[Federal Register Volume 59, Number 234 (Wednesday, December 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30075]
[[Page Unknown]]
[Federal Register: December 7, 1994]
_______________________________________________________________________
Part V
Federal Communications Commission
_______________________________________________________________________
47 CFR Part 24
Implementation of Section 309(j) of the Communications Act--Competitive
Bidding; Final Rule
FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 24
[PP Docket No. 93-253, FCC 94-285]
Implementation of Section 309(j) of the Communications Act--
Competitive Bidding
AGENCY: Federal Communications Commission.
ACTION: Final rule; petitions for reconsideration.
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SUMMARY: In this Fifth Memorandum Opinion and Order the Commission
resolves petitions for reconsideration or clarification of its
competitive bidding rules for the entrepreneurs' blocks, including
provisions established to ensure that small businesses, rural telephone
companies and businesses owned by minorities and women (collectively
termed ``designated entities'') have a meaningful opportunity to
participate in the provision of Personal Communications Services in the
2 GHz band (called ``broadband PCS''). Among the issues the Commission
re-examines in this Fifth Memorandum Opinion and Order are matters
concerning: the financial caps for entry into the entrepreneurs' block
and qualification as a small business; the equity requirements for the
control group and other eligibility criteria; joint venture and
consortia rules; guidelines for defining de facto control of an
applicant; permissible management agreements between noncontrolling
investors and entrepreneurs' block applicants; treatment of affiliated
entities and ownership attribution rules; and installment payments and
bidding credits.
The rules and decisions made in this Fifth Memorandum Opinion and
Order are designed to result in auctions that will serve the public
interest by ensuring that small businesses, rural telephone companies
and businesses owned by minorities and women have the opportunity to
attract the necessary investment capital to compete for and obtain
broadband PCS licenses and ultimately to have meaningful involvement in
building and managing this nation's broadband PCS infrastructure.
EFFECTIVE DATE: February 6, 1995.
FOR FURTHER INFORMATION CONTACT:
Kathleen O'Brien Ham at (202) 634-2443 or Peter Tenhula at (202) 418-
1720.
SUPPLEMENTARY INFORMATION: The complete text of this Fifth Memorandum
Opinion and Order in PP Docket No. 93-253, adopted November 10, 1994,
and released November 23, 1994, is available for inspection and copying
during normal business hours in the FCC Dockets Branch, Room 230, 1919
M Street NW., Washington, D.C. The complete text may be purchased from
the Commission's copy contractor, International Transcription Service,
Inc., 2100 M Street NW., Suite 140, Washington, D.C. 20037, telephone
(202) 857-3800.
Paperwork Reduction Act
In the Fifth Memorandum Opinion and Order in PP Docket No. 93-253,
the Commission has amended 47 CFR Part 24 which contains rules and
requirements governing the award of broadband PCS licenses through a
system of competitive bidding. Applicants are required to file certain
information so that the Commission can determine whether the applicants
are legally, technically, and financially qualified to be bid in the
entrepreneurs' blocks as entrepreneurs and/or designated entities.
Affected members of the public are any members of the public who want
to become a broadband PCS licensee in the frequency blocks allocated
for entrepreneurs and designated entities. Implementation of the rules
contained in the Fifth Memorandum Opinion and Order will impose
reporting and recordkeeping requirements on certain members of the
public. The Federal Communications Commission will submit an
information collection request to OMB for review and clearance under
the Paperwork Reduction Act of 1980, 44 U.S.C. 3507. Persons wishing to
comment on this information collection should contact Timothy Fain,
Office of Management and Budget, Room 3225, New Executive Office
Building, Washington, DC 20503, (202) 395-3561. For further
information, contact Judy Boley, Federal Communications Commission,
(202) 418-0210.
Synopsis of Fifth Memorandum Opinion and Order
Introduction
1. By this action, we resolve petitions for reconsideration or
clarification of our rules governing competitive bidding for
``entrepreneurs' block'' licenses in the 2 GHz band Personal
Communications Service (``broadband PCS'').\1\ Twenty-six petitions
were received, as well as 17 oppositions and 8 replies. Specifically,
in this Fifth Memorandum Opinion and Order, we resolve issues
associated with our entrepreneurs' block rules, as well as other
provisions we established to ensure that small businesses, rural
telephone companies and businesses owned by minorities and women
(collectively termed ``designated entities'') have meaningful
opportunities to participate in the provision of broadband PCS. Our
goal in this proceeding is to ensure that designated entities have the
opportunity to obtain licenses at auction as well as the opportunity to
have meaningful involvement in the management and building of our
nation's broadband PCS infrastructure. Thus, as we describe below, we
make certain modifications to our rules so that they will better serve
these goals.
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\1\The Commission designated frequency blocks C (1895-1910/1975-
1990 MHz) and F (1890-1895/1970-1975 MHz) as ``entrepreneurs'
blocks''. See Fifth Report and Order in PP Docket No. 93-253, FCC
94-178 (released July 15, 1994), reprinted at 59 Fed. Reg. 37,566
(July 22, 1994) (Fifth Report and Order). We also address herein
petitions for reconsideration or clarification filed in response to
the Commission's Order on Reconsideration, FCC 94-217 (released
August 15, 1994), summarized, 59 Fed Reg. 43,062 (August 22, 1994).
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2. When the new broadband PCS auction rules were adopted in the
Fifth Report and Order, the Commission declared its intent to meet
fully the statutory objective set forth by Congress in Section 309(j)
of the Communications Act. See 47 U.S.C. 309(j). In particular, we
observed that it was the mandate of Congress that the Commission should
``ensure that small businesses, rural telephone companies, and
businesses owned by members of minority groups and women are given an
opportunity to participate in the provision of spectrum-based
services.'' See 47 U.S.C. 309(j)(4)(D). We also noted that Congress has
directed us to ``promote economic opportunity and competition and
ensure that new and innovative technologies are readily accessible to
the American people by avoiding excessive concentration of licenses and
by disseminating licenses among a wide variety of applicants.'' See 47
U.S.C. 309(j)(3)(B). With these congressional directives in mind, we
established the entrepreneurs' blocks and designated entity provisions
contained in the Fifth Report and Order, which are now under
reconsideration.
3. Although we wish to ``fine-tune'' some aspects of our rules, we
generally conclude that the ``entrepreneurs' block'' concept and the
special provisions for designated entities adopted in the Fifth Report
and Order are the most efficient and effective means to fulfill our
statutory mandate to provide for a diverse and competitive broadband
PCS marketplace. In particular, we have adopted measures to ensure
opportunities for meaningful participation by minority and women-owned
businesses in the emerging broadband PCS marketplace by providing that
such entities are eligible for bidding credits, installment payments,
reduced up front payments and the benefits of tax certificates, and by
adopting eligibility rules that accommodate noncontrolling equity
investment.
4. On reconsideration of the Fifth Report and Order, we weigh the
recommendations of those who have asked us to modify our rules. While
we conclude that for the most part our rules will remain unchanged, we
find that some rule modifications are necessary to further empower
businesses owned by women and minorities and designated entities
generally to participate in broadband PCS. Also, our rules need to be
clarified in some instances to provide entities wishing to participate
in the entrepreneurs' blocks with greater certainty and a better
understanding of what is expected of them. Our rule changes will grant
designated entities, particularly minority and women-owned applicants,
additional flexibility in how they raise capital and structure their
businesses. Minority-owned applicants, for example, should be able to
draw more readily upon the financial resources and expertise of other
successful minority business enterprises. Our revised rules seek to
accommodate the many existing minority and women-owned firms that want
to enter the PCS market, but whose existing corporate structures do not
meet the criteria for entry prescribed in the Fifth Report and Order.
Thus, experienced minority and women entrepreneurs, who are likely to
succeed in the broadband PCS marketplace, are not inadvertently barred
from participating in the entrepreneurs' block under our new rules. In
sum, our revised rules permit entrepreneurs' block applicants to
structure themselves in a way that better reflects the realities of
raising capital in today's markets, and to obtain the necessary
management and technical expertise for their PCS businesses.
5. As we indicated above, a primary objective on reconsideration is
to ensure that our rules promote diversity and competition in the PCS
marketplace of the future. In this regard, we believe a special effort
must be made to enable minority and women-owned enterprises to enter,
compete and ultimately succeed in the broadband PCS market. These
designated entities face the most formidable barriers to entry,
foremost of which is lack of access to capital. In our effort to
provide opportunities for minorities and women to participate in PCS
via the auctions process, we strive for a careful balance. On one hand,
our rules must provide applicants with the flexibility they need to
raise capital and structure their businesses to compete once they win
licenses. On the other hand, our rules must ensure that control of the
broadband PCS applicant, both as a practical and legal matter, as well
as a meaningful measure of economic benefit, remain with the designated
entities our regulations are intended to benefit.
6. After reviewing the record, we amend or clarify our
entrepreneurs' block rules in several respects.\2\ We emphasize that
these changes constitute a refinement of our original entrepreneurs'
block rules adopted in the Fifth Report and Order that will further
advance our objectives of promoting competition and diversity in the
broadband PCS marketplace.
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\2\We delegate to the appropriate Bureau the authority to revise
and create forms as needed to ensure that PCS applicants comply with
our rules. See 47 CFR 0.201-0.204. See also 47 U.S.C. 155(c).
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Background
7. On August 10, 1993, the Omnibus Budget Reconciliation Act of
1993 (the Budget Act) added Section 309(j) to the Communications Act of
1934, as amended, 47 U.S.C. 309(j). This section gives the Commission
express authority to employ competitive bidding procedures to select
among mutually exclusive applicants for certain initial licenses. In
the Second Report and Orderin this proceeding, the Commission exercised
its authority by determining that broadband PCS licenses should be
awarded through competitive bidding and prescribed a broad menu of
competitive bidding rules and procedures to be used for all auctionable
services.\3\ We re-examined certain aspects of these general rules and
procedures in the Second Memorandum Opinion and Order (released August
15, 1994).\4\
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\3\Second Report and Order in PP Docket No. 93-253, 9 FCC Rcd
2348, 59 Fed. Reg. 2348 (1994) (Second Report and Order).
\4\Second Memorandum Opinion and Order in PP Docket No. 93-253,
FCC 94-215 (released Aug. 15, 1994) (Second Memorandum Opinion and
Order).
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8. In the Fifth Report and Order, we established specific
competitive bidding rules for broadband PCS.\5\ We also decided in the
Fifth Report and Order to conduct three separate auctions for broadband
PCS licenses: the first for the 99 available broadband PCS licenses in
MTA blocks A and B; the second for the 986 broadband PCS licenses in
BTA blocks C and F (the ``entrepreneurs' blocks''); and, the third for
the remaining 986 broadband PCS licenses in BTA blocks D and E.\6\ The
rules adopted in the Fifth Report and Order address auction
methodology, application and payment procedures, and other regulatory
safeguards. In addition, we established the entrepreneurs' block
licenses to insulate smaller applicants from bidding against very
large, well-financed entities. We also supplemented our entrepreneurs'
block regulations with other special provisions designed to offer
meaningful opportunities for designated entity participation in
broadband PCS. In particular, we made bidding credits and installment
payment options available to those entrepreneurs and designated
entities that, according to the record of this proceeding, have
demonstrated historic difficulties accessing capital. Additionally, we
extended the benefits of our tax certificate policies to broadband PCS
minority and women applicants to promote participation by these
designated entities in the service. We also adopted attribution rules
that accommodate passive equity investment in designated entities, but
ensure that control of the applicant resides in the intended
beneficiaries of the special provisions. Furthermore, we reduced the
upfront payment required of bidders in the entrepreneurs' block.
Finally, we established partitioning rules to allow rural telephone
companies to expedite the availability of offerings in rural areas.
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\5\The Third Report and Order in this docket established
competitive bidding rules for narrowband PCS. See Third Report and
Order in PP Docket No. 93-253, 9 FCC Rcd 2941, 59 Fed. Reg. 26741
(1993), recon. Third Memorandum Opinion and Order and Further Notice
of Proposed Rule Making, FCC 94-219 (released Aug. 17, 1994). Also,
in a recent Order, we reconsidered on our own motion several aspects
of our narrowband PCS competitive bidding rules. See Order on
Reconsideration in PP Docket No. 93-253, FCC 94-240, 59 FR 43062
(released Sept. 22, 1994) (Order on Reconsideration). The Fourth
Report and Order in this docket established competitive bidding
rules for the Interactive Video and Data Service (IVDS). See Fourth
Report and Order, 9 FCC Rcd 2330, 59 Fed. Reg. 24947 (1994).
\6\See Fifth Report and Order, FCC 94-178 at 37. When we
crafted our broadband PCS licensing rules in Gen. Docket 90-314, we
divided the licensed broadband PCS spectrum into three 30 MHz blocks
(A, B, and C) and three 10 MHz blocks (D, E, and F). We also
designated two different service areas: 493 Basic Trading Areas
(BTAs) and 51 Major Trading Areas (MTAs). The 493 BTAs and 51 MTAs
used in our broadband PCS licensing rules have been adapted from the
Rand McNally 1992 Commercial Atlas and Marketing Guide, 123rd
Edition, at 38-39. See Second Report and Order in Gen. Docket No.
90-314, 8 FCC Rcd 7700 (1993), recon. Memorandum Opinion and Order,
9 FCC Rcd 4957 (1994), Order on Reconsideration, 9 FCC Rcd 4441
(1994), on further recon. Third Memorandum Opinion and Order, FCC
94-265, 59 Fed. Reg. 55372 (released Oct. 19, 1994).
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9. After the release of the Fifth Report and Order, we adopted on
our own motion an Order on Reconsideration, which made two changes to
our competitive bidding rules for broadband PCS concerning our
attribution and affiliation requirements.\7\ Specifically, we exempted
from entrepreneurs' block affiliation rules, entities owned and
controlled by Indian tribes or Alaska Regional or Village Corporations.
We also decided to permit nonattributable investors in a corporate
applicant to own up to 15 percent of the corporation's voting stock,
provided that the applicant's control group retains at least 25 percent
of the equity and 50.1 percent of the voting stock. We applied this
change to investors in both publicly-traded corporate applicants and
applicants that are not publicly traded. Most recently, however, we
adopted a Fourth Memorandum Opinion and Order in this docket, in which
we addressed issues raised in petitions for reconsideration of the
Fifth Report and Order that involve our broadband PCS competitive
bidding rules governing auction methodology, application and payment
procedures, and regulatory safeguards to prevent anticompetitive
practices among bidders.\8\ In the instant Fifth Memorandum Opinion and
Order, we resolve remaining matters in the petitions for
reconsideration concerning our entrepreneurs' block rules, including
our provisions for designated entities.
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\7\See Order on Reconsideration, PP Docket No. 93-253, FCC 94-
217 (released Aug. 15, 1994).
\8\See Fourth Memorandum Opinion and Order in PP Docket No. 93-
253, FCC 94-246, 59 Fed. Reg. 53364 (released Oct. 19, 1994). On
November 17, 1994, we released an Order, which modified certain
aspects of our stopping and anti-collusion rules, and preserved the
right to change the timing of the entrepreneurs' block auctions.
Memorandum Opinion and Order in PP Docket No. 93-253, FCC 94-295
(released Nov. 17, 1994).
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Concept of Entrepreneurs' Blocks
Authority and Amount of Spectrum
10. In the Fifth Report and Order, the Commission designated a
portion of the broadband PCS spectrum available at auction for
qualified entrepreneurs.\9\ Eligible entrepreneurs can bid on BTA
licenses in the C (30 MHz) and F (10 MHz) blocks. In addition,
entrepreneurs who fall within one of the four statutory ``designated
entity'' categories (i.e., small business, rural telephone companies,
and businesses owned by members of minority groups and/or women) are
eligible for additional benefits to enable them to acquire broadband
PCS licenses.
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\9\Fifth Report and Order, FCC 94-178 at 118-129. An
applicant's eligibility to participate in the entrepreneurs' blocks
is based on its size as measured by specified financial caps.
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11. The Association of Independent Designated Entities (AIDE)
contends that the Commission exceeded its statutory authority in
establishing the entrepreneurs' block because they potentially benefit
entities that fall outside of the four designated entity groups
enumerated by Congress. AIDE maintains that the entrepreneurs' blocks
reduce meaningful opportunities for smaller designated entities to
participate in PCS by forcing them to bid against ``entrepreneurs''
that may not qualify as designated entities. AIDE further argues that
the Commission impermissibly restricted the availability of financial
incentives to designated entities for use only in Blocks C and F.
Instead, AIDE requests that the Commission make its financial
incentives for designated entities available for every auctionable
broadband PCS license. The United States Interactive & Microwave
Television Association and the United States Independent Personal
Communication Association (USIMTA/USIPCA) (filing jointly) support the
entrepreneurs' block concept, but encourage the Commission to provide
additional broadband PCS spectrum exclusively for designated entities.
Citing Congress' concern about the historical impediments that small,
minority and women-owned businesses have encountered, USIMTA/USIPCA
maintain that ``it would not be unreasonable'' to set aside up to one-
half of the available PCS spectrum. Finally, GTE Service Corporation
(GTE) requests the Commission eliminate the entrepreneurs' blocks and
instead allow designated entities to ``partner'' with major investors
and be eligible for more generous bidding credits. Additionally, GTE
contends that our entrepreneurs' block scheme unduly restricts the
ability of cellular carriers to participate in the provision of PCS.
Specifically, GTE contends that this scheme, combined with the PCS-
cellular cross-ownership restrictions, will effectively limit
eligibility for many cellular operators to 20 MHz of spectrum on the D
and E blocks.
12. Contrary to AIDE's contention, it is within our statutory
authority to establish the entrepreneurs' blocks, for which parties
other than designated entities are eligible to apply for or invest in,
and we believe that this scheme will provide meaningful opportunities
for designated entities to participate in the provision of broadband
PCS. Accordingly, we will retain the entrepreneurs' block structure set
forth in the Fifth Report and Order. In establishing a competitive
bidding process for the provision of spectrum-based services, Congress
gave the Commission broad authority to adopt bidding procedures and
policies, so long as certain objectives are fulfilled. Specifically,
Congress mandated that the Commission ``promot[e] economic opportunity
and competition and ensur[e] that new and innovative technologies are
readily accessible to the American people by avoiding excessive
concentration of licenses and by disseminating licenses among a wide
variety of applicants, including small businesses, rural telephone
companies, and businesses owned by members of minority groups and
women.'' See 47 U.S.C. 309(j)(3)(B). Thus, the language of the statute
allows us to consider other entities in order to ensure that licenses
are widely dispersed among a variety of licensees,\10\ so long as we
also, among other statutory objectives, ensure that designated entities
are given the opportunity to participate in the provision of broadband
PCS. See 47 U.S.C. 309(j)(4)(D).
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\10\We believe the term ``including'' used in Section
309(j)(3)(B) of the Communications Act is a term of enlargement, not
limitation, intended to convey that other entities are includable
together with, rather than excluded from the categories of
designated entities so long as legislative intent is satisfied. See
2A Sutherland, Statutory Construction Sec. 47.23 (4th ed. 1984).
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13. The entrepreneurs' blocks approach adopted in our Fifth Report
and Order achieves the statute's objectives by creating significant
opportunities for designated entities and other entrepreneurs to ensure
that licenses are widely disbursed to entities that can rapidly deploy
broadband PCS services. We are making additional changes to our rules
(including eliminating the personal net worth cap and liberalizing our
affiliation rules for individual minority investors) to help designated
entities overcome particularly intractable historic difficulties in
accessing capital. To satisfy Congress' directive, we established the
entrepreneurs' blocks in conjunction with a package of benefits that
are narrowly tailored to provide significant opportunities to
designated entities and those entrepreneurs that lack access to
capital.
14. We disagree with USIMTA/USIPCA who requests that the Commission
provide additional spectrum for entrepreneurs' blocks. Our existing
allotment, which comprises one-third of the total amount of licensed
broadband PCS spectrum, is sufficient to ensure that designated
entities and other entrepreneurs have significant opportunities to
participate in the PCS marketplace. We therefore deny petitioners'
various requests for modification to our entrepreneurs' block
provisions.
15. We also reject AIDE's proposal to make bidding credits and
other special provisions available to all designated entities bidding
on all of the broadband PCS frequency blocks (not just the C and F
blocks). Our existing approach of limiting these special provisions to
the entrepreneurs' blocks, coupled with changes we are making today are
narrowly tailored to meet Congress' objective of ensuring that
designated entities have the opportunity to participate in broadband
PCS. The record does not support broadening this relief to include
additional frequency blocks, nor is there substantial support for
broadening the availability of special provisions generally.
16. Similarly, we do not accept GTE's argument that we should do
away with the entrepreneurs' blocks and instead offer bidding credits
as well as other special provisions across all broadband PCS frequency
blocks. As we already explained in the Fifth Report and Order, in our
judgment we do not anticipate designated entities to realize meaningful
opportunities for participation in broadband PCS unless we supplement
bidding credits and other special provisions with a limitation on the
size of the entities designated entities will bid against. Without the
insulation of the entrepreneurs' block, the record strongly supports
the conclusion that measures such as bidding credits will prove
ineffective for broadband PCS. We also disagree with GTE's contention
that our entrepreneurs' block plan unduly restricts the ability of
cellular carriers to provide PCS. We believe that the public interest
benefits of establishing an entrepreneurs' block outweigh the need to
provide additional opportunities for cellular operators as GTE
describes. Moreover, our rules do allow cellular operators such as GTE
to take noncontrolling interests in designated entities and gain
opportunities in the entrepreneurs' block. We have recently revised the
cellular-PCS crossownership rules to facilitate such opportunities.\11\
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\11\See Third Memorandum Opinion and Order in Gen. Docket 90-
314, FCC 94-265 (released Oct. 19, 1994), at 33-34.
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Gross Revenues and Other Financial Caps
Gross Revenues and Total Assets
17. In the Fifth Report and Order, the Commission established
eligibility rules for the entrepreneurs' blocks based, in part, on an
applicant's gross revenues. To bid in the entrepreneurs' blocks, the
applicant, its attributable investors (i.e., members of its control
group and investors holding 25 percent or more of the applicant's total
equity), and their respective affiliates must cumulatively have gross
revenues of less than $125 million in each of the last two years and
total assets of less than $500 million at the time the applicant files
its Form 175 (``short form'' application). We pointed out in the Fifth
Report and Order that the $125 million gross revenues limit corresponds
roughly to the Commission's definition of a ``Tier 2,'' or medium-sized
local exchange carrier (LEC) and would include virtually all of the
independently-owned rural telephone companies. Additionally, to qualify
for the special provisions accorded small businesses, the applicant
(including attributable investors and affiliates), must cumulatively
have less than $40 million in gross revenues averaged over the last
three years.
18. MasTec, Inc. (MasTec) argues that the Commission's gross
revenues test is misleading when applied across the board to all
applicants because the gross revenues of investors operating in
different industries will not convey the same information about size or
the ability to attract capital. The Telephone Electronics Corporation
(TEC) notes that the discontinuity between gross revenues and the
ability to attract capital is particularly acute where the entity in
question is involved in a volume-intensive business with high operating
costs and small profit margins (such as TEC's interexchange resale
carriers). Accordingly, TEC argues that the Commission's gross revenue
criteria are not rationally related to their stated purpose and should
be eliminated.
19. Several petitioners request that the Commission modify its
gross revenues test, but disagree whether the limits should be
liberalized or made more restrictive. For example, MasTec encourages
the Commission to modify its designated entity criteria to include
those minority businesses which are too small to compete outside of the
entrepreneur blocks, but too large to qualify for the entrepreneurs'
blocks. The National Paging and Personal Communications Association
(NPPCA) and USIMTA/USIPCA urge the Commission to reduce the gross
revenues cap. Specifically, NPPCA requests that the Commission reduce
the gross revenues limit to $75 million and the total assets limit to
$250 million. NPPCA maintains that these modifications are needed
because the present size standards encourage mid-sized companies to
refrain from bidding in competitively unrestricted auctions and to
compete, instead, against designated entities in the entrepreneurs'
block auctions.
20. As an alternative to increasing the revenues cap, Omnipoint
Communications, Inc. (Omnipoint) and the National Association of Black
Owned Broadcasters, Inc. (NABOB) argue that the ``aggregation rule,''
under which the Commission will aggregate the gross revenues and total
assets of the applicant, attributable investors and all affiliates in
order to determine whether the applicant complies with the financial
caps, should be eliminated. Omnipoint contends that a ``multiplier
approach,'' employed in other areas of Commission practice, should be
used to determine compliance with the financial caps. Under this
approach, the revenues and assets attributed to an applicant would be
based on the revenues and assets of each attributable investor,
multiplied by the percentage ownership interest in the applicant held
by that investor.
21. Cellular Telecommunications Industry Association (CTIA)
requests that the Commission prescribe specific dates for measuring the
financial thresholds to determine entrepreneurs' block eligibility.
Specifically, CTIA requests clarification that gross revenues will be
measured from the two years preceding September 23, 1993.\12\ CTIA
maintains that our current rules, referring only to the ``last two
calendar years,'' are ambiguous. See 47 CFR 24.709(a)(1).
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\12\September 23, 1993 is the date the Commission adopted its
broadband PCS service rules order. See Second Report and Order in
Gen. Docket No. 90-314, 8 FCC Rcd 7700 (1993).
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22. Black Entertainment Television Holdings, Inc. (BET), Roland A.
Hernandez (Hernandez), Columbia PCS, Inc. (Columbia PCS), and Omnipoint
all request that we clarify our rules governing growth by
entrepreneurs' block licensees and their attributable investors during
the five-year holding period. Our rule, promulgated in the Fifth Report
and Order, states that ``[a]ny licensee * * * shall maintain its
eligibility [for the entrepreneurs' blocks] until at least five years
from the date of initial license grant, except that increased gross
revenues, increased total assets or personal net worth due to non-
attributable equity investments * * *, debt financing, revenue from
operations, business development or expanded service shall not be
considered.'' See 47 CFR 24.709(a)(3). Petitioners ask us to clarify
whether the following types of growth in assets, revenues, or personal
net worth would result in a licensee's forfeiture of eligibility: (1)
Growth of applicant beyond the size limits by means of mergers or
takeovers; (2) any control group member's growth beyond the size limits
by means of appreciation of attributable investments or growth of
attributable businesses; and (3) affiliates' or attributable investors'
growth beyond the size limits, by means of mergers or takeovers.
23. We will retain a single gross revenues size standard, which is
an established method for determining size eligibility for various
kinds of federal programs that aid smaller businesses.\13\ We
anticipate that applicants will, in many instances, have several
investors and that these investors will be drawn from various segments
of the economy rather than from a single industry group such as
telecommunications. The financial characteristics of these industry
groups will vary widely,\14\ and keying the size standard to each
investor entity in question is thus administratively unworkable. A
gross revenues test is a clear measure for determining the size of a
business, and will produce the most equitable result for entrepreneurs'
block applicants as a whole.
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\13\All federal agencies base eligibility of small businesses
(or minority small businesses) to bid on a government contract set
aside on the (single) size standard set forth in the solicitation.
See, e.g., 13 CFR 121.902. Eligibility for financial assistance from
Small Business Investment Companies sponsored by the Small Business
Administration is determined by a single size standard applicable
across the board to all applicants or by the size standard
applicable to the applicant's primary business activity. See 13 CFR
121.802. Size status for receiving surety guarantees or assistance
under SBA's Small Business Innovation Research Program is also
determined by a single, applicant-wide size standard. See 13 CFR
121.802(a)(3) and 121.1202, respectively.
\14\The Standard Industrial Classification Manual, upon which
the Small Business Administration bases its industry size standards,
identifies over 800 industry groups to which specific Standard
Industrial Classification Codes are assigned. Standard Industrial
Classification Code Manual, Office of Management and Budget,
Executive Office of the President, 1987 ed.
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24. We will also retain the existing gross revenues and total
assets limits for the entrepreneurs' blocks and for small business size
status. We find the arguments of those who oppose any reduction in the
gross revenues limit most persuasive. BET, for example, supports the
balance it perceives the Commission has struck between small and mid-
sized firms by adopting a $125 million gross revenues test. We agree
with BET that a decrease in the gross revenue limit would eliminate
many mid-sized firms from entrepreneurs' block participation while not
substantially raising the level of competition in the blocks.
Conversely, an increase in the gross revenue limit would not
necessarily provide for greater capital access for applicants. We
believe our $125 million gross revenues test represents an appropriate
benchmark for entry into the entrepreneurs' block, given our interest
in including firms that, while not large in comparison to other
telecommunications companies, are likely to have the financial
resources to compete against larger competitors on the MTA blocks.
25. In addition, we will retain the aggregation methodology to
assess the size of an applicant, with certain exceptions. We reject
NABOB's proposal to eliminate our aggregation rule and we cannot adopt
Omnipoint's proposal to determine entrepreneurs' block eligibility and
small business size status by separately evaluating the assets and
revenues of each attributable investor. Aggregating the gross revenues
and total assets of all attributable investors in and affiliates of the
applicant is central to an accurate size determination, and consistent
with the Small Business Administration's (SBA's) approach to similar
determinations. Viewing gross revenues and assets of each investor in
isolation could result in very large entities bidding for these
licenses. We reject Omnipoint's suggestion that a multiplier approach
be used to make these size determinations. A multiplier is appropriate
to arrive at an accurate determination of ownership interest in an
applicant or licensee. In this context, however, we are not concerned
with ownership, but instead seek to make a financially-based size
determination in order to assess whether an applicant is eligible for
significant governmental benefits.
26. We agree with CTIA that clarification is required concerning
the two-year period in order to provide applicants with a uniform way
to measure gross revenues for purposes of qualifying for the
entrepreneurs' blocks. For the initial entrepreneurs' block auctions
involving broadband PCS, companies should use audited financial
statements for each of the two calendar years ending December 31, 1993
or, if audited financial statements are not prepared on a calendar-year
basis, data from audited financial statements for their two most
recently completed fiscal years. Therefore, if applicants and their
investors do not have audited statements ending on December 31, 1993,
they will have to use one annual statement ending at a later date
(sometime in 1994). This approach will enable the Commission to obtain
timely financial data while providing applicants with some degree of
flexibility in their financial reporting practices. For subsequent
entrepreneurs' block auctions (i.e., license reauctioning), we will
require applicants to use their last two annual audited financial
statements to determine compliance with the financial caps. Newly-
formed companies should use the audited financial statements of their
predecessors in interests, or financial statements current as of the
time their Form 175 (short-form) application is filed that are
certified by the applicant as accurate.
27. Clarification is also needed with respect to the issue of
growth and takeovers of an entrepreneurs' block licensee or its
investors. We clarify our rules to the extent necessary to indicate
what types of growth will jeopardize an applicant's continued
eligibility as an entrepreneurs' block licensee during the holding
period. A licensee could not maintain its eligibility if a member of
its control group were itself taken over, effecting a transfer of
control of the licensee during the license holding period. However, an
attributable investor would not affect the licensee's continuing
eligibility for the entrepreneurs' block if another of the investor's
affiliates grew or its investments appreciated during the holding
period. Our rules consider such growth either to be revenue from the
investor's operations or to be normal business development and, in
either case, fully permissible. If an attributable investor is taken
over or purchased by another entity, the other entity steps into the
shoes of the original investor and its assets and revenues will be
considered under the continued eligibility rule. However, if an
affiliate of the applicant is taken over by (or sold to) another
entity, the other entity's assets and revenues would not be considered,
so long as no new affiliation arrangement between the applicant and the
other entity is created by the takeover or sale. That is, in most
cases, the affiliation with the applicant would be severed by such a
takeover and the gain from the sale of the affiliates' assets would
have already been taken into account by the initial consideration of
such assets at the time of application.\15\ We emphasize that we have a
strong interest in seeing entrepreneurs grow and succeed in the PCS
marketplace. Thus, normal projected growth of gross revenues and
assets, or growth such as would occur as a result of a control group
member's attributable investments appreciating, or as a result of a
licensee acquiring additional licenses would not generally jeopardize
continued eligibility as an entrepreneurs' block licensee.
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\15\Thus, for example, if Applicant A is affiliated with
Corporation B and that corporation sells its business to Corporation
C, the income derived from the sale would not affect Applicant A's
continued eligibility, unless a new affiliation arrangement arises
between Applicant A and Corporation C.
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Personal Net Worth
28. In addition to the gross revenues and assets caps, the Fifth
Report and Order also established a personal net worth limit to
determine eligibility for bidding in the entrepreneurs' blocks. The
current rules require that persons that are applicants, attributable
investors in the applicant and all of their respective affiliates who
are themselves individuals each have less than $100 million in personal
net worth. Additionally, the rules require that if the applicant seeks
to qualify as a small business each individual in the control group,
attributable investors and all affiliates who are individuals, must
have less than $40 million in personnel net worth. See 47 CFR 24.720.
29. BET requests the Commission relax the personal net worth limits
applicable to attributable investors in minority-owned firms. BET
argues that eliminating the personal net worth standard would help
ensure participation by minority and women-owned businesses by allowing
successful individuals to bring their experience to bear in the PCS
marketplace. At the same time, BET argues that this measure would
ensure that relatively small, minority and women-owned enterprises have
a meaningful opportunity to participate in the provision of PCS. TEC
also requests the Commission liberalize its personal net worth standard
to permit an attributable individual investor to hold up to $125
million in personal net worth. MasTec claims that net worth/net revenue
definitions are overly restrictive and will exclude those minority
businesses that can best survive and succeed in the competitive PCS
market.
30. We will eliminate the personal net worth limits (both for the
entrepreneurs' blocks and for small business size status) for all
applicants, attributable investors, and affiliates. The obstacles faced
by minorities and minority-controlled businesses in raising capital are
well-documented in this proceeding and are not necessarily confined to
minorities with limited personal net worth. Therefore, we agree with
the view that the personal net worth requirements should be eliminated
in the case of minority-controlled applicants seeking to qualify for
entrepreneurs' block licenses. However, rather than eliminate the
personal net worth limits for minorities only, we will eliminate the
requirement for all applicants because personal net worth limits are
difficult to apply and enforce and may be easily manipulated. We do not
believe that eliminating the personal net worth limits will facilitate
significant encroachment by ``deep pockets'' that can be accessed by
wealthy individuals through affiliated entities because, in those
instances where access to such resources would create an unfair
advantage, the affiliation rules will continue to apply and require
that such an entity's assets and revenues be included in determining an
applicant's size. Thus, we emphasize that we believe the affiliation
rules make the personal net worth rules largely unnecessary since most
wealthy individuals are likely to have their wealth closely tied to
ownership of another business.
Treatment of Affiliates
31. The Fifth Report and Order sets forth specific affiliation
rules for identifying all individuals and entities whose gross revenues
and assets must be aggregated with those of the applicant in
determining whether the applicant exceeds the financial caps for the
entrepreneurs' blocks (or for small business size status). The
affiliation rules were adapted from those used by the SBA for purposes
of assessing size status and consequent eligibility to participate in
SBA's loan, procurement and minority enterprise programs.
32. Specifically, our rules identify which individuals or entities
will be found to control or be controlled by the applicant or an
attributable investor by specifying which ownership interests or other
criteria will give rise to a finding of control and consequent
affiliation. In the August 15, 1994 Order on Reconsideration we
exempted Indian tribes and Alaska Regional and Village Corporations
(hereafter ``Indian tribes'') from the affiliation rules for purposes
of determining eligibility to participate in bidding on the
entrepreneurs' blocks.\16\
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\16\Order on Reconsideration, FCC 94-217 at 3-7. As we
indicated in our Order on Reconsideration, we apply the term
``Indian tribe'' as it is statutorily defined in 25 U.S.C.
Sec. 450b(e) to include ``any Indian tribe, band nation, or other
organized groups or community, including any Alaska Native Village
or regional corporation as defined in or established pursuant to the
Alaska Native Claims Settlement Act, which is recognized as eligible
for special programs and services provided by the United States to
Indians because of their status as Indians.'' Id. at 4, n. 7.
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33. BET and others argue that we did not provide adequate notice or
opportunity to comment on the possibility of the Commission adopting
affiliation rules for all entrepreneurs' block participants
(specifically, minorities and women). BET argues that we have thus
violated the notice and comment requirements of the Administrative
Procedure Act (APA), and that the Commission is required to issue a
Further Notice prior to adopting the affiliation rules. BET also
contends that the affiliation rules add unnecessary complexity to the
broadband auction rules and that they make it very difficult, if not
impossible, for potential bidders to tailor their pre-existing business
relationships and ownership structures to our eligibility requirements.
34. Several parties have filed petitions for reconsideration of our
Order on Reconsideration. On reconsideration of the Fifth Report and
Order, several petitioners also challenge the limited exemption granted
to Indian tribes or request that generic exemptions be granted for
other applicants. BET and MasTec oppose any special treatment for a
particular minority group, arguing that the exemption accorded Indian
tribes creates an imbalance of bidding power in favor of tribally-owned
entities and will skew the broadband PCS auction results. Cook Inlet
Region, Inc. (Cook Inlet) argues that the exemption for Indian tribes
should be expanded to encompass eligibility for treatment as a small
business for purposes of bidding credits and installment payments
because: (1) Indian tribes are congressionally recognized as
particularly disadvantaged; (2) such an exemption applies when
determining size status for SBA's programs; and, (3) substantial legal
constraints with respect to tribal property and businesses preclude
their use to raise capital or to cross-subsidize other tribally-owned
entities.
35. More specifically, Cook Inlet assets that Indian tribes and
Native corporations deserve special treatment because they face legal
constraints that differ from other minority-owned businesses. According
to Cook Inlet, Federal law prohibits Native corporations from pledging
their stock as collateral for loans, issuing new stock to raise funds
in traditional capital markets, or utilizing the majority of the
revenues from their land holdings to invest in new enterprises. Thus,
Cook Inlet contends that Indian tribes and Native corporations should
be exempt from both the affiliation rules and the small business test
because Native corporations cannot utilize their assets or revenues to
fund new business ventures in the same way other corporations can. In
reply, BET asserts that Alaska Regional Corporations still enjoy
significantly greater access to capital than other minority-owned
entities participating in the bidding for the entrepreneurs' block
licenses despite any restrictions they might have on their assets.
36. TEC seeks an exemption from the affiliation rules for rural
telephone companies, arguing that regulatory and corporate barriers
prohibit small telephone companies like TEC from shifting broadband PCS
costs to their affiliated resellers and that courts have found
questions of affiliation to be irrelevant where such barriers to cross-
subsidization exist. MEANS/SDN suggests a more narrowly tailored
exception that would exempt centralized equal access providers (i.e., a
consortia of rural telephone companies that provide centralized equal
access and other sophisticated information services) from the
Commission's affiliation rules. MEANS/SDN argues that this modification
would allow the consortia to bring their considerable expertise and
efficiencies to bear in the deployment of broadband PCS.
37. After considering petitioners' various concerns, we will not
eliminate the affiliation rules. As explained fully below, however, we
create a limited exception to our affiliation rules that will apply
when an attributable minority investor or enterprise in an applicant or
an applicant's control group has controlling interests in other
concerns. We also revise our treatment of Indian tribes under our
affiliation rules to more narrowly tailor our application of these
rules to the unique status of these minority groups.
38. As an initial matter we do not believe the promulgation of the
affiliation rules violated the notice and comment requirements of the
Administrative Procedures Act. Our Notice of Proposed Rule Making in
this docket\17\ alerted petitioners to the fact that the Commission was
considering SBA's size standards which, by their terms (as set forth in
the Notice), incorporate the concept of affiliation in determining a
firm's small business size status.\18\ The question of affiliation is
integral to the concept of size status, by whatever means size status
is assessed. Without affiliation rules, large firms may unfairly avail
themselves of the preferences intended for small businesses and other
designated entities since they have an incentive to create subsidiaries
(that would have access to the parent's substantial resources) to
compete against bona fide applicants in the entrepreneurs' blocks.
Adoption of affiliation rules similar to those used by the SBA is a
logical outgrowth of the Commission's decision to impose a gross
revenues test for small businesses and to consider SBA's size standards
in establishing that test.\19\ It was reasonable for petitioners to
conclude that such rules would be applied in assessing eligibility for
the entrepreneurs' blocks and for small business size status. Thus,
sufficient opportunity to comment was provided on the affiliation rules
since they play an integral role in any determination of size status.
Moreover, we see no advantage in seeking additional comment on the
affiliation rules since petitioners, such as BET, had a full and fair
opportunity to suggest modifications to our affiliation rules, some of
which we adopt on reconsideration. A Further Notice could also
substantially delay the auction of entrepreneurs' block licenses.
---------------------------------------------------------------------------
\17\See Notice of Proposed Rule Making in PP Docket No. 93-253,
8 FCC Rcd 7635, 7647 at 77 and n. 51, 78 (1993) (Notice).
\18\See 13 CFR 121.802(a)(2). See also 13 CFR 121.401(a) (which
provides that ``* * * size determinations shall include the
applicant concern and all its domestic and foreign affiliates).
\19\Rules adopted as a ``logical outgrowth'' of a Notice of
Proposed Rule Making satisfy our APA notice requirements. See Public
Service Commission of the District of Columbia v. FCC, 906 F.2d 713,
717 (D.C. Cir. 1990); Small Refiner Lead Phase-Down Task Force v.
EPA, 705 F.2d 506, 547 (D.C. Cir. 1983). An agency must be free to
adopt a final rule not described exactly in the Notice. where the
difference involved is ``sufficiently minor,'' otherwise, agencies
could not change a rule in response to valid comments without
beginning the rulemaking anew. See National Cable Television Assoc.,
Inc. v. FCC, 747 F.2d 1503, 1507 (D.C. Cir. 1984).
---------------------------------------------------------------------------
39. Furthermore, we decline to adopt the suggestion that we
eliminate the affiliation rules on the grounds that these rules are
unduly complex or overburdensome. Affiliation rules are an established
and essential element in determining an applicant's compliance with a
gross revenues (or other) size standard. Their use ensures that all
financial and other resources available to a company will be considered
in assessing its size status. The Commission's affiliation rules, in
conjunction with its attribution rules, are intended to include in this
calculation: (1) All individuals and entities that directly or
indirectly control the applicant, any member of its control group, or
any other investor having an attributable interest in the applicant;
(2) any other entities also controlled by such individual or entity;
(3) all entities over which the applicant has direct control or
indirect control through an intermediary; and (4) all other entities
over which a member of its control group or any other attributable
investor has direct or indirect control. Elimination of the affiliation
rules would result in an underassessment of an applicant's size and
would present an unrealistic picture of the applicant's need for
bidding credits, installment payments and reduced up front payments.
40. We are persuaded, however, that a limited exception to our
affiliation rules is appropriate for minority-owned applicants and
applicants owned by a combination of minorities and women. The
exception will apply to affiliates controlled by investors who are
members of minority groups who are attributable members of an
applicant's control group. Under the exception, the gross revenues and
assets of affiliates that the minority investor controls will not be
counted in determining the applicant's compliance with the financial
caps, both for purposes of the entry into the entrepreneurs' block and
for purposes of the applicant qualifying as a small business.
41. This exception will permit minority investors that control
other concerns to be members of an applicant's control group and to
bring their management skills and financial resources to bear in its
operation without the assets and revenues of those other concerns being
counted as part of the applicant's total assets and revenues. By making
such an exception, we further our goal of addressing traditional
problems minorities have of accessing capital. As we documented in the
Fifth Report & Order, minorities have faced and continue to face unique
barriers to capital from traditional, non-minority sources. To raise
capital for a new business venture, therefore, minorities need the
ability to draw upon the financial strength and business experience of
successful minorities and minority-owned businesses within their own
communities; they may not have access to any other source of funds on
which to draw. Moreover, this exception permits minority applicants to
pool their resources with other minority-owned businesses and draw on
the expertise of those who have faced similar barriers to raising
capital in the past.\20\ We therefore conclude that further tailoring
of our affiliation rules to the specific capital formation problems of
minorities is necessary to avoid eliminating a traditional source of
capital for minority businesses--the minority community itself. We note
that this exception applies only to affiliates controlled by minority
investors in the applicant or members of the applicant's control group.
The exception does not apply to affiliates of such investors or
businesses that control the applicant or that have an attributable
interest in the applicant. Thus, a minority-owned firm that exceeds the
financial caps would not be able to create a subsidiary to participate
in a PCS applicant's control group.\21\
---------------------------------------------------------------------------
\20\See, e.g., Ellis, B., ``Black Community Needs to Focus on
Capital Formation,'' The Philadelphia Tribune, May 20, 1994, at 6A
(``[R]ecent immigrants (in the African-American community) have
utilized family and friends as a means of pooling their savings--
i.e., to form capital); Lee, E., ``Korean American Grocers All Over
the Country Hit Hard By Recession and Crime,'' AsianWeek, Dec. 17,
1993, Vol. 15, No. 17 at 1 (``[F]amily members often employed [in
Korean-owned businesses] and informal Korean credit organizations
give many business owners their starts * * *.''); Lesly, E., and
Mallory, M., ``Inside the Black Business Network,'' Business Week,
Nov. 29, 1993, at 70 (``African Americans are forming pools of
capital and new opportunities that are helping to overcome
traditional barriers to success.''); Miller, Y., ``Improvements Seen
in Minority Business Loans,'' Bay State Banner, Nov. 21, 1993, Vol.
29, No. 14, at 1 (``Many entrepreneurs in the minority community
have their business cash flow tied up in their personal assets and
expenses * * *.''); Stone, S., ``Why Can't We All Get Along? Many
Blacks, Koreans Find Understanding,'' The Philadelphia Tribune, Nov.
23, 1993, Vol. 110, No. 100 at la (``Koreans don't usually go to
banks * * *. What they have done is form their own [credit] pools. *
* * Chinese-Americans also have lending pools; many Jamaicans have
the same thing.''); Wynter, L., ``Understanding Capital is Key to
Getting It,'' Emerge, Aug. 31, 1993, Vol. 9, No. 4, at 22 (minority
venture capital firm finances several black-owned firms including
Essence Communications and Earl G. Graves. Ltd).
\21\For example, if M, an attributable minority investor in the
applicant, controls Corporation C with assets of $500 million, but
Corporation C does not control applicant A and is not an
attributable investor in Applicant A, the assets and revenues of
Corporation C will not be counted in assessing A's compliance with
the financial caps for either the entrepreneurs' blocks or small
business size status. On the other hand, if M Corporation, a
minority-owned company with an attributable interest in Applicant A,
is controlled by Corporation C in the above example, or is under
common control with Corporation C, the assets and revenues of M
Corporation's affiliates are attributable.
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42. As we established in our Order on Reconsideration, we treat
Indian tribes differently under our affiliation rules for purposes of
our entrepreneurs' block financial caps because of their unique legal
status. Specifically, we exclude the gross revenues and total assets of
Indian tribes in our calculations for purposes of determining whether
an affiliated applicant satisfies our entrepreneurs' block financial
caps. After considering the arguments of petitioners, we also will
exclude generally the revenues of Indian tribes in our calculations for
purposes of determining small business eligibility.
43. In response to MasTec's and BET's concerns about special
treatment for a particular minority group, we clarify that we exempt
Indian tribes generally from our affiliation rules because Congress has
imposed unique legal constraints on the way they can utilize their
revenues and assets. Cook Inlet contends that, while other minority-
owned businesses can issue debt and equity securities and pledge their
assets and securities to raise capital, the real and personal property
interests held by Alaska Native Corporations are subject to a number of
constraints--both legal and cultural--that affect their ability to
manage and dispose of property. For example, under the Alaska Native
Claims Settlement Act, 43 U.S.C. 1601 et seq., the stock held by Native
corporations is subject to strict alienability restrictions--it cannot
be sold, pledged, mortgaged, or otherwise encumbered. Thus, Native
corporations are precluded from two of the most important means of
raising capital enjoyed by virtually every other corporation: (1) The
ability to pledge stock of the company against ordinary borrowings, and
(2) the ability to issue new stock or debt securities. In addition,
assets held by Indian tribes include land holdings that cannot be used
as collateral for purposes of raising capital, because the land
holdings are owned in trust by the federal government or are subject to
a restraint on alienation in the government's favor. Congress has not
placed similar legal constraints on the assets and revenues of
enterprises owned by any other minority group. We agree with Cook Inlet
that such legal restraints on assets and revenues place Indian tribes
at a disadvantage vis-a-vis other minority groups with similar revenues
and assets. Finally, as we noted in our Order on Reconsideration,
Congress has mandated that the SBA determine the size of a business
concern owned by a Tribe without regard to the concern's affiliation
with the Indian tribe. Our policy mirrors this congressional mandate.
44. After considering the record, however, we have determined that
gaming revenues generally are not subject to the same types of legal
restrictions as other revenues received by Indian tribes. Therefore, we
establish a rebuttable presumption that revenues derived from gaming
pursuant to the Indian Gaming Regulatory Act, 25 U.S.C. 2701 et seq.,
will be included in our calculations when determining whether an
applicant that is affiliated with an Indian tribe qualifies for the
entrepreneurs' block or as a small business. Cook Inlet has set forth
several reasons why we should treat gaming revenues differently from
other types of Indian tribe revenues. First, Cook Inlet argues that
these revenues were not part of the tribal economic picture when
Congress enacted the SBA tribal exception to the affiliation rule in
1970. Second, Cook Inlet contends that the Indian Gaming Regulatory Act
provides certain Indian tribes with a non-traditional source of revenue
that could be very substantial. Cook Inlet also asserts that gaming
revenues are not subject to the same types of legal and governmental
controls as other revenues received by Indian tribes, and therefore are
more analogous to the revenues of non-Indian entities. Furthermore,
Congress granted the SBA (whose rules inspired our affiliation rules)
flexibility to treat tribal and other affiliations with exceptional
revenues differently if such revenues would create an ``unfair
competitive advantage.''\22\ Gaming revenues generated by tribal
organizations, appear to be exceptional revenues that if not included,
create an unfair competitive advantage in the auctioning of broadband
PCS entrepreneurs' block licenses. Thus, we will include such gaming
revenues in our calculations when determining eligibility for the
entrepreneurs' block and for small business status, unless the
entrepreneurs' block applicant establishes that it will not receive an
unfair competitive advantage, because significant legal constraints
restrict its ability (or an affiliate's ability) to access and utilize
revenues from gaming.
---------------------------------------------------------------------------
\22\As we noted in our Order on Reconsideration, Section
7(j)(10)(J) of the Small Business Act gives the SBA the discretion
to consider tribal and other affiliations if it determines that one
or more such tribally-owned businesses has obtained, or is likely to
obtain, a substantial unfair competitive advantage within an
industry category. See 15 U.S.C. 636(j)(10)(J)(ii)(11).
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45. Finally, we decline to create an exception to our affiliation
rules for rural telephone companies. We are concerned that relaxing our
rules would unfairly match large rural telephone companies, with
greater access to capital, against entrepreneurs and designated
entities (including small and medium-sized rural telephone companies).
We note in this regard, that rural telephone companies already enjoy
substantial regulatory benefits (e.g., access to Rural Electrification
Administration loans) affecting available capital in comparison to
other designated entities. Moreover, we observe that rural telephone
companies will be permitted to acquire partitioned licenses at any time
after the close of auctions. We believe that existing measures will
thereby achieve our goal of facilitating the rapid deployment of PCS to
rural areas. At MEANS/SDN's request, however, we clarify that a
centralized equal access provider (i.e., a group of rural telephone
companies that provide centralized equal access and other sophisticated
information services)\23\ will not be deemed an affiliate of each of
its constituent members. Based on the record, it does not appear that
such entities control their constituent members or that each of the
members control the centralized equal access providers. Thus, for
example, if two or more of MEANS' members form a consortium of small
businesses that apply for the entrepreneurs' blocks, MEANS itself would
not be attributed to each one of the small businesses. We agree with
MEANS that this clarification will contribute to the efficient
deployment of broadband PCS in rural areas.
---------------------------------------------------------------------------
\23\See, e.g., 47 CFR 69.112(i) (citing to Transport Rate
Structure and Pricing, CC Docket No. 91-214, FCC 920442, 7 FCC Rcd
7002 (1992), modified, 8 FCC Rcd 5370, 5287 (1993) for description
of ``centralized equal access providers'').
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Designated Entity Definitions
Minority and Women-Owned Businesses
46. In the Fifth Report and Order, we adopted the definition of the
term ``members of minority groups'' as set forth in our Second Report
and Order in this docket.\24\ Thus, we defined ``members of minority
groups'' as ``* * * individuals of African-American, Hispanic-surnamed,
American Eskimo, Aleut, American Indian and Asian American
extraction.'' See 47 CFR 24.720(i).
---------------------------------------------------------------------------
\24\See Fifth Report and Order, FCC 94-178 at n. 157. See also
Second Report and Order, 9 FCC Rcd 2348, 2397 n. 209, quoting
Statement of Policy on Minority Ownership of Broadcasting
Facilities, 68 FCC 2d 979, 980 n. 8 (1978) and citing Commission
Policy Regarding the Advancement of Minority Ownership in
Broadcasting, 92 FCC 2d 849, 849 n. 1 (1982); 47 CFR 1.2110(b)(2).
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47. Karl Brothers requests that the Commission amend its definition
of ``members of minority groups'' to include businesses owned by
individuals with disabilities. Specifically, Karl Brothers suggest the
Commission adopt the standard established in the SBA Section 8(a)
program to determine who should qualify for designated entity status.
According to Karl Brothers, this SBA program includes businesses owned
by disabled individuals under a ``means'' and ``socially
disadvantaged'' test. Karl Brothers maintains that the congressional
mandate to give special preference to minority groups is not limited to
just ethnic minorities, but should include other historically
disadvantaged minorities. Karl Brothers maintains that Congress was
merely giving examples of groups to be included in the definition of
minorities, not limiting the definition to ethnic groups only. Karl
Brothers contends that there is no statutory language excluding other
disadvantaged groups.
48. After considering Karl Brothers' request, we will not include
persons with disabilities in the definition of minorities for purposes
of bidding on the entrepreneurs' blocks and obtaining the special
provisions available to minority applicants. The record in this
proceeding does not contain any evidence that demonstrates that firms
owned by persons with disabilities have more difficulty accessing
capital than any other small business. In this respect, the record of
this proceeding on the difficulties that minorities, women and small
businesses, in general, have experienced accessing capital strongly
supports the special provisions we adopted for these groups. Moreover,
individuals with disabilities are not expressly named as a designated
entity in Section 309(j)(4)(D) of the Communications Act, and there is
no indication in the legislative record of the statute that Congress
intended to expand this group of beneficiaries to include any group or
individual that can demonstrate that it is ``socially disadvantaged''
similar to the SBA Section 8(a) approach described by the Karl
Brothers. Unlike the Small Business Act, Section 309(j)(4)(D) of the
Communications Act does not contain the term ``socially
disadvantaged.'' Compare 47 U.S.C. 309(j)(4)(D) with 15 U.S.C. 637(a)
(1), (4) and (5). We note that even in the SBA context, that agency
presumes eligibility for Section 8(a) status for minority groups (which
are defined in racial and ethnic terms), but firms owned by persons
with disabilities must demonstrate that they are ``socially
disadvantaged'' in order to gain entry into the program. Also, the
SBA's denial of Section 8(a) status for firms owned by persons with
disabilities where such ``social disadvantage'' has not been
established, has been upheld in court.\25\
---------------------------------------------------------------------------
\25\See Doe v. Heatherly, 671 F. Supp. 1081, (M.D.C. 1978) aff'd
854 F.2d 1316 (4th Cir. 1988).
---------------------------------------------------------------------------
49. Additionally, there is no indication that in enacting Section
309(j)(4)(D) Congress intended to expand the definition of ``members of
minority groups'' to include classes of persons other than racial or
ethnic groups, such as those listed in the preceding subsection,
Section 309(i).\26\ We further observe that in no other Commission
context, have we included disabled persons in the categories of groups
that comprise our definition of minorities. Making such a change here,
without clear statutory and legislative support to do so, would
therefore be inconsistent with our traditional application of the
definition, which we believe should be uniform in all licensing
contexts.\27\
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\26\47 U.S.C. 309(i)(3)(C)(ii). Below, we revise our definition
of ``members of minority groups'' to conform to this statutory
definition. In interpreting this definition in the past, we have
taken a restrictive view of the categories of minorities included in
this definition and limited its expansion. See Third Report and
Order, Gen. Docket No. 81-768, 102 FCC 2d 1401 (1985).
\27\See In re Petition of Paralyzed Veterans Of America, et. al,
to Amend Regulations Facilitating Minority Ownership of Broadcast
Facilities to Include the Physically Handicapped, Memorandum Opinion
and Order, FCC 85-651, 59 Rad. Reg. 2d (P&F) 1353 (released Dec. 16,
1985), petition for review dismissed as untimely, California Assoc.
of the Physically Handicapped, Inc. v. FCC, 833 F.2d 1333 (9th Cir.
1987).
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50. We wish to emphasized also, that it is highly likely that most
firms owned by individuals with disabilities will be eligible to bid in
the entrepreneurs' block and for an installment payment option if they
meet the required gross revenues and total assets test. Such firms may
also be eligible for ``enhanced'' installment payments and bidding
credits if they qualify as small businesses under our rules. Indeed,
absent a substantial record that demonstrates firms owned by persons
with disabilities have any more difficulty accessing capital then any
other small business, we find that we cannot accommodate the Karl
Brothers request.
51. We also note that we have before us a Petition for Rulemaking
filed by David J. Lieto (Lieto Petition), which requests that the
Commission amend Section 1.2110 of the Commission's rules to provide
that disabled individuals are within the minority group categories and
are thus entitled to the benefits associated with being a designated
entity under the Commission's auction rules. See David J. Lieto
Petition for Rulemaking, filed September 21, 1994, at 2-3. As stated
above, we believe that our existing rules provide opportunities for
individuals with disabilities to participate in the entrepreneurs'
block, and that there is no direct statutory or record support for
Lieto's request. Furthermore, Lieto has failed to provide a record
comparable to that for women and minorities demonstrating that disabled
individuals experience difficulties accessing capital that are unique
to their status. Accordingly, we decline to initiate a rulemaking at
this time, and hereby dismiss the Lieto Petition.
52. In response to numerous inquiries,\28\ however, we revise the
definition of ``members of minority groups'' slightly to conform with
the definition of minority used in other contexts.\29\ Thus,
Sec. 24.720(i) shall read as follows: ``Members of minority groups
include Blacks, Hispanics, American Indians, Alaskan Natives, Asians,
and Pacific Islanders.''\30\ We have also been asked to clarify the
meaning of particular categories in the definition of minority. Again,
for consistency, we shall use the same category descriptions the
Commission has relied on in other contexts.\31\ These categories are as
follows:
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\28\We received several inquiries about the definition of
``members of minority groups'' from participants in the FCC PCS
seminars, which provide an overview of the PCS rules and procedures.
The seminar series included sessions held in the following
locations: Washington, D.C. (Aug. 29 1994); Chicago (Aug. 22, 1994);
Denver (Aug. 24, 1994); San Francisco (Aug. 26, 1994).
\29\See, e.g., Broadcast Equal Employment Opportunity Rules and
FCC Form 395, 70 FCC 2d 1466, 1473 (1979); 47 CFR 73.3555(d)(3)(iv),
1.1621(b); see also 47 U.S.C. Sec. 309(i)(3)(c)(ii); Race and Ethnic
Standards for Federal Statistics and Administration Reporting, OMB
Statistical Policy Directive No. 15 (1977).
\30\In a separate Order, we shall be making the same correction
to the definition of minority groups used in the generic auction
rules (see 47 CFR 1.2110(b)(2)) and the narrowband auction rules
(see 47 CFR 24.320(f)).
\31\See Broadcast Equal Employment Opportunity Rules and FCC
Form 395; See also ``Instructions for Completing FCC Forms 395-A &
395-M,'' Section V (Race/Ethnic Categories).
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a. Black. A person having origins in any of the black racial groups
of Africa.
b. Hispanic. A person of Mexican, Puerto Rican, Cuban, Central or
South American or other Spanish Culture or origin, regardless of race.
c. American Indian or Alaskan Native. A person having origins in
any of the original peoples of North America, and who maintains
cultural identification through tribal affiliations or community
recognition.
d. Asian or Pacific Islander. A person having origins in any of the
original peoples of the Far East, Southeast Asia, the Indian
subcontinent, or the Pacific Islands. This area includes, for example,
China, Indian, Japan, Korea, the Philippine Islands, and Samoa.
To address any specific claims or allegations regarding an
individual race or origin, we will follow existing Commission
precedent.\32\ To the extent that prior Commission cases do not provide
adequate guidance in specific cases, we may look to cases developed
under minority programs in other federal agencies, such as the Office
of Management and Budget (OMB) and the SBA.
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\32\See, e.g., Lone Cypress Radio Assoc. Inc., 7 FCC Rcd 4403
(Rev. Bd. 1992), and cases cited therein; See also Storer
Broadcasting Co., 87 FCC 2d 190, 191-93 (1981).
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Small Business Consortia
53. In the Fifth Report and Order the Commission allowed a
consortium of small businesses to qualify collectively for the
preferences available to a small business if each business within the
consortium individually satisfies the definition of a small business
designated entity. The Commission defined a small business designated
entity as any company that, together with attributable investors and
affiliates, has average gross revenues for the three preceding years of
not in excess of $40 million. We defined ``consortium of small
businesses'' as a conglomerate organization formed as a joint venture
among mutually-independent business firms, each of which individually
satisfies the definition of a small business. See 47 CFR
Sec. 24.720(b)(3). In the Second Report and Order, we concluded that
consortia should not always be entitled to qualify for measures
designed specifically for designated entities. In the Fifth Report and
Order, however, we stated that for the auctioning of broadband PCS, it
is especially necessary to allow small businesses to pool their
resources in this manner to help them overcome capital formation
problems. Thus, our rules provide that if a consortium's members are
all small businesses (i.e., defined as companies that do not have
average yearly gross revenues for the preceding three years in excess
of $40 million), the consortium as a whole will qualify for designated
entity provisions for small businesses.
54. Omnipoint requests that the Commission allow small businesses
to form a single corporate applicant (rather than a joint venture) and
get the same treatment as consortia. BET requests that the Commission
eliminate the preference available to small business consortia.
55. We believe the current preferences for small business consortia
are adequate and necessary to ensure that small businesses have
sufficient opportunities to participate in the broadband PCS auctions.
Accordingly, we deny BET's request to eliminate the small business
consortia preferences. As we observed in the Fifth Report and Order,
allowing small businesses to pool their resources in this manner is
necessary to help them overcome capital formation problems and ensure
their participation in the provision of broadband PCS. We believe that
small, rural telephone companies, in particular, are expected to use
this mechanism to compete in some of the smaller markets.
56. We also deny Omnipoint's request that small businesses be
allowed to form a single corporate applicant that would be afforded the
same treatment as consortia. The concept of a consortium is that each
small business participant remains a distinct corporate entity
independent of other consortium members and that each member has rights
and obligations similar, or equal to, those held by participants in
other types of joint ventures. Allowing a group of small businesses to
apply as one corporate applicant and receive the benefits or our
consortia rule would disadvantage small, independent businesses wishing
to bid as a group under our rule, but who cannot restructure as a
corporate applicant and could tend to dilute each member's influence
and insulate their responsibilities in the venture. We believe that
such a change would also eviscerate our small business eligibility size
requirement. We wish to clarify, however, that we intent to examine the
qualifications of each consortium member to ensure that each is a bona
fide small business. In this regard, it is assumed that each concern
should be an entity ``organized for profit'' and not for the sole
purpose of qualifying as part of a small business consortia. This is
consistent with SBA's long-standing definition of ``business concern.''
See 43 CFR 121.403(a), Small Business Size Standards, 54 FR 52634 (Dec.
21, 1989).
57. On another issue, BET contends that the $40 million gross
revenues standard fails to comply with an SBA requirement that any size
standard proposed by a federal agency that varies from SBA's standard
be ``proposed after an opportunity for public notice and comment'' and
be ``approved by the Administrator [of the SBA].''\33\ We believe we
have fully met our notice and comment obligations, both under the
Administrative Procedures Act and the Small Business Act, in this
proceeding. We solicited comment on a range of size options, and
received comment that included SBA's recommendation for a $40 million
gross revenues cap (which we ultimately adopted). Indeed, we recently
obtained SBA's approval of the $40 million size standard.\34\
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\33\See 15 U.S.C. 632(a)(2)(A) and (C)
\34\See Letter to William Kennard, FCC General Counsel from
Philip Lader, SBA Administrator, Nov. 9, 1994 (responding to Aug.
19, 1994 request for size approval).
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Eligibility Requirements
Minimum Equity Limit for the Control Group
58. In the Fifth Report and Order, the Commission adopted a
methodology for assessing an applicant's compliance with the financial
caps for the entrepreneurs' blocks and for small business size status
based on the distinction between: (a) Noncontrolling investors (whose
financial status would not be attributed to the applicant); and (b)
investors holding interests in the control group of the applicant. The
gross revenues, assets and personal net worth limits of attributable
investors (i.e., those with more than 25 percent equity) and all
control group members, regardless of the size of their individual
interests, are included in assessing an applicant's compliance with the
financial caps. To qualify as a women or minority-owned business, the
Commission further required that the control group be composed entirely
of women and minorities. The control group requirement ensures that
designated entity and entrepreneur principals retain control of the
applicant and own a substantial financial interest in the venture. At
the same time, it enables noncontrolling investors outside the control
group to provide essential capital to an applicant without their
revenues, assets or net worth being attributed to the applicant or
their non-minority or male status disqualifying the applicant.
59. The Commission adopted two control group options in the Fifth
Report and Order. Under the first option, passive investors are
permitted to own up to 75 percent of the applicant's total equity, so
long as: (1) No investor holds more than 25 percent of the applicant's
passive equity (which was subsequently defined to include up to 15
percent of a corporation's voting stock); and (2) in the case of a
corporate applicant, at least 50.1 percent of the voting stock is held
by the control group. In the case of partnership applicants, the
control group must own all the general partnership interests. The
Commission determined that this minimum equity level strikes an
appropriate balance between the competing considerations of permitting
qualified bidders to raise capital and ensuring that designated
entities receive a significant economic benefit from the venture. The
Commission extended an alternate option to qualified women or minority-
owned businesses. Under this option, the Commission would permit a
single investor in a minority or women-owned applicant to own up to
49.9 percent of the passive equity (which we subsequently defined to
include up to 15 percent of a corporation's voting stock), so long as
the control group holds the remaining 50.1 percent of the equity. As
with the first option, the control group is required to retain control
and, in the case of a corporate applicant, hold at least 50.1 percent
of the voting stock. Also, ownership interests are to be calculated on
a fully diluted basis.
60. Petitions filed by BET, Columbia PCS, CTIA, EATEL, Lehman Bros.
and Omnipoint variously address the Commission's restrictions on the
composition of an applicant's control group. Specifically, petitioners
request clarification that our attribution rules and definitions of
minority and women-owned business be interpreted to permit
``nonqualifying'' noncontrolling investors within the control group.
``Nonqualifying'' investors, as petitioners describe, are investors
that are neither women nor minorities, or investors that if attributed
would cause the applicant to exceed the financial caps. EATEL argues
that to do otherwise may preclude participation by existing companies
whose existing corporate structures would disqualify an applicant
absent significant expenditures for corporate restructuring. EATEL
maintains that existing entities have the greatest amount to offer
applicants in terms of financial and technical resources. Petitioners
also request that the Commission allow a limited amount of equity
investment in the control group to help the applicant comply with the
25 percent minimum equity requirement. Columbia PCS, for example,
advocates adoption of a bright-line test that would require at least a
75 percent equity and a 100 percent voting interest in the control
group to be held by ``qualifying'' entities. Columbia PCS maintains
that designated entities will be unable to raise sufficient capital
unless this clarification is made. EATEL and CTIA maintain that the 100
percent equity requirement for minority and women-owned control groups
is too restrictive for entities already in existence. Instead, they
argue that businesses which are in fact controlled by women and/or
minorities, but which have numerous non-controlling shareholders
(including some that are neither women nor minorities), should be
eligible for the preferences we adopted for minority and women-owned
businesses. BET also requests clarification that a control group may be
comprised of a single individual.
61. Omnipoint, Columbia PCS, CTIA and Lehman Brothers contend that
the 25 percent minimum equity ownership restriction is too high and
that designated entities will face insurmountable difficulties
arranging financing if it is not reduced. To remedy this problem,
Lehman Brothers proposes two alternative solutions. First, for publicly
traded companies, Lehman proposes that public shareholders with less
than 5 percent equity should be counted towards the control group's 25
percent equity threshold. Lehman maintains that this proposal would
permit control group equity to be diluted by new shareholders, but not
below a minimum equity level (Lehman recommends 10 percent). Second,
Lehman suggests that all designated entities should be permitted to
dilute their 25 percent equity interests in the following
circumstances: (a) Not earlier than one year after license grant, to
dilute control group equity to a total of not less than 20 percent; (b)
not earlier than two years, to dilute control group entity to a total
of not less than 15 percent; and (c) not earlier than three years to
dilute control group equity to a total of not less than 10 percent.
Lehman argues that this proposal would provide designated entities
efficient access to capital, thereby improving their competitive
position. CTIA recommends that an applicant should be eligible to bid
on the C and F blocks with at least 10 percent equity. Lehaman Brothers
requests that the Commission modify its control group definition to
provide that members of the control group receive dividends, profits
and regular and liquidating distributions in proportion to the actual
possession of equity held, rather than in proportion to their interest
in the total equity of the applicant. Lehman Brothers contends that our
rules could be interpreted to mean that such distributions must be paid
on options held but not exercised by control group members, rather than
on the basis of actual shares held.
62. After considering the record, and as described below, we modify
our rules to allow certain noncontrolling investors who do not qualify
for the entrepreneurs' block or as a small business to be investors in
an applicant's control group. We also allow entities that are
controlled by minorities and/or women, but that have investors that are
neither minorities nor women, to be part of the control group. We agree
with petitioners that some accommodation should be made in our
regulations to allow participation in an applicant's control group by
existing firms controlled by designated entities or entrepreneurs that
have investors that, if attributed, would cause the applicant to exceed
the small business or entrepreneurs' blocks financial caps or, for
minority or women-owned applicants, investors that are not minorities
or women. We will therefore modify our definition of a minority and
women-owned business to include preexisting companies that are
controlled by women or minorities but have noncontrolling investors in
the control group who are not minorities or women. Similarly, we will
allow preexisting companies that, in aggregate, meet our entrepreneurs'
block and small business size standards to be members of the control
group even if one or more of the noncontrolling investors in those
companies would disqualify the company based on its gross revenues or
total assets. We believe that these rule changes will provide a
reasonable balance between the need to ensure that designated entities
have a significant economic investment in the applicant and the
financing realities of a PCS venture.
63. We also agree with petitioners that it is not optimal to
require the qualifying control group members to hold at least 25
percent of the applicant's equity. The record indicates that in many
cases, designated entities and entrepreneurial principals will have
limited capital to contribute to the applicant's equity and that
nonontrolling investors will be unwilling to advance funds to enable
the designated entity (even one with management expertise) to reach the
25 percent threshold. Thus, without some modifications to our rules,
designated entities could face insurmountable difficulties in arranging
financing. We therefore conclude that we should modify our rules to
address petitioners' concerns, while balancing the need to ensure
meaningful equity participation by ``qualifying'' control group
members.
64. Specifically, we will retain the 25 percent minimum equity
requirement for the control group, but we will require only 15 percent
(i.e., 60 percent of the control group's 25 percent equity
contribution) to be held by qualifying, controlling principals in the
control group (i.e., minorities, women or small/entrepreneurial
business principals). For example, if the applicant seeks minority or
women-owned status, the 15 percent equity (as well as 50.1 percent of
the voting stock of the applicant) must be owned by control group
members who are minorities and/or women. If the applicant seeks small
business status, 15 percent of the equity must be held by control group
members who, in the aggregate, qualify as a small business.\35\ The
composition of the principals of the control group determines whether
the applicant qualifies for bidding credits, installment payments and
reduced upfront payments. The 15 percent may be held in the form of
options, provided these options are exercisable at any time, solely at
the holder's discretion, and at an exercise price equal to or less than
the current market valuation of the underlying shares at the time of
short-form filing. The remaining 10 percent (i.e., 40 percent of the
control group's minimum equity contribution) may be held in the form of
either stock options or shares, and we will allow certain investors
that are not minorities, women, small businesses or entrepreneurs to
hold interests in such shares or options. Specifically, we will allow
the 10 percent portion to be held in the form of shares or stock
options by: (1) Investors in the control group that are women,
minorities, small businesses or entrepreneurs; (2) individuals who are
members of an applicant's management team (which could include
individuals who are not minorities or women or individuals who have
affiliates that exceed the entrepreneurs' blocks or small business size
thresholds); (3) existing investors of businesses in the control group
that were operating and earning revenues for two years prior to
December 31, 1994; or (4) noncontrolling institutional investors.
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\35\For instance, if a preexisting company wants to qualify as a
small business control group, its gross revenues and total assets
will be added to the gross revenues and assets of each of its
controlling shareholders and to those of all affiliates. The
resulting sum must be under $40 million in gross revenues and $500
million in total assets. The gross revenues and total assets of the
company's preexisting, noncontrolling shareholders will be ignored,
however.
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65. The Commission also adopted an alternative to the 25 percent
minimum equity requirement for minority and women-owned businesses,
which permits a single investor to hold as much as 49.9 percent of its
equity, provided the control group holds at least 50.1 percent. Several
petitioners have expressed similar concerns with respect to the need to
revise the 50.1 percent requirements. Therefore, in tandem with, and
for the same reasons as, the modifications to the 25 percent equity
requirement, we make similar modifications to the rules governing the
50.1 percent minimum equity requirement. Accordingly, where a minority
or women-owned business uses the 50.1 percent minimum equity option, we
will require only 30 percent of the total equity to be held by the
principals of the control group that are minorities or women. The 30
percent may be held in the form of options, provided these options are
exercisable at any time, solely at the holder's discretion, and at an
exercise price equal to or less than the current market valuation of
the underlying shares at the time of short-form filing. The remaining
20.1 percent may be made up of shares and/or options held by investors
that are not women or minorities under the same criteria described in
paragraph 64 above. That is, the 20.1 percent portion of the control
group's equity may be held in the form of shares or stock options by
any of the following: (1) Investors in the control group that are
minorities, women, small businesses or entrepreneurs; (2) individuals
who are members of an applicant's management team (which could include
individuals who are not minorities or women, or individuals who have
affiliates that exceed the entrepreneurs' blocks and small business
size standards); (3) existing investors of businesses in the control
group that were operating and earning revenues for two years prior to
December 31, 1994; or (4) noncontrolling institutional investors.\36\
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\36\For our purposes, we define institutional investors in a
manner that is similar to the definition that is used by the
Commission in the attribution rules applied to assess compliance
with the broadcast multiple ownership; rules. We modify that
definition slightly, however, to fit this service. Specifically, we
expect that investment companies will be important sources of
capital formation for designated entities. Accordingly, we adopt a
definition that specifically includes venture capital firms and
other smaller investment companies that may not be included in the
definition of investment companies found in 15 U.S.C. 80a-3 (which
is cited in our broadcast rules at 47 CFR 73.3555 Note 2(c)).
Specifically, we define an institutional investor as an insurance
company, a bank holding stock in trust accounts through its trust
department, or an investment company as defined in 15 U.S.C. 80a-
3(a) without reference to, or incorporation of, the exemptions set
forth in 15 U.S.C. 80a-3(b) and (c); provided that, if such
investment company is owned, in whole or in part, by other entities,
then such investment company, such other entities and the affiliates
of such other entities, taken as a whole, must be primarily engaged
in the business of investing, reinvesting or trading in securities
or in distributing or providing investment management services for
securities. See Sec. 24.720(h).
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66. In addition, the control group minimum equity requirement will
be reduced three years from the date of license grant as suggested by
Lehman Brothers, but the control group must still retain voting control
(i.e., 50.1 percent of the vote). According the control group the
option to reduce the equity requirement accommodates the needs of
designated entity licensees to raise capita as they build out their
systems. Significantly, the three-year mark corresponds with the end of
the no transfer period under our license holding rule. In the case of a
licensee that has chosen the 25 percent minimum equity option, the
principals in the control group will only be required to hold 10
percent of the licensee's equity after three years, with no further
equity requirements imposed on the control group. Similarly, in the
case of a licensee that has used the 50.1 percent minimum equity
option, the principals in the control group will be required to hold 20
percent of the licensee's equity, and no further equity requirements
will be imposed on the control group.
67. After reviewing the record, we are persuaded that these changes
will afford the control group greater flexibility in raising the
necessary equity for participation in the entrepreneurs' blocks. In
particular, we are allowing that 10 (or 20.1) percent of the equity can
come from sources that otherwise would not qualify for the control
group. In making these limited changes to the control group equity
requirements, we believe the amended rules will: (1) promote investment
in designated entities generally; (2) attract and promote skilled
management for applicants; and (3) encourage involvement by existing
firms that have valuable management skills and resources to contribute
to the success of applicants.
68. With respect to our decision to allow investment in the control
group by investors of preexisting firms, the business involved must be
a going concern that has been in existence for a reasonable period of
time prior to adoption of our rules in order to avoid any sham
arrangements. Specifically, the business involved must have been
operating and earning revenues for at least two years prior to December
31, 1994 to qualify for this provision. While we want to relax the
control group equity requirements slightly, we also recognize there may
be an incentive for nonqualifying investors to purchase substantial
interests in ``preexisting'' businesses unless we place some
restrictions on those investors. As a practical matter, however, we
realize that the identity of noncontrolling investors in such
businesses, particularly if they are publicly-traded companies, will
change regularly. We intend that the allowed equity (10 or 20.1
percent) portion should be held by existing investors in such a company
although we will not place limits on who qualifies as such an investor.
We emphasize, however, that we will scrutinize any significant equity
restructing of preexisting companies that occurs after adoption of our
rules. We would presume that any change of equity by an investor in a
preexisting company (that is in an applicant's control group) that is
five percent or less would not be significant, and the burden is on the
applicant to demonstrate whether changes in equity that exceed five
percent are not significant.
69. We also agree with petitioners and commenters that greater
flexibility should be afforded to any applicant whose ownership
structures were established before our designated entity requirements
were formulated. Therefore, as a further modification, if the sole
control group member of an applicant is a business that was in
existence and had earnings from operations for at least two years prior
to December 31, 1994, we offer the option that control group principals
establishing the applicant's status as a minority and/or women-owned
business, small or entrepreneurial business may hold 10 percent of the
applicant's equity if the 25 percent equity option is used, or a 20
percent equity interest if the 50.1 percent equity option is used.\37\
The balance of the control group's equity contribution (i.e., 15 or
30.1 percent) must be held in the form of shares or stock options by
any of the following: (1) Qualifying principals in the control group;
(2) individuals who are members of the applicant's management team
(which could include ``nonqualifying'' individuals); or (3) existing
investors of business in the control group that were operating and
earning revenues for two years prior to December 31, 1994.
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\37\This equity may be held outright or in the form of options
provided these options are exercisable at any time, solely at the
holder's discretion, and at an exercise price equal to or less than
the current market valuation of the underlying shares at the time of
the filing of the short-form application.
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70. The lower equity requirement of 10 percent for preexisting
companies that are sole control group members addresses the concerns of
these firms, many of which have already undergone successive rounds of
financing that may have diluted the qualifying investors' original
equity interest in the business. Existing firms that were structured
prior to the adoption of the entrepreneurs' blocks regulatory scheme
are less likely to become ``fronts'' for business that would not
qualify for the entrepreneurs' block or the special provisions accorded
designated entities. This option is solely intended to accommodate
long-standing capital structures of applicants that have already been
required to dilute equity ownership to raise capital. Thus, we will
require that the portion of equity not held by qualifying principals
(15 or 30.1 percent, as the case may be) to be comprised entirely of
existing investors of the company (unless the equity is held by
management or qualified principals of the control group). As we stated
above, we recognize that for many companies, especially those that are
publicly-traded, the identities of noncontrolling investors change
regularly. Thus we will not place limits on the amount of time a
particular individual or entity must have been an investor in the
company. We emphasize, however, that we will scrutinize carefully
applicants that engage in significant equity reshuffling after adoption
of our rules.\38\ By giving preexisting applicants additional
flexibility, we do not intend to place other applicants at a
competitive disadvantage by permitting greater capital infusion from
institutional investors.
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\38\We will presume that a change in equity by an investor (in a
preexisting business) of five percent or less is not significant,
and the burden is on the applicant to demonstrate whether equity
changes above five percent are not significant.
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71. In implementing our requirements, we will provide that where
the interests in question are not held directly in the applicant, a
multiplier will be used to calculate the effective interests held by
the control group principals toward fulfillment of the minimum equity
requirement. In addition, we will use a multiplier to calculate the
interests of noncontrolling investors in the control group so as to
assess compliance with the 25 percent nonattributable equity limit.\39\
A multiplier is a traditional tool used by the Commission to calculate
the effective ownership levels of investors that, through one or more
intervening corporations, hold indirect interests in a licensee.\40\
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\39\We illustrate the application of a multiplier as follows: If
a member of a minority group or a woman holds a 25 percent equity
interest in a corporate member of the control group and that
corporation holds a 25 percent equity interest in the applicant, the
effective interest for purposes of assessing compliance with the
minimum equity requirement would be 6.25 percent (i.e.,0.25 x 0.25
= 6.25). This falls well below the 25 percent requirement of our
original rule. Correspondingly, if a noncontrolling (and
nonqualifying) investor holds a 40 percent interest in a corporate
member of a control group and that corporation holds 25 percent of
the applicant's total equity, the effective interest held in the
applicant by the investor would be 10 percent (i.e., 0.25 x .40 =
10.00). If that same investor also owns more than 15 percent of the
applicant's equity outside of the control group, it would exceed the
25 percent non-attributable equity limit.
\40\See, e.g., 47 CFR 73.3555 Note 2(d) (indicating that
attribution ownership interests in a broadcast licensee, cable
television system or daily newspaper that are held indirectly by a
party through one or more intervening corporations will be
determined by successive multiplication of the ownership percentages
for each link in the vertical ownership chain). We note that the
multiplier used here does not employ the 51 percent control
exception used in the broadcast context since we are using a
multiplier only to determine a control group member's equity
investment, not whether such member has control or substantial
influence over the applicant.
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72. Additionally, in a written ex parte presentation, Metricom
requests that we exempt small, publicly-traded corporations with widely
dispersed voting stock ownership from our control group requirement.
Metricom contends that the control group concept is unworkable for
small, publicly-traded companies, because it would not be possible to
identify a group of shareholders that own 50.1 percent of the
corporation's voting stock. As a result, such corporations could be
unable to establish eligibility for the entrepreneurs' blocks, or
status as a small business. Metricom proposes a test for identifying
small, publicly-traded corporations with widely-dispersed voting stock
ownership that closely follows guidelines used by the Securities and
Exchange Commission.
73. We will adopt Metricom's proposal, and create a limited
exemption from the control group requirement for small, publicly-traded
corporations with widely dispersed voting stock ownership. As Metricom
points out, a significant number of small, publicly traded companies
have such widely dispersed voting stock ownership that no identifiable
control group exists or can be created. Without a control group, such
companies may not be able to bid for entrepreneurs' block licenses or
quality for small business status even though their gross revenues and
assets meet our financial caps. It was not the Commission's intent that
these companies be denied the opportunity to bid on the entrepreneurs
block, or to qualify for treatment as a small business.
74. Consistent with Metricom's proposal, a small, publicly-traded
corporation will be found to have dispersed ownership of voting stock
if no person (including any ``group'' as that term is used in the
Securities Exchange Act of 1934)\41\ has the power to control the
election of more than 15 percent of the corporation's directors. In
addition, we will require that no person shall have an equity interest
in the applicant for more than 15 percent, which is consistent with out
revised equity requirements for small business applicants utilizing a
control group. Under those requirements small business principals in an
applicant's control group must hold at least 15 percent interest in the
applicant (in combination with an additional, 10 percent equity
interest that may come from ``nonqualifying'' sources). A 15 percent
equity requirement is appropriate here because the same percentage of
equity is needed for a small business applicant's control group to
satisfy its equity obligations (unless it is a preexisting company),
and because a 15 percent equity cap is likely to ensure that no control
questions arise. We, emphasize that this control group exemption will
only apply to an applicant or licensee that is not controlled by any
entity or group other than corporate management, as should be the case
where there is no identifiable group of shareholders holding a
controlling interest in the company's voting stock. A small corporation
that has dispersed voting stock ownership and no controlling affiliates
will therefore not be required to aggregate with its own revenues and
assets the revenues and assets of management and shareholders for
purposes of entrepreneurs' block eligibility or small business status.
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\41\15 U.S.C. 78(a) et seq. (Section 13(d) and Section 13(g)
state that ``when two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring,
holding, or disposing of securities in an issuer, such syndicate or
group shall be deemed a `person' and therefore required to make the
disclosures indicated in those subsections'').
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75. Small, publicly-traded corporations that choose to exempt
themselves from the control group requirement must own all the equity
and voting stock of the applicant or licensee. We find their ability to
reply on the corporation's existing capital structure to introduce new
passive investment on an ongoing basis provides a level of flexibility
that is comparable to applicants/licensees with an identifiable control
group. We note that minority and/or women-owned businesses would not
qualify for this exemption since a control group is necessary to
determine whether the applicant is controlled by minorities or women.
76. Finally we consider a few other points. First, as BET requests,
we clarify that an individual can be the control group of an applicant,
so long as our equity requirements and other provisions are satisfied.
In response to Lehman Brothers' concerns, we clarify the control group
requirements to provide that control group investors must receive
dividends, profits, and regular and liquidating distributions in
proportion to their actual possession of equity holdings, rather than
in proportion to their interest in the total equity (which may include
options not yet exercised). Finally, we see no conflict in our rules
with a Pacific Telesis' proposal to allow designated entities and their
partners to allocate amongst themselves tax benefits on a non-pro rata
basis.
De Facto Control Issues and Management Contracts
77. In the Fifth Report and Order, we provided that the designated
entity control group must have de facto as well as de jure control if
the applicant and must be prepared to demonstrate that it controls the
enterprise. The requirement of de facto control arises from Section
310(d) of the Communications Act, 47 U.S.C. 310(d), which prohibits any
transfer or assignment of license or transfer of control of a
corporation holding a license without the Commission's authorization.
To help in determining what constitutes a transfer of control under
this statutory provision we follow precedent defining de facto
control.\42\ We also apply this standard in the case of designed
entities to determine whether the applicant is in fact controlled by
qualifying individuals or entities. Several petitioners seek
reconsideration or clarification of our de facto control standard,
particularly as it applies to questions of de facto control by the
designated entity control group and use of management contracts by
licensees.
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\42\See Rochester Telephone v. United States, 23 F. Supp. 634,
636 (S.D.N.Y 1938), aff'd, 307 U.S. 125 (1939); Lorain Journal Co.
v. FCC, 351 F.2d 824, 827-828 (D.C. Cir. 1965, cert. denied, 383
U.S. 967 (1966).
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Definition of De Facto Control
78. The Fifth Report and Order does not set forth specific
guidelines defining de facto control in the entrepreneurs' block
context. Because issues of de facto control are necessarily fact-
specific, we have treated the issue as one to be handled on a case-by-
case basis.\43\ Consequently, a wide variety of factors may be relevant
to determining whether a control group Has de acto control of a
particular applicant, applying in the entrepreneurs' blocks.
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\43\Stereo Broadcasters, Inc., 55 FCC 2d 819, 821 (1975),
modified, 59 FCC 2d 1002 (1976).
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79. Some petitioners ask us to provide more specific guidelines
with respect ti what dies and does not constitute de facti control.
Omnipoint states that such guidelines would help designated entity
applicants in setting up their management structure Others seek
assurance that designated entity control groups can meet the de facto
control test even if they enter into agreements containing ``standard''
covenants for the protection of non-majority or non-voting
shareholders, e.g., supermajority voting requirements for major
corporate changes, liquidation preference (commonly in the form of
preferred stock), rights of first refusal, veto rights concerning
particular corporate transactions, or the preemptive right to purchase
stock to prevent dilution.
80. We continue to believe that determinations of de factir control
for purposes of determining designated entity eligibility for
entrepreneurs' blocks are inherently factual therefore will require
case-by-case determination Nevertheless, to provide a level of
certainty for designated entities and to ensure that designated
entities maintain de facto control, we believe it is appropriate to
articulate some guidelines for defining de facto control in this
context. We therefore clarify that a designated entity or
entrepreneurs' control group must demonstrate at least the following
indicia of control to establish that it retains de facto control of the
applicant (1) The control group must constitute or appoint more than 50
percent of the board of directors or partnership management committee;
(2) the control group must have authority to appoint, promote, demote
and fire senior executives that control the day-to-day activities of
the licensee; (3) the control group must play in integral role in all
major management decisions; and (4) in the case of applicants
controlled by minorities and women, at least one minority or female
control group member must have senior managerial responsibility over
day-to-day operations, e.g., as President or CEO of the licensee.\44\
We emphasize, however, that these criteria are guidelines only and are
not necessarily dispositive of the issue of de facto control in all
situations. Even where these criteria are met, therefore, the
determination of whether de facto control exists will depend on the
totality of circumstances in the particular case.
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\44\These same four indicia will be used to determine whether
the ``qualified'' members of the control group (i.e., women,
minorities, and small business or entrepreneurial principals) have
de facto control over the control group. For example, in a women-
owned limited partnership applicant with one corporate general
partner, the women shareholders of that corporation must constitute,
or be able to appoint, more than 50 percent of the board, appoint
and fire senior executives, play an integral role in all major
management decisions, and at least one of the women must have senior
managerial responsibility over day-to-day operations.
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81. With respect to provisions benefitting non-majority or non-
voting shareholders, we recognize that inclusion of such provisions in
a common practice to induce investment and ensure that the basic
interests of such shareholders are protected. For example, many
corporations require a supermajority of shareholders to approve major
corporate decisions such as taking on additional debt, significant
corporate acquisitions, or issuance of new stock. Similarly, strategic
investors making large passive equity contributions to a company
frequently insist on a right of first refusal exercisable in the event
that a third party seeks to purchase the company. We agree with
petitioners that allowing such provisions enhances the ability of
designated entities to raise needed capital from strategic investors,
thereby bolstering their financial stability and competitive viability.
We believe, however, that precedent provides guidance in determining
the appropriate extent to which these safeguards may protect
investment. We therefore clarify that under our case law non-majority
or non-voting shareholders may be given a decision-making role (through
supermajority provisions or similar mechanisms) in major corporate
decisions that fundamentally affect their interests as shareholders
without being deemed to be in de facto control.\45\ Such decisions
generally include: (1) Issuance or reclassification of stock; (2)
setting compensation for senior management; (3) expenditures that
significantly affect market capitalization; (4) incurring significant
corporate debt or otherwise encumbering corporate assets; (5) sale of
major corporate assets; and (6) fundamental changes in corporate
structure, including merger or dissolution.\46\ We also clarify that
non-majority or non-voting investors may hold rights of first refusal,
provided that right is exercisable only to prevent dilution of the
investor's interest or a transfer of control by the control group to a
third party. We also observe that we would not look favorably upon an
assignment or transfer of a license that resulted from rights of first
refusal being exercised if (1) the holder of such rights was a manager
of the licensee, and (2) there was evidence the manager had not acted
to maximize the profitability of the business in order to ensure that
the options would be exercised at a lower price.
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\45\See. e.g., News International, 97 FCC 2d 349, 357-66, (1984)
(describing minority shareholder voting and consent rights that
serve to protect interest and do not constitute a transfer of
control); Data Transmissions, 44 FCC 2d 935, 936-37 (1974) (same).
\46\Our most recent decision on such voting and consent rights
addressed an agreement between MCI Communications Corporation (MCI)
and British Telecommunications plc (BT). In that Order, we evaluated
whether particular voting and consent rights intended to protect
BT's investment in MCI triggered a transfer of Control. See
Declaratory Ruling and Order, 9 FCC Rcd (1994). We indicated that
covenants that give a party the power to block certain major
transactions of a company do not in and of themselves represent the
type of transfer of corporate control envisioned by Section 310(d)
of the Communications Act. We found it significant, however, that
while BT could block certain major transactions by MCI, BT could not
compel MCI to engage in such major transactions. Thus, we concluded
that BT's power was permissibly limited to protecting its own
investment in MCI. Id. 9 FCC Rcd at 3962. See Also McCaw Ceullar
Communications, Inc., 4 FCC Rcd 3784 (Com. Car. Bur. 1989).
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82. While we conclude that the provisions described above will
generally not be considered to deprive an otherwise qualified control
group of de facto control, some proposals made by petitioners and
comments to benefit non-majority shareholders would violate this
standard. For example, non-majority shareholders should not have the
power to select or replace members of the control group or key
employees of the corporation. Further, as discussed in the Second
Report and Order in this docket, we do not intend to restrict the use
of preferential dividends and liquidation preferences. We will
scrutinize, however, any mechanisms that deprive the control group of
the ability to realize a financial benefit proportional to its
ownership of the applicant. Finally, we emphasize that any final
determination of whether a control group has yielded de facto control
to outside investors must depend on the circumstances of the particular
case. For example, while certain provisions benefitting non-majority
investors may not give rise to a transfer of control when considered
individually, the aggregate effect of multiple provisions could be
sufficient to deprive the control group of de facto control,
particularly if the terms of such provisions vary from recognized
standards.\47\ To facilitate review of such provisions, we will amend
the Form 401 (long-form)\48\ to require winners of C and F block
auctions to disclose any such convenants and terms that protect non-
majority investors' rights in the licensee.
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\47\In assessing whether such provisions vary from recognized
standards, the Commission may assess whether the provisions are
accepted measures to protect financial interests of nonctrolling
investors. See, e.g. Model Business Corporations Act and Uniform
Limited Partnership Act.
\48\FCC Form 600 will replace both Form 401 (used under Part 22
of the Commission's Rules) and Form 574 (used under Part 90 of the
Commission's Rules). Third Report and Order in Gen. Docket No. 93-
252, FCC 94-212 (released September 23, 1994) 286. Applicants must
use Form 600 beginning January 2, 1995. Id. 298, 414. the
Commission has received a Motion for Stay of the January 2, 1995
effective date, which is currently pending. National Association of
Business and Educational Radio, Inc., Motion for Partial Stay of the
Third Report and Order in Gen. Docket No. 93-252, filed November 4,
1994.
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Management Contracts
83. An issue of concern to many petitioners and commenters is
whether designated entities may enter into management agreements with
third parties without being deemed to have engaged in an unauthorized
transfer of control. Although we did not expressly address this issue
in the Fifth Report and Order, we have traditionally scrutinized common
carrier management agreements for this purpose under the Intermountain
Microwave test,\49\ and we recently extended the use of this test to
all CMRS providers in our Fourth Report and Oder in Gen. Docket 93-
252.\50\ Under this test, a licensee may enter into a management
agreement with a third party provided that the licensee retains
exclusive responsibility for operation and control of the licensed
facilities, as determined by the following six factors: (1) Unfettered
use of licensed facilities and equipment; (2) day-to-day operation and
control; (3) determination of and carrying out of policy decisions; (4)
employment, supervision, and dismissal of personnel; (5) payment of
financial obligations; and (6) receipt of profits from operation of the
licensed facilities.
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\49\See Intermountain Microwave, Inc., 24 Rad. Reg. (P&B) 983
(1963) Intermountain Microwave). See also Memorandum Opinion and
Order in CC Docket No. 90-257 (La Star Cellular Telphone Company),
FCC 94-299 (adopted Nov. 18, 1994; released ____) (on remand from
the D.C. Circuit).
\50\Fourth Report and Order, Gen. Docket No. 93-252, FCC 94-270
(released Nov. 18, 1994), 20. In this order, we also concluded that
management contracts could be considered ``attributable interests''
for purposes of the PCS/cellular/SMR spectrum cap even if they did
not confer control under the Intermountain Microwave standard. This
conclusion applies only for spectrum cap purposes, however, and does
not affect underlying analysis of when a mangement affect our
undering analysis when a management contract gives rise to an
unauthorized transfer of control. Id. at 25.
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84. In its petition, Pacific Bell contends that the Intermountain
Microwave test needs to be clarified to eliminate uncertainty about the
permissible scope of management agreements. Pacific Bell notes that the
D.C. Circuit has recently remanded a case in which the Commission
purportedly misapplied the Intermountain test and argues that further
guidance from the Commission is therefore needed to prevent sham
agreements between designated entities and third party managers. Other
parties also support the view that the Commission should clarify its
standards regarding management contracts, but do not necessarily agree
about what standard should be anticipated. NABOB, for example, argues
that the Intermountain test is too rigid and that a more flexible
standard should be applied to designated entities who enter into
management agreements. Columbia PCS, on the other hand, contends that
the Commission should apply a stricter standard by limiting managers to
performing discrete functions on a subcontractor basis as opposed to
assuming broad responsibility for system management.
85. We have recently held in Gen. Docket 93-252 that the
Intermountain Microwave standard applies to all CMRS licensees who
enter into management contracts. Because we have determined that
broadband PCS licensees will be presumptively classified as CMRS
providers,\51\ we reaffirm the applicability of the Intermountain
standard here. We disagree with NABOB's view that this standard is not
sufficiently flexible to account for the management needs of designated
entities. The six Intermountain factors provide reasonable benchmarks
for ensuring retention of control by the licensee while allowing for
full consideration of the circumstances in each case. In the case of
designated entity applicants, they will ensure that designated entities
participate actively in the day-to-day management of the company while
allowing reasonable flexibility to obtain services from outside experts
as well. We believe that relaxing the Intermountain standard, by
contrast, could give rise to sham agreements in which designated
entities do not exercise actual control.
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\51\See Second Report and Order, Gen. Docket No. 93-252, 9 FCC
Rcd 1411 (1994) at 119.
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86. While we reject the view that scrutiny of management contracts
should be relaxed, we also disagree with the view that such contracts
should be subject to a stricter standard than we have applied
previously. We conclude that limiting managers to discrete
``subcontractor'' functions, as Columbia PCS proposes, could prevent
designated entities from drawing on managers with broad expertise.
Moreover, whether a manager undertakes a large number of operational
functions is irrelevant to the issue of control so long as ultimate
responsibility for those functions resides with the licensee.
Attribution Rules
Voting Equity
87. The Fifth Report and Order provided that an investor may hold a
25 percent passive equity interest in the entrepreneurs' block
applicant before its interest is attributable for purposes of our
eligibility rules.\52\ In addition, the passive equity investment for
closely-held companies could include no more than five percent voting
equity, while publicly-traded companies could include no more than 15
percent voting equity. In a subsequent Order, we increased the
threshold percentage of non-attributable voting equity from five
percent to 15 percent for closely-held companies,\53\ Similarly, for
the alternative equity option available to women and/or minority
principals, the 49.9 percent passive investment could include no more
than 15 percent voting equity.
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\52\Fifth Report and Order, FCC 94-178 at 158.
\53\Order on Reconsideration, FCC 94-217 at 8-10.
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88. Petitioners request that the Commission increase the threshold
percentage of non-attributable voting equity from 15 percent to an
amount ranging from 20 percent to 49 percent. In addition, petitioners
request that the Commission clarify whether the existing rules permit
nonattributable investors outside of the control group to hold a less
than 25 percent or a less than or equal to 25 percent equity interest
in the applicant. Also, on reconsideration of our Order on
Reconsideration parties have debated our decision to raise the voting
equity threshold for closely-held applicants from five to 15 percent.
AIDE argues that raising the voting level of closely-held applicants is
imprudent because it increases the likelihood that big business will
control the applicant. AMP disagrees with AIDE that 15 percent voting
control would increase the likelihood of shams, because 15 percent is
still not a controlling percentage. Rather, AMP argues that increasing
the permissible level of voting equity will enable applicants to
attract more equity financing, thereby increasing the applicant's
likelihood of success.
89. We amend our attribution rules to raise the voting equity
threshold that qualifies an investor as having an attributable interest
in an applicant to 25 percent. We will raise the voting equity level
for both publicly-traded and closely-held corporations, and will apply
the 25-percent threshold for the 25/75-percent equity option available
to all applicants and to the 49.9/50.1 percent equity option
additionally available to minority and/or women applicants. We observe
that 25 percent is the percentage suggested by both CTIA and BET. We
agree with CTIA that investors will be more likely to invest in new
companies if they have the ability to protect their investment through
increased voting rights. We also agree that a 25-percent voting
interest will not convey a significantly greater risk of control than a
15-percent voting interest. BET asserts that higher voting thresholds
will enable a larger number of existing companies--those which have
established financial structures with a higher percentage of voting
stock owned by non-controlling stockholders--to compete in the
entrepreneurial block. Furthermore, in other contexts, Congress has
used a 25-percent threshold as a measure of determining control. For
example, under Section 310(b) of the Communications Act, 47 U.S.C.
310(b), foreign companies are permitted to directly or indirectly
control up to 25 percent of CMRS licensees. We believe that in this
context as well, a 25-percent threshold strikes an appropriate balance
between the need to encourage investment and our goal of ensuring that
designated entities remain in clear control. Finally, for purposes of
clarification, the maximum permissible nonattributable equity level may
be no greater than 25 percent of the applicant's total equity and
includes the right to vote such share (e.g., through voting trusts or
other arrangement).\54\
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\54\For example, an investor holding 25 percent of an
applicant's voting stock will not be considered a nonattributable
equity investor if it also has the right, through a voting trust or
other arrangement, to vote additional shares.
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90. Additionally, however, to discourage large investors from
circumventing our equity limitations for nonattributable investors, we
clarify that persons or entities that are affiliates of one another, or
that have an ``identity of interests,'' will be treated as though they
were one person or entity and their ownership interests aggregated for
purposes of determining compliance with our maximum nonattributable
equity limits. We will aggregate their ownership interests in
calculating their total equity interests in the applicant and in
determining whether their gross revenues and assets will be attributed
to the applicant. Thus, for example, if two entities form a joint
venture or consortium to apply for broadband PCS A and B block
licenses, they have an identity of interests that is characteristic of
affiliates, and will be treated as a single entity when investing in
the same entrepreneurs' block applicant. See 47 CFR 24.72(1)(3); see
also 47 CFR 24.204, note 1. Consequently, under our rules we would
aggregate all equity investments in the applicant and count it as a
single, possibly attributable investment in the applicant where such
investors have an identity of interests.
Ownership Interests
91. The Fifth Report and Order states that ownership interests are
to be calculated on a fully diluted basis and that all agreements such
as warrants, stock options and convertible debentures will generally be
treated as if the rights thereunder have been fully exercised.
Designated entities are required to disclose any business five percent
or more of whose stocks, warrants, options or debt securities are owned
by the applicant or an officer, director, stockholder or key management
personnel of the applicant.\55\
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\55\See 47 CFR 24.813(a)(1)) (Form 175 and Form 401 application
requirements).
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92. Petitioners and ex parte commenters request that we clarify our
rules regarding the treatment of various ownership instruments such as
warrants, stock options and convertible debentures. Additionally,
commenters have asked whether rights of first refusal are considered
options and how stock ``calls'' and ``puts'' will be treated. A ``put''
option gives the holder the right to sell a share of stock at a
specified price at any time up to the expiration date. Conversely, a
``call'' option gives the holder the right to buy a share of stock at a
specified price, known as the ``exercise price.''
93. In general, we will treat stock options as fully exercised with
the exception of some ownership instruments. We recognize that some
forms of options are common and often beneficial to the management of a
company. Many companies, for example, include stock options in senior
management compensation packages. We also recognize that treating
options as fully exercised will encourage companies to hire minorities
and women for top management positions, because any options they
receive will count toward the equity eligibility requirement.
94. We decide that for purposes of calculating ownership interests,
however, some ownership instruments will not be treated as ``fully
diluted'', or will not be considered options generally. For example, we
will not consider rights of first refusal as options when calculating
ownership interests.\56\ Rights of first refusal differ from other
types of options because they cannot be exercised unless there is a
proposed sale to a third party. Sales and transfers to third parties
are restricted during the holding period, so rights of first refusal do
not threaten the composition of designated entities.\57\ At the end of
the five-year period, it will still be the designated entity's decision
as to whether to sell the business, which ensures that the designated
entity controls the decision whether to sell. We agree that without
these rights, investors are likely to shy away from investing in
designated entities. As Pacific Telesis and BellSouth point out, rights
of first refusal are a valued safeguard mechanism because they give
investors some control over the entry of new business associates. They
also enable investors to prevent their own shares from becoming dilutes
as a result of a sale.
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\56\A ``right of first refusal'' is an agreement between parties
which grants an investor the right to match a purchase offer from a
third party.
\57\See 47 CFR 24.839(d) (restrictions on assignment or transfer
of control of C and F block licensees). In any event, the Commission
would have to approve any sale or transfer that would result from a
noncontrolling investor exercising a right of first refusal.
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95. ``Put'' options held by the designated entity--which can be
realized only after the licensee can permissibly transfer the license--
will not be treated as fully diluted for purposes of determining
ownership interests. Put options held by the designated entity leave
the ownership decision in the designated entity's control and do not
force an unwanted sale upon the designated entity. We observe, however,
that while such options will not be factored in for purposes of
determining de jure control, we will continue to look at whether put
options in combination with other terms to an agreement deprive an
otherwise qualified control group of de facto control over the
applicant. Thus, a ``put'' in combination with other terms to an
agreement may result in an applicant not retaining de facto control.
For example, if an agreement between a strategic investor and a
designated entity provides that (1) the investor makes debt financing
available to the applicant on very favorable terms (e.g., 15-year term,
no payments of principal or interest for six years) and (2) that the
designated entity has a one-time put right that is exercisable at a
time and under conditions that are designed to maximize the incentive
of the licensee to sell (e.g., six years after issue, option to put
partnership interest in lieu of payment of principal and accrued
interest on loan), we may conclude that de facto control has been
relinquished. ``Call'' options held by investors will be considered
exercised immediately to calculate ownership levels because they can be
used to force a designated entity to sell its ownership interests.
Finally, we observe that such a call option would vest an impermissible
degree of control in the applicant's so-called ``noncontrolling''
investors.
96. In summary, agreements between designated entities and
strategic investors that involve terms (such as management contracts
combined with rights of first refusal, loans, puts, etc.) that
cumulatively are designed financially to force the designated entity
into a sale (or major refinancing) will constitute a transfer of
control under our rules. We will look at the totality of circumstances
in each particular case. We emphasize that our concerns are greatly
increased when a single entity provides most of the capital and
management services and is the beneficiary of the investor protections.
Special Provisions For Designated Entities
Bidding Credits
97. In the Fifth Report and Order, we determine that bidding
credits were necessary to better ensure that women and minority-owned
businesses and small businesses have meaningful opportunities to
participate in broadband PCS. Accordingly, our rules provided that
small businesses will receive a 10 percent credit, women and minority-
owned businesses will receive a 15 percent credit, and small businesses
owned by women and minorities will receive an aggregate credit of 25
percent.\58\ Our decision in the Fifth Report and Order to enhance the
effectiveness of the entrepreneurs' blocks through the addition of
bidding credits reflected our expectation that broadband PCS will be a
capital intensive undertaking. We stated that bidding credits would
function as a discount on the bid price a firm will actually have to
pay to obtain a license and, thus, would directly address the obstacles
to raising capital encountered by small, women and minority-owned
firms.
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\58\See 47 CFR 24.712(a)-(c).
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98. Several petitioners request that we increase the level of
bidding credits. For example, while some petitioners argue in favor of
higher bidding credits for all designated entities, others seek to
raise the bidding credit for women and minority-owned businesses, or
only for minority-owned small businesses. Many of these petitioners
find support in our Third Memorandum Opinion and Order in this docket,
where we raised the bidding credit for minority and women-owned
businesses bidding on regional narrowband PCS licenses from 25 percent
to 40 percent.\59\ Two petitioners contend that rural telephone
companies should receive a 10 percent bidding credit, that would be
cumulative with any other bidding credits for which the applicant would
be eligible. Finally, consistent with its argument that the
entrepreneurs' blocks should be abolished, GTE supports availability of
bidding credits across all broadband PCS channel blocks.
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\59\Third Memorandum Opinion and Order, FCC 94-219 at 58. See
also 47 CFR 24.309(b)(2).
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99. We will retain our existing bidding credit scheme. Present
levels of bidding credits, coupled with other provisions directed at
the capital formation problems of designated entities, such as size
limitations on the entrepreneurs' block and installment payments, are
sufficient to achieve our regulatory objectives. Moreover, additional
measures that we have adopted on reconsideration, including elimination
of the limits on personal net worth and relaxation on the attribution
of affiliates owned and controlled by minorities, will further enhance
the value of the bidding credits to women and minority-owned firms in
particular. We find that our action on reconsideration of the
narrowband PCS auction rules does not dictate raising the bidding
credit in this instance. As the Third Memorandum Opinion and Order
makes clear, the 40 percent bidding credit for women and minorities
bidding on regional narrowband PCS licenses was adopted in the absence
of any entrepreneurs' blocks. Further, we state that in the insulated
entrepreneurs' block setting, a 25 percent bidding credit for minority
and/or women-owned small firms is more appropriate. We also find that
the record does not support creation of a new bidding credit for rural
telephone companies. In this regard, we agree with BET that petitioners
have failed to demonstrate a historical lack of access to capital that
was the basis for according bidding credits to small businesses,
minorities and women. To the extent that a rural telephone company is
also a small business, or minority or women-owned, then bidding credits
would, of course, be available. We also decline to adopt GTE's scheme
to eliminate the entrepreneurs' blocks, and distribute bidding credits
throughout the broadband PCS channel blocks. As Omnipoint, Columbia PCS
and ET observe, the insulation provided by the entrepreneurs' block is
key to the utility of bidding credits in such a capital intensive
undertaking.
Installment Payments
100. In the Fifth Report and Order we made installment payments
available to most businesses that obtain entrepreneurs' block licenses.
Installment payments directly address the significant barriers that
smaller businesses face in accessing private financing. With the
expectation of enormous costs associated with obtaining and operating a
broadband PCS license, installment payments provide low-cost government
financing that reduces the amount of private financing needed before
and after the auction. Our installment payment plan was made available
to all entrepreneurs' block eligibles granted licenses in the 50
largest BTAs. In the smaller BTAs where the costs of license
acquisition and operation are expected to be lower, installment
payments are only available to licensees owned by women and minorities,
and licensees with less than $75 million in gross revenues. We also
provided an ``enhanced'' installment payment plan for small businesses
and businesses owned by women and minorities where interest-only
payments were required for such entities for as long as five years from
the date of license grant if the firm is both small and owned by women
or minorities. By tailoring the deferral of principal payments to the
needs of the particular designated entities, we promoted greater
participation in broadband PCS by viable competitors.
101. Vanguard asks us to offer installment payments to all
entrepreneurs' block winners for all BTAs. Without this relief,
Vanguard contends that small cellular carriers that are, in fact, more
likely to serve the smaller markets would be forced to comply with the
same payment schedule as large carriers bidding for smaller markets.
SBPCS seeks to eliminate interest on installment payments altogether,
and limit availability of installment payment plans to revenue less
than $75 million dollars. Hernandez requests that the Commission
require bidders to demonstrate their ability to meet the terms of an
installment payment plan when the short-form application is filed.
102. We will extend availability of installment payments to all
entrepreneurs' block licensees, regardless of gross revenues. A key
factor to the overall success of the entrepreneurs' blocks is the
installment payment plan. The installment plan was established to
facilitate the entry of small and minority-owned businesses into the
broadband PCS market. The top 50 BTAs will be the most competitive
wireless communications markets in the country and will require
inordinately large amounts of capital. It will be extremely challenging
for any entrepreneurs' block participant to compete in these markets.
The installment plans will greatly enhance the ability of all
entrepreneurs' block participants to raise capital to succeed against
major, well-capitalized competitors. As Vanguard points out,
disallowing installment payments to large entrepreneurs' block winners
of small BTAs unfairly restricts these companies from competing for
markets in which they will have a logical interest. In addition, the
larger entrepreneurs would be forced to pay for BTAs on the same terms
as major companies that do not qualify for the entrepreneurs' blocks.
While we accept these arguments, and therefore extend installment
payments to all entrepreneur's block licensees, we note that the terms
of these payments should be less generous than those extended to
smaller companies, less able to access traditional sources of capital.
Therefore, we will require entrepreneurs with gross revenues exceeding
$75 million to make a post-auction down payment equaling ten percent of
their winning bids, but then pay the remaining 90 percent of the
auction price in installments with interest charges to be fixed at the
time of licensing at a rate equal to that for ten-year U.S. Treasury
obligations plus 3.5 percent, with payments on both interest and
principal required.
103. We decline to reduce or eliminate interest rates entirely
because we believe that the present approach achieves the proper
balance among our regulatory objectives. In particular, our present
tailoring of interest rates to the needs of the designated entity
enables licenses to be disseminated to small businesses and furthers
the congressional goal of allowing taxpayers to reap a portion of the
value of the licenses. Reducing or eliminating interest payments could
result in very high bids, which could reduce competition and promote
defaults among entrepreneurs. Such an approach could also encourage
speculation instead of legitimate applicants who can attract capital.
On our own motion, however we will amend 47 C.F.R. Sec. 24.711 to
permit small businesses owned by minorities and/or women to make
interest-only payments for six years from the date of license grant.
Under our current rules, principal payments start to come due at the
same time the entrepreneur is permitted to transfer the license and
immediately following the first, build-out requirement. By deferring
payment of principal an additional year, we intend to assist the
designated entity in avoiding an unwanted sale of business at the five-
year mark in order to avoid payment of principal. Finally, for the
reasons discussed in the Fourth Memorandum Opinion and Order, we
believe that our existing requirements for broadband PCS auction
applicants adequately measure an applicant's ability to pay.\60\ We
therefore decline to impose more stringent requirements to determine
whether an applicant can meet the terms of an installment payment plan.
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\60\Fourth Memorandum Opinion and Order, FCC 94-246, at 45.
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Rural Telephone Company Provisions
104. In the Fifth Report and Order, the Commission established
several provisions to help rural telephone companies become meaningful
participants in the emerging PCS market. In that proceeding, we defined
a rural telephone company as a local exchange carrier having 100,000 or
fewer access lines, including all affiliates. In departing from the
more restrictive definition adopted in the Second Report and Order, the
Commission stated that the revised definition strikes an appropriate
balance by facilitating the rapid deployment of broadband PCS to rural
areas, without giving benefits to large companies that do not require
special assistance. Qualified rural telephone companies are eligible
for broadband PCS licenses through a partitioning system, which permits
rural telephone companies to obtain licenses that are geographically
partitioned from larger PCS service areas. These companies will be
permitted to acquire partitioned broadband PCS licenses in any
frequency block in two ways: (l) they may form bidding consortia
consisting entirely of rural telephone companies to participate in the
auctions, and then partition the licenses won among consortia
participants; and (2) they may acquire partitioned broadband PCS
licenses from other licensees through private negotiation and agreement
either before or after the auction.
105. Under our rules, if a rural telephone company receives a
partitioned license from another PCS licensee in a post-auction
transaction, the partitioned area must be reasonably related to the
rural telephone company's wireline service area that lies within the
PCS service area. We recognized in the Fifth Report and Order that
rural telephone companies will require some flexibility in fashioning
areas in which they will receive partitioned licenses, so we did not
adopt a strict rule concerning the reasonableness of the partitioned
area.
106. Petitioners variously request the Commission modify our rural
telephone company provisions. Century Telephone Enterprises, Inc.
(Century) and Citizens Utilities Company (Citizens) argue that the
rural telephone company definition adopted in the Fifth Report and
Order is overly restrictive and excludes local exchange carriers that
exceed the access line standard but nevertheless serve predominantly
rural areas. Alternatively, Citizens requests the Commission implement
waiver procedures. In addition, Hicks and Ragland and TEC urge the
Commission to eliminate its partitioned service area limitations,
stating that the present rules unnecessarily impede the ability of a
rural telephone company to provide service in a technically and
economically feasible manner. Finally, MEANS/SDN and TEC contend the
rural telephone companies should be afforded the same benefits as other
designated entities, including outside passive investment in rural
telephone company consortia and bidding credits.
107. We generally will retain the rural telephone company
provisions adopted in the Fifth Report and Order. We remain convinced
that our definition of rural telephone company, which reflects the
views of numerous parties to this proceeding, will ensure that
broadband PCS will be deployed rapidly to rural areas. At the same
time, it is narrowly tailored to exclude large local exchange carriers
that do not require special treatment. We observe that we can entertain
and grant a waiver request if a local exchange carrier that does not
satisfy our rural telephone company definition can meet our waiver
standard set forth in Section 24.819 of the Commission's Rules to
warrant qualifying the LEC for a partitioned broadband PCS license. See
47 CFR Sec. 24.819.
108. We continue to believe that our existing rules, which allow
rural telephone companies to obtain broadband PCS licenses that are
geographically partitioned from larger PCS service areas, will provide
a viable opportunity for these entities to successfully acquire PCS
licenses and offer service to rural areas. We are confident that the
partitioning system articulated in the Fifth Report and Order satisfies
the directive of Congress to ensure that rural telephone companies have
the opportunity to provide PCS services to all areas of the country,
including rural areas. In addition, we believe that the other benefits
afforded to designated entities, combined with the cellular attribution
threshold for rural telephone companies adopted in Gen. Docket No. 90-
314, will further ensure that rural areas have expedient access to PCS
services.
109. We disagree with MEANS/SDN's contention that modifications to
our consortia provisions are needed to fulfill Congress' mandate that
rural telephone companies have an opportunity to acquire PCS licenses.
As we noted in the Fifth Report and Order, we expect that virtually all
rural telephone company consortia will be eligible to bid on licenses
in Blocks C and F without competition from ``deep pocket'' bidders.
Additionally, if consortia members qualify as small businesses, the
Commission will provide the bidding credit and installment payment
provisions extended to similarly-situated applicants. Accordingly, we
believe it is unnecessary to permit passive equity investments in rural
telephone company consortia, as MEANS/SDN requests. Indeed we do not
extend similar benefits to small, non-rural telephone businesses that
form bidding consortia.
110. We also reject TEC's and MEANS/SDN's proposal to extend
bidding credits to rural telephone companies even if they are not small
businesses or owned by minorities and/or women. We continue to believe
that existing benefits for rural telephone companies will allow them to
effectively compete for licenses that serve rural territories. In
addition to the partitioning and consortia provisions, we also note
that rural telephone companies qualify for significant financial
benefits from the Rural Electrification Administration and the
Universal Service Fund, which as BET suggests, adequately compensates
these entities for the lack of bidding credits. Additionally, we note
that our bidding credits were specifically tailored to address the
discriminatory market barriers faced by women and minority-owned
entities. We concur with BET's assessment that rural telephone
companies do not face the same kinds of barriers raising capital.
111. We note that most, if not all, rural telephone companies meet
the entrepreneurs' block size standards and are permitted to bid
directly on entrepreneurs' blocks licenses. To the extent that a rural
telephone company does not qualify for the entrepreneurs' blocks,
however, we disagree that it will be forced to negotiate with other
licensees that may not be willing to sell their broadband PCS interests
in the from of partitioned licenses or other ownership arrangements. On
the contrary, we believe that other applicants and licensees will find
rural telephone companies attractive entities to negotiate with,
because of the efficiencies associated with rural telephone companies
existing infrastructure. Additionally, since a licensee will be
permitted to assign a portion of its license to a rural telephone
company without violating the transfer and holding requirements, we
expect that licensees will actively solicit participation by rural
telephone companies. For the reasons discussed above, we continue to
believe that our existing scheme, which is narrowly tailored to satisfy
Congress' mandate, will provide rural telephone companies with a
meaningful opportunity to participate in the provision of broadband PCS
services and further the objective of rapidly getting service to rural
areas.
112. Finally, we dismiss concerns raised by TEC and Hicks and
Ragland concerning the permissible size of a rural telephone company's
service area. We addressed these concerns in the Fifth Report and Order
and concluded that a partitioned area containing no more than twice the
population of that portion of a rural telephone company's wireline
service area provides a reasonable presumption of a permissible service
territory. However, we agree that rural telephone companies will
require some flexibility in fashioning a partitioned service area and
thereby affirm our prior conclusion that a strict rule is not needed.
Aggregation of and Holding Period for the Entrepreneurs' Block Licenses
Single Entity Purchase Limit
113. To ensure that C and F block licenses are disseminated among a
wide variety of applicants, our rules as adopted in the Fifth Report
and Order, restrict the number of licenses within the entrepreneurs'
block that a single entity may win at auction. Specifically, we impose
a limitation that no single entity may win more than 10 percent of the
licenses available in the entrepreneurs' blocks, or 98 licenses. We
indicated that the 98 licenses may all be in frequency block C or all
in frequency block F, or in some combination of the two blocks. We
observed that such a limit would ensure that at least 10 winning
bidders enjoy the benefits of the entrepreneurs' blocks, while also
allowing bidders to effectuate aggregation strategies that include
large numbers of licenses and extensive geographic coverage. We
provided that the limit would apply only to the total number of
licenses that may be won at auction on the C and F blocks. Furthermore,
we indicated that for purposes of this restriction we will consider
licenses to be won by the same entity if an applicant (or other entity)
that controls, or has the power to control licenses won at the auction,
controls or has the power to control another license at the auction.
114. On reconsideration, the Small Business PCS Association (SBPCS)
recommends that the maximum number of entrepreneurs' block licenses
purchased by a single entity be limited to licenses that cover no more
than a total of 10 percent of the national population, or approximately
25 million ``pops.'' SBPCS expresses concern that the existing limit
does not provide for enough diversity of ownership since it would allow
a single entity to acquire the top 98 BTA licenses on the 30 MHz
entrepreneurs' blocks.
115. After considering SBPCS' concerns, we will retain the existing
limit, which prevents any single entity from acquiring more than 10
percent of the entrepreneurs' block licenses. We believe that changing
the limit to 10 percent of the population or 25 million ``pops'' rule
would be overly restrictive. We note, for example, that successful
entrepreneurs will need to form coherent regional ``cluster''
strategies to compete against large communications companies, such as
dominant cellular providers, and that such regional clusters may come
together into a national alliance with common technology and marketing
strategies, including a common brand name. A 25 million ``pops'' per
entity limit would severely restrict entrepreneurs that win the New
York BTA (with 18 million ``pops'') and the Los Angeles BTA (with 15
million ``pops'') from any meaningful regional cluster strategy, given
the size of adjoining markets. In light of this concern, we want to be
careful not to impose a restriction that would unfairly disadvantage C
and F block new entrants in the new PCS marketplace. We are satisfied
that the present limit achieves the proper balance between promoting
fair distribution of benefits and ensuring that entrepreneur block
winners have enough flexibility to develop competitive systems on a
regional and nationwide basis.
Restrictions on Transfer or Assignment
116. In the Fifth Report and Order, restrictions on the transfer or
assignment of licenses were adopted to ensure that designated entities
do not take advantage of special entrepreneurs' block provisions by
immediately assigning or transferring control of their licenses to non-
designated entities. We indicated that the ``trafficking'' of licenses
in this manner would unjustly enrich the auction winners and would
undermine the congressional objective of giving designated entities the
opportunity to provide spectrum-based services. Thus, our rules
prohibit licensees in the entrepreneurs' blocks from voluntarily
assigning or transferring control of their licenses during the three
years after the date of the license grant.\61\ For the subsequent two
years (or the fourth and fifth years of the term), the licensee is
permitted to assign or transfer control of its authorization only to an
entity that satisfies the entrepreneurs' blocks entry criteria.
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\61\See 47 CFR 24.839(d). We indicated that we would consider
exceptions to the three-year holding period on a case-by-case basis
in the event of a judicial order decreeing bankruptcy or a judicial
foreclosure if the licensee proposes to assign or transfer its
authorization to an entity that meets the financial thresholds for
bidding in the entrepreneurs' blocks. See Fifth Report and Order,
FCC 94-178 at 128 n. 101.
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117. We also provided that during the five-year period licensees
cannot assign an attributable interest in the license that would cause
them to exceed the financial eligibility requirements.\62\
Additionally, we stated that a transferee or assignee who receives a C
or F block license during the five-year holding period will remain
subject to the transfer restrictions for the balance of the holding
period. Thus, if a C-block authorization is assigned to an eligible
business in year four of the license term, it will be required to hold
that license until the original five-year period expires, subject to
the same exceptions that applied to the original licensee. Moreover, we
stated that we will conduct random pre- and post-auction audits to
ensure that applicants receiving preferences are in compliance with the
Commission's rules.\63\
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\62\See 47 CFR 24.709(a)(3).
\63\See 47 CFR 24.709(d).
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118. In the Fifth Report and Order, we also adopted rules to
prevent entrepreneur block license holders from realizing any unjust
enrichment that is gained through a transfer or assignment that occurs
during the original license term.\64\ Specifically, we provided that
if, within the original license term, a licensee applies to assign or
transfer control of a license to an entity that is not eligible for as
high a level of bidding credit, then the difference between the bidding
credit obtained by the assigning party and the bidding credit for which
the acquiring party would qualify, must be paid to the U.S. Treasury as
a condition of approval of the transfer or assignment.\65\
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\64\While we indicated that the five-year holding and limited
transfer requirements in the entrepreneurs' blocks limit the
applicability of unjust enrichment provisions generally during the
first five-years of the license term (i.e., in cases where the
license-holder has engaged in a permissible transfer or assignment
where the buyer is eligible for comparable bidding credits or is
qualified for installment payments), we indicated that such
provisions were still useful, particularly since they are applicable
for the full ten-year license term. See Fifth Report and Order, FCC
94-178 at 141 n. 119.
\65\See 47 CFR 24.712(d).
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119. We adopted similar requirements with respect to repayment of
installment payments. Specifically, if a licensee that was awarded
installment payments seeks to assign or transfer control of its license
during the term of a license to an entity not meeting the applicable
eligibility standards, we require payment of the remaining principal
and any interest accrued through the date of assignment as a condition
of approval of the transfer or assignment. Accordingly, we explained
that if an entity seeks to assign or transfer control of a license to
an entity that does not quality for as favorable an installment payment
plan, the installment payment plan, if any, for which the acquiring
entity qualifies will become effective immediately upon transfer or
assignment of the license. Thus, a higher interest rate and earlier
payment of principal may begin to be applied.\66\
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\66\See 47 CFR 24.711(s).
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120. Two petitioners discussed the holding period and limited
transfer restrictions imposed on entrepreneurs' block licenses.
Specifically, AIDE requests the Commission repeal the five-year holding
period, contending that the unjust enrichment provisions (to the extent
they promote recovery of bidding credits and installment payments)
eliminate the need for such a restriction. AIDE also argues that once a
designated entity receives a spectrum-based license, the mandate of
Congress to provide these entities with a fair opportunity to provide
spectrum-based services is satisfied, and that there is no
justification for any further restrictions beyond that point in time.
AIDE also wants clarification of how our unjust enrichment provisions
will apply if a transfer or assignment does occur during the five-year
holding period.
121. Additionally, CTIA requests that the Commission amend its
transfer restrictions to allow all PCS licensees (including
entrepreneurs' blocks and designated entities) to transfer 5 MHz of
spectrum immediately after license grant. Alternatively, CTIA asks that
transfer be permitted within one year after service is initiated by a
new PCS entrant in the relevant PCS service area. CTIA contends that
this change is needed to provide cellular carriers with reasonable
flexibility to reach the 40 MHz PCS spectrum cap (especially in
secondary market transactions), and may increase the value of spectrum
at auction (i.e., by providing designated entities with an added source
of funding and ensuring that market forces place the spectrum in the
hands of those who value it most highly).
122. We will not modify our five-year holding period and limit
transfer restrictions. While AIDE and CTIA ask us to eliminate or
significantly relax our restrictions, many commenters generally support
the idea of a holding and limited transfer period for entrepreneurs'
block licenses. BET, for example, contends that without a holding
requirement, the opportunities for circumventing the Commission's rules
are increased as non-designated entities weigh the benefits of
sacrificing certain preferences (e.g., bidding credits) in exchange for
control of a valuable PCS license. Contrary to AIDE's point of view, we
believe that unjust enrichment provisions alone do not provide adequate
safeguards for ensuring that designated entities retain de jure and de
facto control over their licenses. We are satisfied that the five-year
holding period and limited transfer restrictions adopted in the Fifth
Report and Order are justified for our purposes in meeting our
congressional mandate.
123. Additionally we reject CTIA's request to permit 5 MHz of
spectrum to be transferred after the license grant because it would
contradict our determinations in the PCS service rules docket (Gen.
Docket 90-314) concerning the disaggregation of broadband PCS spectrum.
In that docket, we decided that no disaggregation of spectrum should be
allowed until a broadband PCS licensee had met our five-year
construction requirements.\67\ We also determined that in-region
cellular interests should not be permitted to acquire 10 MHz of
broadband PCS spectrum until the year 2000--when they would be eligible
for an additional 5 MHz of spectrum in their service areas. See 47 CFR
24.404. CTIA's proposal would permit disaggregation sooner than is
permissible under our PCS service rules, and should be rejected for
reasons that we have previously established.
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\67\See Broadband PCS Reconsideration Order, FCC 94-144 at
69-70, further recon. Third Memorandum Opinion and Order in Gen.
Docket 90-314, FCC 94-265 (released Oct. 19, 1994).
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124. In addition, we wish to clarify the application of our holding
rule to our financial caps. As we have stated, under certain
circumstances we will allow licensees to retain their eligibility
during the holding period, even if the company has grown beyond our
size limitations for the entrepreneurs' block and for small business
eligibility. Thus, we will permit entrepreneurs' block licensees to
transfer their licenses in years four through five to other
entrepreneurs' block licensees even if it would result in growth beyond
the permissible gross assets and total revenues caps, as long as it
otherwise complies with our control group and equity requirements. We
believe this encourages designated entities to grow, instead of
penalizing them for their success, which was a concern expressed by
some commenters.
125. Further, we clarify that between years four and five we will
allow licensees to transfer a license to any entity that either holds
other entrepreneurs' block licenses (and thus at the time of auction
satisfied the entrepreneurs' block criteria) or that satisfies the
criteria at the time of transfer. Unjust enrichment penalties apply if
these requirements are not met, or if they qualified for different
provisions at the time of licensing. For purposes of determining size
eligibility for transfers or assignments that occur between the fourth
and fifth years, we will use the most recently available audited
financial statements in cases where the entity to whom the license is
being transferred did not win a license in the original entrepreneurs'
block auction.
126. AIDE sought clarification concerning the application of our
unjust enrichment provisions to our holding period and limited transfer
rules. In response to their request, we reiterate that if a designated
entity transfers or assigns its license before year five to a company
that qualifies for no bidding credit, then such a sale will entail full
payment of the bidding credit as a condition of transfer. If, however,
the same transaction occurs (during the same time frame), but the buyer
is eligible for a lesser bidding credit, then the difference between
the bidding credit obtained by the seller and the bidding credit for
which the buyer would qualify, must be paid to the U.S. Treasury for
the transaction to be approved by the FCC. With respect to installment
payments, we confirm that we expect that when the purchaser is not to
an entity that qualifies for any installment payment plan, we will
require payment of the unpaid balance in full before the sale will be
approved.
Miscellaneous
Audits
127. In the Fifth Report and Order, we expressed our intention to
conduct random pre- and post-auction audits to ensure that designated
entities retain de facto and de jure control of their facilities and
licenses and to ensure that all applicants receiving preferences are in
compliance with the eligibility requirements. On reconsideration, we
clarify on our own motion that the Commission's use of the term
``random'' in the Fifth Report and Order was generic and that the
Commission does not intend to limit itself to conducting ``random''
audits. While random selection for audit may be one, acceptable
enforcement technique in some cases, it may not be the most efficient.
We expect that audits might also be undertaken on information received
from third parties or on the basis of other factors.\68\ Since the
audit process will involve the application of in-house and contract
resources, we intend to pursue a course of audits that will be
efficient as well as effective. Consequently, we are amending the rules
to more fully reflect the variety of circumstances that might lead to
an audit. We will also add an audit consent to the FCC short-form and
other forms where eligibility must be established. Because the
Commission's audit program will cover all auction applications,
regardless of the service involved, we will promulgate conforming
amendments to Subpart Q in Part 1 of the Commission's regulations in a
separate order.
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\68\While we anticipate that public scrutiny of entrepreneurs'
block applications and the petition to deny process, together with
audits, will assist the Commission in uncovering potentially
unqualified applicants for the entrepreneurs' blocks, we will in no
way condone the filing of frivolous complaints or petitions. We will
take appropriate action against those who abuse our processes. We
also emphasize that the initiation of an investigation by the
Commission (whether pursuant to a complaint or on our own
initiative) will not result in the suspension of construction or
operation of a licensee's facilities pending the outcome of such
investigation.
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128. Audits and other enforcement vehicles are a necessary adjunct
to a self-certification process to implement the measures to assist
designated entities adopted pursuant to Section 309(j) of the
Communications Act. To facilitate our audit program and to provide
preliminary assurances that those applicants claiming eligibility for
such preferences are in compliance with the regulatory requirements
concerning ownership and financial status, we will require that
applicants list their control group members, affiliates, attributable
investors, gross revenues, total assets and other basic ownership and
eligibility information in an exhibit to their short-form applications.
Additional, more detailed information concerning eligibility will be
required of winning bidders. All applicants are required to maintain an
updated file of documentary evidence supporting the information and the
status claimed. Applicants that do not win the licenses for which they
applied, shall maintain such records until final grant of the
license(s) in question, or one year from the date of the filing of
their short-form applications, whichever is earlier. Licensees shall
maintain such records for the term of the license.
Defaults
129. Parties have asked questions about how the Commission would
resolve issues associated with an entrepreneurs' block licensee
becoming financially insolvent. In particular, there is concern about
the status of the license when the licensee cannot make the required
installment payments, and in the case of when a licensee enters
bankruptcy.
130. In the Second Report and Order, we clarified that ``a
designated entity that has defaulted or that anticipated default under
an installment payment program'' may request a three to six month grace
period before the Commission cancels its license.\69\
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\69\See Second Report and Order, FCC 94-61 at 240.
``During this grace period, a defaulting licensee could maintain
its construction efforts and/or operations while seeking funds to
continue payments or seek from the Commission a restructured plan.
We will evaluate requests for a grace period on a case-by-case basis
* * * deciding whether to grant such requests or to pursue other
measures, we may consider, for example, the licensee's payment
history, including whether it has defaulted before and how far into
the license term the default occurs, the reasons for default,
whether the licensee has met construction build-out requirements,
the licensee's financial condition, and whether the licensee is
seeking a buyer under a distress sale policy. Following a grace
period without successful resumption of payment or upon denial of a
grace period request, we will declare the license cancelled and take
appropriate measures under the Commission's debt collection rules
and procedures.\70\
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\70\Id.
131. Since several commenters requested clarification as to what
the Commission would allow in the event a licensee defaults on payment
of its installment monies, we clarify that lenders and entrepreneurs'
block licensees are free to agree contractually to their own terms
regarding situations where the licensee has defaulted under the
Commission's installment payment program, and possibly other
obligations. As long as there is no transfer of control, we would not
become involved in the particulars of a voluntary workout arrangement
between a designated entity and a third-party lender.
132. Specifically, an entrepreneurs' block licensee and its lenders
may agree that, in the event the licensee defaults on its installment
payments, the lenders to that licensee will cure this default by
assuming the designated entity's payments to the government. Barring
any transfer of control, we would not object to such an arrangement.
133. In the event a transfer of control is sought under the terms
of the workout, the licensee and its lenders must apply for Commission
approval of the transfer, in accordance with Section 310(d) of the
Communications Act. In a situation where the lender itself is the
proposed buyer or transferee, we would scrutinize such an application
to determine whether, by virtue of the loan agreement, an earlier
transfer of control was effectuated. We clarify that we would also
expect that any requirements that arise by virtue of a licensee's
status as an entrepreneur or as a designated entity would be satisfied
with respect to such a sale. Thus, for example, the transfer would need
to be to another qualified entrepreneur if it is to occur within our
five-year holding period.
134. In the event an entrepreneurs' block licensee becomes subject
to bankruptcy, our existing rules and precedent clarify how the
Commission would dispose of a license in such a circumstance.
Specifically, transfer to a bankruptcy trustee is viewed as an
involuntary transfer or assignment to another party under Section
24.839 of the Commission's Rules.\71\ In such a case therefore, there
would be a pro forma involuntary assignment of the license to a court-
appointed trustee in bankruptcy, or to the licensee, as a debtor-in-
possession. Assuming the bankrupt estate is liquidated or the trustee
finds a qualified purchaser for the licensee's system, and assuming
payments to the Commission are maintained or a grace period granted, we
will continue generally to defer to federal bankruptcy laws on many
matters.\72\ We would, however, ultimately have to approve any final
transfer of the license. As stated above, we would expect that any
requirements that arise by virtue of a licensee's status as an
entrepreneur or as a designated entity would be satisfied with respect
to such a sale. Thus, for example, the transfer would need to be to
another qualified entrepreneur if it is to occur within our five-year
holding period.
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\71\In the case of an involuntary transfer, FCC Form 490 shall
be filed within thirty days following the event that gives rise to
the transfer. See 47 CFR 24.839.
\72\See LaRose v. FCC, 494 F.2d 1145 (D.C. Cir. 1974). See also
Section 47 CFR 24.839(d)(4).
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Final Regulatory Flexibility Analysis
135. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.
604, the Commission's final analysis for the Fifth Memorandum Opinion
and Order is as follows:
Need for, and Purpose of, this Action. As a result of new
statutory, authority, the Commission may utilize competitive bidding
mechanisms in the granting of certain initial licenses. The Commission
published an Initial Regulatory Flexibility Analysis, see generally 5
U.S.C. 603, in the Notice of Proposed Rule Making in this proceeding
and published Final Regulatory Flexibility Analyses in the Second
Report and Order (at 299-302) and the Fifth Report and Order (at
219-222). As noted in these previous final analyses, this proceeding
will establish a system of competitive bidding for choosing among
certain applications for initial licenses, and will carry out statutory
mandates that certain designated entities, including small entities, be
afforded an opportunity to participate in the competitive bidding
process and in the provision of spectrum-based services.
136. Summary of the Issues Raised by the Public Comments. No
commenters responded specifically to the issues raised by the Fifth
Report and Order. We have made some modifications to the proposed
requirements as appropriate.
137. Significant Alternatives Considered and Rejected. All
significant alternatives have been addressed in the Fifth Report and
Order and in this Memorandum Opinion and Order.
Ordering Clauses
138. Accordingly, it is ordered that the Petitions for
Reconsideration and/or Clarification of the Fifth Report and Order in
this proceeding are granted to the extent described above and denied in
all other respects.
139. It is further ordered that the Petition for Rulemaking filed
by David J. Lieto on September 21, 1994 is hereby dismissed.
140. It is further ordered that the Petitions for Reconsideration
of the Order on Reconsideration in this proceeding are granted to the
extent described above and denied in all other respects.
141. It is further ordered that these rule changes made herein will
become effective sixty days after publication in the Federal Register.
This action is taken pursuant to Sections 4(i), 303(r) an 309(j) of the
Communications Act of 1934, as amended, 47 U.S.C. 154(i), 303(r) and
309(j).
142. It is further ordered that the appropriate Bureau, in
consultation with the Managing Director, is delegated authority to
revise FCC Forms 175, 401 (and any successor forms) and to modify and
create any additional forms to ensure that PCS applicants are in
compliance with the requirements set forth in Part 24 of the
Commission's Rules, as amended.
List of Subjects in 47 CFR Part 24
Personal communications services.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Amendatory Text
Part 24 of Chapter I of Title 47 of the Code of Federal Regulations
is amended as follows:
PART 24--PERSONAL COMMUNICATIONS SERVICES
1. The authority citation for part 24 continues to read as follows:
Authority: 47 U.S.C. 154, 301. 302, 303, 309, and 332, unless
otherwise noted.
2. Section 24.709 is revised to read as follows:
Sec. 24.709 Eligibility for licenses for frequency Blocks C and F.
(a) General Rule.
(1) No application is acceptable for filing and no license shall be
granted for frequency block C or frequency block F, unless the
applicant, together with its affiliates and persons or entities that
hold interests in the applicant and their affiliates, have gross
revenues of less than $125 million in each of the last two years and
total assets of less than $500 million at the time the applicant's
short-form application (Form 175) is filed.
(2) The gross revenues and total assets of the applicant (or
licensee), and its affiliates, and (except as provided in paragraph (b)
of this section) of persons or entities that hold interests in the
applicant (or licensee), and their affiliates, shall be attributed to
the applicant and considered on a cumulative basis and aggregated for
purposes of determining whether the applicant (or licensee) is eligible
for a license for frequency block C or frequency block F under this
section.
(3) Any licensee awarded a license pursuant to this section (or
pursuant to Sec. 24.839(d)(2)) shall maintain its eligibility until at
least five years from the date of initial license grant, except that a
licensee's (or other attributable entity's) increased gross revenues or
increased total assets due to nonattributable equity investments (i.e.,
from sources whose gross revenues, and total assets are not considered
under paragraph (b) of this section), debt financing, revenue from
operations or other investments, business development or expanded
service shall not be considered.
(b) Exceptions to General Rule.
(1) Small Business Consortia. Where an applicant (or licensee) is a
consortium of small businesses, the gross revenues and total assets of
each small business shall not be aggregated.
(2) Publicly-Traded Corporations. Where an applicant (or licensee)
is a publicly traded corporation with widely dispersed voting power,
the gross revenues and total assets of a person or entity that holds an
interest in the applicant (or licensee), and its affiliates, shall not
be considered.
(3) 25 Percent Equity Exception. The gross revenues and total
assets of a person or entity that holds an interest in the applicant
(or licensee), and its affiliates, shall not be considered so long as:
(i) Such person or entity, together with its affiliates, holds only
nonattributable equity equaling no more than 25 percent of the
applicant's (or licensee's) total equity;
(ii) Except as provided in paragraph (b)(5) of this section, such
person or entity is not a member of the applicant's (or licensee's)
control group; and
(iii) The applicant (or licensee) has a control group that complies
with the minimum equity requirements of paragraph (b)(5) of this
section, and, if the applicant (or licensee) is a corporation, owns at
least 50.1 percent of the applicant's (or licensee's) voting interests,
and, if the applicant (or licensee) is a partnership, holds all of its
general partnership interests.
(4) 49.9 Percent Equity Exception. The gross revenues and total
assets of a person or entity that holds an interest in the applicant
(or licensee), and its affiliates, shall not be considered so long as:
(i) Such person or entity, together with its affiliates, holds only
nonattributable equity equaling no more than 49.9 percent of the
applicant's (or licensee's) total equity;
(ii) Except as provided in paragraph (b)(6) of this section, such
person or entity is not a member of the applicant's (or licensee's)
control group; and
(iii) The applicant (or licensee) has a control group that complies
with the minimum equity requirements of paragraph (b)(6) of this
section and, if the applicant (or licensee) is a corporation, owns at
least 50.1 percent of the applicant's (or licensee's) voting interests,
and, if the applicant (or licensee) is a partnership, holds all of its
general partnership interests.
(5) Control Group Minimum 25 Percent Equity Requirement. In order
to be eligible to exclude gross revenues and total assets of persons or
entities identified in paragraph (b)(3) of this section, and applicant
(or licensee) must comply with the following requirements:
(i) Except for an applicant (or licensee) whose sole control group
member is a preexisting entity, as provided in paragraph (b)(5)(ii) of
this section, at the time the applicant's short-form application (Form
175) is filed and until at least three years following the date of
initial license grant, the applicant's (or licensee's) control group
must own at least 25 percent of the applicant's (or licensee's) total
equity as follows:
(A) At least 15 percent of the applicant's (or licensee's) total
equity must be held by qualifying investors, either unconditionally or
in the form of options exercisable, at the option of the holder, at any
time and at any exercise price equal to or less than the market value
at the time the applicant files its short-form application (Form 175);
(B) Such qualifying investors must have both de jure and de facto
control of the applicant;
(C) The remaining 10 percent of the applicant's (or licensee's)
total equity may be owned by any of the following:
(1) Such qualifying investors, either unconditionally or in the
form of stock options not subject to the restrictions of paragraph
(b)(5)(i)(A) of this section;
(2) Institutional investors, either unconditionally or in the form
of stock options;
(3) Noncontrolling existing investors in any preexisting entity
that is a member of the control group, either unconditionally or in the
form of stock options; or
(4) Individuals that are members of the applicant's (or licensee's)
management, either unconditionally or in the form of stock options.
(D) Following termination of the three-year period specified in
paragraph (b)(5)(i) of this section, qualifying investors must continue
to own at least 10 percent of the applicant's (or licensee's) total
equity, either unconditionally or in the form of stock options subject
to the restrictions in paragraph (b)(5)(i)(A) of this section. The
restrictions specified in paragraph (b)(5)(i)(C)(1) through (4) of this
section no longer apply to the remaining equity after termination of
such three-year period.
(ii) At the election of an applicant (or licensee) whose control
group's sole member is a preexisting entity, the 25 percent minimum
equity requirements set forth in paragraph (b)(5)(i) of this section
shall apply, except that only 10 percent of the applicant's (or
licensee's) total equity must be held by qualifying investors and that
the remaining 15 percent of the applicant's (or licensee's) total
equity may be held by qualifying investors or noncontrolling existing
investors in such control group member or individuals that are members
of the applicant's (or licensee's) management. These restrictions on
the identity of the holder(s) of the remaining 15 percent of the
licensee's total equity no longer apply after termination of the three-
year period specified in paragraph (b)(5)(i) of this section.
(6) Control Group Minimum 50.1 Percent Equity Requirement. In order
to be eligible to exclude gross revenues and total assets of persons or
entities identified in paragraph (b)(4) of this section, an applicant
(or licensee) must comply with the following requirements:
(i) Except for an applicant (or licensee) whose sole control group
member is a preexisting entity, as provided in paragraph (b)(6)(ii) of
this section, at the time the applicant's short-form application (Form
175) is filed and until at least three years following the date of
initial license grant, the applicant's (or licensee's) control group
must own at least 50.1 percent of the applicant's (or licensee's) total
equity as follows:
(A) at least 30 percent of the applicant's (or licensee's) total
equity must be held by qualifying minority and/or women investors,
either unconditionally or in the form of options exercisable, at the
option of the holder, at any time and at any exercise price equal to or
less than the market value at the time the applicant files its short-
form application (Form 175);
(B) Such qualifying minority and/or women investors, must have both
du jure and de facto control of the applicant;
(C) The remaining 20.1 percent of the applicant's (or licensee's)
total equity may be owned by any of the following:
(1) Such qualifying minority and/or women investors, either
unconditionally or in the form of stock options not subject to the
restrictions of paragraph (b)(6)(i)(A) of this section;
(2) Institutional investors, either unconditionally or in the form
of stock options;
(3) Noncontrolling existing investors in any preexisting entity
that is a member of the control group, either unconditionally or in the
form of stock options; or
(4) Individuals that are members of the applicant's (or licensee's)
management, either unconditionally or in the form of stock options.
(D) Following termination of the three-year period specified in
paragraph (b)(6)(i) of this section, qualifying minority and/or women
investors must continue to own at least 20 percent of the applicant's
(or licensee's) total equity, either unconditionally or in the form of
stock options subject to the restrictions in paragraph (b)(6)(i)(A) of
this section. The restrictions specified in paragraph (b)(6)(i)(C)(1)
through (4) of this section no longer apply to the remaining equity
after termination of such three-year period.
(ii) At the election of an applicant (or licensee) whose control
group's sole member is a preexisting entity, the 50.1 percent minimum
equity requirements set forth in paragraph (b)(6)(i) of this section
shall apply, except that only 20 percent of the applicant's (or
licensee's) total equity must be held by qualifying minority and/or
women investors, and that the remaining 30.1 percent of the applicant's
(or licensee's) total equity may be held by qualifying minority and/or
women investors, or noncontrolling existing investors in such control
group member or individuals that are members of the applicant's (or
licensee's) management. These restrictions on the identity of the
holder(s) of the remaining 30.1 percent of the licensee's total equity
no longer apply after termination of the three-year period specified in
paragraph (b)(6)(i) of this section.
(7) Calculation of Certain Interests. Except as provided in
paragraphs (b)(5) and (b)(6) of this section, ownership interests shall
be calculated on a fully diluted basis; all agreements such as
warrants, stock options and convertible debentures will generally be
treated as if the rights thereunder already have been fully exercised,
except that such agreements may not be used to appear to terminate or
divest ownership interests before they actually do so, in order to
comply with the nonattributable equity requirements in paragraphs
(b)(3)(i) and (b)(4)(i) of this section.
(8) Aggregation of Affiliate Interests. Persons or entities that
hold interest in an applicant (or licensee) that are affiliates of each
other or have an identify of interests identified in Sec. 24.720(1)(3)
will be treated as though they were one person or entity and their
ownership interests aggregated for purposes of determining an
applicant's (or licensee's) compliance with the nonattributable equity
requirements in paragraphs (b)(3)(i) and (b)(4)(i) of this section.
Example 1 for paragraph (b)(8). ABC Corp. is owned by
individuals, A, B, and C, each having an equal one-third voting
interest in ABC Corp. A and B together, with two-thirds of the stock
have the power to control ABC Corp. and have an identity of
interest. If A & B invest in DE Corp., a broadband PCS applicant for
block C, A and B's separate interests in DE Corp. must be aggregated
because A and B are to be treated as one person.
Example 2 for paragraph (b)(8). ABC Corp. has subsidiary BC
Corp., of which it holds a controlling 51 percent of the stock. If
ABC Corp. and BC Corp., both invest in DE Corp., their separate
interests in DE Corp. must be aggregated because ABC Corp. and BC
Corp. are affiliates of each other.
(c) Short-Form and Long-Form Applications: Certifications and
Disclosure.
(1) Short-form Application. In addition to certifications and
disclosures required by Part 1, subpart Q of this Chapter and
Sec. 24.813, each applicant for a license for frequency Block C or
frequency Block F shall certify on its short-form application (Form
175) that it is eligible to bid on and obtain such license(s), and (if
applicable) that it is eligible for designated entity status pursuant
to this section and Sec. 24.720, and shall append the following
information as an exhibit to its Form 175:
(i) For an applicant that is a publicly traded corporation with
widely disbursed voting power:
(A) A certified statement that such applicant complies with the
requirements of the definition of publicly traded corporation with
widely disbursed voting power set forth in Sec. 24.720(m);
(B) The identify of each affiliate of the applicant if not
disclosed pursuant to Sec. 24.813; and
(C) The applicant's gross revenues and total assets, computed in
accordance with paragraphs (a) and (b) of this section.
(ii) For all other applicants:
(A) The identity of each member of the applicant's control group,
regardless of the size of each member's total interest in the
applicant, and the percentage and type of interest held;
(B) The citizenship and the gender or minority group classification
for each member of the applicant's control group if the applicant is
claiming status as a business owned by members of minority groups and/
or women;
(C) The status of each control group member that is an
institutional investor, an existing investor, and/or a member of the
applicant's management;
(D) The identify of each affiliate of the applicant and each
affiliate of individuals or entities identified pursuant to paragraphs
(c)(1)(ii)(A) and (c)(1)(ii)(C) of this section if not disclosed
pursuant to Sec. 24.813;
(E) A certification that the applicant's sole control group member
is a preexisting entity, if the applicant makes the election in either
paragraph (b)(5)(ii) or (b)(6)(ii) of this section; and
(F) The applicant's gross revenues and total assets, computed in
accordance with paragraphs (a) and (b) of this section.
(iii) for each applicant claiming status as a small business
consortium, the information specified in paragraph (c)(1)(ii) of this
section, for each member of such consortium.
(2) Long-form Application. In addition to the requirements in
subpart I of this part and other applicable rules (e.g.,
Sec. 24.204(f), 20.6(e), 20.9(b)), each applicant submitting a long-
form application for license(s) for frequency blocks C and F shall, in
an exhibit to its long-form application:
(i) Disclose separately and in the aggregate the gross revenues and
total assets, computed in accordance with paragraphs (a) and (b) of
this section, for each of the following: the applicant; the applicant's
affiliates, the applicant's control group members; the applicant's
attributable investors; and affiliates of its attributable investors;
(ii) List and summarize all agreements or other instruments (with
appropriate references to specific provisions in the text of such
agreements and instruments) that support the applicant's eligibility
for a license(s) for frequency Block C or frequency Block F and its
eligibility under Secs. 24.711 through 24.270, including the
establishment of de facto and de jure control; such agreements and
instruments include articles of incorporation and bylaws, shareholder
agreements, voting or other trust agreements, partnership agreements,
management agreements, joint marketing agreements, franchise
agreements, and any other relevant agreements (including letters of
intent), oral or written; and
(iii) List and summarize any investor protection agreements and
identify specifically any such provisions in those agreements
identified pursuant to paragraph (c)(2)(ii) of this section, including
rights of first refusal, supermajority clauses, options, veto rights,
and rights to hire and fire employees and to appoint members to boards
of directors or management committees.
(3) Records Maintenance. All applicants, including those that are
winning bidders, shall maintain at their principal place of business an
updated file of ownership, revenue and asset information, including
those documents referenced in paragraphs (c)(2)(ii) and (c)(2)(iii) of
this section and any other documents necessary to establish eligibility
under this section or under the definitions of small business and/or
business owned by members of minority groups and/or women. Licensees
(and their successors in interest) shall maintain such files for the
term of the license. Applicants that do not obtain the license(s) for
which they applied shall maintain such files until the grant of such
license(s) is final, or one year from the date of the filing of their
short-form application (Form 175), whichever is earlier.
(d) Audits.
(1) Applicants and licensees claiming eligibility under this
section or Secs. 24.711 through 24.720 shall be subject to audits by
the Commission, using in-house and contract resources. Selection for
audit may be random, on information, or on the basis of other factors.
(2) Consent to such audits is part of the certification included in
the short-form application (Form 175). Such consent shall include
consent to the audit of the applicant's or licensee's books, documents
and other material (including accounting procedures and practices)
regardless of form or type, sufficient to confirm that such applicant's
or licensee's representations are, and remain, accurate. Such consent
shall include inspection at all reasonable times of the facilities, or
parts thereof, engaged in providing and transacting business, or
keeping records regarding licensed broadband PCS service and shall also
include consent to the interview of principals, employees, customers
and suppliers of the applicant or licensee.
(e) Definitions. The terms affiliate, business owned by members of
minority groups and women, consortium of small businesses, control
group, existing investor, gross revenues, institutional investor,
members of minority groups, nonattributable equity, preexisting entity,
publicly traded corporation with widely dispersed voting power,
qualifying investor, qualifying minority and/or woman investor, small
business and total assets used in this section are defined in
Sec. 24.720.
3. Section 24.711 is revised to read as follows:
Sec. 27.711 Upfront payments, down payments and installment payments
for licenses for frequency Blocks C and F.
(a) Upfront Payments and Down Payments.
(1) Each eligible bidder for licenses on frequency Blocks C or F
subject to auction shall pay an upfront payment of $0.015 per MHz per
pop for the maximum number of licenses (in terms of MHz-pops) on which
it intends to bid pursuant to Sec. 1.2106 of this Chapter and
procedures specified by Public Notice.
(2) Each winning bidder shall make a down payment equal to ten
percent of its winning bid (less applicable bidding credits); a winning
bidder shall bring its total amount on deposit with the Commission
(including upfront payment) to five percent of its net winning bid
within five business days after the auction closes, and the remainder
of the down payment (five percent) shall be paid within five business
days after the application required by Sec. 24.809(b) is granted.
(b) Installment Payments. Each eligible licensee of frequency Block
C or F may pay the remaining 90 percent of the net auction price for
the license in installment payments pursuant to Sec. 1.2110(e) of this
Chapter and under the following terms:
(1) For an eligible licensee with gross revenues exceeding $75
million (calculated in accordance with Sec. 24.709(a)(2) and (b)) in
each of the two preceding years, interest shall be imposed based on the
rate for ten-year U.S. Treasury obligations applicable on the date the
license is granted, plus 3.5 percent; payments shall include both
principal and interest amortized over the term of the license,
beginning one year after the date of the initial license grant.
(2) For an eligible licensee with gross revenues not exceeding $75
million (calculated in accordance with Sec. 24.709(a)(2) and (b)) in
each of the two preceding years or an eligible licensee in a BTA market
other than the fifty largest markets, interest shall be imposed based
on the rate for ten-year U.S. Treasury obligations applicable on the
date the license is granted, plus 2.5 percent; payments shall include
interest only for the first year and payments of interest and principal
amortized over the remaining nine years of the license term.
(3) For an eligible licensee that qualifies as a Small business or
as a consortium of small businesses, interest shall be imposed based on
the rate for ten-year U.S. Treasury obligations applicable on the date
the license is granted, plus 2.5 percent; payments shall include
interest only for the first two years and payments of interest and
principal amortized over the remaining eight years of the license term.
(4) For an eligible licensee that qualifies as a business owned by
members of minority groups and/or women, interest shall be imposed
based on the rate for ten-year U.S. Treasury obligations applicable on
the date the license is granted; payments shall include interest only
for the first three years and payments of interest and principal
amortized over the remaining seven years of the license term.
(5) For an eligible licensee that qualifies as a small business
owned by members of minority groups and/or women or as a consortium of
small business owned by members of minority groups and/or women,
interest shall be imposed based on the rate for ten-year U.S. Treasury
obligations applicable on the date the license is granted; payments
shall include interest only for the first six years and payments of
interest and principal amortized over the remaining four years of the
license term.
(c) Unjust Enrichment.
(1) If a licensee that utilizes installment financing under this
section seeks to assign or transfer control of its license to an entity
not meeting the eligibility standards for installment payments, the
licensee must make full payment of the remaining unpaid principal and
any unpaid interest accrued through the date of assignment or transfer
as a condition of approval.
(2) If a licensee that utilizes installment financing under this
section seeks to make any change in ownership structure that would
result in the licensee losing eligibility for installment payments, the
licensee shall first seek Commission approval and must make full
payment of the remaining unpaid principal and any unpaid interest
accrued through the date of such change as a condition of approval. A
licensee's (or other attributable entity's) increased gross revenues or
increased total assets due to nonattributable equity investments (i.e.,
from sources whose gross revenues and total assets are not considered
under Sec. 24.709(b)), debt financing, revenue from operations or other
investments, business development or expanded service shall not be
considered to result in the licensee losing eligibility for installment
payments.
(3) If a licensee seeks to make any change in ownership that would
result in the licensee qualifying for a less favorable installment plan
under this section, the licensee shall seek Commission approval and
must adjust its payment plan to reflect its new eligibility status. A
licensee may not switch its payment plan to a more favorable plan.
1. Section 24.712 is amended by revising paragraph (d) to read as
follows:
Sec. 24.712 Bidding credits for licenses for frequency Blocks C and F.
* * * * *
(d) Unjust Enrichment.
(1) If, before termination of the five-year period following the
date of the initial license grant, a licensee that utilizes a bidding
credit under this section seeks to assign or transfer control of its
license to an entity not meeting the eligibility standards for bidding
credits or seeks to make any other change in ownership that would
result in the licensee no longer qualifying for bidding credits under
this section, the licensee must seek Commission approval and reimburse
the government for the amount of the bidding credit as a condition of
the approval of such assignment, transfer or other ownership change.
(2) If, before termination of the five-year period following the
date of the initial license grant, a licensee that utilizes a bidding
credit under this section seeks to assign or transfer control of its
license to an entity meeting the eligibility standards for lower
bidding credits or seeks to make any other change in ownership that
would result in the licensee qualifying for a lower bidding credit
under this section, the licensee must seek Commission approval and
reimburse the government for the difference between the amount of the
bidding credit obtained by the licensee and the bidding credit for
which the assignee, transferee or licensee is eligible under this
section as a condition of the approval of such assignment, transfer or
other ownership change.
2. Section 24.720 is revised to read as follows:
Sec. 24.720 Definitions.
(a) Scope. The definitions in this section apply to Secs. 24.709
through 24.714, unless otherwise specified in those sections.
(b) Small Business: Consortium of Small Businesses.
(1) A small business is an entity that, together with its
affiliates and persons or entities that hold interest in such entity
and their affiliates, has average annual gross revenues that are not
more than $40 million for the preceding three years.
(2) For purposes of determining whether an entity meets the $40
million average annual gross revenues size standard set forth in
paragraph (b)(1) of this section, the gross revenues of the entity, its
affiliates, persons or entities holding interests in the entity and
their affiliates shall be considered on a cumulative basis and
aggregated, subject to the exceptions set forth Sec. 24.709(b).
(3) A small business consortium is conglomerate organization formed
as a joint venture between or among mutually-independent business
firms, each of which individually satisfies the definition of a small
business in paragraphs (b)(1) and (b)(2) of this section.
(c) Business Owned by Members of Minority Groups and/or Women. A
business owned by members of minority groups and/or women is an entity:
(1) In which the qualifying investor members of an applicant's
control group are members of minority groups and/or women who are
United States citizens; and
(2) That complies with the requirements of Sec. 24.709 (b)(3) and
(b)(5) or Sec. 24.709 (b)(4) and (b)(6).
(d) Small Business Owned by Members of Minority Groups and/or
Women: Consortium of Small Businesses Owned by Members of Minority and/
or Women. A Small business owned by members of minority groups and/or
women is an entity that meets the definitions in both paragraphs (b) ad
(c) of this section. A consortium of small businesses owned by members
of minority groups and/or women is a conglomerate organization formed
as a joint venture between mutually-independent business firms, each of
which individually satisfies the definitions in paragraphs (b) and (c)
of this section.
(e) Rural Telephone Company. A rural telephone company is a local
exchange carrier having 100,000 or fewer access lines, including all
affiliates.
(f) Gross Revenues. Gross revenues shall mean all income received
by an entity, whether earned or passive, before any deductions are made
for costs of doing business (e.g. cost of goods sold), as evidenced by
audited financial statements for the relevant number of calendar years
preceding January 1, 1994, or, if audited financial statements were not
prepared on a calendar-year basis, for the most recently completed
fiscal years preceding the filing of the applicant's short-form
application (Form 175). For applications filed after June 30, 1995,
gross revenues shall be evidenced by audited financial statements for
the preceding relevant number of calendar or fiscal years. If an entity
was not in existence for all or part of the relevant period, gross
revenues shall be evidenced by the audited financial statements of the
entity's predecessor-in-interest or, if there is no identifiable
predecessor-in-interest, unaudited financial statements certified by
the applicant as accurate.
(g) Total assets. Total assets shall mean the book value (except
where generally accepted accounting principles (GAAP) require market
valuation) of all property owned by an entity, whether real or
personal, tangible or intangible, as evidenced by the most recent
audited financial statements.
(h) Institutional Investor. An institutional investor is an
insurance company, a bank holding stock in trust accounts through its
trust department, or an investment company as defined in 15 U.S.C. 80a-
3(a), without reference to, or incorporation of, the exemptions set
forth in 15 U.S.C. 80a-3(b) and (c); provided that, if such investment
company is owned, in whole or in part, by other entities, such
investment company, such other entities and the affiliates of such
other entities, taken as a whole, must be primarily engaged in the
business of investing, reinvesting or trading in securities or in
distributing or providing investment management services for
securities.
(i) Members of Minority Groups. Members of minority groups includes
Blacks, Hispanics, American Indians, Alaskan Natives, Asians, and
Pacific Islanders.
(j) Nonattributable Equity.
(1) Nonattributable equity shall mean:
(i) For corporations, voting stock or non-voting stock that
includes no more than twenty-five percent of the total voting equity,
including the right to vote such stock through a voting trust or other
arrangement;
(ii) For partnerships, joint ventures and other non-corporate
entities, limited partnership interests and similar interests that do
not afford the power to exercise control of the entity.
(2) For purposes of assessing compliance with the equity limits in
Sec. 24.709(b)(3)(i) and (b)(4)(i), where such interests are not held
directly in the applicant, the total equity held by a person or entity
shall be determined by successive multiplication of the ownership
percentages for each link in the vertical ownership chain.
(k) Control Group. A control group is an entity, or a group of
individuals or entities, that possesses de jure control and de facto
control of an applicant or licensee, and as to which the applicant's or
licensee's charters, bylaws, agreements and any other relevant
documents (and amendments thereto) provide:
(1) That the entity and/or its members own unconditionally at least
50.1 percent of the total voting interests of a corporation;
(2) That the entity and/or its members receive at least 50.1
percent of the annual distribution or any dividends paid on the voting
stock of a corporation;
(3) That, in the event of dissolution or liquidation of a
corporation, the entity and/or or its members are entitled to receive
100 percent of the value of each share of stock in its possession and a
percentage of the retained earnings of the concern that is equivalent
to the amount of equity held in the corporation; and
(4) That, for other types of businesses, the entity and/or its
members have the right to receive dividends, profits and regular and
liquidating distributions from the business in proportion to the amount
of equity held in the business.
Note to paragraph (k): Voting control does not always assure de
facto control, such as for example, when the voting stock of the
control group is widely dispersed (see e.g., Sec. 24.720(1)(2)(iii).
(l) Affiliate.
(1) Basis for Affiliation. An individual or entity is an affiliate
of an applicant or of a person holding an attributable interest in an
applicant (both referred to herein as ``the applicant'') if such
individual or entity:
(i) Directly or indirectly controls or has the power to control the
applicant, or
(ii) Is directly or indirectly controlled by the applicant, or
(iii) Is directly or indirectly controlled by a third party or
parties that also controls or has the power to control the applicant,
or
(iv) Has an ``identity of interest'' with the applicant.
(2) Nature of control in determining affiliation.
(i) Every business concern is considered to have one or more
parties who directly or indirectly control or have the power to control
it. Control may be affirmative or negative and it is immaterial whether
it is exercised so long as the power to control exists.
Example for paragraph (l)(2)(i). An applicant owning 50 percent
of the voting stock of another concern would have negative power to
control such concern since such party can block any action of the
other stockholders. Also, the bylaws of a corporation may permit a
stockholder with less than 50 percent of the voting to block any
actions taken by the other stockholders in the other entity.
Affiliation exists when the applicant has the power to control a
concern while at the same time another person, or persons, are in
control of the concern at the will of the party or parties with the
power of control.
(ii) Control can arise through stock ownership; occupancy of
director, officer or key employee positions; contractual or other
business relations; or combinations of these and other factors. A key
employee is an employee who, because of his/her position in the
concern, has a critical influence in or substantive control over the
operations or management of the concern.
(iii) Control can arise through management positions where a
concern's voting stock is so widely distributed that no effective
control can be established.
Example for paragraph (l)(2)(iii). In a corporation where the
officers and directors own various size blocks of stock totaling 40
percent of the corporation's voting stock, but no officer or
director has a block sufficient to give him or her control or the
power to control and the remaining 60 percent is widely distributed
with no individual stockholder having a stock interest greater than
10 percent, management has the power to control. If persons with
such management control of the other entity are persons with
attributable interests in the applicant, the other entity will be
deemed an affiliate of the applicant.
(3) Identity of interest between and among persons. Affiliation can
arise between or among two or more persons with an identity of
interest, such as members of the same family or persons with common
investments. In determining if the applicant controls or is controlled
by a concern, persons with an identity of interest will be treated as
though they were one person.
Example for paragraph (l)(3) introductory text. Two shareholders
in Corporation Y each have attributable interests in the same PCS
application. While neither shareholder has enough shares to
individually control Corporation Y, together they have the power to
control Corporation Y. The two shareholders with these common
investments (or identity in interest) are treated as though they are
one person and Corporation Y would be deemed an affiliate of the
applicant.
(i) Spousal Affiliation. Both spouses are deemed to own or control
or have the power to control interests owned or controlled by either of
them, unless they are subject to a legal separation recognized by a
court of competent jurisdiction in the United States.
(ii) Kinship Affiliation. Immediate family members will be presumed
to own or control or have the power to control interests owned or
controlled by other immediate family members. In this context
``immediate family member'' means father, mother, husband, wife, son,
daughter, brother, sister, father- or mother-in-law, son- or daughter-
in-law, brother- or sister-in-law, step-father, or -mother, step-
brother, or -sister, step-son, or -daughter, half brother or sister.
This presumption may be rebutted by showing that
(A) The family members are estranged,
(B) The family ties are remote, or
(C) The family members are not closely involved with each other in
business matters.
Example for paragraph (l)(3)(ii). A owns a controlling interest
in Corporation X. A's sister-in-law, B, has an attributable interest
in a PCS application. Because A and B have a presumptive kinship
affiliation, A's interest in Corporation X is attributable to B, and
thus to the applicant, unless B rebuts the presumption with the
necessary showing.
(4) Affiliation through stock ownership.
(i) An applicant is presumed to control or have the power to
control a concern if he or she owns or controls or has the power to
control 50 percent or more of its voting stock.
(ii) An applicant is presumed to control or have the power to
control a concern even though he or she owns, controls or has the power
to control less than 50 percent of the concern's voting stock, if the
block of stock he or she owns, controls or has the power to control is
large as compared with any other outstanding block of stock.
(iii) If two or more persons each owns, controls or has the power
to control less than 50 percent of the voting stock of a concern, such
minority holdings are equal or approximately equal in size, and the
aggregate of these minority holdings is large as compared with any
other stock holding, the presumption arises that each one of these
persons individually controls or has the power to control the concern;
however, such presumption may be rebutted by a showing that such
control or power to control, in fact, does not exist.
(5) Affiliation arising under stock options, convertible
debentures, and agreements to merge. Stock options, convertible
debentures, and agreements to merge (including agreements in principle)
are generally considered to have a present effect on the power to
control the concern. Therefore, in making a size determination, such
options, debentures, and agreements will generally be treated as though
the rights held thereunder had been exercised. However, neither an
affiliate nor an applicant can use such options and debentures to
appear to terminate its control over another concern before it actually
does so.
Example 1 for paragraph (l)(5). If company B holds an option to
purchase a controlling interest in company A, who holds an
attributable interest in a PCS application, the situation is treated
as though company B had exercised its rights and had become owner of
a controlling interest in company A. The gross revenues of company B
must be taken into account in determining the size of the applicant.
Example 2 for paragraph (l)(5). If a large company, BigCo, holds
70% (70 of 100 outstanding shares) of the voting stock of company A,
who holds an attributable interest in a PCS application, and gives a
third party, SmallCo, an option to purchase 50 of the 70 shares
owned by BigCo, BigCo will be deemed to be an affiliate of company
A, and thus the applicant, until SmallCo actually exercises its
options to purchase such shares. In order to prevent BigCo from
circumventing the intent of the rule which requires such options to
be considered on a fully diluted basis, the option is not considered
to have present effect in this case.
Example 3 for paragraph (l)(5). If company A has entered into an
agreement to merge with company B in the future, the situation is
treated as though the merger has taken place.
(6) Affiliation under voting trusts.
(i) Stock interests held in trust shall be deemed controlled by
any person who holds or shares the power to vote such stock, to any
person who has the sole power to sell such stock, and to any person
who has the right to revoke the trust at will or to replace the
trustee at will.
(ii) If a trustee has a familial, personal or extra-trust
business relationship to the grantor or the beneficiary, the stock
interests held in trust will be deemed controlled by the grantor or
beneficiary, as appropriate.
(iii) If the primary purpose of a voting trust, or similar
agreement, is to separate voting power from beneficial ownership of
voting stock for the purpose of shifting control of or the power to
control a concern in order that such concern or another concern may
meet the Commission's size standards, such voting trust shall not be
considered valid for this purpose regardless of whether it is or is
not recognized within the appropriate jurisdiction.
(7) Affiliation through common management. Affiliation generally
arises where officers, directors, or key employees serve as the
majority or otherwise as the controlling element of the board of
directors and/or the management of another entity.
(8) Affiliation through common facilities. Affiliation generally
arises where one concern shares office space and/or employees and/or
other facilities with another concern, particularly where such
concerns are in the same or related industry or field of operations,
or where such concerns were formerly affiliated, and through these
sharing arrangements one concern has control, or potential control,
of the other concern.
(9) Affiliation through contractual relationships. Affiliation
generally arises where one concern is dependent upon another concern
for contracts and business to such a degree that one concern has
control, or potential control, of the other concern.
(10) Affiliation under joint venture arrangements.
(i) A joint venture for size determination purposes is an
association of concerns and/or individuals, with interests in any
degree or proportion, formed by contract, express or implied, to
engage in and carry out a single, specific business venture for
joint profit for which purpose they combine their efforts, property,
money, skill and knowledge, but not on a continuing or permanent
basis for conducting business generally. The determination whether
an entity is a joint venture is based upon the facts of the business
operation, regardless of how the business operation may be
designated by the parties involved. An agreement to share profits/
losses proportionate to each party's contribution to the business
operation is a significant factor in determining whether the
business operation is a joint venture.
(ii) The parties to a joint venture are considered to be
affiliated with each other
(11) Exclusions from affiliation coverage.
(i) For purposes of Sec. 24.709(a)(2) and paragraph (b)(2) of
this section, Indian tribes or Alaska Regional or Village
Corporations organized pursuant to the Alaska Native Claims
Settlement Act (43 U.S.C. 1601 et seq.), or entities owned and
controlled by such tribes or corporations, are not considered
affiliates of an applicant (or licensee) that is owned and
controlled by such tribes, corporations or entities, and that
otherwise complies with the requirements of Sec. 24.709 (b)(3) and
(b)(5) or Sec. 24.709 (b)(4) and (b)(6), except that gross revenues
derived from gaming activities conducted by affiliated entities
pursuant to the Indian Gaming Regulatory Act (25 U.S.C. 2701 et
seq.) will be counted in determining such applicant's (or
licensee's) compliance with the financial requirements of
Secs. 24.709(a) and paragraph (b) of this section, unless such
applicant establishes that it will not receive a substantial unfair
competitive advantage because significant legal constraints restrict
the applicant's ability to access such gross revenues.
(ii) For purposes of Sec. 24.709(a)(2) and paragraph (b)(2) of
this section, an entity controlled by members of minority groups is
not considered an affiliate of an applicant (or licensee) that
qualify as a business owned by members of minority groups and/or
women if affiliation would arise solely from control of such entity
by members of the applicant's (or licensee's) control group who are
members of minority groups. For purposes of this subparagraph, the
term minority-controlled entity shall mean, in the case of a
corporation, an entity in which 50.1 percent of the voting interests
is owned by members of minority groups or, in the case of a
partnership, all of the general partners are members of minority
groups or entities controlled by members of minority groups; and, in
all cases, one in which members of minority groups have both de jure
and de facto control of the entity.
(m) Publicly Traded Corporation with Widely Dispersed Voting
Power. A publicly traded corporation with widely dispersed voting
power is a business entity organized under the laws of the United
States:
(1) Whose shares, debt, or other ownership interests are traded
on an organized securities exchange within the United States;
(2) In which no person
(i) Owns more than 15 percent of the equity; or
(ii) Possesses, directly or indirectly, through the ownership of
voting securities, by contract or otherwise, the power to control
the election of more than 15 percent of the members of the board of
directors or other governing body of such publicly traded
corporation; and
(3) Over which no person other than the management and members
of the board of directors or other governing body of such publicly
traded corporation, in their capacities as such, has de facto
control.
(4) The term person shall be defined as in section 13(d) of the
Securities and Exchange Act of 1934, as amended (15 U.S.C. 78(m)),
and shall also include investors that are commonly controlled under
the indicia of control set forth in the definition of affiliate in
paragraphs (1)(2) through (1) of this section.
(n) Qualifying Investor; Qualifying Minority and/or Woman
Investor.
(1) A qualifying investor is a person who is (or holds an
interest in) a member of the applicant's (or licensee's) control
group whose gross revenues and total assets, when aggregated with
those of all other attributable investors and affiliates, do not
exceed the gross revenues and total assets limits specified in
Sec. 24.709(a), or, in the case of an applicant (or licensee) that
is a small business, do not exceed the gross revenues limit
specified in paragraph (b) of this section.
(2) A qualifying minority and/or woman investor is a person who
is a qualifying investor under paragraph (n)(1), who is (or holds an
interest in) a member of the applicant's (or licensee's) control
group and who is a member of a minority group or a woman and a
United States citizen.
(3) For purposes of assessing compliance with the minimum equity
requirements of Sec. 24.709(b) (5) and (6), where such equity
interests are not held directly in the applicant, interests held by
qualifying ivnestors and qualifying minority and/or woman investors
shall be determined by successive multiplication of the ownership
percentages for each link in the vertical ownership chain.
(o) Preexisting Entity. A preexisting entity is an entity that
was operating and earning revenues for at least two years prior to
December 31, 1994.
3. Section 24.839 is amended by revising paragraphs (a) and (d)
to read as follows:
Sec. 24.839 Transfer of control or assignment of license.
(a) Approval Required. Authorizations shall be transferred or
assigned to another party, voluntarily (for example, by contract) or
involuntarily (for example, by death, bankruptcy or legal
disability), directly or indirectly or by transfer of control of any
corporation holding such authorization, only upon application and
approval by the Commission. A transfer of control or assignment of
station authorization in the broadband Personal Communications
Service is also subject to Secs. 24.711(c), 24.712(d), 24.713(b)
(unjust enrichment) and 1.2111(a) of this chapter (reporting
requirement).
* * * * *
(d) Restrictions on Assignments and Transfers of Licenses for
Frequency Blocks C and F. No assignment or transfer of control of a
license for frequency Block C or frequency Block F will be granted
unless--
(1) The application for assignment or transfer of control is
filed after five years from the date of the initial license grant;
(2) The application for assignment or transfer of control is
filed after three years from the date of the initial license grant
and the proposed assignee or transferee meets the eligibility
criteria set forth in Sec. 24.709 at the time the application for
assignment or transfer of control is filed, or the proposed assignee
or transferee holds other license(s) for frequency Blocks C and F
and, at the time of receipt of such license(s), met the eligibility
criteria set forth in Sec. 24.709;
* * * * *
[FR Doc. 94-30075 Filed 12-5-94; 8:45 am]
BILLING CODE 6712-01-M
