Implementation of Section 309(j) of the Communications Act Competitive Bidding

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 24

[PP Docket No. 93-253; FCC 94-219]

Implementation of Section 309(j) of the Communications Act--

Competitive Bidding

AGENCY: Federal Communications Commission.

ACTION: Further notice of proposed rulemaking.

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SUMMARY: In this Third Memorandum Opinion and Order and Further Notice

of Proposed Rulemaking, the Commission seeks comment on certain

proposals to increase opportunities for smaller entities, including

entities owned by minorities and women to participate in narrowband PCS

auctions and in the provision of narrowband PCS services. These

proposed rules will promote economic opportunity and competition, and

disseminate licenses among a wide variety of applicants, including

small business and businesses owned by members of minority groups and

women.

DATES: Comments are due September 16, 1994; Reply comments are due on

October 3, 1994.

FOR FURTHER INFORMATION CONTACT: Jackie Chorney Office of Plans and

Policy, (202) 418-2030.

SUPPLEMENTARY INFORMATION: Pursuant to applicable procedures set forth

in Sections 1.415 and 1.419 of the Commission's Rules, 47 CFR 1.415 and

1.419, interested parties may file comments on or before September 16,

1994 and reply comments on or before October 3, 1994. To file formally

in this proceeding, you must file an original and four copies of all

comments, reply comments, and supporting comments. If you want each

Commission to receive a personal copy of your comments, you must file

an original plus nine copies. You should send comments and reply

comments to Office of the Secretary, Federal Communications Commission,

Washington, DC 20554. Comments and reply comments will be available for

public inspection during regular business hours in the FCC Reference

Center of the Federal Communications Commission, Room 239, 1919 M

Street, NW., Washington, DC 20554. The complete text of this document

may be purchased from the Commission's copy contractor, International

Transcription Service, 1919 M Street, Room 236, Washington, DC 20554,

telephone (202) 857-3800.

In the matter of Implementation of Section 309(j) of the

Communications Act--Competitive Bidding Narrowband PCS, PP Docket

No. 93-253 and Amendment of the Commission's Rules to Establish New

Narrowband Personal Communication Services, GEN Docket No. 90-314,

ET Docket No. 92-100.

Third Memorandum Opinion and Order and Further Notice of Proposed

Rulemaking

Adopted: August 16, 1994.

Released: August 17, 1994.

Comment Date: September 16, 1994.

Reply Comment Date: October 3, 1994.

By the Commission:

Table of Contents

I. Proposed designated entity provisions for MTA and BTA auctions 1

A. Introduction................................................ 1

B. Summary of special provisions for designated entities....... 8

C. Summary of eligibility requirements and definitions......... 16

1. Entrepreneurs' blocks and small business eligibility...... 16

2. Definition of women and/or minority-owned business........ 17

D. The entrepreneurs' blocks................................... 19

E. Bidding credits............................................. 24

F. Installment payments........................................ 29

G. Upfront payments............................................ 36

H. Definitions and Eligibility................................. 38

1. Eligibility to bid in the entrepreneurs' blocks........... 38

2. Attribution rules for the entrepreneurs' blocks........... 39

3. Definition of women and minority-owned business........... 44

4. Definition of an affiliate................................ 55

I. Limit on licenses awarded in entrepreneurs' blocks.......... I56

J. Redesignated of certain narrowband PCS spectrum blocks...... 59

II. Procedural matters........................................... 60

A. Further notice--initial analysis............................ 60

B. Ex parte rules.............................................. 67

C. Comment dates............................................... 68

I. Proposed Designated Entity Provisions for MTA and BTA Auctions

A. Introduction

1. In the Budget Act, Congress recognized the novelty of auctions

as a licensing method and encouraged us to experiment with a variety of

techniques to ensure that small businesses and those owned by women and

minorities have an opportunity to participate in spectrum-based

services. While we believe that measures taken with respect to the

regional narrowband PCS auctions will provide substantial opportunities

for designated entities to participate in narrowband PCS, we seek

comment on whether it may be necessary to adopt alternative provisions

such as entrepreneurs' blocks or higher bidding credits to encourage

investment in minority- and women-owned businesses in future auctions.

As we have learned, narrowband PCS licenses may be auctioned for large

sums of money in the competitive bidding process. It therefore may be

necessary to do more to ensure that designated entities have the

opportunity to participate in narrowband PCS than may be necessary in

other, less costly spectrum-based services. In our view, we must

consider whether these steps and any others we may adopt are required

to fulfill Congress's mandate that designated entities have the

opportunity to participate in the provision of PCS. We believe that the

measures we propose today would increase the likelihood that designated

entities will win licenses in the auctions and become strong

competitors in the provision of narrowband PCS service. We also will

review the results of the regional auction in making our decision on

the rules proposed in this Further Notice.

2. As we noted in the Fifth Report and Order, by instructing the

Commission to ensure the opportunity for designated entities to

participate in auctions and spectrum-based services, Congress was well

aware of the difficulties these groups encounter in accessing

capital.\1\ Indeed, less than two years ago, Congress made specific

findings in the Small Business Credit and Business Opportunity

Enhancement Act of 1992, that ``small business concerns, which

represent higher degrees of risk in financial markets than do large

businesses, are experiencing increased difficulties in obtaining

credit.''\2\ Because of these problems, Congress resolved to consider

carefully legislation and regulations ``to ensure that small business

concerns are not negatively impacted'' and to give priority to passage

of ``legislation and regulations that enhance the viability of small

business concerns.''\3\

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\1\Fifth Report and Order at 97, in PP Docket No. 93-253, FCC

94-178, adopted June 29, 1994, released July 15, 1994, 59 FR 37566

(Jul 29, 1994), (Fifth Report and Order).

\2\Small Business Credit and Business Opportunity Enhancement

Act of 1992, Section 331(a)(3), Pub. Law 102-366, Sept. 4, 1992.

\3\Id., Section 441(b)(2),(3).

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3. Congress also recognized that these funding problems are even

more severe for minority and women-owned businesses, who face

discrimination in the private lending market. For example, Congress

explicitly found that businesses owned by minorities and women have

particular difficulties in obtaining capital and that problems

encountered by minorities in this regard are ``extraordinary.''\4\ A

number of studies also amply support the existence of widespread

discrimination against minorities in lending practices. As we noted in

the Fifth Report and Order, in October, 1992, the year prior to passage

of the auction law, the Federal Reserve Bank of Boston released an

important and highly-publicized study demonstrating that a black or

Hispanic applicant in the Boston area is roughly 60 percent more likely

to be denied a mortgage loan than a similarly situated white

applicant.\5\ The researchers measured every variable mentioned as

important in numerous conversations with lenders, underwriters, and

examiners and found that minority applicants are more likely to be

denied mortgages even where they have the same obligation ratios,

credit history, loan to value and property characteristics as white

applicants. The lending discrimination that occurs, the study found,

does not involve the application of specific rules, but instead occurs

where discretionary decisions are made. Based on the Boston study, we

found that it is reasonable to expect that race will affect business

loans that are based on more subjective criteria to an even greater

extent than the mortgage loan process, which uses more standard rules.

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\4\Id., Section 12(4); 331(a)(4).

\5\Mortgage Lending in Boston: Interpreting HMDA Data, Federal

Reserve Bank of Boston, Working Paper 92-7 (October 1992).

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4. Similarly, evidence presented in testimony before the House

Minority Enterprise Subcommittee on May 20, 1994 indicates that African

American business borrowers have difficulty raising capital mainly

because they have less equity to invest, they receive fewer loan

dollars per dollar of equity investment, and they are less likely to

have alternate loan sources, such as affluent family or friends.

Assuming two hypothetical college-educated, similarly situated male

entrepreneurs, one black, one white, the testimony indicated that the

white candidate would have access to $1.85 in bank loans for each

dollar of owner equity invested, while the black candidate would have

access to only $1.16. According to the testimony, the problems

associated with lower incomes and intergenerational wealth, as well as

the discriminatory treatment minorities receive from financial

institutions, make it much more likely that minorities will be shut out

of capital intensive industries, such as telecommunications. This

testimony also noted that African American representation in

communications is so low that it was not possible to generate

meaningful summary statistics on underrepresentation.\6\

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\6\Testimony of Dr. Timothy Bates, Visiting Fellow, The Woodrow

Wilson Center, before the U.S. House of Representatives Committee on

Small Business, Subcommittee on Minority Enterprise, Finance, and

Urban Development (House Minority Enterprise Subcommittee), May 20,

1994.

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5. We also stated in the Fifth Report and Order that inability to

access capital is also a major impediment to the successful

participation of women in PCS auctions. In enacting the Women's

Business Ownership Act in 1988, Congress made findings that women, as a

group, are subject to discrimination that adversely affects their

ability to raise or secure capital.\7\ AWRT documents that these

discriminatory barriers still exist today. Indeed, AWRT reports that

while venture capital is an important source of funding for

telecommunications companies, women-owned companies received only

approximately one percent of the $3 billion invested by institutional

venture capitalists in 1993. Citing a 1992 National Women's Business

Council report, AWRT further argues that even successful women-owned

companies did not overcome these financing obstacles after they had

reached a level of funding and profitability adequate for most other

businesses.\8\

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\7\Pub. L. 100-533 (1988). In 1991, Congress enacted the Women's

Business Development Act of 1991 to further assist the development

of small businesses owned by women. See Pub. L. 102-191 (1991).

\8\See Letter of AWRT to the Honorable Kweisi Mfume, Chairman,

House Minority Enterprise Subcommittee, June 1, 1994.

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6. A study prepared in 1993 by the National Foundation for Women

Business Owners (NFWBO) further illustrates the barriers faced by

women-owned businesses. For example, it finds that women-owned firms

are 22 percent more likely to report problems dealing with their banks

than are businesses at large. In addition, the NFWBO study finds that

the largest single type of short-term financing used by women business

owners is credit cards and that over half of women-owned firms use

credit cards for such purposes, as compared to 18 percent of all small

to medium-sized businesses, which generally use bank loans and vendor

credit for short-term credit needs. With regard to long-term financing,

the study states that a greater proportion of women-owned firms are

turning, or are forced to turn, to private sources, and to a wider

variety of sources, to fulfill their needs. Based on these findings,

the NFWBO study concludes that removal of financial barriers would

encourage stronger growth among women-owned businesses, resulting in

much greater growth throughout the economy.\9\

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\9\See The National Foundation for Women Business Owners,

Financing the Business, A Report on Financial Issues from the 1992

Biennial Membership Survey of Women Business Owners, October 1993.

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7. If we are to meet the congressional goals of promoting economic

opportunity and competition by disseminating licenses among a wide

variety of providers, we must find ways to counteract effectively these

barriers to entry. As chronicled in the Fifth Report and Order, both

Congress and the Commission have tried various methods to enhance

access to the broadcast and cable industries by minorities and

women.\10\ These efforts however, have met with limited success. The

record shows that women and minorities have not gained substantial

ownership representation in either the broadcast or non-broadcast

telecommunications industries. For example, a 1993 report conducted by

the National Telecommunications and Information Administration's (NTIA)

Minority Telecommunications Development Program shows that, as of

August 1993, only 2.7 percent of commercial broadcast stations were

owned by minorities. Another study commissioned by the Commerce

Department's Minority Business Development Agency in 1991 found that

only one half of one percent of the telecommunications firms in the

country were minority owned. The study also identified only 15 minority

cable operators and 11 minority firms engaged in the delivery of

cellular, specialized mobile radio, radio paging or messaging services

in the United States.\11\ And, according to the last available U.S.

Census, only 24 percent of the communications firms in the country were

owned by women, and these women-owned firms generated only

approximately 8.7 percent of the revenues earned by communications

companies.\12\ When companies without paid employees are removed from

the equation, firms with women owners represent only 14.5 percent of

the communications companies in the country.\13\ One result of these

low numbers is that there are very few minority or women-owned

businesses that bring experience or infrastructure to narrowband PCS.

They thus face an additional barrier relative to many existing service

providers.

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\10\See Fifth Report and Order at 103-106.

\11\See Testimony of Larry Irving, Assistant Secretary for

Communications and Information, U.S. Department of Commerce, before

the House Minority Enterprise Subcommittee, May 20, 1994. In his

testimony at this same hearing, FCC Chairman Reed Hundt cited some

of these statistics and noted that in light of this serious

underrepresentation, there remains ``a fundamental obligation for

both Congress and the FCC to examine new and creative ways to ensure

minority opportunity.'' Testimony of Reed E. Hundt, Chairman,

Federal Communications Commission, before the House Minority

Enterprise Subcommittee, May 20, 1994.

\12\See Women-Owned Businesses, 1987 Economic Censuses, U.S.

Department of Commerce, issued August 1990, at 7,147. The census

data includes sole proprietorships, partnerships, and subchapter S

corporations. We have no statistics regarding women representation

among owners of larger communications companies.

\13\Id.

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8. Small businesses also have not become major participants in the

telecommunications industry. For instance, one commenter asserts that

ten large companies--six Regional Bell Operating Companies (RBOCs),

AirTouch (formerly owned by Pacific Telesis), McCaw, GTE and Sprint--

control nearly 86 percent of the cellular industry. This commenter

further contends that nine of these ten companies control 95 percent of

the cellular licenses and population in the 50 BTAs that have one

million or more people.\14\

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\14\Ex parte filing of DCR Communications, May 31, 1994.

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9. In the new auction law, Congress directed the Commission to

remedy this serious imbalance in the participation by certain groups,

especially minorities and women. The auction law itself contemplates

that requiring payment for initial licenses through competitive

bidding, unlike existing licensing methods such as comparative hearings

or lotteries, may inhibit participation by those with limited access to

capital and could further diminish opportunities for designated

entities. The first nationwide auction demonstrated that a 25 percent

bidding credit may not be sufficient to ensure that designated entities

have the opportunity to participate where narrowband PCS values are

high. The regional auctions will demonstrate whether a 40 percent

bidding credit for women- and minority-owned firms combined with

installment payments for eligible small businesses is sufficient to

provide meaningful opportunities for designated entities at the

regional level. We further propose to examine the use of measures we

specified in the Fifth Report and Order to carry out Congress's

directive to provide meaningful opportunities for small entities and

businesses owned by women and minorities to provide PCS services. If,

based on the results of the regional auction, we conclude that the 40

percent bidding credit is insufficient, we may decide that these

measures, which are expressly designed to address the funding problems

faced by these groups, may be necessary to achieve Congress's goals

with respect to narrowband PCS.

B. Summary of Special Provisions for Designated Entities

10. While there was significant designated entity participation in

the nationwide narrowband PCS auction, we are concerned that the high

license values in that auction and the substantial involvement by

large, incumbent firms with significant financial resources suggests

that designated entities may have difficulties in competing in future

narrowband PCS auctions. We recognize that larger incumbent firms are

able to pay much higher license prices than smaller firms because of

the significant infrastructure and cost of capital advantages these

firms enjoy. Because of these factors, we believe that additional

measures may be necessary to achieve Congress's mandate that we ensure

the opportunity for designated entities to participate in the

competitive bidding process and in the provision of spectrum-based

services. In this regard, we propose additional provisions for

businesses owned by women and/or minorities and small businesses

similar to those employed in the auction rules for broadband PCS.

11. To fulfill Congress's mandate that we ensure that designated

entities have the opportunity to participate in providing narrowband

PCS; we propose to reserve up to four MTA frequency blocks--19, 21, 22

and 24--, and both BTA frequency blocks--25 and 26--for bidding

exclusively by entities with annual gross revenues of less than $125

million and total assets of less than $500 million (``entrepreneurs'

blocks''). We believe that excluding large companies from bidding in

the proposed entrepreneurs' blocks, and limiting the total number of

licenses that one entity can obtain in these blocks, would

significantly enhance opportunities for smaller entities to become PCS

providers and thereby ensure that narrowband PCS licenses will be

disseminated ``among a wide variety of applicants,'' as required by

Section 309(j)(3)(B).

12. We recognize, however, that reserving blocks for bidding only

by relatively small companies may not, by itself, be sufficient to

ensure that small businesses and businesses owned by members of

minority groups and women have the opportunity to obtain narrowband PCS

licenses. Businesses owned by members of minority groups and women face

discrimination that poses additional obstacles for these firms.

Accordingly, we propose a number of related steps to assist small

businesses and businesses owned by woman and/or minorities in

attracting the capital necessary to obtain a narrowband PCS license.

13. First, to encourage large companies to invest in designated

entities and to assist designated entities without large investors to

overcome the additional hurdle presented by auctions, we propose to

make bidding credits available to designated entities within the

entrepreneurs' blocks. More specifically, we propose to provide small

businesses with a 10 percent bidding credit. Businesses owned by

minorities and women would receive a 15 percent bidding credit to

compensate for the substantial problems they face in attracting

capital.\15\ The credits would be cumulative, so that a business owned

by minorities or women that also qualified as a small business would

receive a 25 percent bidding credit. Second, we propose to allow most

successful bidders within the entrepreneurs' block to pay for their

licenses in installments and to ``enhance'' those installment payments

for small businesses and businesses owned by minorities and women by

varying the moratorium on principal and the interest rate. Third, we

propose to continue to extend our tax certificate policies to promote

participation by minorities and women in the provision of narrowband

PCS. Fourth, we propose to reduce the upfront payment for all eligible

bidders in the entrepreneurs' blocks from $0.02 per MHz per pop to

$0.015 per MHz per pop.

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\15\Although this bidding credit would be less than the bidding

credit available for selected nationwide and regional licenses (25

percent and 40 percent respectively), the 15 percent bidding credit

would be available within the entrepreneurs' block rather than in a

block where all companies could participate.

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14. Finally, we propose to redesignate the two BTA licenses as

regional licenses organized in the same configuration set forth in

Section 24.102 of the rules. We also seek comment on other means to

achieve larger geographic license sizes such as designating these BTA

licenses as nationwide licenses or by maintaining the BTA designation,

but allowing combinatorial bidding for the designated regions. We also

seek comment on whether some of the MTA and BTA response channels

should be redesignated as larger license areas with bidding limited

only to those entities eligible to bid for entrepreneurs' block

licenses.

15. The following chart highlights the major provisions proposed

for businesses bidding in the proposed entrepreneurs' blocks.\16\

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\16\This table is not comprehensive and therefore it does not

present all the provisions established for designated entities,

especially those available outside the entrepreneurs' blocks.

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Bidding Tax

credits Installment payments certificates

(Percent) for investors

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Entrepreneurial 0 Interest only for 1 No.

businesses (in year; rate equal to

excess of $40 MM and 10-year Treasury

less than or equal note plus 2.5

to $125 MM in percent; (for

revenue and less businesses with

than $500 MM in revenues greater

total assets). than $75 MM,

available only in

regional and MTA

markets)

Small businesses (not 10 Interest only for 2 No.

in excess of $40 MM years; rate equal to

in revenues and less 10-year Treasury

than $500 MM in note plus 2.5

total assets). percent;

Businesses owned by 15 Interest only for 3 Yes.

minorities and/or years; rate equal to

women (in excess of 10-year Treasury

$40 MM and less than note;

or equal to $125 MM

in revenues and less

than $500 MM in

total assets).

Small businesses 25 Interest only for 5 Yes.

owned by minorities years; rate equal to

and/or women (not in 10-year treasury

excess of $40 MM in note;

revenues and less

than $500 MM in

total assets.

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C. Summary of Eligibility Requirements and Definitions

1. Entrepreneurs' Blocks and Small Business Eligibility

16. The following points summarize the principal rules we propose

regarding eligibility to bid in the entrepreneurs' blocks and have

adopted above to qualify as a small business. In addition, they

summarize the attribution rules we will propose to use to assess

whether an applicant satisfies the various financial thresholds. More

precise details are discussed in the subsections that follow.

Proposed Financial Caps

Entrepreneurs' Blocks: To bid in the entrepreneurs'

blocks, the applicant, including attributable investors and affiliates,

must cumulatively have less than $125 million in gross revenues and

less than $500 million in total assets. No individual attributable

investor or affiliate may have $100 million or more in personal net

worth.

Small Business: To qualify for special measures accorded a

small business, the applicant, including attributable investors and

affiliates, must cumulatively have not in excess of $40 million in

gross revenues. No individual attributable investor or affiliate may

have in excess of $40 million in personal net worth. (Note: this is the

small business definition we have adopted above). We seek comments on

whether in an entrepreneur's block we should define small businesses

differently.

Proposed Attribution Rules

Control Group. The gross revenues, total assets and

personal net worth of certain investors are not considered so long as

the applicant has a ``control group'' consisting of one or more

individuals or entities that control the applicant, hold at least 25

percent of the equity and, for corporations, at least 50.1 percent of

the voting stock.

The gross revenues, total assets and personal net worth of

each member of the control group are counted toward the financial caps.

Other Investors. Where the applicant has a control group,

the gross revenues, total assets and personal net worth of any other

investor are not considered unless the investor holds 25 percent or

more of the applicant's passive equity (which, for corporations, will

include as much as 15 percent of the voting stock).

Passive Equity. Passive equity is limited partnership or

non-voting stock interests or voting stock interests of 15 percent or

less of the issued and outstanding voting stock.

Proposed Option for Minority or Woman-Owned Applicants. If

the control group (consisting entirely of women and/or minorities) owns

at least 50.1 percent of the equity and, or corporation, at least 50.1

percent of the voting stock, then the gross revenues, total assets and

personal net worth of any other investor are not considered unless the

investor holds more than 49.9 percent of the applicant's passive equity

(which, for corporations, includes no more than as 15 percent of the

voting stock).

Affiliates. The gross revenues, assets and personal net

worth of outside interests held by the applicant (and the attributable

investors in the applicant) are counted toward the financial caps if

the applicant (or the attributable investors in the applicant) control

or have power to control the outside interests or if the applicant (or

the attributable investors in the applicant) is under the control of

the outside interests. The financial interests of spouses are also

attributed to each other.

2. Definition of Women and/or Minority-Owned Business

17. The points below summarize the two structural options proposed

to be available to firms that wish to qualify for the special

provisions adopted for businesses owned by minorities and women. These

options will be discussed in more detail in the text that follows.

50.1 Percent Equity Option

If woman and/or minority principals control the applicant

and own at least:

50.1 percent of the equity, and;

50.1 percent of the voting stock, in the case of

corporations.

Then any other investor may hold:

not more than 49.9 percent of the passive equity (which,

for corporations, includes as much as 15 percent of the voting stock).

25 Percent Equity Option

If women and/or minority principals control the applicant

and own at least:

25 percent of the equity, and;

50.1 percent of the voting stock, in the case of

corporations.

Then any other investor may hold:

25 percent or less of the passive equity (which, for

corporations, includes as much as 15 percent of the voting stock).

18. We also request comment on alternatives intended to deter shams

and fronts and to prevent abuse of the incentives for designated

entities. The Commission would enforce vigorously any requirements

adopted. These proposals include a holding and limited transfer period

for licensees in the entrepreneurs' blocks and repayment provisions

associated with bidding credits and installment payments. These steps

and our eligibility and affiliation rules are intended to ensure that

the benefits of any measures we take flow to the entities Congress

intended. Ultimately, we believe that we will best fulfill our

statutory mandate by creating powerful incentives for bona fide

designated entities to attract the capital necessary to compete both in

auctions for narrowband PCS and in the provision of service. We

therefore specifically request that comments address in detail the

impact any of these alternatives would likely produce on the

opportunity for designated entities to acquire narrowband PCS licenses.

D. The Entrepreneurs' Blocks

19. As discussed above, because the auction process itself requires

additional expenditures of capital to acquire licenses, this new

licensing procedure in many respects holds the potential to erect an

additional barrier to entry that had not existed even under the Act's

previous licensing methods, comparative hearings and lotteries. As

reflected in the House Committee Report, Congress was well aware of

that possibility and wanted to ensure that competitive bidding should

not exclude smaller entities from obtaining licenses.\17\ The inability

of small businesses and businesses owned by women and minorities to

obtain adequate private financing creates a serious imbalance between

these companies and large businesses in their prospects for competing

successfully in narrowband PCS auctions.

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\17\See H.R. Rep. No. 103-111 at 255.

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20. We anticipate that the results of the narrowband regional

auctions as well as the comments we seek in this Notice will be

relevant to our final conclusion of whether an entrepreneurs' block is

appropriate in narrowband PCS. We seek comments on what results in the

regional auction would or would not justify the use of an entrepeneurs'

block in subsequent narrowband auctions. The $125 million gross

revenue/$500 million asset caps have the effect of excluding the large

companies that would easily be able to outbid designated entries and

frustrate Congress' goal of disseminating licenses among a diversity of

licensees. At the same time, this restriction does not exclude many

firms that, while not large in comparison with other telecommunications

companies, nevertheless are likely to have the financial ability to

provide sustained competition for the PCS licensees. For example, the

$125 million gross revenue figure corresponds roughly to the

Commission's definition of a Tier 2, or medium-sized, local exchange

carrier,\18\ and would include virtually all of the independently owned

rural telephone companies, while excluding the largest incumbent paging

licensees. Limiting the personal net worth of any individual investor

or affiliate of the applicant to $100 million would prevent a very

wealthy individual from leveraging his or her personal assets to allow

the applicant to circumvent the size limitations of the entrepeneurs'

blocks.

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\18\Local exchange carriers are categorized as Tier 1 and Tier 2

companies by applying the criterion that Sections 32.11(a) and

32.11(e) of the Commission's Rules use to distinguished Class A and

Class B companies, respectively. Class A companies are those

companies having annual revenues from regulated telecommunications

operations of $100 million or more; Class B companies are those

companies having annual revenues from regulated telecommunications

operations of less than $100 million. The initial classification of

a company is determined by its lowest annual operating revenues for

the five immediately preceding years. A company's classification is

changed when its annual operating revenue exceeds or is under the

$100 million mark in each of five consecutive years. The Commission

imposes more relaxes regulatory requirements on Tier 2 LECs than on

Tier 1 LECs. See Automated Reporting Requirements for Certain Class

A and Tier 1 Telephone Companies, 2 FCC Rcd 5770, 5772 (1987), 52 FR

35918 (Sept. 24, 1987), Commission Requirements for Cost Support

Material to be Filed with 1994 Annual Access Tariffs and for Other

Cost Support Material, 9 FCC Rcd 1060 n. 3 (Comm. Carr. Bur. 1994),

Commission Requirements for Cost Support Material to be Filed with

Access Tariffs on March 1, 1985, Public Notice, Mimeo No. 2133

(Comm. Carr. Bur. released Jan. 25, 1985).

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21. In determining which of the blocks in each market should

constitute the entrepreneurs' blocks, we seek to make sufficient

opportunity available to businesses that would qualify for the

entrepreneurs' blocks and to those that would not. We seek comment on

whether it would be appropriate to include all of those remaining

blocks designated for bidding credits and to add one additional MTA

block and one additional BTA block if we decide to adopt the proposal.

We seek comment on the choice of blocks and the number of blocks that

should be included in the entrepreneurs' blocks. We want to choose

blocks to provide adequate amounts of spectrum and geographic territory

necessary to ensure that the eligible bidders will be able to compete

effectively. We believe that designating a variety of frequency blocks

as entrepreneurs' blocks would satisfy the needs of those parties who

believe they must have larger amounts of spectrum to compete

effectively as well as the needs of other designated entities who

require smaller blocks. Finally, it would not foreclose opportunities

for other parties.\19\

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\19\In addition, incumbent paging licensees would have the

opportunity to bed on 2,176 MTA and BTA response channel licenses

reserved for existing paging licensees.

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22. Holding and Limited Transfer Period. Because we interpret the

congressional goal of giving designated entities the opportunity to

provide spectrum-based services to extend beyond merely obtaining a

license, we seek comment on whether we should prohibit licensees in the

entrepreneurs' blocks from voluntarily assigning or transferring

control of their licenses for a period of three years from the date of

the license grant.\20\ We further ask commenters to address whether,

for the next two to seven years of the license term, we should permit

the licensee to assign or transfer control of its authorization only to

an entity that satisfies the entrepreneurs' blocks entry criteria.\21\

Comments should address whether any restrictions of this type would

accurately balance the goal of promoting access to capital by

designated entities with the need to assure the integrity of our

process. During this limited transfer period, licensees would continue

to be bound by the financial eligibility requirements, as set forth

below.\22\ In addition, a transferee or assignee who receives an

entrepreneurs' block license during this period would remain subject to

the transfer restrictions for the balance of the holding period.\23\

Should any of these proposals be adopted, the Commission would conduct

random pre- and post-auction audits to ensure that applicants receiving

preferences are in compliance with the FCC's rules.

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\20\We propose considering exceptions to this three-year holding

period rule 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. In addition, we note that a transfer is considered

``involuntary'' if it is made pursuant to a court decree requiring

the sale or transfer of the licensee's stock or assets. Paramount

Pictures, Inc., 43 FCC 453 (1949); Cf. William Penn Broadcasting, 16

FCC 2d 1050 (1969).

\21\We note that a licensee assigning its authorization pursuant

to this limited transfer period might be subject to the repayment

provisions associated with installment payments and bidding credits.

See infra  28, 35.

\22\See infra  38-43. In addition, for purposes of the

installment payment and bidding credit provisions set forth below,

licensees will continue to be bound by the financial eligibility

requirements throughout the term of the license.

\23\For example, if an entrepreneurs' block authorization is

assigned to an eligible business in year four of the license term,

it would be required to hold that license until the original holding

period expires, subject to the same exceptions that applied to the

original licensee.

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23. Our goals are to create significant opportunities for

entrepreneurs, small businesses, and businesses owned by minorities and

women to compete in auctions for licenses and attract sufficient

capital to build-out those licenses and provide service. We recognize

the critical need to attract capital, which requires flexibility. We

are very concerned, however, that such flexibility not undermine our

more fundamental objective, which is to ensure that designated entities

retain de facto and de jure control of their companies. The holding and

limited transfer period upon which we seek comment, may help promote

this objective. We seek comment on the effect that any rules of this

sort are likely to have on the achievement of our goals of meaningful

long-term participation by designated entities and how such a rule

would impact the ability to raise capital.

E. Bidding Credits

24. In the Third Report and Order we adopted a 25 percent bidding

credit for businesses owned by minorities and women. We concluded that

the use of bidding credits would be an effective tool to ensure that

women and minority-owned businesses have opportunities to participate

in the provision of narrowband services.\24\ And, in this Order, we

raised this bidding credit to 40 percent for the regional narrowband

auctions. While we do not think that a bidding credit of this magnitude

is required when used in conjunction with an insulated entrepreneurs'

block, we continue to believe that a bidding credit is necessary to

ensure that women and minority-owned businesses have the opportunity to

participate in narrowband PCS. In addition, we believe that a small

bidding credit is warranted to help small businesses overcome financing

obstacles. Accordingly, we propose to continue to provide a bidding

credits in the proposed entrepreneurs' blocks that would give small

businesses a 10 percent credit, women and minority-owned businesses a

15 percent credit, and small businesses owned by women and minorities

an aggregate credit of 25 percent.

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\24\See Third Report and Order at 72, in PP Docket No. 93-252,

9 FCC Rcd 2941, 59 FR 26741 (May 24, 1994), (Third Report and

Order).

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25. In ex parte presentations to the Commission, many commenters

have indicated that, without spectrum set-asides for narrowband PCS,

bidding credits would not be sufficient to assist designated entities

in outbidding very large entities who are likely to bid for licenses in

this service. PCSD states, for example, that all of the existing large

paging companies can justify much larger payments for licenses than

could an individual entrepreneur, regardless of a bidder's credit.

Therefore, it believes no entrepreneur will win a bid for any PCS

market that is desirable to any of the large companies.\25\ As

described above, in order to afford designated entities a realistic

opportunity to obtain licenses in the narrowband PCS service, we

propose to exclude very large businesses from bidding for licenses in

the entrepreneurs' blocks. These measures would enhance the value of

the bidding credits for small businesses and businesses owned by

minorities and women. In this context, we believe that bidding credits

can have a significant effect on the ability of small businesses and

businesses owned by women and minorities to participate successfully in

auctions for licenses in entrepreneurs' blocks.

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\25\Ex parte filing of PCSD Development Corporation (PCSD),

August 9, 1994.

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26. As explained above, the capital access problems faced by small

firms and women and minority-owned firms make special provisions like

bidding credits appropriate for these designated entities in narrowband

PCS.\26\ In effect, the bidding credit would function as a discount on

the bid price a firm would actually have to pay to obtain a license

and, thus, will address directly the financing obstacles encountered by

these entities. Moreover, as noted previously, women and minorities

face discrimination in lending and other barriers to entry not

encountered by other firms, including other designated entities.

Therefore, as one of the measures designed to counter these increased

capital formation difficulties, we propose to provide them with a

slightly higher bidding credit than small businesses. Thus, women and

minorities would receive a 15 percent payment discount that is applied

against the amounts they bid on licenses. Absent such measures targeted

specifically to women and minorities, it might be impossible to assure

that these groups achieve any meaningful measure of opportunity for

actual participation in the provision of narrowband PCS. Similarly, it

is reasonable to assume that small firms owned by women and minorities

suffer the problems endemic to both groups. Therefore, we propose a

cumulative bidding credit of 25 percent for these groups. We believe

that these measures will help women and minorities to attract the

capital necessary for obtaining a license and constructing and

operating a narrowband PCS system, consistent with the intent of

Congress. We seek comments on these proposals.

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\26\Although we did not previously grant bidding credits to

small businesses in the Third Report and Order, we now believe that,

given the exponentially greater expense likely to be incurred in

acquiring broadband PCS licenses, bidding credits might be a proper

means to ensure that these firms have the opportunity to participate

in this service.

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27. As discussed below, we have also proposed to modify the

definition of a minority and women-owned firm.\27\ To receive a 10

percent bidding credit, we propose that a small business must satisfy

the same gross revenue test adopted for installment payments. As

explained more fully in the small business definition section, we

propose that a consortium consisting entirely of small businesses also

be eligible for a 10 percent bidding credit even if the combined gross

revenues of the consortium exceed the small business gross revenues

threshold. In addition, we propose that a small business that is owned

by women and minorities must satisfy the definition of a business owned

by minorities and women as well as the small business definition to

receive a 25 percent bidding credit. Finally, we propose that a

consortium of small firms owned by women and/or minorities is eligible

for a 25 percent bidding credit, provided that each member of the

consortium meets the definition of a small business and a minority and/

or women-owned firm.

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\27\See infra 44-54.

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28. Repayment Policies Applicable to Bidding Credits. To ensure

that bidding credits benefit the parties to whom they are directed, we

inquire whether we should adopt strict repayment policies: if, within

the original 10-year term, a licensee applies to assign or transfer

control of a license to for example, an entity that is not eligible for

as a 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 would have to be paid to

the U.S. Treasury as a condition of approval of the transfer. Thus, an

assignment of a license from a small minority-owned firm to a women-

owned firm with revenues greater than $40 million would require

repayment of 10 percent of the original bid price (25 percent less 15

percent) to the Treasury. A sale to an entity that would not qualify

for bidding credits would entail full repayment of the original bidding

credit as a condition of transfer. Small businesses also would be bound

by the financial eligibility rules during the entire license term as

set forth below. Thus, if after licensing an investor purchases an

``attributable'' interest in the business and, as a result, the gross

revenues of the firm exceed the $40 million small business cap, this

repayment provision would apply.\28\ If such a proposal were to be

adopted, we would envision that these repayment provisions apply

throughout the original term of the license to help promote the long-

term holding of licenses by those parties receiving bidding credits.

Nevertheless, as in the case of the holding period and transfer

restrictions discussed at 88-89 above we seek comment on any effects

such rules may have on the ability of designated entities to attract

capital. We therefore ask commenters to address in detail whether this

type of restriction would further the goal of increasing the number of

designated entities participating in the provision of narrowband PCS

services.

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\28\See infra 39-43, for a discussion of which investor

interests would be ``attributable'' for purposes of calculating the

gross revenues caps.

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F. Installment Payments

29. A significant barrier for most businesses small enough to

qualify to bid in the proposed entrepreneurs' blocks would be access to

adequate private financing to ensure their ability to compete against

larger firms in the PCS marketplace.\29\ In the Third Report and Order,

we concluded that installment payments are an effective means to

address the inability of small businesses to obtain financing and will

enable these entities to compete more effectively for the auctioned

spectrum. We also determined that small businesses eligible for

installment payments would only be required to pay half of the down

payment (10 percent of the winning bid, as opposed to 20 percent) five

days after the auction closes, with the remaining 10 percent payment

deferred until five days after grant of the license. Finally, we

indicated that installment payments should be made available to small

businesses at an interest rate equal to the rate for U.S. Treasury

obligations.\30\

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\29\See e.g., comments of SBA Chief Counsel of Advocacy at 6,

20-21, NTIA at 27; SBAC Report at 2 (September 15, 1993).

\30\See Third Report and Order at  86-90.

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30. In light of the expected substantial capital required to

acquire narrowband PCS licenses, we proposed that installment payments

be available to most businesses that obtain narrowband PCS licenses in

the proposed entrepreneurs' blocks. By allowing payment in

installments, the government would in effect be extending credit to

licensees, thus reducing the amount of private financing needed prior

to and after the auction. Such low cost government financing would

promote long-term participation by these businesses, which, because of

their smaller size, lack access to sufficient capital to compete

effectively with larger PCS licensees. Under the rules we propose

today, installment payments would be available to smaller entities that

do not technically qualify as small businesses for purposes of other

measures we have proposed, such as bidding credits. We believe,

however, that, given the significant costs of narrowband PCS licenses

and the likelihood of very large participants in the other blocks, this

option would be fully consistent with the congressional intent in

enacting Section 309(j)(4)(A) to avoid a competitive bidding program

that has the effect of favoring incumbent providers of other

communications services, with established revenue streams, over smaller

entities.\31\

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\31\See H.R. Rep. No. 103-111 at 255 (Commission has the

authority to design alternative payment schedules in order that the

auction process does not inadvertently favor only those with ``deep

pockets'' over new or small companies).

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31. Under the plan we propose here, all licenses that satisfy the

gross revenues, total assets and personal net worth criteria to bid in

the entrepreneurs' blocks would be allowed to pay in installments for

regional and MTA licenses granted in those blocks. With respect to the

BTA licenses in those blocks, however, only businesses owned by women

and minorities and those licensees with less than $75 million in gross

revenues would be able to use installment payments.\32\ This

distinction is based on the expected lower costs to acquire licenses

and construct systems in the BTAs. However, if we adopt our proposal to

redesignate BTA licenses as nationwide or regional licenses, we propose

extending installment payments on those blocks to all parties eligible

for the entrepreneurs' blocks. Thus, with the exception of companies

owned by women or minorities, which face additional problems accessing

capital, we do not think that a firm with gross revenues exceeding $75

million would require government financing to be competitive for the

BTA licenses.\33\

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\32\We will apply the same $500 million total assets and $100

million personal net worth standards for purposes of determining

eligibility for installment payments in the BTA entrepreneurs'

blocks. The attribution rules set forth with regard to eligibility

to bid will also apply in all of the BTA entrepreneurs' blocks.

\33\We note that a consortium of small businesses would be

eligible for installment payments in any market so long as each

member of the consortium satisfies the definition of a small

business, as set forth in Section V.A., infra.

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32. The installment payment option would enable qualified

businesses to pay their winning bid over time. These businesses would

still make the applicable upfront payment in full before the auction,

but would be required to make a post-auction down payment equaling only

ten percent of their winning bids, half of which will be due five

business days after the auction closes. Payment of the other half of

the down payment would be deferred until five business days after the

license is granted. In general, the remaining 90 percent of the auction

price would be paid in installments with interest charges to be fixed

at the time of licensing at a rate equal to the rate for ten-year U.S.

Treasury obligations plus 2.5 percent. Under this general rule, only

payments of interest would be due for the first year with principal and

interest payments amortized over the remaining nine years of the

license. Timely payment of all installments would be a condition of the

license grant and failure to make such timely payment would be grounds

for revocation of the license.\34\ We seek comment on this installment

payment proposal.

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\34\As described in the Second Report and Order, in PP Docket

No. 93-253, 9 FCC Rcd 2348, 59 FR 22980 (May 4, 1994), (Second

Report and Order), the Commission may, on a case-by-case basis,

permit a three to six month grace period within which a licensee may

seek a restructuring of the payment plan.

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33. Enhanced Installment Payments. As explained previously, small

businesses and businesses owned by minorities and women face capital

access difficulties not encountered by other firms and, thus, require

special measures to ensure their opportunity to participate in

narrowband PCS. Accordingly, we propose an ``enhanced'' installment

payment plan for these entities. Pursuant to this enhanced installment

payment plan, small businesses who win licenses in the proposed

entrepreneurs' blocks would be required to pay interest only for the

first two years of the license term at the same interest rate as set

forth in the general rule. Businesses owned by women and/or minorities

would be able to make interest-only payments for three years. Interest

would accrue at the Treasury note rate without the additional 2.5

percent.\35\ And finally, businesses that are both small and owned by

women and/or minorities would be required to pay only interest for five

years. Interest would accrue at the Treasury note rate.

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\35\To be eligible for these ``enhanced'' installment payments,

a firm would have to satisfy either of the two alternative

definitions of a woman or minority-owned business, as set forth in

44-54, infra, as well as the applicable financial caps.

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34. These proposed enhanced installment payments are narrowly

tailored to the needs of the various designated entities, as reflected

in the record in this proceeding. We believe that varying the

moratorium on principal in the early years of the loan and varying the

interest rate based on these needs would allow small businesses and

companies owned by women and/or minorities to bid higher in auctions,

thereby increasing their chances for obtaining licenses. In addition,

it would allow them to concentrate their resources on infrastructure

build-out and, therefore, it would increase the likelihood that they

become viable narrowband PCS competitors. We request comment on these

proposed enhancements to the installment payment plan.

35. Unjust Enrichment Applicable to Installment Payments. To ensure

that large businesses do not become the unintended beneficiaries of

measures meant for smaller firms, we propose to retain the unjust

enrichment provisions adopted in the Third Report and Order applicable

to installment payments. Specifically, if a licensee that was awarded

installment payments seeks to assign or transfer control of its license

to an entity not meeting the applicable eligibility standards set out

above during the term of the license, we would require payment of the

remaining principal and any interest accrued through the date of

assignment as a condition of the license assignment or transfer.\36\

Moreover, if an entity seeks to assign or transfer control of a license

to an entity that does not qualify for as favorable an installment

payment plan, the installment payment plan, if any, for which the

acquiring entity qualifies would become effective immediately upon

transfer. Thus, a higher interest rate and earlier payment of principal

may begin to be applied. For example, a transfer of a license in the

fourth year after license grant from a small minority-owned firm to a

small non-minority owned firm would require that the firm begin

principal payments and the balance would begin accruing interest at a

rate 2.5 percent above the rate that had been in effect. Finally, if an

investor subsequently purchases an ``attributable'' interest in the

businesses and, as a result, the gross revenues or total assets of the

business exceed the applicable financial caps, this unjust enrichment

provision would also apply.\37\ We seek comment on these proposals.

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\36\See Third Report and Order at 89.

\37\See infra 39-43, for a discussion of which investor

interests would be ``attributable'' for purposes of calculating the

gross revenues and total assets thresholds.

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G. Upfront Payments

36. As previously indicated in the Third Report and Order, the

upfront payment requirement was designed to ensure that bidders are

qualified and serious and to provide the Commission with a source of

funds in the event that it becomes necessary to assess default or bid

withdrawal penalties.\38\ The upfront payment ensures that bids during

the course of the auction are bona fide and convey information about

the value of the underlying licenses. Our standard upfront payment for

narrowband PCS is $0.02 per MHz per pop. As an additional means of

enhancing the opportunity of designated entities to participate in

competitive bidding we propose to reduce the required upfront payment

for those applicants. As we concluded in the Fifth Report and Order, we

are concerned that the $0.02 per MHz per pop upfront payment

requirement might impose a barrier for smaller entities wishing to

participate in the auctions. Moreover, we note that most bidders in the

proposed entrepreneurs' blocks would be entitled to pay for their

licenses in installments, which would require a down payment of only

five percent of the winning bid. We are concerned that requiring an

upfront payment that may be larger than the down payment that the

winning bidder is required to tender could discourage auction

participation.

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\38\Third Report and Order,Secs. 41-45.

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37. For these reasons, we propose to reduce the upfront payment

requirement to $0.015 per MHz per pop for bidders in the entrepreneurs'

blocks. This 25 percent discount should facilitate auction

participation by capital-constrained companies and would permit them to

conserve resources for infrastructure development after winning a

license. Moreover, since the upfront payment is still substantial, we

believe that insincere bidding would be discouraged and the Commission

would have access to funds if it must collect default or bid withdrawal

penalty payments.

H. Definitions and Eligibility

1. Eligibility to Bid in the Proposed Entrepreneurs' Blocks

38. As noted previously, eligibility to bid in the proposed

entrepreneurs' blocks would be limited to companies that, together with

their affiliates and investors, had gross revenues of less than $125

million in each of the last two years and have total assets of less

than $500 million at the time their short form applications are filed.

In addition, we propose to prohibit an applicant from bidding in these

blocks if any one attributable individual investor or principal in the

applicant has $100 million or greater in personal net worth at the

short form application filing date.

2. Attribution Rules for the Proposed Entrepreneurs' Blocks

39. For purposes of determining whether an entity qualifies to bid

in the entrepreneurs' blocks, we propose to follow the control group

and attribution rules set forth with regard to eligibility to bid as a

small business. In particular, winning bidders would be required to

identify on their long-form applications a control group that controls

the applicant, owns at least 25 percent of the equity, and in the case

of a corporation, holds at least 50.1 percent of the voting stock. For

partnership applicants, we propose that every general partner be

considered part of the group. The gross revenues and total assets of

each member of the control group and each member's affiliates would be

counted toward the $125 million/$500 million thresholds, regardless of

the size of the member's total interest in the applicant. The $100

million personal net worth limitation would also apply to each member

of the control group. We would not consider the gross revenues or

personal net worth of any other investor unless the investor holds 25

percent or more of the outstanding passive equity in the applicant,

which, as defined above, includes as much as fifteen percent of the

voting stock in a corporate applicant.

40. We also propose more relaxed attribution standard with regard

to investors in small businesses owned by minorities and women.

Specifically, we would not consider the gross revenues or personal net

worth of a single passive investor in a minority or female-owned small

business unless the investor holds in excess of a 49.9 percent passive

interest (which includes as much as fifteen percent of a corporate

applicant's voting stock), provided the women or minority control group

maintains at least 50.1 percent of the equity and, in the case of a

corporate applicant, at least 50.1 percent of the voting stock. We

believe that such revenue attribution would ensure that only bona fide

small businesses are able to take advantage of the special provisions

we have proposed, but would allow those businesses to attract

sufficient equity capital to be truly viable contenders in the PCS

industry.

41. In addition, we propose to allow a consortium of small

businesses to qualify for any of the measures adopted in this order

applicable to individual small businesses including the ability to bid

in the entrepreneurs' block. As used here, the term ``consortium''

means a conglomerate organization formed as a joint venture among

mutually-independent business firms, each of which individually

satisfies the definition of a small business.

42. We explain how these attribution rules would apply with regard

to any holding and limited transfer period for entrepreneurs' block

licensees should such rules ultimately be adopted. During this holding

period, an entrepreneurs' block licensee could not sell more than 25

percent of its passive equity to a single investor if the resulting

attribution of that investor's gross revenues or total assets would

bring the company over the $125 million gross revenues/$500 million

personal net worth cap. Similarly, while individual members of the

control group could change (if it would not result in a transfer of

control of the company), the control group would have to maintain

control and at least 25 percent of the equity and 50.1 percent of the

voting stock.\39\ A company would be permitted to grow beyond these

gross revenues/total assets caps, however, through equity investment by

non-attributable (i.e. passive) investors, debt financing, revenue from

operations, business development or expanded service.\40\

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\39\A minority of woman-owned company would have to continue to

adhere to the attribution rules applicable to it, set out above.

\40\These rules would continue to apply in this manner

throughout the license term with regard to firm's continuing

eligibility for installment payments, ``enhanced'' installment

payments and bidding credits.

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43. We seek comment on these proposed eligibility requirements for

the entrepreneurs' blocks. In particular, parties should discuss the

equity and control requirements for the control group and investors in

both the corporate and partnership context. In addition, commenters

should discuss the alternative option for women and minority-owned

companies and the ability of small businesses to form consortia. With

regard to all of these issues, parties are asked to comment on the

proposals' impact on the ability of entities to obtain financing as

well as on the Commission's goals of deterring shams and fronts.

3. Definition of Women and Minority-Owned Business

44. As discussed above, we have proposed steps in this order to

address the special funding problems faced by minority and women-owned

firms and thereby to ensure that these groups have the opportunity to

participate and become strong competitors in the narrowband PCS

service.\41\ We previously adopted a tax certificate program for women

and minorities to allow more sources of potential funding, and in this

Order have relaxed the attribution standard used to determine

eligibility as a qualified small business.

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\41\We proposed to use the same criteria set forth in the Second

Report and Order, and consider the members of the following groups

``minorities'' for purposes of our rules: ``[T]hose of Black,

Hispanic Surnamed, American Eskimo, Aleut, American Indian and

Asiatic American extraction.'' See Statement of Policy on Minority

Ownership of Broadcasting Facilities, 68 FCC 2d 979, 980 n.8 (1978);

Commission Policy Regarding the Advancement of Minority Ownership in

Broadcasting, 92 FCC 2d 849, 489 n.1 (1982). Moreover, as adopted in

the Second Report and Order, minority and women-owned businesses

would be eligible for special measures only if the minority and

women principals are also United States citizens.

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45. For purposes of implementing these steps, we propose to depart

from the definition of a minority and women-owned firm that was adopted

in the Third Report and Order. We have adopted relaxed attribution

standards for businesses owned by women and minorities for purposes of

qualifying for small business provisions. We are proposing relaxed

standards for businesses owned by women and minorities to qualify for

the entrepreneurs' blocks. In the Third Report and Order, we found

generally that to establish ownership by minorities and women, a strict

eligibility standard should be adopted that required minorities or

women to have at least 50.1 percent equity stake and a 50.1 percent

controlling interest in the designated entity. Third Report and Order

at  68; 47 CFR Sec. 1.2110(b)(2). For future narrowband PCS auctions,

we propose to retain the requirement that minorities and/or women

control the applicant and hold at least 50.1 percent of a corporate

applicant's voting stock. However, to establish their eligibility for

certain benefits, summarized below, we propose an additional

requirement that, even where minorities and women hold at least 50.1

percent of the applicant's equity, other investors in the applicant may

own only passive interests, which, for corporate applicants, is defined

to include as much as fifteen percent of the voting stock. In addition,

provided that certain restrictions are met, we propose to allow women

and minority-owned firms the option to reduce to 25 percent the 50.1

percent minimum equity amount that must be held.

46. We emphasized in the Third Report and Order that we did not

intend to restrict the use of various equity financing mechanisms and

incentives to attract financing, provided that the minority and women

principals continued to own 50.1 percent of the equity, calculated on a

full-diluted basis, and that their equity interest entitled them to a

substantial stake in the profits and liquidation value of the venture

relative to the non-controlling principals. We noted, however, in the

Second Report and Order that different standards that meet the same

objectives may be appropriate in other contexts. Second Report and

Order at  278. In view of the evidence of discriminatory lending

experiences faced by minority and women entrepreneurs and the

exceptionally great financial resources believed to be required by

narrowband PCS applicants, we conclude that it may be appropriate to

allow more flexibility with regard to the 50.1 percent equity

requirements for this service in order to open doors to more sources of

equity financing for women and minority-owned firms.

47. We propose therefore to allow women and minority-owned firms

the following options. First, they may satisfy the general definition

set forth in the Second Report and Order, which requires the minority

and/or female principals to control the applicant, own at least 50.1

percent of its equity and, in the case of corporate applicants, hold at

least 50.1 percent of the voting stock. Under this option, other

investors may own as much as a 49.9 percent passive equity interest. As

noted above regarding eligibility to bid in the entrepreneurs' blocks,

passive equity in the corporate context means only non-voting stock may

be held, or stock that includes no more than fifteen percent of the

voting interests.\42\ For partnerships, the term means limited

partnership interests that do not have the power to exercise control of

the entity. We ask commenters specifically to address whether the

proposed fifteen percent voting interest limitation strikes the correct

balance, or whether a higher percentage would facilitate capital

formation without unduly contributing to a proliferation of shams. In

addition, the Second Report and Order, all investor interests would be

calculated on a fully-diluted basis, meaning that agreements such as

stock options, warrants and convertible debentures generally would be

considered to have a present effect and would be treated as if the

rights thereunder already have been fully exercised.\43\ We recognize

that the requirement that other investors own only passive interests

would be a departure from the definition of a minority or women-owned

business adopted in the Second Report and Order, but because of the

very significant financial contribution that may be made by such other

investors in designated entities, we believe that the passive equity

requirement may be appropriate as an additional safeguard. In addition,

we seek comments on whether these rules as currently framed may affect

the ability of legitimate designated entities to obtain the capital

needed to participate in the auction.

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\42\For example, under this option, a corporate applicant with

two classes of issued and outstanding stock, 100 shares of voting

stock and 100 shares of non-voting stock, could sell to a single

non-eligible entity 49.9 percent of the applicant's equity,

consisting of 5 shares of the corporation's voting stock and 94

shares of its non-voting stock. Under this scenario, eligible

minorities or women, in order to retain at least 50.1 percent of the

value of all outstanding shares of the corporation's stock, must own

all of the corporation's remaining shares of stock; that is, 95

shares of voting stock and six shares of non-voting stock.

\43\As also noted in the Second Report and Order, we will

consider departing from the requirement that the equity of investors

in minority and women-owned businesses must be calculated on a

fully-diluted basis only upon a demonstration, in individual cases,

that options or conversion rights held by non-controlling principals

will not deprive the minority and women principals of a substantial

financial stake in the venture or impair their rights to control the

designated entity. See Second Report and Order at 277.

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48. As a second proposed option, women and minority-owned firms

would be able to sell up to 75 percent of the company's equity,

provided that no single investor may hold 25 percent or more of the

firm's passive equity, which is defined in the same manner as above.

For example, a corporation with 100 shares of voting stock and 100

shares of non-voting stock, with the 200 shares representing the total

outstanding shares of the company, could qualify as a minority or

women-owned business under the following circumstances. The minority or

women principals would have to own at least 51 shares of voting stock,

which satisfies the requirement that they have voting control and, in

this case, also meets the requirement that they hold at least 25

percent of the equity. Two other investors could each own 34 shares of

non-voting stock and fifteen shares of voting stock, which represents

24.5 percent of the company's equity for each of the shareholders. A

third investor could own the remaining 32 shares of non-voting stock

and fifteen shares of the voting stock, or 23.5 percent of the equity.

The remaining 4 shares of voting stock may be sold to other investors.

49. Whichever option is chosen, we would require establishment of a

``control group'' for women and minority-owned firms in much the same

way we did for purposes of eligibility to bid in the entrepreneurs'

blocks. Specifically, winning bidders, transferees or assignees would

have to identify on their long-form applications a control group

(consisting entirely of minorities and/or women or entities 100 percent

owned and controlled by minorities and women) that has de jure and de

facto control of the applicant and holds either at least 50.1 or 25

percent of the applicant's equity, depending upon which option is

elected.

50. We believe that a modification of our 50.1 percent equity

requirement would best achieve the Congressional objective of providing

effective and long-term economic opportunities for women and minority-

owned firms in narrowband PCS. At the same time, we propose to maintain

strict enforcement of the requirement that actual control reside with

the qualified designated entities. Thus, to establish their eligibility

for tax certificates, enhanced installment payments, bidding credits

and relaxed cellular attribution rules, women and minority-owned

applicants electing to use the 25 percent equity option could not in

any instance allow an individual investor who is not in the control

group to own more than a 25 percent passive equity interest. This

restriction would apply even in circumstances in which allowing an

investor to exceed these limitations would not result in the

applicant's exceeding the gross revenues and other financial standards

that apply to other bidders in the entrepreneurs' blocks and other

situations involving financial caps. These structural safeguards, as

well as the general requirement that other investors hold only passive

interests in women and minority-owned applicants, would help to ensure

that control truly remains with the women and minority designated

entities.

51. For example, a women or minority-owned firm electing to use the

25 percent option may have a non-eligible investor with more than 25

percent passive stake and still qualify to bid in the entrepreneurs'

blocks or for benefits that apply to small businesses, as long as the

attributable revenues of the investor do not cause the applicant to

exceed the gross revenues/total asset caps. In these contexts, no

additional restrictions would be necessary, because women and minority-

owned applicants, like other applicants, would be eligible to bid in

these blocks and to qualify as small businesses so long as they comply

with the same restrictions on financial eligibility that apply to other

applicants. Since the attribution rule itself operates to ensure

compliance with size limitations, it would not be necessary to impose

additional restrictions on the size of interests held by investors with

attributable interests. This firm would not qualify, however, for

special measures applicable only to women and minority-owned

businesses, such as ``enhanced'' installment payments or the 15 or 25

percent bidding credits, because it has a single non-eligible investor

with more than 25 percent passive interest. In circumstances in which

women and minorities are required to retain only 25 percent of the

firm's equity, this additional structural restriction would be

appropriate because the objective in this context is to ensure not

merely financial eligibility, but that women and minorities retain

control of the license.

52. We set forth previously rules defining more explicitly the term

``control'' for purposes of determining whether a ``control group''

maintains de facto as well as de jure control of an applicant.\44\ We

propose to apply those rules equally to the minority and women

principals of minority and women-owned applicants. Consistent with our

general policies with regard to women-owned applicants for purposes of

our multiple ownership and cross-ownership rules in this broadcast

context, we do not propose to adopt, at this time, any special rules or

presumptions to determine whether women-owned applicants exercise

independent control of their firms. See In the Matter of Clarification

of Commission Policies Regarding Spousal Attribution, 7 FCC Rcd. 1920,

57 FR 08845 (Mar 13, 1992).

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\44\See supra 49.

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53. We also note here that we are proposing to depart from the

provision in the Third Report and Order that bars publicly traded

companies from qualifying as minority and women-owned businesses for

purposes of participating in auctions. Most of the steps proposed to

assist these designated entities in this Further Notice (e.g., bidding

credits and installment payments) are confined to winning bidders in

the entrepreneurs' blocks, where there would be a financial limit on

the size of participants. Because of the large capital entry costs of

narrowband PCS, we now believe that even publicly traded companies

owned by women and minorities that qualify to bid in entrepreneurs'

blocks require additional measures, such as bidding credits and

installment payments, to be able to participate successfully.

54. As noted above, we propose that applicants owned by women and

minorities must meet the limitations on gross revenues, total assets

and personal net worth to qualify for entry into the entrepreneurs'

blocks. The size limitations would not apply, however, to all measures

designed to assist applicants owned by minorities and/or women. The tax

certificate policy applies to all narrowhead PCS licenses and would not

be limited to licenses in the entrepreneurs' blocks. Therefore,

businesses owned by minorities and women need not meet the gross

revenue and other financial restrictions to qualify for tax

certificates. But minority and women-owned firms would have to satisfy

the Commission's structural ownership requirements to receive the

benefits of tax certificates; that is, they would be subject to the

limitation that interests held by investors who are not women and

minorities must be passive.

4. Definition of an Affiliate

55. In the Second Report and Order, we referenced the SBA's

affiliation rules for purposes of defining generally whether an entity

qualifies as a small business and gave examples of how the affiliation

rules would be applied. In the Fifth Report and Order, we expanded on

the SBA's affiliation rules in establishing detailed affiliation

standards for narrowband PCS to be used when designated entities must

include ``affiliates'' to determine their eligibility for special

designated entity provisions. In the Second Memorandum Opinion and

Order\45\ that we adopted in this docket, we incorporate into our

generic auction rules the affiliation standards that we established for

narrowband PCS in the Fifth Report and Order. We propose to apply these

affiliation standards to narrowband PCS for purposes of determining any

of the above described, size-based eligibility criteria for designated

entities seeking special treatment under the provisions adopted herein.

These standards would give applicants clear guidance regarding the

relationships that we will attribute for purposes of applying any of

our sized-based eligibility criteria.

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\45\Second Memorandum Opinion and Order at 46, in PP Docket No.

93-253, FCC No. 94-215, released Aug. 15, 1994, (Second Memorandum

Opinion and Order).

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I. Limit on Licenses Awarded in Entrepreneurs' Blocks

56. The special provisions which we propose for designated entities

are based, in part, on our mandate to fulfill the congressional goal

that we disseminate licenses among a wide variety of applicants. 47

U.S.C. Sec. 309(j)(3)(B). Therefore, in proposing the financial

assistance measures set forth in this Further Notice, we are concerned

about the possibility, even if remote, that a few bidders will win a

very large number of the licenses in the entrepreneurs' blocks. As a

consequence, the benefits that Congress intended for designated

entities would be enjoyed, in disproportionate measure, by only a few

individuals or entities. Congress, in our view, did not intend that

result. We therefore propose steps to ensure that the financial

assistance provided through our rules is dispersed to a reasonable

number of applicants who win licenses in these blocks.

57. To achieve a fair distribution of the benefits intended by

Congress, we propose a limit on the total number of licenses within the

entrepreneurs' blocks that a single entity could win at auction. In

setting this limit, we would avoid imposing a restriction that would

prevent applicants from obtaining a sufficient number of licenses to

create large and efficient nationwide or regional services.

Specifically, we propose a limitation that no single entity may win

more than 10 percent of the licenses available in the entrepreneurs'

blocks. These licenses could be in any combination of frequency blocks.

Such a limit would ensure that at least 10 winning bidders enjoy the

benefits of the entrepreneurs' blocks. At the same time, it would allow

bidders to effectuate aggregation strategies that include large numbers

of licenses and extensive geographic coverage.

58. Further, this limitation would apply only to the total number

of licenses that may be won at auctions in these proposed

entrepreneurs' blocks; it would not be an ownership cap that applies to

licenses that might be obtained after the auctions. For purposes of

implementing this restriction, we would 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 won at the auction.

J. Redesignation of Certain Narrowband PCS Spectrum Blocks

59. Finally, we are concerned that there are companies that would

be eligible for an entrepreneurs' block license that may desire larger

license areas than MTAs and BTAs. It appears that over half of the

bidders in the nationwide auction would have qualified for an

entrepreneurs' block license. As a result, we propose to redesignate

the two BTA licenses as regional licenses organized in the same

configuration set forth in section 24.102 of the rules. Doing so would

give designated entities an opportunity to bid on a larger and more

valuable license under the rules for entrepreneurs' blocks. We also

seek comment on other means to achieve larger geographic license sizes

such as designating these BTA licenses as nationwide licenses or by

maintaining the BTA designation, but allowing combinatorial bidding for

the designated regions. Commenters should also address the appropriate

premium we should adopt for comparison of combinatorial and BTA license

bids if we allow combinatorial bidding. We also seek comment on whether

some of the MTA and BTA response channels should be redesignated as

larger license areas with bidding limited only to those entities

eligible to bid for entrepreneurs' block licenses.

II. Procedural Matters and Ordering Clause

A. Further Notice--Initial Analysis

60. Reason for the Action. The purpose of the Further Notice is to

implement competitive bidding rules and regulations rules consistent

with the Commission's competitive bidding authority that will carry out

the statutory mandates that certain designated entities, including

small entities, are afforded an opportunity to participate in the

competitive bidding process and in the provision of spectrum-based

services.

61. Objectives of this Action. The Omnibus Budget Reconciliation

Act of 1993 and the subsequent Commission actions to implement it are

intended to 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, are afforded an opportunity to participate in the competitive

bidding process and in the provision of narrowband PCS services.

62. Legal Basis. Authority for the Further Notice can be found in

the Omnibus Budget Reconciliation Act of 1993 and in Sections 2(a),

4(i) 303(r), 309(i) and 309(j) of the Communications Act of 1934, as

amended, 47 U.S.C. Secs. 152(a), 154(i), 303(r), 309(i) and 309(j).

63. Reporting, Recordkeeping and Other Compliance Requirements. The

proposals under consideration in this Further Notice include the

possibility of new reporting and recordkeeping requirements for a

number of small business entities.

64. Federal Rules Which Overlap, Duplicate or Conflict With These

Rules. None.

65. Description, Potential Impact, and Number of Small Entities

Involved. The rule changes proposed in this Further Notice could effect

smaller entities if they have mutually exclusive applications for

initial licenses or permits for narrowband PCS licenses. The Further

Notice proposes to establish certain narrowband PCS spectrum blocks for

bidding exclusively by smaller entities and to provide installment

payments and bidding credits to certain eligible entities within those

blocks.

66. Any Significant Alternatives Minimizing the Impact on Small

Entities Consistent with the Stated Objectives. The Further Notice

proposes certain provisions for smaller entities designed to ensure

that such entities have the opportunity to participate in the

competitive bidding process and in the provision of narrowband PCS

services.

B. Ex Parte Rules

67. This is a non-restricted notice and comment rule making

proceeding. Ex Parte presentations are permitted, except during the

Sunshine Agenda period, provided they are disclosed as provided in

Commission rules. See generally 47 CFR Secs. 1.1202, 1.1203, and

1.120(a).

C. Comment Dates

68. Pursuant to applicable procedures set forth in sections 1.415

and 1.419 of the Commission's Rules, 47 CFR Secs. 1.415 and 1.419,

interested parties may file comments on or before September 16, 1994

and reply comments on or before October 3, 1994. To file formally in

this proceeding, you must file an original and four copies of all

comments, reply comments, and supporting comments. If you want each

Commissioner to receive a personal copy of your comments, you must file

an original plus nine copies. You should send comments and reply

comments to Office of the Secretary, Federal Communications Commission,

Washington, DC 20554. Comments and reply comments will be available for

public inspection during regular business hours in the FCC Reference

Center of the Federal Communications Commission, Room 239, 1919 M

Street, NW., Washington, DC 20554. The complete text of this document

may be purchased from the Commission's copy contractor, International

Transcription Service, 1919 M Street, room 236, Washington, DC 20554,

telephone (202) 857-3800.

List of Subjects in 47 CFR Part 24

Administrative practice and procedure, Reporting and recordkeeping

requirements, Telecommunications.

Federal Communications Commission.

LaVera F. Marshall,

Acting Secretary.

[FR Doc. 94-21015 Filed 8-25-94; 8:45 am]

BILLING CODE 6712-01-M