management of
integrated voice, video, and data services through the development of
LMDS and LMDS-like wireless networks in selected markets primarily
outside the United States. At present, FII's primary focus is on doing
business in European, Latin American and Asian/Pacific countries that
have a market economy, stable political environment, and favorable
regulatory framework. FII generally forms a separate subsidiary for
each country in which it operates a LMDS system,\1\ which then forms a
subsidiary to acquire licenses and build and operate the LMDS system
within the respective country. FII typically works with local partners
who are knowledgeable about local governmental regulations and local
business practices. FII currently holds interests in telecommunications
entities in Ecuador, Poland, New Zealand and Germany.
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\1\ The subsidiary may be organized and operated in the United
States.
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3. Formus and FII request relief to permit them and each entity
that is now or in the future controlled by, or under common control
with, Formus or FII (each, including Formus and FII, a ``Covered
Entity'') to engage, either directly or indirectly through
subsidiaries, in certain foreign telecommunications ventures without
being subject to the provisions of the Act. For purposes of the
application, applicants represent that ``foreign telecommunications
venture'' means any and all activities outside the United States
involving: communications; media; the creation, storage, and
transmission of analog or digital voice, video, or data; programming,
including entertainment, news, information, and home shopping services;
broadband and satellite distribution; over the air broadcast;
telecommunications; wireless and wireline distribution and telephony;
network construction; design, operation, and ownership of related
transport construction; and any and all related similar activities,
services, and assets.
4. Applicants participate in foreign telecommunications ventures in
either of two ways. In one, an applicant, directly or through one or
more other Covered Entities, invests in a foreign telecommunications
company. ``Foreign telecommunications company,'' as used in the
application, means any corporation, partnership, joint venture,
association, joint stock company, limited liability company, or other
form of organization (i) substantially all of whose operations are
conducted outside of the United States, (ii) that owns the assets of a
foreign telecommunications venture (which may consist of capital assets
or stock of operating subsidiaries), and (iii) whose business primarily
relates to, or whose operations consist primarily of, the ownership,
development, and operation of, or the provision of managment or
operational services relating to, foreign telecommunications ventures.
An applicant, directly or through one or more other Covered Entities,
acquires a substantial interest in the foreign telecommunications
company, and provides active developmental assistance to the foreign
telecommunications company. For purposes of the application, applicants
represent that ``substantial interest'' means any ownership interest
that represents at least a 10% economic or voting interest. In
addition, applicants represent that ``active developmental assistance''
means material involvement in the creation, development or operation
of, the provision of material managerial, advisory, technical, or
operations services relating to, or significant input on material
decisions affecting the development or operations of, a foreign
telecommunications venture.
5. The second way applicants participate in foreign
telecommunications ventures is to invest, either directly or through
one or more other Covered Entities, in a telecommunications
partnership. Applicants represent that, for purposes of the
application, a ``telecommunications partnership'' means any
partnership, joint venture, limited liability company or other
unincorporated association (i) substantially all of whose operations
are conducted outside the United States, and (ii) whose purpose is to
acquire interests in, and to develop, operate, or provide management
services to, one or more foreign telecommunications companies.
Representatives of an applicant or other Covered Entity participate on
the management committee or similar governing body of the
telecommunications partnership. An applicant, directly or through one
or more other Covered Entities, acquires a substantial interest in the
telecommunications partnership which, in turn, directly or through one
or more subsidiaries, acquires a substantial interest in one or more
foreign telecommunications companies. An applicant or another Covered
Entity, either directly or through the telecommunications partnership,
would provide active developmental assistance to the foreign
telecommunications ventures of the telecommunications partnership.
6. Applicants represent that providing ``active developmental
assistance'' requires an applicant or other Covered Entity to be or
have been materially involved in providing such assistance. Thus, an
applicant or another Covered Entity may rely on the exemptive order
even though it no longer provides active developmental assistance so
long as it continues to have a substantial interest in the foreign
telecommunications venture, which is past the developmental stage, and
a Covered Entity provided active developmental assistance during the
venture's developmental stage. Similarly, if a Covered Entity acquires
a substantial interest in a foreign telecommunications venture after
the development stage and a Covered Entity provides active
developmental assistance to the foreign telecommunications venture,
then the first Covered Entity may continue to rely on the exemptive
order, even though active developmental assistance ceases, so long as
the first Covered Entity continues to have a substantial interest in
the venture, and (i) the business of the foreign telecommunications
venture was significantly enhanced by the active developmental
assistance of a Covered Entity or (ii) such foreign
[[Page 56273]]
telecommunications venture (x) is merged or combined with, or acquired
by, a company in the same or a related business, or (y) effects an
initial public offering of voting stock.
7. Applicants represent that Formus, FII, or another Covered Entity
provides active developmental assistance to each foreign
telecommunications venture in which it takes a substantial interest by
either developing, conducting, or expanding the venture's operations. A
Covered Entity gives assistance in four areas: network design and
engineering; purchase of goods and services; recruitment and training
of personnel; and the deployment and operations of telecommunication
ventures.
8. Network design and engineering services may begin before a bid
is submitted for an LMDS-like license, and continue until completion of
network build out. LMDS systems are based on radio transmission of
signals from one point to another. Therefore, transmitters, or ``cell
sites,'' must be placed at strategic sites within a transmission area,
or ``cell.'' To permit efficient transmission of signals, cell sites
are typically on the tallest buildings within a cell. Employees of a
Covered Entity, with the assistance of consultants hired and supervised
by such employees, survey both the physical layout of a service area as
well as the demographics of potential end-users within an area. The
location of cell sites and the hardware and software used in building a
particular network are based on the interplay between the physical area
serviced (i.e., the availability of appropriate cell sites) and the
needs of the users in that area. For example, if a cell is dominated by
businesses, network design will be different from the design for an
area dominated by individual users. Design also takes into account any
regulatory limitations. Applicants state, for example, that the license
held in a particular country may be limited to television transmission
while in another country it may cover any and all services that could
be transmitted on a particular bandwidth. Another factor considered by
the Covered Entity's employees is preexisting competition from other
transmission systems (for example, cable television systems). System
design also includes specifications for the ``central switching sites''
that control the flow of signals among cell sites.
9. Active developmental assistance also includes assistance with
purchasing goods and services (including hardware and software)
necessary in building an LMDS network. FII is currently negotiating
bulk purchasing arrangements with a variety of vendors that it believes
provide quality equipment, software, or services. In Formus'
experience, most foreign telecommunications ventures do not have
contacts or knowledge of the vendors of the necessary goods and
services. These arrangements will make goods and services readily
available, on prenegotiated terms and at discounted prices, to any
foreign telecommunications venture in which a Covered Entity holds a
substantial interest'.
10. Covered Entities also provide assistance with recruiting and
training qualified senior personnel to operate a foreign
telecommunications venture. To date, senior personnel of the
applicants' foreign telecommunications ventures in Poland and New
Zealand have been recruited from among former employees or consultants
of the applicants. FII is currently establishing a training program
which will permit it to bring key personnel of a foreign
telecommunications venture to the United States for training in various
aspects of the business, including engineering, installation, field
maintenance, sales, and marketing and customer service.
11. Covered Entities also will provide assistance in deploying and
operating the networks of foreign telecommunications ventures. This
will include matters such as operating an in-country or regional net
fault center (i.e., a computer system to monitor and identify faults in
an operating network), oversight of administration, including field
operations and the supervision of customer service personnel,
maintenance of operating networks, provisioning of signal (i.e.,
developing computer programs to tell a network what facilities and
capabilities are available to best provide a particular service
requested by a particular customer), and the development and deployment
of billing and financial systems and training personnel to operate
them.
12. Applicants' participation in foreign telecommunications
ventures with local or strategic partnerships is a result of both
restrictions on ownership of foreign telecommunications ventures under
the laws of many countries, as well as various benefits, both tangible
and intangible, that an applicant may obtain from joining with
strategic partners to create, develop and operate such ventures.
Applicants' structure was not established for the purpose of creating
an investment company within the contemplation of the Act. While
applicants believe that today they are not required to register under
the Act, they are seeking the requested relief as they are increasingly
constrained in structuring their foreign telecommunications ventures by
the requirements of the Act.
Applicants' Legal Analysis
1. Section 3(a)(1)(C) of the Act defines an ``investment company''
to include any issuer that is engaged in the business of investing,
reinvesting, owning, holding, or trading in securities, and owns
investment securities having a value exceeding 40% of the value of the
issuer's total assets (exclusive of Government securities and cash
items). Section 3(a)(2) of the Act defines ``investment securities'' to
include, in pertinent part, all securities except securities issued by
majority-owned subsidiaries of the owner which are not investment
companies and which are not excepted from the definition of investment
company by section 3(c)(1) or section 3(c)(7). Section 2(a)(24) defines
a ``majority-owned subsidiary'' of a person as a company 50% or more of
the outstanding voting securities of which are owned by the person, or
by a company which, with the meaning of section 2(a)(24), is a
majority-owned subsidiary of the person.
2. Rule 3a-1 under the Act deems certain issuers that meet the
statutory definition of investment company in section 3(a)(1)(C) of the
Act not to be investment companies, provided the issuer meets certain
criteria. An issuer can qualify for this exemption only if no more then
45% of its total assets consist of, and no more than 45% of its net
income is derived from, securities other than, among others, securities
of certain companies controlled primarily by the issuer.\2\
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\2\ ``Primary control'' under rule 3a-1 means a degree of
control that is greater than that of any other person. See Health
Communications Services, Inc. (pub. avail. Apr. 26, 1985).
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3. Applicants represent that they seek to acquire a majority voting
interest in their foreign telecommunications ventures or, where such an
interest is not permitted under applicable foreign investment laws or
is inadvisable for business reasons, seek to acquire interests that
grant them primary control. Applicants assert that these ownership
thresholds are prohibitively large, as the applicants often seek to
join with two or three strategic partners in a foreign
telecommunications venture. Applicants represent that each partner
typically desires an interest in, and rights over, the venture that is
equal to that of the other partners. Hence, applicants state that the
acquisition of a
[[Page 56274]]
majority interest, or the largest interest, in a foreign
telecommunications venture is often impossible.
4. Applicants state that they may participate in a foreign
telecommunications venture through a ``joint venture,'' in which an
applicant's interest may not be a ``security'' for purposes of the Act.
However, applicants state that whether an arrangement is a joint
venture is sometimes difficult to determine.
5. Applicants assert that the need to structure their participation
in foreign telecommunications ventures in a manner that complies with
the Act has resulted in severe constraints on their ability to operate
effectively and efficiently and grow their business. Applicants state
that if a Covered Entity is unable to obtain either a majority interest
or primary control for purposes of section 3(a)(1)(C) or rule 3a-1, or
a degree of control that will allow it to obtain an opinion of counsel
that it can classify its participation as a joint venture interest,
then the Covered Entity most likely will abstain from participating in
that foreign telecommunications venture.
6. Applicants also state that as a venture grows out of the
development stage, it will often seek to expand its businesses through
acquisitions, or will seek public financing. Applicants note that these
goals are often in direct conflict with the Covered Entity's need to
maintain its ownership interest at a level that permits the interest to
be classified as a non-investment security. Applicants submit that this
can result in serious delays in the development of their foreign
telecommunications ventures, as they seek to structure transactions
around the requirements of the Act. Applicants state that at times,
especially when the Covered Entity's interest would fall below the
level of presumptive control as set forth in section 2(a)(9) of the
Act, the Covered Entity may have to deny the foreign telecommunications
venture permission to undertake a transaction that would have been in
the best interest of the Covered Entity and that venture.
7. Section 6(c) provides that the SEC may exempt any person,
security, or transaction from any provision of the Act or any rule or
regulation under the Act, if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act. Applicants request an order under section
6(c) to permit applicants and the other Covered Entities to engage,
directly or through subsidiaries, in foreign telecommunications
ventures without being subject to the Act.
8. Applicants believe that the requested exemption is necessary and
appropriate in the public interest. Applicants assert that their
interests in the foreign telecommunications ventures, unlike the assets
of investment companies, are not liquid, mobile or otherwise readily
negotiable because Formus, directly or indirectly, will be actively and
materially involved in the business activities of the foreign
telecommunications ventures. Applicants also state that they are not a
so-called ``special situation'' investment company that takes a
controlling position in other issuers primarily for the purpose of
making a profit in the sale of the controlled company's securities.
Instead, applicants state that the Covered Entities will provide active
developmental assistance for the purpose of participating in the
profits from the foreign telecommunications ventures. Applicants
maintain that their active developmental assistance, which requires
personnel with expertise in planning, operating, managing, and
providing services to a foreign telecommunications venture, requires
resources far beyond those available to the manager of an investment
company. Accordingly, applicants assert that the Covered Entities
engage in business activities that do not entail the types of abuses
that the Act was designed to address.
9. Applicants believe that the requested relief is consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the Act. Applicants believe that the
requirements of their business, their strategy that each Covered Entity
own or hold directly or indirectly a substantial interest in a foreign
telecommunications company or partnership, and their representation
that each Covered Entity will provide active developmental assistance
to a foreign telecommunications ventures demonstrate that none of the
applicants is of the type that engages in the activities which the Act
was designed to address.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. No covered Entity that proposes to rely on the requested relief
will hold itself out as being engaged in the business of investing,
reinvesting, or trading in securities.
2. A Covered Entity may rely on the order granting the requested
relief only if the manner in which it is involved in foreign
telecommunications ventures does not differ materially from that
described in the application.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28168 Filed 10-20-98; 8:45 am]
BILLING CODE 8010-91-M
