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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A94-30075

## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** December 7, 1994

## Text

SUMMARY: In this Fifth Memorandum Opinion and Order the Commission
resolves petitions for reconsideration or clarification of its
competitive bidding rules for the entrepreneurs' blocks, including
provisions established to ensure that small businesses, rural telephone
companies and businesses owned by minorities and women (collectively
termed ``designated entities'') have a meaningful opportunity to
participate in the provision of Personal Communications Services in the
2 GHz band (called ``broadband PCS''). Among the issues the Commission
re-examines in this Fifth Memorandum Opinion and Order are matters
concerning: the financial caps for entry into the entrepreneurs' block
and qualification as a small business; the equity requirements for the
control group and other eligibility criteria; joint venture and
consortia rules; guidelines for defining de facto control of an
applicant; permissible management agreements between noncontrolling
investors and entrepreneurs' block applicants; treatment of affiliated
entities and ownership attribution rules; and installment payments and
bidding credits.
The rules and decisions made in this Fifth Memorandum Opinion and
Order are designed to result in auctions that will serve the public
interest by ensuring that small businesses, rural telephone companies
and businesses owned by minorities and women have the opportunity to
attract the necessary investment capital to compete for and obtain
broadband PCS licenses and ultimately to have meaningful involvement in
building and managing this nation's broadband PCS infrastructure.

EFFECTIVE DATE: February 6, 1995.

FOR FURTHER INFORMATION CONTACT:
Kathleen O'Brien Ham at (202) 634-2443 or Peter Tenhula at (202) 418-
1720.

SUPPLEMENTARY INFORMATION: The complete text of this Fifth Memorandum
Opinion and Order in PP Docket No. 93-253, adopted November 10, 1994,
and released November 23, 1994, is available for inspection and copying
during normal business hours in the FCC Dockets Branch, Room 230, 1919
M Street NW., Washington, D.C. The complete text may be purchased from
the Commission's copy contractor, International Transcription Service,
Inc., 2100 M Street NW., Suite 140, Washington, D.C. 20037, telephone
(202) 857-3800.

Paperwork Reduction Act

In the Fifth Memorandum Opinion and Order in PP Docket No. 93-253,
the Commission has amended 47 CFR Part 24 which contains rules and
requirements governing the award of broadband PCS licenses through a
system of competitive bidding. Applicants are required to file certain
information so that the Commission can determine whether the applicants
are legally, technically, and financially qualified to be bid in the
entrepreneurs' blocks as entrepreneurs and/or designated entities.
Affected members of the public are any members of the public who want
to become a broadband PCS licensee in the frequency blocks allocated
for entrepreneurs and designated entities. Implementation of the rules
contained in the Fifth Memorandum Opinion and Order will impose
reporting and recordkeeping requirements on certain members of the
public. The Federal Communications Commission will submit an
information collection request to OMB for review and clearance under
the Paperwork Reduction Act of 1980, 44 U.S.C. 3507. Persons wishing to
comment on this information collection should contact Timothy Fain,
Office of Management and Budget, Room 3225, New Executive Office
Building, Washington, DC 20503, (202) 395-3561. For further
information, contact Judy Boley, Federal Communications Commission,
(202) 418-0210.

Synopsis of Fifth Memorandum Opinion and Order

Introduction

1. By this action, we resolve petitions for reconsideration or
clarification of our rules governing competitive bidding for
``entrepreneurs' block'' licenses in the 2 GHz band Personal
Communications Service (``broadband PCS'').\1\ Twenty-six petitions
were received, as well as 17 oppositions and 8 replies. Specifically,
in this Fifth Memorandum Opinion and Order, we resolve issues
associated with our entrepreneurs' block rules, as well as other
provisions we established to ensure that small businesses, rural
telephone companies and businesses owned by minorities and women
(collectively termed ``designated entities'') have meaningful
opportunities to participate in the provision of broadband PCS. Our
goal in this proceeding is to ensure that designated entities have the
opportunity to obtain licenses at auction as well as the opportunity to
have meaningful involvement in the management and building of our
nation's broadband PCS infrastructure. Thus, as we describe below, we
make certain modifications to our rules so that they will better serve
these goals.
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\1\The Commission designated frequency blocks C (1895-1910/1975-
1990 MHz) and F (1890-1895/1970-1975 MHz) as ``entrepreneurs'
blocks''. See Fifth Report and Order in PP Docket No. 93-253, FCC
94-178 (released July 15, 1994), reprinted at 59 Fed. Reg. 37,566
(July 22, 1994) (Fifth Report and Order). We also address herein
petitions for reconsideration or clarification filed in response to
the Commission's Order on Reconsideration, FCC 94-217 (released
August 15, 1994), summarized, 59 Fed Reg. 43,062 (August 22, 1994).
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2. When the new broadband PCS auction rules were adopted in the
Fifth Report and Order, the Commission declared its intent to meet
fully the statutory objective set forth by Congress in Section 309(j)
of the Communications Act. See 47 U.S.C. 309(j). In particular, we
observed that it was the mandate of Congress that the Commission should
``ensure that small businesses, rural telephone companies, and
businesses owned by members of minority groups and women are given an
opportunity to participate in the provision of spectrum-based
services.'' See 47 U.S.C. 309(j)(4)(D). We also noted that Congress has
directed us to ``promote economic opportunity and competition and
ensure that new and innovative technologies are readily accessible to
the American people by avoiding excessive concentration of licenses and
by disseminating licenses among a wide variety of applicants.'' See 47
U.S.C. 309(j)(3)(B). With these congressional directives in mind, we
established the entrepreneurs' blocks and designated entity provisions
contained in the Fifth Report and Order, which are now under
reconsideration.
3. Although we wish to ``fine-tune'' some aspects of our rules, we
generally conclude that the ``entrepreneurs' block'' concept and the
special provisions for designated entities adopted in the Fifth Report
and Order are the most efficient and effective means to fulfill our
statutory mandate to provide for a diverse and competitive broadband
PCS marketplace. In particular, we have adopted measures to ensure
opportunities for meaningful participation by minority and women-owned
businesses in the emerging broadband PCS marketplace by providing that
such entities are eligible for bidding credits, installment payments,
reduced up front payments and the benefits of tax certificates, and by
adopting eligibility rules that accommodate noncontrolling equity
investment.
4. On reconsideration of the Fifth Report and Order, we weigh the
recommendations of those who have asked us to modify our rules. While
we conclude that for the most part our rules will remain unchanged, we
find that some rule modifications are necessary to further empower
businesses owned by women and minorities and designated entities
generally to participate in broadband PCS. Also, our rules need to be
clarified in some instances to provide entities wishing to participate
in the entrepreneurs' blocks with greater certainty and a better
understanding of what is expected of them. Our rule changes will grant
designated entities, particularly minority and women-owned applicants,
additional flexibility in how they raise capital and structure their
businesses. Minority-owned applicants, for example, should be able to
draw more readily upon the financial resources and expertise of other
successful minority business enterprises. Our revised rules seek to
accommodate the many existing minority and women-owned firms that want
to enter the PCS market, but whose existing corporate structures do not
meet the criteria for entry prescribed in the Fifth Report and Order.
Thus, experienced minority and women entrepreneurs, who are likely to
succeed in the broadband PCS marketplace, are not inadvertently barred
from participating in the entrepreneurs' block under our new rules. In
sum, our revised rules permit entrepreneurs' block applicants to
structure themselves in a way that better reflects the realities of
raising capital in today's markets, and to obtain the necessary
management and technical expertise for their PCS businesses.
5. As we indicated above, a primary objective on reconsideration is
to ensure that our rules promote diversity and competition in the PCS
marketplace of the future. In this regard, we believe a special effort
must be made to enable minority and women-owned enterprises to enter,
compete and ultimately succeed in the broadband PCS market. These
designated entities face the most formidable barriers to entry,
foremost of which is lack of access to capital. In our effort to
provide opportunities for minorities and women to participate in PCS
via the auctions process, we strive for a careful balance. On one hand,
our rules must provide applicants with the flexibility they need to
raise capital and structure their businesses to compete once they win
licenses. On the other hand, our rules must ensure that control of the
broadband PCS applicant, both as a practical and legal matter, as well
as a meaningful measure of economic benefit, remain with the designated
entities our regulations are intended to benefit.
6. After reviewing the record, we amend or clarify our
entrepreneurs' block rules in several respects.\2\ We emphasize that
these changes constitute a refinement of our original entrepreneurs'
block rules adopted in the Fifth Report and Order that will further
advance our objectives of promoting competition and diversity in the
broadband PCS marketplace.
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\2\We delegate to the appropriate Bureau the authority to revise
and create forms as needed to ensure that PCS applicants comply with
our rules. See 47 CFR 0.201-0.204. See also 47 U.S.C. 155(c).
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Background

7. On August 10, 1993, the Omnibus Budget Reconciliation Act of
1993 (the Budget Act) added Section 309(j) to the Communications Act of
1934, as amended, 47 U.S.C. 309(j). This section gives the Commission
express authority to employ competitive bidding procedures to select
among mutually exclusive applicants for certain initial licenses. In
the Second Report and Orderin this proceeding, the Commission exercised
its authority by determining that broadband PCS licenses should be
awarded through competitive bidding and prescribed a broad menu of
competitive bidding rules and procedures to be used for all auctionable
services.\3\ We re-examined certain aspects of these general rules and
procedures in the Second Memorandum Opinion and Order (released August
15, 1994).\4\
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\3\Second Report and Order in PP Docket No. 93-253, 9 FCC Rcd
2348, 59 Fed. Reg. 2348 (1994) (Second Report and Order).
\4\Second Memorandum Opinion and Order in PP Docket No. 93-253,
FCC 94-215 (released Aug. 15, 1994) (Second Memorandum Opinion and
Order).
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8. In the Fifth Report and Order, we established specific
competitive bidding rules for broadband PCS.\5\ We also decided in the
Fifth Report and Order to conduct three separate auctions for broadband
PCS licenses: the first for the 99 available broadband PCS licenses in
MTA blocks A and B; the second for the 986 broadband PCS licenses in
BTA blocks C and F (the ``entrepreneurs' blocks''); and, the third for
the remaining 986 broadband PCS licenses in BTA blocks D and E.\6\ The
rules adopted in the Fifth Report and Order address auction
methodology, application and payment procedures, and other regulatory
safeguards. In addition, we established the entrepreneurs' block
licenses to insulate smaller applicants from bidding against very
large, well-financed entities. We also supplemented our entrepreneurs'
block regulations with other special provisions designed to offer
meaningful opportunities for designated entity participation in
broadband PCS. In particular, we made bidding credits and installment
payment options available to those entrepreneurs and designated
entities that, according to the record of this proceeding, have
demonstrated historic difficulties accessing capital. Additionally, we
extended the benefits of our tax certificate policies to broadband PCS
minority and women applicants to promote participation by these
designated entities in the service. We also adopted attribution rules
that accommodate passive equity investment in designated entities, but
ensure that control of the applicant resides in the intended
beneficiaries of the special provisions. Furthermore, we reduced the
upfront payment required of bidders in the entrepreneurs' block.
Finally, we established partitioning rules to allow rural telephone
companies to expedite the availability of offerings in rural areas.
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\5\The Third Report and Order in this docket established
competitive bidding rules for narrowband PCS. See Third Report and
Order in PP Docket No. 93-253, 9 FCC Rcd 2941, 59 Fed. Reg. 26741
(1993), recon. Third Memorandum Opinion and Order and Further Notice
of Proposed Rule Making, FCC 94-219 (released Aug. 17, 1994). Also,
in a recent Order, we reconsidered on our own motion several aspects
of our narrowband PCS competitive bidding rules. See Order on
Reconsideration in PP Docket No. 93-253, FCC 94-240, 59 FR 43062
(released Sept. 22, 1994) (Order on Reconsideration). The Fourth
Report and Order in this docket established competitive bidding
rules for the Interactive Video and Data Service (IVDS). See Fourth
Report and Order, 9 FCC Rcd 2330, 59 Fed. Reg. 24947 (1994).
\6\See Fifth Report and Order, FCC 94-178 at 37. When we
crafted our broadband PCS licensing rules in Gen. Docket 90-314, we
divided the licensed broadband PCS spectrum into three 30 MHz blocks
(A, B, and C) and three 10 MHz blocks (D, E, and F). We also
designated two different service areas: 493 Basic Trading Areas
(BTAs) and 51 Major Trading Areas (MTAs). The 493 BTAs and 51 MTAs
used in our broadband PCS licensing rules have been adapted from the
Rand McNally 1992 Commercial Atlas and Marketing Guide, 123rd
Edition, at 38-39. See Second Report and Order in Gen. Docket No.
90-314, 8 FCC Rcd 7700 (1993), recon. Memorandum Opinion and Order,
9 FCC Rcd 4957 (1994), Order on Reconsideration, 9 FCC Rcd 4441
(1994), on further recon. Third Memorandum Opinion and Order, FCC
94-265, 59 Fed. Reg. 55372 (released Oct. 19, 1994).
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9. After the release of the Fifth Report and Order, we adopted on
our own motion an Order on Reconsideration, which made two changes to
our competitive bidding rules for broadband PCS concerning our
attribution and affiliation requirements.\7\ Specifically, we exempted
from entrepreneurs' block affiliation rules, entities owned and
controlled by Indian tribes or Alaska Regional or Village Corporations.
We also decided to permit nonattributable investors in a corporate
applicant to own up to 15 percent of the corporation's voting stock,
provided that the applicant's control group retains at least 25 percent
of the equity and 50.1 percent of the voting stock. We applied this
change to investors in both publicly-traded corporate applicants and
applicants that are not publicly traded. Most recently, however, we
adopted a Fourth Memorandum Opinion and Order in this docket, in which
we addressed issues raised in petitions for reconsideration of the
Fifth Report and Order that involve our broadband PCS competitive
bidding rules governing auction methodology, application and payment
procedures, and regulatory safeguards to prevent anticompetitive
practices among bidders.\8\ In the instant Fifth Memorandum Opinion and
Order, we resolve remaining matters in the petitions for
reconsideration concerning our entrepreneurs' block rules, including
our provisions for designated entities.
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\7\See Order on Reconsideration, PP Docket No. 93-253, FCC 94-
217 (released Aug. 15, 1994).
\8\See Fourth Memorandum Opinion and Order in PP Docket No. 93-
253, FCC 94-246, 59 Fed. Reg. 53364 (released Oct. 19, 1994). On
November 17, 1994, we released an Order, which modified certain
aspects of our stopping and anti-collusion rules, and preserved the
right to change the timing of the entrepreneurs' block auctions.
Memorandum Opinion and Order in PP Docket No. 93-253, FCC 94-295
(released Nov. 17, 1994).
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Concept of Entrepreneurs' Blocks

Authority and Amount of Spectrum
10. In the Fifth Report and Order, the Commission designated a
portion of the broadband PCS spectrum available at auction for
qualified entrepreneurs.\9\ Eligible entrepreneurs can bid on BTA
licenses in the C (30 MHz) and F (10 MHz) blocks. In addition,
entrepreneurs who fall within one of the four statutory ``designated
entity'' categories (i.e., small business, rural telephone companies,
and businesses owned by members of minority groups and/or women) are
eligible for additional benefits to enable them to acquire broadband
PCS licenses.
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\9\Fifth Report and Order, FCC 94-178 at 118-129. An
applicant's eligibility to participate in the entrepreneurs' blocks
is based on its size as measured by specified financial caps.
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11. The Association of Independent Designated Entities (AIDE)
contends that the Commission exceeded its statutory authority in
establishing the entrepreneurs' block because they potentially benefit
entities that fall outside of the four designated entity groups
enumerated by Congress. AIDE maintains that the entrepreneurs' blocks
reduce meaningful opportunities for smaller designated entities to
participate in PCS by forcing them to bid against ``entrepreneurs''
that may not qualify as designated entities. AIDE further argues that
the Commission impermissibly restricted the availability of financial
incentives to designated entities for use only in Blocks C and F.
Instead, AIDE requests that the Commission make its financial
incentives for designated entities available for every auctionable
broadband PCS license. The United States Interactive & Microwave
Television Association and the United States Independent Personal
Communication Association (USIMTA/USIPCA) (filing jointly) support the
entrepreneurs' block concept, but encourage the Commission to provide
additional broadband PCS spectrum exclusively for designated entities.
Citing Congress' concern about the historical impediments that small,
minority and women-owned businesses have encountered, USIMTA/USIPCA
maintain that ``it would not be unreasonable'' to set aside up to one-
half of the available PCS spectrum. Finally, GTE Service Corporation
(GTE) requests the Commission eliminate the entrepreneurs' blocks and
instead allow designated entities to ``partner'' with major investors
and be eligible for more generous bidding credits. Additionally, GTE
contends that our entrepreneurs' block scheme unduly restricts the
ability of cellular carriers to participate in the provision of PCS.
Specifically, GTE contends that this scheme, combined with the PCS-
cellular cross-ownership restrictions, will effectively limit
eligibility for many cellular operators to 20 MHz of spectrum on the D
and E blocks.
12. Contrary to AIDE's contention, it is within our statutory
authority to establish the entrepreneurs' blocks, for which parties
other than designated entities are eligible to apply for or invest in,
and we believe that this scheme will provide meaningful opportunities
for designated entities to participate in the provision of broadband
PCS. Accordingly, we will retain the entrepreneurs' block structure set
forth in the Fifth Report and Order. In establishing a competitive
bidding process for the provision of spectrum-based services, Congress
gave the Commission broad authority to adopt bidding procedures and
policies, so long as certain objectives are fulfilled. Specifically,
Congress mandated that the Commission ``promot[e] economic opportunity
and competition and ensur[e] that new and innovative technologies are
readily accessible to the American people by avoiding excessive
concentration of licenses and by disseminating licenses among a wide
variety of applicants, including small businesses, rural telephone
companies, and businesses owned by members of minority groups and
women.'' See 47 U.S.C. 309(j)(3)(B). Thus, the language of the statute
allows us to consider other entities in order to ensure that licenses
are widely dispersed among a variety of licensees,\10\ so long as we
also, among other statutory objectives, ensure that designated entities
are given the opportunity to participate in the provision of broadband
PCS. See 47 U.S.C. 309(j)(4)(D).
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\10\We believe the term ``including'' used in Section
309(j)(3)(B) of the Communications Act is a term of enlargement, not
limitation, intended to convey that other entities are includable
together with, rather than excluded from the categories of
designated entities so long as legislative intent is satisfied. See
2A Sutherland, Statutory Construction Sec. 47.23 (4th ed. 1984).
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13. The entrepreneurs' blocks approach adopted in our Fifth Report
and Order achieves the statute's objectives by creating significant
opportunities for designated entities and other entrepreneurs to ensure
that licenses are widely disbursed to entities that can rapidly deploy
broadband PCS services. We are making additional changes to our rules
(including eliminating the personal net worth cap and liberalizing our
affiliation rules for individual minority investors) to help designated
entities overcome particularly intractable historic difficulties in
accessing capital. To satisfy Congress' directive, we established the
entrepreneurs' blocks in conjunction with a package of benefits that
are narrowly tailored to provide significant opportunities to
designated entities and those entrepreneurs that lack access to
capital.
14. We disagree with USIMTA/USIPCA who requests that the Commission
provide additional spectrum for entrepreneurs' blocks. Our existing
allotment, which comprises one-third of the total amount of licensed
broadband PCS spectrum, is sufficient to ensure that designated
entities and other entrepreneurs have significant opportunities to
participate in the PCS marketplace. We therefore deny petitioners'
various requests for modification to our entrepreneurs' block
provisions.
15. We also reject AIDE's proposal to make bidding credits and
other special provisions available to all designated entities bidding
on all of the broadband PCS frequency blocks (not just the C and F
blocks). Our existing approach of limiting these special provisions to
the entrepreneurs' blocks, coupled with changes we are making today are
narrowly tailored to meet Congress' objective of ensuring that
designated entities have the opportunity to participate in broadband
PCS. The record does not support broadening this relief to include
additional frequency blocks, nor is there substantial support for
broadening the availability of special provisions generally.
16. Similarly, we do not accept GTE's argument that we should do
away with the entrepreneurs' blocks and instead offer bidding credits
as well as other special provisions across all broadband PCS frequency
blocks. As we already explained in the Fifth Report and Order, in our
judgment we do not anticipate designated entities to realize meaningful
opportunities for participation in broadband PCS unless we supplement
bidding credits and other special provisions with a limitation on the
size of the entities designated entities will bid against. Without the
insulation of the entrepreneurs' block, the record strongly supports
the conclusion that measures such as bidding credits will prove
ineffective for broadband PCS. We also disagree with GTE's contention
that our entrepreneurs' block plan unduly restricts the ability of
cellular carriers to provide PCS. We believe that the public interest
benefits of establishing an entrepreneurs' block outweigh the need to
provide additional opportunities for cellular operators as GTE
describes. Moreover, our rules do allow cellular operators such as GTE
to take noncontrolling interests in designated entities and gain
opportunities in the entrepreneurs' block. We have recently revised the
cellular-PCS crossownership rules to facilitate such opportunities.\11\
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\11\See Third Memorandum Opinion and Order in Gen. Docket 90-
314, FCC 94-265 (released Oct. 19, 1994), at 33-34.
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Gross Revenues and Other Financial Caps

Gross Revenues and Total Assets
17. In the Fifth Report and Order, the Commission established
eligibility rules for the entrepreneurs' blocks based, in part, on an
applicant's gross revenues. To bid in the entrepreneurs' blocks, the
applicant, its attributable investors (i.e., members of its control
group and investors holding 25 percent or more of the applicant's total
equity), and their respective affiliates must cumulatively have gross
revenues of less than $125 million in each of the last two years and
total assets of less than $500 million at the time the applicant files
its Form 175 (``short form'' application). We pointed out in the Fifth
Report and Order that the $125 million gross revenues limit corresponds
roughly to the Commission's definition of a ``Tier 2,'' or medium-sized
local exchange carrier (LEC) and would include virtually all of the
independently-owned rural telephone companies. Additionally, to qualify
for the special provisions accorded small businesses, the applicant
(including attributable investors and affiliates), must cumulatively
have less than $40 million in gross revenues averaged over the last
three years.
18. MasTec, Inc. (MasTec) argues that the Commission's gross
revenues test is misleading when applied across the board to all
applicants because the gross revenues of investors operating in
different industries will not convey the same information about size or
the ability to attract capital. The Telephone Electronics Corporation
(TEC) notes that the discontinuity between gross revenues and the
ability to attract capital is particularly acute where the entity in
question is involved in a volume-intensive business with high operating
costs and small profit margins (such as TEC's interexchange resale
carriers). Accordingly, TEC argues that the Commission's gross revenue
criteria are not rationally related to their stated purpose and should
be eliminated.
19. Several petitioners request that the Commission modify its
gross revenues test, but disagree whether the limits should be
liberalized or made more restrictive. For example, MasTec encourages
the Commission to modify its designated entity criteria to include
those minority businesses which are too small to compete outside of the
entrepreneur blocks, but too large to qualify for the entrepreneurs'
blocks. The National Paging and Personal Communications Association
(NPPCA) and USIMTA/USIPCA urge the Commission to reduce the gross
revenues cap. Specifically, NPPCA requests that the Commission reduce
the gross revenues limit to $75 million and the total assets limit to
$250 million. NPPCA maintains that these modifications are needed
because the present size standards encourage mid-sized companies to
refrain from bidding in competitively unrestricted auctions and to
compete, instead, against designated entities in the entrepreneurs'
block auctions.
20. As an alternative to increasing the revenues cap, Omnipoint
Communications, Inc. (Omnipoint) and the National Association of Black
Owned Broadcasters, Inc. (NABOB) argue that the ``aggregation rule,''
under which the Commission will aggregate the gross revenues and total
assets of the applicant, attributable investors and all affiliates in
order to determine whether the applicant complies with the financial
caps, should be eliminated. Omnipoint contends that a ``multiplier
approach,'' employed in other areas of Commission practice, should be
used to determine compliance with the financial caps. Under this
approach, the revenues and assets attributed to an applicant would be
based on the revenues and assets of each attributable investor,
multiplied by the percentage ownership interest in the applicant held
by that investor.
21. Cellular Telecommunications Industry Association (CTIA)
requests that the Commission prescribe specific dates for measuring the
financial thresholds to determine entrepreneurs' block eligibility.
Specifically, CTIA requests clarification that gross revenues will be
measured from the two years preceding September 23, 1993.\12\ CTIA
maintains that our current rules, referring only to the ``last two
calendar years,'' are ambiguous. See 47 CFR 24.709(a)(1).
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\12\September 23, 1993 is the date the Commission adopted its
broadband PCS service rules order. See Second Report and Order in
Gen. Docket No. 90-314, 8 FCC Rcd 7700 (1993).
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22. Black Entertainment Television Holdings, Inc. (BET), Roland A.
Hernandez (Hernandez), Columbia PCS, Inc. (Columbia PCS), and Omnipoint
all request that we clarify our rules governing growth by
entrepreneurs' block licensees and their attributable investors during
the five-year holding period. Our rule, promulgated in the Fifth Report
and Order, states that ``[a]ny licensee * * * shall maintain its
eligibility [for the entrepreneurs' blocks] until at least five years
from the date of initial license grant, except that increased gross
revenues, increased total assets or personal net worth due to non-
attributable equity investments * * *, debt financing, revenue from
operations, business development or expanded service shall not be
considered.'' See 47 CFR 24.709(a)(3). Petitioners ask us to clarify
whether the following types of growth in assets, revenues, or personal
net worth would result in a licensee's forfeiture of eligibility: (1)
Growth of applicant beyond the size limits by means of mergers or
takeovers; (2) any control group member's growth beyond the size limits
by means of appreciation of attributable investments or growth of
attributable businesses; and (3) affiliates' or attributable investors'
growth beyond the size limits, by means of mergers or takeovers.
23. We will retain a single gross revenues size standard, which is
an established method for determining size eligibility for various
kinds of federal programs that aid smaller businesses.\13\ We
anticipate that applicants will, in many instances, have several
investors and that these investors will be drawn from various segments
of the economy rather than from a single industry group such as
telecommunications. The financial characteristics of these industry
groups will vary widely,\14\ and keying the size standard to each
investor entity in question is thus administratively unworkable. A
gross revenues test is a clear measure for determining the size of a
business, and will produce the most equitable result for entrepreneurs'
block applicants as a whole.
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\13\All federal agencies base eligibility of small businesses
(or minority small businesses) to bid on a government contract set
aside on the (single) size standard set forth in the solicitation.
See, e.g., 13 CFR 121.902. Eligibility for financial assistance from
Small Business Investment Companies sponsored by the Small Business
Administration is determined by a single size standard applicable
across the board to all applicants or by the size standard
applicable to the applicant's primary business activity. See 13 CFR
121.802. Size status for receiving surety guarantees or assistance
under SBA's Small Business Innovation Research Program is also
determined by a single, applicant-wide size standard. See 13 CFR
121.802(a)(3) and 121.1202, respectively.
\14\The Standard Industrial Classification Manual, upon which
the Small Business Administration bases its industry size standards,
identifies over 800 industry groups to which specific Standard
Industrial Classification Codes are assigned. Standard Industrial
Classification Code Manual, Office of Management and Budget,
Executive Office of the President, 1987 ed.
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24. We will also retain the existing gross revenues and total
assets limits for the entrepreneurs' blocks and for small business size
status. We find the arguments of those who oppose any reduction in the
gross revenues limit most persuasive. BET, for example, supports the
balance it perceives the Commission has struck between small and mid-
sized firms by adopting a $125 million gross revenues test. We agree
with BET that a decrease in the gross revenue limit would eliminate
many mid-sized firms from entrepreneurs' block participation while not
substantially raising the level of competition in the blocks.
Conversely, an increase in the gross revenue limit would not
necessarily provide for greater capital access for applicants. We
believe our $125 million gross revenues test represents an appropriate
benchmark for entry into the entrepreneurs' block, given our interest
in including firms that, while not large in comparison to other
telecommunications companies, are likely to have the financial
resources to compete against larger competitors on the MTA blocks.
25. In addition, we will retain the aggregation methodology to
assess the size of an applicant, with certain exceptions. We reject
NABOB's proposal to eliminate our aggregation rule and we cannot adopt
Omnipoint's proposal to determine entrepreneurs' block eligibility and
small business size status by separately evaluating the assets and
revenues of each attributable investor. Aggregating the gross revenues
and total assets of all attributable investors in and affiliates of the
applicant is central to an accurate size determination, and consistent
with the Small Business Administration's (SBA's) approach to similar
determinations. Viewing gross revenues and assets of each investor in
isolation could result in very large entities bidding for these
licenses. We reject Omnipoint's suggestion that a multiplier approach
be used to make these size determinations. A multiplier is appropriate
to arrive at an accurate determination of ownership interest in an
applicant or licensee. In this context, however, we are not concerned
with ownership, but instead seek to make a financially-based size
determination in order to assess whether an applicant is eligible for
significant governmental benefits.
26. We agree with CTIA that clarification is required concerning
the two-year period in order to provide applicants with a uniform way
to measure gross revenues for purposes of qualifying for the
entrepreneurs' blocks. For the initial entrepreneurs' block auctions
involving broadband PCS, companies should use audited financial
statements for each of the two calendar years ending December 31, 1993
or, if audited financial statements are not prepared on a calendar-year
basis, data from audited financial statements for their two most
recently completed fiscal years. Therefore, if applicants and their
investors do not have audited statements ending on December 31, 1993,
they will have to use one annual statement ending at a later date
(sometime in 1994). This approach will enable the Commission to obtain
timely financial data while providing applicants with some degree of
flexibility in their financial reporting practices. For subsequent
entrepreneurs' block auctions (i.e., license reauctioning), we will
require applicants to use their last two annual audited financial
statements to determine compliance with the financial caps. Newly-
formed companies should use the audited financial statements of their
predecessors in interests, or financial statements current as of the
time their Form 175 (short-form) application is filed that are
certified by the applicant as accurate.
27. Clarification is also needed with respect to the issue of
growth and takeovers of an entrepreneurs' block licensee or its
investors. We clarify our rules to the extent necessary to indicate
what types of growth will jeopardize an applicant's continued
eligibility as an entrepreneurs' block licensee during the holding
period. A licensee could not maintain its eligibility if a member of
its control group were itself taken over, effecting a transfer of
control of the licensee during the license holding period. However, an
attributable investor would not affect the licensee's continuing
eligibility for the entrepreneurs' block if another of the investor's
affiliates grew or its investments appreciated during the holding
period. Our rules consider such growth either to be revenue from the
investor's operations or to be normal business development and, in
either case, fully permissible. If an attributable investor is taken
over or purchased by another entity, the other entity steps into the
shoes of the original investor and its assets and revenues will be
considered under the continued eligibility rule. However, if an
affiliate of the applicant is taken over by (or sold to) another
entity, the other entity's assets and revenues would not be considered,
so long as no new affiliation arrangement between the applicant and the
other entity is created by the takeover or sale. That is, in most
cases, the affiliation with the applicant would be severed by such a
takeover and the gain from the sale of the affiliates' assets would
have already been taken into account by the initial consideration of
such assets at the time of application.\15\ We emphasize that we have a
strong interest in seeing entrepreneurs grow and succeed in the PCS
marketplace. Thus, normal projected growth of gross revenues and
assets, or growth such as would occur as a result of a control group
member's attributable investments appreciating, or as a result of a
licensee acquiring additional licenses would not generally jeopardize
continued eligibility as an entrepreneurs' block licensee.
---------------------------------------------------------------------------

\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'').
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Designated Entity Definitions

Minority and Women-Owned Businesses
46. In the Fifth Report and Order, we adopted the definition of the
term ``members of minority groups'' as set forth in our Second Report
and Order in this docket.\24\ Thus, we defined ``members of minority
groups'' as ``* * * individuals of African-American, Hispanic-surnamed,
American Eskimo, Aleut, American Indian and Asian American
extraction.'' See 47 CFR 24.720(i).
---------------------------------------------------------------------------

\24\See Fifth Report and Order, FCC 94-178 at n. 157. See also
Second Report and Order, 9 FCC Rcd 2348, 2397 n. 209, quoting
Statement of Policy on Minority Ownership of Broadcasting
Facilities, 68 FCC 2d 979, 980 n. 8 (1978) and citing Commission
Policy Regarding the Advancement of Minority Ownership in
Broadcasting, 92 FCC 2d 849, 849 n. 1 (1982); 47 CFR 1.2110(b)(2).
---------------------------------------------------------------------------

47. Karl Brothers requests that the Commission amend its definition
of ``members of minority groups'' to include businesses owned by
individuals with disabilities. Specifically, Karl Brothers suggest the
Commission adopt the standard established in the SBA Section 8(a)
program to determine who should qualify for designated entity status.
According to Karl Brothers, this SBA program includes businesses owned
by disabled individuals under a ``means'' and ``socially
disadvantaged'' test. Karl Brothers maintains that the congressional
mandate to give special preference to minority groups is not limited to
just ethnic minorities, but should include other historically
disadvantaged minorities. Karl Brothers maintains that Congress was
merely giving examples of groups to be included in the definition of
minorities, not limiting the definition to ethnic groups only. Karl
Brothers contends that there is no statutory language excluding other
disadvantaged groups.
48. After considering Karl Brothers' request, we will not include
persons with disabilities in the definition of minorities for purposes
of bidding on the entrepreneurs' blocks and obtaining the special
provisions available to minority applicants. The record in this
proceeding does not contain any evidence that demonstrates that firms
owned by persons with disabilities have more difficulty accessing
capital than any other small business. In this respect, the record of
this proceeding on the difficulties that minorities, women and small
businesses, in general, have experienced accessing capital strongly
supports the special provisions we adopted for these groups. Moreover,
individuals with disabilities are not expressly named as a designated
entity in Section 309(j)(4)(D) of the Communications Act, and there is
no indication in the legislative record of the statute that Congress
intended to expand this group of beneficiaries to include any group or
individual that can demonstrate that it is ``socially disadvantaged''
similar to the SBA Section 8(a) approach described by the Karl
Brothers. Unlike the Small Business Act, Section 309(j)(4)(D) of the
Communications Act does not contain the term ``socially
disadvantaged.'' Compare 47 U.S.C. 309(j)(4)(D) with 15 U.S.C. 637(a)
(1), (4) and (5). We note that even in the SBA context, that agency
presumes eligibility for Section 8(a) status for minority groups (which
are defined in racial and ethnic terms), but firms owned by persons
with disabilities must demonstrate that they are ``socially
disadvantaged'' in order to gain entry into the program. Also, the
SBA's denial of Section 8(a) status for firms owned by persons with
disabilities where such ``social disadvantage'' has not been
established, has been upheld in court.\25\
---------------------------------------------------------------------------

\25\See Doe v. Heatherly, 671 F. Supp. 1081, (M.D.C. 1978) aff'd
854 F.2d 1316 (4th Cir. 1988).
---------------------------------------------------------------------------

49. Additionally, there is no indication that in enacting Section
309(j)(4)(D) Congress intended to expand the definition of ``members of
minority groups'' to include classes of persons other than racial or
ethnic groups, such as those listed in the preceding subsection,
Section 309(i).\26\ We further observe that in no other Commission
context, have we included disabled persons in the categories of groups
that comprise our definition of minorities. Making such a change here,
without clear statutory and legislative support to do so, would
therefore be inconsistent with our traditional application of the
definition, which we believe should be uniform in all licensing
contexts.\27\
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\26\47 U.S.C. 309(i)(3)(C)(ii). Below, we revise our definition
of ``members of minority groups'' to conform to this statutory
definition. In interpreting this definition in the past, we have
taken a restrictive view of the categories of minorities included in
this definition and limited its expansion. See Third Report and
Order, Gen. Docket No. 81-768, 102 FCC 2d 1401 (1985).
\27\See In re Petition of Paralyzed Veterans Of America, et. al,
to Amend Regulations Facilitating Minority Ownership of Broadcast
Facilities to Include the Physically Handicapped, Memorandum Opinion
and Order, FCC 85-651, 59 Rad. Reg. 2d (P&F) 1353 (released Dec. 16,
1985), petition for review dismissed as untimely, California Assoc.
of the Physically Handicapped, Inc. v. FCC, 833 F.2d 1333 (9th Cir.
1987).
---------------------------------------------------------------------------

50. We wish to emphasized also, that it is highly likely that most
firms owned by individuals with disabilities will be eligible to bid in
the entrepreneurs' block and for an installment payment option if they
meet the required gross revenues and total assets test. Such firms may
also be eligible for ``enhanced'' installment payments and bidding
credits if they qualify as small businesses under our rules. Indeed,
absent a substantial record that demonstrates firms owned by persons
with disabilities have any more difficulty accessing capital then any
other small business, we find that we cannot accommodate the Karl
Brothers request.
51. We also note that we have before us a Petition for Rulemaking
filed by David J. Lieto (Lieto Petition), which requests that the
Commission amend Section 1.2110 of the Commission's rules to provide
that disabled individuals are within the minority group categories and
are thus entitled to the benefits associated with being a designated
entity under the Commission's auction rules. See David J. Lieto
Petition for Rulemaking, filed September 21, 1994, at 2-3. As stated
above, we believe that our existing rules provide opportunities for
individuals with disabilities to participate in the entrepreneurs'
block, and that there is no direct statutory or record support for
Lieto's request. Furthermore, Lieto has failed to provide a record
comparable to that for women and minorities demonstrating that disabled
individuals experience difficulties accessing capital that are unique
to their status. Accordingly, we decline to initiate a rulemaking at
this time, and hereby dismiss the Lieto Petition.
52. In response to numerous inquiries,\28\ however, we revise the
definition of ``members of minority groups'' slightly to conform with
the definition of minority used in other contexts.\29\ Thus,
Sec. 24.720(i) shall read as follows: ``Members of minority groups
include Blacks, Hispanics, American Indians, Alaskan Natives, Asians,
and Pacific Islanders.''\30\ We have also been asked to clarify the
meaning of particular categories in the definition of minority. Again,
for consistency, we shall use the same category descriptions the
Commission has relied on in other contexts.\31\ These categories are as
follows:
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\28\We received several inquiries about the definition of
``members of minority groups'' from participants in the FCC PCS
seminars, which provide an overview of the PCS rules and procedures.
The seminar series included sessions held in the following
locations: Washington, D.C. (Aug. 29 1994); Chicago (Aug. 22, 1994);
Denver (Aug. 24, 1994); San Francisco (Aug. 26, 1994).
\29\See, e.g., Broadcast Equal Employment Opportunity Rules and
FCC Form 395, 70 FCC 2d 1466, 1473 (1979); 47 CFR 73.3555(d)(3)(iv),
1.1621(b); see also 47 U.S.C. Sec. 309(i)(3)(c)(ii); Race and Ethnic
Standards for Federal Statistics and Administration Reporting, OMB
Statistical Policy Directive No. 15 (1977).
\30\In a separate Order, we shall be making the same correction
to the definition of minority groups used in the generic auction
rules (see 47 CFR 1.2110(b)(2)) and the narrowband auction rules
(see 47 CFR 24.320(f)).
\31\See Broadcast Equal Employment Opportunity Rules and FCC
Form 395; See also ``Instructions for Completing FCC Forms 395-A &
395-M,'' Section V (Race/Ethnic Categories).
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a. Black. A person having origins in any of the black racial groups
of Africa.
b. Hispanic. A person of Mexican, Puerto Rican, Cuban, Central or
South American or other Spanish Culture or origin, regardless of race.
c. American Indian or Alaskan Native. A person having origins in
any of the original peoples of North America, and who maintains
cultural identification through tribal affiliations or community
recognition.
d. Asian or Pacific Islander. A person having origins in any of the
original peoples of the Far East, Southeast Asia, the Indian
subcontinent, or the Pacific Islands. This area includes, for example,
China, Indian, Japan, Korea, the Philippine Islands, and Samoa.
To address any specific claims or allegations regarding an
individual race or origin, we will follow existing Commission
precedent.\32\ To the extent that prior Commission cases do not provide
adequate guidance in specific cases, we may look to cases developed
under minority programs in other federal agencies, such as the Office
of Management and Budget (OMB) and the SBA.
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\32\See, e.g., Lone Cypress Radio Assoc. Inc., 7 FCC Rcd 4403
(Rev. Bd. 1992), and cases cited therein; See also Storer
Broadcasting Co., 87 FCC 2d 190, 191-93 (1981).
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Small Business Consortia

53. In the Fifth Report and Order the Commission allowed a
consortium of small businesses to qualify collectively for the
preferences available to a small business if each business within the
consortium individually satisfies the definition of a small business
designated entity. The Commission defined a small business designated
entity as any company that, together with attributable investors and
affiliates, has average gross revenues for the three preceding years of
not in excess of $40 million. We defined ``consortium of small
businesses'' as a conglomerate organization formed as a joint venture
among mutually-independent business firms, each of which individually
satisfies the definition of a small business. See 47 CFR
Sec. 24.720(b)(3). In the Second Report and Order, we concluded that
consortia should not always be entitled to qualify for measures
designed specifically for designated entities. In the Fifth Report and
Order, however, we stated that for the auctioning of broadband PCS, it
is especially necessary to allow small businesses to pool their
resources in this manner to help them overcome capital formation
problems. Thus, our rules provide that if a consortium's members are
all small businesses (i.e., defined as companies that do not have
average yearly gross revenues for the preceding three years in excess
of $40 million), the consortium as a whole will qualify for designated
entity provisions for small businesses.
54. Omnipoint requests that the Commission allow small businesses
to form a single corporate applicant (rather than a joint venture) and
get the same treatment as consortia. BET requests that the Commission
eliminate the preference available to small business consortia.
55. We believe the current preferences for small business consortia
are adequate and necessary to ensure that small businesses have
sufficient opportunities to participate in the broadband PCS auctions.
Accordingly, we deny BET's request to eliminate the small business
consortia preferences. As we observed in the Fifth Report and Order,
allowing small businesses to pool their resources in this manner is
necessary to help them overcome capital formation problems and ensure
their participation in the provision of broadband PCS. We believe that
small, rural telephone companies, in particular, are expected to use
this mechanism to compete in some of the smaller markets.
56. We also deny Omnipoint's request that small businesses be
allowed to form a single corporate applicant that would be afforded the
same treatment as consortia. The concept of a consortium is that each
small business participant remains a distinct corporate entity
independent of other consortium members and that each member has rights
and obligations similar, or equal to, those held by participants in
other types of joint ventures. Allowing a group of small businesses to
apply as one corporate applicant and receive the benefits or our
consortia rule would disadvantage small, independent businesses wishing
to bid as a group under our rule, but who cannot restructure as a
corporate applicant and could tend to dilute each member's influence
and insulate their responsibilities in the venture. We believe that
such a change would also eviscerate our small business eligibility size
requirement. We wish to clarify, however, that we intent to examine the
qualifications of each consortium member to ensure that each is a bona
fide small business. In this regard, it is assumed that each concern
should be an entity ``organized for profit'' and not for the sole
purpose of qualifying as part of a small business consortia. This is
consistent with SBA's long-standing definition of ``business concern.''
See 43 CFR 121.403(a), Small Business Size Standards, 54 FR 52634 (Dec.
21, 1989).
57. On another issue, BET contends that the $40 million gross
revenues standard fails to comply with an SBA requirement that any size
standard proposed by a federal agency that varies from SBA's standard
be ``proposed after an opportunity for public notice and comment'' and
be ``approved by the Administrator [of the SBA].''\33\ We believe we
have fully met our notice and comment obligations, both under the
Administrative Procedures Act and the Small Business Act, in this
proceeding. We solicited comment on a range of size options, and
received comment that included SBA's recommendation for a $40 million
gross revenues cap (which we ultimately adopted). Indeed, we recently
obtained SBA's approval of the $40 million size standard.\34\
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\33\See 15 U.S.C. 632(a)(2)(A) and (C)
\34\See Letter to William Kennard, FCC General Counsel from
Philip Lader, SBA Administrator, Nov. 9, 1994 (responding to Aug.
19, 1994 request for size approval).
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Eligibility Requirements

Minimum Equity Limit for the Control Group
58. In the Fifth Report and Order, the Commission adopted a
methodology for assessing an applicant's compliance with the financial
caps for the entrepreneurs' blocks and for small business size status
based on the distinction between: (a) Noncontrolling investors (whose
financial status would not be attributed to the applicant); and (b)
investors holding interests in the control group of the applicant. The
gross revenues, assets and personal net worth limits of attributable
investors (i.e., those with more than 25 percent equity) and all
control group members, regardless of the size of their individual
interests, are included in assessing an applicant's compliance with the
financial caps. To qualify as a women or minority-owned business, the
Commission further required that the control group be composed entirely
of women and minorities. The control group requirement ensures that
designated entity and entrepreneur principals retain control of the
applicant and own a substantial financial interest in the venture. At
the same time, it enables noncontrolling investors outside the control
group to provide essential capital to an applicant without their
revenues, assets or net worth being attributed to the applicant or
their non-minority or male status disqualifying the applicant.
59. The Commission adopted two control group options in the Fifth
Report and Order. Under the first option, passive investors are
permitted to own up to 75 percent of the applicant's total equity, so
long as: (1) No investor holds more than 25 percent of the applicant's
passive equity (which was subsequently defined to include up to 15
percent of a corporation's voting stock); and (2) in the case of a
corporate applicant, at least 50.1 percent of the voting stock is held
by the control group. In the case of partnership applicants, the
control group must own all the general partnership interests. The
Commission determined that this minimum equity level strikes an
appropriate balance between the competing considerations of permitting
qualified bidders to raise capital and ensuring that designated
entities receive a significant economic benefit from the venture. The
Commission extended an alternate option to qualified women or minority-
owned businesses. Under this option, the Commission would permit a
single investor in a minority or women-owned applicant to own up to
49.9 percent of the passive equity (which we subsequently defined to
include up to 15 percent of a corporation's voting stock), so long as
the control group holds the remaining 50.1 percent of the equity. As
with the first option, the control group is required to retain control
and, in the case of a corporate applicant, hold at least 50.1 percent
of the voting stock. Also, ownership interests are to be calculated on
a fully diluted basis.
60. Petitions filed by BET, Columbia PCS, CTIA, EATEL, Lehman Bros.
and Omnipoint variously address the Commission's restrictions on the
composition of an applicant's control group. Specifically, petitioners
request clarification that our attribution rules and definitions of
minority and women-owned business be interpreted to permit
``nonqualifying'' noncontrolling investors within the control group.
``Nonqualifying'' investors, as petitioners describe, are investors
that are neither women nor minorities, or investors that if attributed
would cause the applicant to exceed the financial caps. EATEL argues
that to do otherwise may preclude participation by existing companies
whose existing corporate structures would disqualify an applicant
absent significant expenditures for corporate restructuring. EATEL
maintains that existing entities have the greatest amount to offer
applicants in terms of financial and technical resources. Petitioners
also request that the Commission allow a limited amount of equity
investment in the control group to help the applicant comply with the
25 percent minimum equity requirement. Columbia PCS, for example,
advocates adoption of a bright-line test that would require at least a
75 percent equity and a 100 percent voting interest in the control
group to be held by ``qualifying'' entities. Columbia PCS maintains
that designated entities will be unable to raise sufficient capital
unless this clarification is made. EATEL and CTIA maintain that the 100
percent equity requirement for minority and women-owned control groups
is too restrictive for entities already in existence. Instead, they
argue that businesses which are in fact controlled by women and/or
minorities, but which have numerous non-controlling shareholders
(including some that are neither women nor minorities), should be
eligible for the preferences we adopted for minority and women-owned
businesses. BET also requests clarification that a control group may be
comprised of a single individual.
61. Omnipoint, Columbia PCS, CTIA and Lehman Brothers contend that
the 25 percent minimum equity ownership restriction is too high and
that designated entities will face insurmountable difficulties
arranging financing if it is not reduced. To remedy this problem,
Lehman Brothers proposes two alternative solutions. First, for publicly
traded companies, Lehman proposes that public shareholders with less
than 5 percent equity should be counted towards the control group's 25
percent equity threshold. Lehman maintains that this proposal would
permit control group equity to be diluted by new shareholders, but not
below a minimum equity level (Lehman recommends 10 percent). Second,
Lehman suggests that all designated entities should be permitted to
dilute their 25 percent equity interests in the following
circumstances: (a) Not earlier than one year after license grant, to
dilute control group equity to a total of not less than 20 percent; (b)
not earlier than two years, to dilute control group entity to a total
of not less than 15 percent; and (c) not earlier than three years to
dilute control group equity to a total of not less than 10 percent.
Lehman argues that this proposal would provide designated entities
efficient access to capital, thereby improving their competitive
position. CTIA recommends that an applicant should be eligible to bid
on the C and F blocks with at least 10 percent equity. Lehaman Brothers
requests that the Commission modify its control group definition to
provide that members of the control group receive dividends, profits
and regular and liquidating distributions in proportion to the actual
possession of equity held, rather than in proportion to their interest
in the total equity of the applicant. Lehman Brothers contends that our
rules could be interpreted to mean that such distributions must be paid
on options held but not exercised by control group members, rather than
on the basis of actual shares held.
62. After considering the record, and as described below, we modify
our rules to allow certain noncontrolling investors who do not qualify
for the entrepreneurs' block or as a small business to be investors in
an applicant's control group. We also allow entities that are
controlled by minorities and/or women, but that have investors that are
neither minorities nor women, to be part of the control group. We agree
with petitioners that some accommodation should be made in our
regulations to allow participation in an applicant's control group by
existing firms controlled by designated entities or entrepreneurs that
have investors that, if attributed, would cause the applicant to exceed
the small business or entrepreneurs' blocks financial caps or, for
minority or women-owned applicants, investors that are not minorities
or women. We will therefore modify our definition of a minority and
women-owned business to include preexisting companies that are
controlled by women or minorities but have noncontrolling investors in
the control group who are not minorities or women. Similarly, we will
allow preexisting companies that, in aggregate, meet our entrepreneurs'
block and small business size standards to be members of the control
group even if one or more of the noncontrolling investors in those
companies would disqualify the company based on its gross revenues or
total assets. We believe that these rule changes will provide a
reasonable balance between the need to ensure that designated entities
have a significant economic investment in the applicant and the
financing realities of a PCS venture.
63. We also agree with petitioners that it is not optimal to
require the qualifying control group members to hold at least 25
percent of the applicant's equity. The record indicates that in many
cases, designated entities and entrepreneurial principals will have
limited capital to contribute to the applicant's equity and that
nonontrolling investors will be unwilling to advance funds to enable
the designated entity (even one with management expertise) to reach the
25 percent threshold. Thus, without some modifications to our rules,
designated entities could face insurmountable difficulties in arranging
financing. We therefore conclude that we should modify our rules to
address petitioners' concerns, while balancing the need to ensure
meaningful equity participation by ``qualifying'' control group
members.
64. Specifically, we will retain the 25 percent minimum equity
requirement for the control group, but we will require only 15 percent
(i.e., 60 percent of the control group's 25 percent equity
contribution) to be held by qualifying, controlling principals in the
control group (i.e., minorities, women or small/entrepreneurial
business principals). For example, if the applicant seeks minority or
women-owned status, the 15 percent equity (as well as 50.1 percent of
the voting stock of the applicant) must be owned by control group
members who are minorities and/or women. If the applicant seeks small
business status, 15 percent of the equity must be held by control group
members who, in the aggregate, qualify as a small business.\35\ The
composition of the principals of the control group determines whether
the applicant qualifies for bidding credits, installment payments and
reduced upfront payments. The 15 percent may be held in the form of
options, provided these options are exercisable at any time, solely at
the holder's discretion, and at an exercise price equal to or less than
the current market valuation of the underlying shares at the time of
short-form filing. The remaining 10 percent (i.e., 40 percent of the
control group's minimum equity contribution) may be held in the form of
either stock options or shares, and we will allow certain investors
that are not minorities, women, small businesses or entrepreneurs to
hold interests in such shares or options. Specifically, we will allow
the 10 percent portion to be held in the form of shares or stock
options by: (1) Investors in the control group that are women,
minorities, small businesses or entrepreneurs; (2) individuals who are
members of an applicant's management team (which could include
individuals who are not minorities or women or individuals who have
affiliates that exceed the entrepreneurs' blocks or small business size
thresholds); (3) existing investors of businesses in the control group
that were operating and earning revenues for two years prior to
December 31, 1994; or (4) noncontrolling institutional investors.
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\35\For instance, if a preexisting company wants to qualify as a
small business control group, its gross revenues and total assets
will be added to the gross revenues and assets of each of its
controlling shareholders and to those of all affiliates. The
resulting sum must be under $40 million in gross revenues and $500
million in total assets. The gross revenues and total assets of the
company's preexisting, noncontrolling shareholders will be ignored,
however.
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65. The Commission also adopted an alternative to the 25 percent
minimum equity requirement for minority and women-owned businesses,
which permits a single investor to hold as much as 49.9 percent of its
equity, provided the control group holds at least 50.1 percent. Several
petitioners have expressed similar concerns with respect to the need to
revise the 50.1 percent requirements. Therefore, in tandem with, and
for the same reasons as, the modifications to the 25 percent equity
requirement, we make similar modifications to the rules governing the
50.1 percent minimum equity requirement. Accordingly, where a minority
or women-owned business uses the 50.1 percent minimum equity option, we
will require only 30 percent of the total equity to be held by the
principals of the control group that are minorities or women. The 30
percent may be held in the form of options, provided these options are
exercisable at any time, solely at the holder's discretion, and at an
exercise price equal to or less than the current market valuation of
the underlying shares at the time of short-form filing. The remaining
20.1 percent may be made up of shares and/or options held by investors
that are not women or minorities under the same criteria described in
paragraph 64 above. That is, the 20.1 percent portion of the control
group's equity may be held in the form of shares or stock options by
any of the following: (1) Investors in the control group that are
minorities, women, small businesses or entrepreneurs; (2) individuals
who are members of an applicant's management team (which could include
individuals who are not minorities or women, or individuals who have
affiliates that exceed the entrepreneurs' blocks and small business
size standards); (3) existing investors of businesses in the control
group that were operating and earning revenues for two years prior to
December 31, 1994; or (4) noncontrolling institutional investors.\36\
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\36\For our purposes, we define institutional investors in a
manner that is similar to the definition that is used by the
Commission in the attribution rules applied to assess compliance
with the broadcast multiple ownership; rules. We modify that
definition slightly, however, to fit this service. Specifically, we
expect that investment companies will be important sources of
capital formation for designated entities. Accordingly, we adopt a
definition that specifically includes venture capital firms and
other smaller investment companies that may not be included in the
definition of investment companies found in 15 U.S.C. 80a-3 (which
is cited in our broadcast rules at 47 CFR 73.3555 Note 2(c)).
Specifically, we define an institutional investor as an insurance
company, a bank holding stock in trust accounts through its trust
department, or an investment company as defined in 15 U.S.C. 80a-
3(a) without reference to, or incorporation of, the exemptions set
forth in 15 U.S.C. 80a-3(b) and (c); provided that, if such
investment company is owned, in whole or in part, by other entities,
then such investment company, such other entities and the affiliates
of such other entities, taken as a whole, must be primarily engaged
in the business of investing, reinvesting or trading in securities
or in distributing or providing investment management services for
securities. See Sec. 24.720(h).
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66. In addition, the control group minimum equity requirement will
be reduced three years from the date of license grant as suggested by
Lehman Brothers, but the control group must still retain voting control
(i.e., 50.1 percent of the vote). According the control group the
option to reduce the equity requirement accommodates the needs of
designated entity licensees to raise capita as they build out their
systems. Significantly, the three-year mark corresponds with the end of
the no transfer period under our license holding rule. In the case of a
licensee that has chosen the 25 percent minimum equity option, the
principals in the control group will only be required to hold 10
percent of the licensee's equity after three years, with no further
equity requirements imposed on the control group. Similarly, in the
case of a licensee that has used the 50.1 percent minimum equity
option, the principals in the control group will be required to hold 20
percent of the licensee's equity, and no further equity requirements
will be imposed on the control group.
67. After reviewing the record, we are persuaded that these changes
will afford the control group greater flexibility in raising the
necessary equity for participation in the entrepreneurs' blocks. In
particular, we are allowing that 10 (or 20.1) percent of the equity can
come from sources that otherwise would not qualify for the control
group. In making these limited changes to the control group equity
requirements, we believe the amended rules will: (1) promote investment
in designated entities generally; (2) attract and promote skilled
management for applicants; and (3) encourage involvement by existing
firms that have valuable management skills and resources to contribute
to the success of applicants.
68. With respect to our decision to allow investment in the control
group by investors of preexisting firms, the business involved must be
a going concern that has been in existence for a reasonable period of
time prior to adoption of our rules in order to avoid any sham
arrangements. Specifically, the business involved must have been
operating and earning revenues for at least two years prior to December
31, 1994 to qualify for this provision. While we want to relax the
control group equity requirements slightly, we also recognize there may
be an incentive for nonqualifying investors to purchase substantial
interests in ``preexisting'' businesses unless we place some
restrictions on those investors. As a practical matter, however, we
realize that the identity of noncontrolling investors in such
businesses, particularly if they are publicly-traded companies, will
change regularly. We intend that the allowed equity (10 or 20.1
percent) portion should be held by existing investors in such a company
although we will not place limits on who qualifies as such an investor.
We emphasize, however, that we will scrutinize any significant equity
restructing of preexisting companies that occurs after adoption of our
rules. We would presume that any change of equity by an investor in a
preexisting company (that is in an applicant's control group) that is
five percent or less would not be significant, and the burden is on the
applicant to demonstrate whether changes in equity that exceed five
percent are not significant.
69. We also agree with petitioners and commenters that greater
flexibility should be afforded to any applicant whose ownership
structures were established before our designated entity requirements
were formulated. Therefore, as a further modification, if the sole
control group member of an applicant is a business that was in
existence and had earnings from operations for at least two years prior
to December 31, 1994, we offer the option that control group principals
establishing the applicant's status as a minority and/or women-owned
business, small or entrepreneurial business may hold 10 percent of the
applicant's equity if the 25 percent equity option is used, or a 20
percent equity interest if the 50.1 percent equity option is used.\37\
The balance of the control group's equity contribution (i.e., 15 or
30.1 percent) must be held in the form of shares or stock options by
any of the following: (1) Qualifying principals in the control group;
(2) individuals who are members of the applicant's management team
(which could include ``nonqualifying'' individuals); or (3) existing
investors of business in the control group that were operating and
earning revenues for two years prior to December 31, 1994.
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\37\This equity may be held outright or in the form of options
provided these options are exercisable at any time, solely at the
holder's discretion, and at an exercise price equal to or less than
the current market valuation of the underlying shares at the time of
the filing of the short-form application.
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70. The lower equity requirement of 10 percent for preexisting
companies that are sole control group members addresses the concerns of
these firms, many of which have already undergone successive rounds of
financing that may have diluted the qualifying investors' original
equity interest in the business. Existing firms that were structured
prior to the adoption of the entrepreneurs' blocks regulatory scheme
are less likely to become ``fronts'' for business that would not
qualify for the entrepreneurs' block or the special provisions accorded
designated entities. This option is solely intended to accommodate
long-standing capital structures of applicants that have already been
required to dilute equity ownership to raise capital. Thus, we will
require that the portion of equity not held by qualifying principals
(15 or 30.1 percent, as the case may be) to be comprised entirely of
existing investors of the company (unless the equity is held by
management or qualified principals of the control group). As we stated
above, we recognize that for many companies, especially those that are
publicly-traded, the identities of noncontrolling investors change
regularly. Thus we will not place limits on the amount of time a
particular individual or entity must have been an investor in the
company. We emphasize, however, that we will scrutinize carefully
applicants that engage in significant equity reshuffling after adoption
of our rules.\38\ By giving preexisting applicants additional
flexibility, we do not intend to place other applicants at a
competitive disadvantage by permitting greater capital infusion from
institutional investors.
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\38\We will presume that a change in equity by an investor (in a
preexisting business) of five percent or less is not significant,
and the burden is on the applicant to demonstrate whether equity
changes above five percent are not significant.
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71. In implementing our requirements, we will provide that where
the interests in question are not held directly in the applicant, a
multiplier will be used to calculate the effective interests held by
the control group principals toward fulfillment of the minimum equity
requirement. In addition, we will use a multiplier to calculate the
interests of noncontrolling investors in the control group so as to
assess compliance with the 25 percent nonattributable equity limit.\39\
A multiplier is a traditional tool used by the Commission to calculate
the effective ownership levels of investors that, through one or more
intervening corporations, hold indirect interests in a licensee.\40\
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\39\We illustrate the application of a multiplier as follows: If
a member of a minority group or a woman holds a 25 percent equity
interest in a corporate member of the control group and that
corporation holds a 25 percent equity interest in the applicant, the
effective interest for purposes of assessing compliance with the
minimum equity requirement would be 6.25 percent (i.e.,0.25 x 0.25
= 6.25). This falls well below the 25 percent requirement of our
original rule. Correspondingly, if a noncontrolling (and
nonqualifying) investor holds a 40 percent interest in a corporate
member of a control group and that corporation holds 25 percent of
the applicant's total equity, the effective interest held in the
applicant by the investor would be 10 percent (i.e., 0.25 x .40 =
10.00). If that same investor also owns more than 15 percent of the
applicant's equity outside of the control group, it would exceed the
25 percent non-attributable equity limit.
\40\See, e.g., 47 CFR 73.3555 Note 2(d) (indicating that
attribution ownership interests in a broadcast licensee, cable
television system or daily newspaper that are held indirectly by a
party through one or more intervening corporations will be
determined by successive multiplication of the ownership percentages
for each link in the vertical ownership chain). We note that the
multiplier used here does not employ the 51 percent control
exception used in the broadcast context since we are using a
multiplier only to determine a control group member's equity
investment, not whether such member has control or substantial
influence over the applicant.
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72. Additionally, in a written ex parte presentation, Metricom
requests that we exempt small, publicly-traded corporations with widely
dispersed voting stock ownership from our control group requirement.
Metricom contends that the control group concept is unworkable for
small, publicly-traded companies, because it would not be possible to
identify a group of shareholders that own 50.1 percent of the
corporation's voting stock. As a result, such corporations could be
unable to establish eligibility for the entrepreneurs' blocks, or
status as a small business. Metricom proposes a test for identifying
small, publicly-traded corporations with widely-dispersed voting stock
ownership that closely follows guidelines used by the Securities and
Exchange Commission.
73. We will adopt Metricom's proposal, and create a limited
exemption from the control group requirement for small, publicly-traded
corporations with widely dispersed voting stock ownership. As Metricom
points out, a significant number of small, publicly traded companies
have such widely dispersed voting stock ownership that no identifiable
control group exists or can be created. Without a control group, such
companies may not be able to bid for entrepreneurs' block licenses or
quality for small business status even though their gross revenues and
assets meet our financial caps. It was not the Commission's intent that
these companies be denied the opportunity to bid on the entrepreneurs
block, or to qualify for treatment as a small business.
74. Consistent with Metricom's proposal, a small, publicly-traded
corporation will be found to have dispersed ownership of voting stock
if no person (including any ``group'' as that term is used in the
Securities Exchange Act of 1934)\41\ has the power to control the
election of more than 15 percent of the corporation's directors. In
addition, we will require that no person shall have an equity interest
in the applicant for more than 15 percent, which is consistent with out
revised equity requirements for small business applicants utilizing a
control group. Under those requirements small business principals in an
applicant's control group must hold at least 15 percent interest in the
applicant (in combination with an additional, 10 percent equity
interest that may come from ``nonqualifying'' sources). A 15 percent
equity requirement is appropriate here because the same percentage of
equity is needed for a small business applicant's control group to
satisfy its equity obligations (unless it is a preexisting company),
and because a 15 percent equity cap is likely to ensure that no control
questions arise. We, emphasize that this control group exemption will
only apply to an applicant or licensee that is not controlled by any
entity or group other than corporate management, as should be the case
where there is no identifiable group of shareholders holding a
controlling interest in the company's voting stock. A small corporation
that has dispersed voting stock ownership and no controlling affiliates
will therefore not be required to aggregate with its own revenues and
assets the revenues and assets of management and shareholders for
purposes of entrepreneurs' block eligibility or small business status.
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\41\15 U.S.C. 78(a) et seq. (Section 13(d) and Section 13(g)
state that ``when two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring,
holding, or disposing of securities in an issuer, such syndicate or
group shall be deemed a `person' and therefore required to make the
disclosures indicated in those subsections'').
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75. Small, publicly-traded corporations that choose to exempt
themselves from the control group requirement must own all the equity
and voting stock of the applicant or licensee. We find their ability to
reply on the corporation's existing capital structure to introduce new
passive investment on an ongoing basis provides a level of flexibility
that is comparable to applicants/licensees with an identifiable control
group. We note that minority and/or women-owned businesses would not
qualify for this exemption since a control group is necessary to
determine whether the applicant is controlled by minorities or women.
76. Finally we consider a few other points. First, as BET requests,
we clarify that an individual can be the control group of an applicant,
so long as our equity requirements and other provisions are satisfied.
In response to Lehman Brothers' concerns, we clarify the control group
requirements to provide that control group investors must receive
dividends, profits, and regular and liquidating distributions in
proportion to their actual possession of equity holdings, rather than
in proportion to their interest in the total equity (which may include
options not yet exercised). Finally, we see no conflict in our rules
with a Pacific Telesis' proposal to allow designated entities and their
partners to allocate amongst themselves tax benefits on a non-pro rata
basis.

De Facto Control Issues and Management Contracts

77. In the Fifth Report and Order, we provided that the designated
entity control group must have de facto as well as de jure control if
the applicant and must be prepared to demonstrate that it controls the
enterprise. The requirement of de facto control arises from Section
310(d) of the Communications Act, 47 U.S.C. 310(d), which prohibits any
transfer or assignment of license or transfer of control of a
corporation holding a license without the Commission's authorization.
To help in determining what constitutes a transfer of control under
this statutory provision we follow precedent defining de facto
control.\42\ We also apply this standard in the case of designed
entities to determine whether the applicant is in fact controlled by
qualifying individuals or entities. Several petitioners seek
reconsideration or clarification of our de facto control standard,
particularly as it applies to questions of de facto control by the
designated entity control group and use of management contracts by
licensees.
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\42\See Rochester Telephone v. United States, 23 F. Supp. 634,
636 (S.D.N.Y 1938), aff'd, 307 U.S. 125 (1939); Lorain Journal Co.
v. FCC, 351 F.2d 824, 827-828 (D.C. Cir. 1965, cert. denied, 383
U.S. 967 (1966).
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Definition of De Facto Control

78. The Fifth Report and Order does not set forth specific
guidelines defining de facto control in the entrepreneurs' block
context. Because issues of de facto control are necessarily fact-
specific, we have treated the issue as one to be handled on a case-by-
case basis.\43\ Consequently, a wide variety of factors may be relevant
to determining whether a control group Has de acto control of a
particular applicant, applying in the entrepreneurs' blocks.
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\43\Stereo Broadcasters, Inc., 55 FCC 2d 819, 821 (1975),
modified, 59 FCC 2d 1002 (1976).
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79. Some petitioners ask us to provide more specific guidelines
with respect ti what dies and does not constitute de facti control.
Omnipoint states that such guidelines would help designated entity
applicants in setting up their management structure Others seek
assurance that designated entity control groups can meet the de facto
control test even if they enter into agreements containing ``standard''
covenants for the protection of non-majority or non-voting
shareholders, e.g., supermajority voting requirements for major
corporate changes, liquidation preference (commonly in the form of
preferred stock), rights of first refusal, veto rights concerning
particular corporate transactions, or the preemptive right to purchase
stock to prevent dilution.
80. We continue to believe that determinations of de factir control
for purposes of determining designated entity eligibility for
entrepreneurs' blocks are inherently factual therefore will require
case-by-case determination Nevertheless, to provide a level of
certainty for designated entities and to ensure that designated
entities maintain de facto control, we believe it is appropriate to
articulate some guidelines for defining de facto control in this
context. We therefore clarify that a designated entity or
entrepreneurs' control group must demonstrate at least the following
indicia of control to establish that it retains de facto control of the
applicant (1) The control group must constitute or appoint more than 50
percent of the board of directors or partnership management committee;
(2) the control group must have authority to appoint, promote, demote
and fire senior executives that control the day-to-day activities of
the licensee; (3) the control group must play in integral role in all
major management decisions; and (4) in the case of applicants
controlled by minorities and women, at least one minority or female
control group member must have senior managerial responsibility over
day-to-day operations, e.g., as President or CEO of the licensee.\44\
We emphasize, however, that these criteria are guidelines only and are
not necessarily dispositive of the issue of de facto control in all
situations. Even where these criteria are met, therefore, the
determination of whether de facto control exists will depend on the
totality of circumstances in the particular case.
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\44\These same four indicia will be used to determine whether
the ``qualified'' members of the control group (i.e., women,
minorities, and small business or entrepreneurial principals) have
de facto control over the control group. For example, in a women-
owned limited partnership applicant with one corporate general
partner, the women shareholders of that corporation must constitute,
or be able to appoint, more than 50 percent of the board, appoint
and fire senior executives, play an integral role in all major
management decisions, and at least one of the women must have senior
managerial responsibility over day-to-day operations.
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81. With respect to provisions benefitting non-majority or non-
voting shareholders, we recognize that inclusion of such provisions in
a common practice to induce investment and ensure that the basic
interests of such shareholders are protected. For example, many
corporations require a supermajority of shareholders to approve major
corporate decisions such as taking on additional debt, significant
corporate acquisitions, or issuance of new stock. Similarly, strategic
investors making large passive equity contributions to a company
frequently insist on a right of first refusal exercisable in the event
that a third party seeks to purchase the company. We agree with
petitioners that allowing such provisions enhances the ability of
designated entities to raise needed capital from strategic investors,
thereby bolstering their financial stability and competitive viability.
We believe, however, that precedent provides guidance in determining
the appropriate extent to which these safeguards may protect
investment. We therefore clarify that under our case law non-majority
or non-voting shareholders may be given a decision-making role (through
supermajority provisions or similar mechanisms) in major corporate
decisions that fundamentally affect their interests as shareholders
without being deemed to be in de facto control.\45\ Such decisions
generally include: (1) Issuance or reclassification of stock; (2)
setting compensation for senior management; (3) expenditures that
significantly affect market capitalization; (4) incurring significant
corporate debt or otherwise encumbering corporate assets; (5) sale of
major corporate assets; and (6) fundamental changes in corporate
structure, including merger or dissolution.\46\ We also clarify that
non-majority or non-voting investors may hold rights of first refusal,
provided that right is exercisable only to prevent dilution of the
investor's interest or a transfer of control by the control group to a
third party. We also observe that we would not look favorably upon an
assignment or transfer of a license that resulted from rights of first
refusal being exercised if (1) the holder of such rights was a manager
of the licensee, and (2) there was evidence the manager had not acted
to maximize the profitability of the business in order to ensure that
the options would be exercised at a lower price.
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\45\See. e.g., News International, 97 FCC 2d 349, 357-66, (1984)
(describing minority shareholder voting and consent rights that
serve to protect interest and do not constitute a transfer of
control); Data Transmissions, 44 FCC 2d 935, 936-37 (1974) (same).
\46\Our most recent decision on such voting and consent rights
addressed an agreement between MCI Communications Corporation (MCI)
and British Telecommunications plc (BT). In that Order, we evaluated
whether particular voting and consent rights intended to protect
BT's investment in MCI triggered a transfer of Control. See
Declaratory Ruling and Order, 9 FCC Rcd (1994). We indicated that
covenants that give a party the power to block certain major
transactions of a company do not in and of themselves represent the
type of transfer of corporate control envisioned by Section 310(d)
of the Communications Act. We found it significant, however, that
while BT could block certain major transac

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-30075. Public record. Not legal advice.