Implementation of Section 309(j) of the Communications ActCompetitive Bidding; Final Rule FEDERAL COMMUNICATIONS COMMISSION

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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).

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\11\See Third Memorandum Opinion and Order in Gen. Docket 90-

314, FCC 94-265 (released Oct. 19, 1994), at 33-34.

---------------------------------------------------------------------------

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).

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

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).

---------------------------------------------------------------------------

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'').

---------------------------------------------------------------------------

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).

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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:

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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'').

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\43\Stereo Broadcasters, Inc., 55 FCC 2d 819, 821 (1975),

modified, 59 FCC 2d 1002 (1976).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\51\See Second Report and Order, Gen. Docket No. 93-252, 9 FCC

Rcd 1411 (1994) at 119.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\52\Fifth Report and Order, FCC 94-178 at 158.

\53\Order on Reconsideration, FCC 94-217 at 8-10.

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\55\See 47 CFR 24.813(a)(1)) (Form 175 and Form 401 application

requirements).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\58\See 47 CFR 24.712(a)-(c).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\59\Third Memorandum Opinion and Order, FCC 94-219 at 58. See

also 47 CFR 24.309(b)(2).

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\60\Fourth Memorandum Opinion and Order, FCC 94-246, at 45.

---------------------------------------------------------------------------

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

This text is long and has been trimmed here. Open the source document for the complete record.