Interactive Video and Data Service

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 95

[PP Docket No. 93-253; FCC 96-447]

Interactive Video and Data Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This Tenth Report and Order modifies the competitive bidding

rules for the upcoming auction of Interactive Video and Data Service

(IVDS) licenses as proposed by the Sixth Memorandum Opinion and Order

and Further Notice of Proposed Rule Making, In the Matter of

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

Bidding. Specifically, the rule amendments include eliminating the

bidding credits available to women- and minority-owned IVDS applicants

and extending bidding credits to small businesses based upon a revised

two-tiered small business definition, i.e., providing varying bidding

credit amounts to small businesses of different sizes. The Tenth Report

and Order also clarifies the attribution rules for affiliates of IVDS

applicants, and amends the competitive bidding rules to increase the

amount of the upfront payments required to participate in the IVDS

auction. The intended effect of this action is to establish the

competitive bidding rules for the upcoming auction of IVDS licenses.

EFFECTIVE DATE: December 27, 1996.

FOR FURTHER INFORMATION CONTACT: Howard Griboff or Christina Eads

Clearwater, Wireless Telecommunications Bureau, (202) 418-0660.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Tenth

Report and Order in PP Docket No. 93-253; FCC 96-447, adopted November

15, 1996 and released November 21, 1996. The complete text of the Tenth

Report and Order is available for inspection and copying during normal

business hours in the FCC Reference Center (Room 239), 1919 M Street,

N.W., Washington, D.C. and also may be purchased from the Commission's

copy contractor, International Transcription Service, (202) 857-3800,

2100 M Street, N.W., Suite 140, Washington, D.C. 20037.

Title: In the Matter of Implementation of Section 309(j) of the

Communications Act--Competitive Bidding

Tenth Report and Order

I. Introduction and Executive Summary

1. In this Tenth Report and Order, the Commission modifies its

competitive bidding rules for the upcoming auction of Interactive Video

and Data Service (IVDS) licenses.1 Specifically, the Commission

amends certain provisions concerning the treatment of small businesses,

businesses owned by members of minority groups and women, and rural

telephone companies (collectively, ``designated entities''), in order

to address the legal requirements of the Supreme Court's decisions in

Adarand Constructors, Inc. v. Pena (Adarand) 2 and United States

v. Virginia (VMI).3 The Commission also increases the upfront

payment amounts for bidding on IVDS licenses in order to encourage

sincere bidding. By implementing these modifications, the Commission

reiterates that it is committed to fulfilling its statutory obligation

to ensure that designated entities are afforded opportunities to

participate in the provision of spectrum-based services.4

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\1\ IVDS is a point-to-multipoint, multipoint-to-point, short

distance communications service. IVDS licensees may provide

information, products, or services to individual subscribers located

within a service area and subscribers may provide responses. 47 CFR

Section 95.803(a).

\2\ ______ U.S. ______, 115 S. Ct. 2097, 132 L.Ed.2d 158 (1995).

\3\ ______ U.S. ______, 116 S. Ct. 2264, 135 L.Ed.2d 735 (1996).

\4\ 47 U.S.C. Section 309(j)(4)(D).

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2. As it explained in the Sixth Memorandum Opinion and Order and

Further Notice of Proposed Rule Making (FNPRM),5 the Commission

was prompted to reexamine its race- and gender-based IVDS auction rules

by the Supreme Court's decisions in Adarand and VMI. The Commission

initially adopted these race- and gender-based rules in the Fourth

Report and Order in this docket in order to fulfill its mandate under

Section 309(j) of the Communications Act of 1934, as amended

(``Communications Act''), to provide opportunities for businesses owned

by members of minority groups and women to participate in the provision

of spectrum-based services.6 After the Commission adopted these

rules, however, the Supreme Court held in Adarand that any federal

program that makes distinctions on the basis of race must satisfy the

strict scrutiny standard of judicial review.7 More recently, the

Supreme Court held in VMI that a state program that makes distinctions

on the basis of gender must be supported by an ``exceedingly persuasive

justification'' in order to withstand constitutional scrutiny.8

Based on the analysis of VMI in conjunction with Adarand, the

Commission concludes that any gender-based preference maintained in the

IVDS auction rules must meet the VMI intermediate scrutiny standard of

judicial review.

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\5\ Implementation of Section 309(j) of the Communications Act--

Competitive Bidding, Sixth Memorandum Opinion and Order and Further

Notice of Proposed Rule Making, PP Docket No. 93-253, FCC 96-330, 61

FR 49103 (September 18, 1996). In response to the FNPRM, comments

were filed by (1) ITV, Inc. and IVDS Affiliates, LLC (ITV/IALC); (2)

Interactive America Corporation, Inc. (IAC); (3) Loli, Inc., Trans

Pacific Interactive, Wireless Interactive Return Path, L.L.C., and

IVDS On-Line Partnership (collectively, ``IVDS Licensees''); and (4)

Progressive Communications, Inc. (Progressive). Reply comments were

filed by IAC.

\6\ Implementation of Section 309(j) of the Communications Act--

Competitive Bidding, Fourth Report and Order, PP Docket No. 93-253,

59 FR 24947 (May 13, 1994), 9 FCC Rcd 2330, 2336-40 (1994) (Fourth

Report and Order).

\7\ Adarand, 115 S. Ct. at 2113. Adarand explicitly overruled

the intermediate scrutiny standard for racial classifications set by

the Supreme Court in Metro Broadcasting, Inc. v. FCC, 497 U.S. 547,

564-65 (1990), which was the standard of review at the time the IVDS

rules were adopted. See Fourth Report and Order, 9 FCC Rcd at 2338

n.73.

\8\ VMI, 116 S. Ct. at 2274-76.

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3. Based upon review of the comments submitted in response to the

FNPRM, the Commission also concludes that the present record is

insufficient to support either the race-based IVDS auction rules under

the strict scrutiny standard or the gender-based rules under the

``exceedingly persuasive justification'' standard of intermediate

scrutiny. The Commission has considered the need to award the remaining

IVDS licenses expeditiously and to promote the rapid deployment of new

services to the public without judicial delays,9 as well as the

statutory objective of disseminating licenses among a wide variety of

applicants, including designated entities.10 Bearing these factors

in mind, the Commission concluded that in order to avoid uncertainty

and delay that would likely result from legal challenges to the special

provisions for minority- and women-owned businesses in its current

[[Page 60199]]

IVDS rules, it is appropriate to make the IVDS rules race- and gender-

neutral.11 The Commission believes that its action here is

consistent with its obligations under Section 309(j)(3).12

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\9\ 47 U.S.C. Section 309(j)(3)(A).

\10\ Id. Section 309(j)(3)(B).

\11\ See Amendment of Parts 20 and 24 of the Commission's Rules,

Report and Order, WT Docket No. 96-59, 61 FR 51233 (October 1,

1996), 11 FCC Rcd 7824 (1996) (DEF Report and Order), which modified

the designated entity provisions of the broadband Personal

Communications Services (PCS) F block rules to make them race- and

gender-neutral; Implementation of Section 309(j) of the

Communications Act--Competitive Bidding, Sixth Report and Order, PP

Docket No. 93-253, 60 FR 37786 (July 21, 1995), 11 FCC Rcd 136

(1995), aff'd sub nom. Omnipoint Corp. v. FCC, 78 F.3d 620 (D.C.

Cir. 1996), which modified the designated entity provisions of the

broadband PCS C block rules to make them race- and gender-neutral.

\12\ 47 U.S.C. Section 309(j)(3).

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4. As explained in the FNPRM, the Commission's experience in

conducting the initial IVDS auction also led it to examine other

aspects of its rules, and the Commission has determined that it should

take certain steps to minimize the possibility of insincere bidding and

bidder default. To achieve these goals, the Commission amends its rules

to raise the initial upfront payment for participation in the IVDS

auction to $9,000 per Metropolitan Statistical Area (MSA) license and

$2,500 per license for Rural Service Area (RSA) markets, for the

maximum number of licenses on which the applicant wishes to bid.

5. Finally, a number of the comments addressed other issues which

are not within the scope of this proceeding. The Commission defers

decisions on those matters until they can be addressed in the

appropriate context.

II. Rules Affecting Designated Entities

A. Meeting the Constitutional Standards

6. Background. In the FNPRM, the Commission explained the history

of its race-and gender-based IVDS rules, the statutory objectives they

were designed to promote, and the impact of the Supreme Court's

decisions in Adarand and VMI. As discussed, an intermediate scrutiny

standard of review was applied to federal race- and gender-based

programs at the time the IVDS rules were adopted.

7. In Adarand, the Supreme Court held that all racial

classifications, whether imposed at the federal, state or local

government level, must be analyzed by a reviewing court under a strict

scrutiny standard of review. This standard requires such

classifications to be narrowly tailored to further a compelling

governmental interest.13 In VMI, the Supreme Court reviewed a

state program containing gender classification and held it was

unconstitutional under an intermediate scrutiny standard of review.

This standard requires that ``[p]arties who seek to defend gender-based

government action must demonstrate an `exceedingly persuasive

justification' for that action.'' 14 Under this test, the

government must show ``at least that the [challenged] classification

serves `important governmental objectives and that the discriminatory

means employed' are `substantially related to the achievement of those

objectives.' '' 15 While the Supreme Court has not directly

addressed constitutional challenges to federal gender-based programs

since Adarand and VMI,16 a review of the relevant broad language

in VMI indicates that the Court does not differentiate between federal

and state official actions in its equal protection analysis.17

Similarly, the Adarand decision definitively eliminated any distinction

between federal and state race-based programs in setting its strict

scrutiny standard of judicial review.18 Therefore, the Commission

concludes that any gender-based preference maintained in the IVDS

auction rules would need to meet the VMI intermediate scrutiny standard

of review.

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\13\ Adarand, 115 S. Ct. at 2113.

\14\ VMI, 116 S. Ct. at 2274 (citing J.E.B. v. Alabama ex rel.

T. B., 511 U.S. 127, 136-37 & n.6 (1994) and Mississippi Univ. for

Women v. Hogan, 458 U.S. 718, 724 (1982)).

\15\ Id. at 2275 (quoting Mississippi Univ. for Women, 458 U.S.

at 724 (quoting Wengler v. Druggists Mutual Ins. Co., 446 U.S. 142,

150 (1980))).

\16\ But see Lamprecht v. FCC, 958 F.2d 382, 391, 393 n.3 (D.C.

Cir. 1992), a pre-Adarand/VMI decision in which Justice Thomas (a

member of the D.C. Circuit panel to which the case was presented)

invokes the ``exceedingly persuasive justification'' standard in

striking down a federal gender-preference policy. As the dissent in

Lamprecht confirmed, Justice Thomas applied ``the more exacting

scrutiny of Justice O'Connor's dissent [in Metro, 497 U.S. at 602-

31],'' id. at 404 (Mikva, C.J., dissenting), which formed the core

of Justice O'Connor's majority opinion in Adarand.

\17\ ``Since [Reed v. Reed, 404 U.S. 71 (1971)], the Court has

repeatedly recognized that neither federal nor state government acts

compatibly with the equal protection principle when a law or

official policy denies * * * equal opportunity * * *.'' VMI, 116 S.

Ct. at 2275 (emphasis added); ``To summarize the Court's current

directions for cases of official classification based on gender: * *

* the reviewing court must determine whether the proffered

justification is `exceedingly persuasive.' '' Id. (emphasis added).

See also Heckler v. Mathews, 465 U.S. 728, 744-45 (1984) (reviewing

a federal statute containing gender classification under the same

standard the Court used to review the state statute in Mississippi

Univ. for Women); Califano v. Westcott, 443 U.S. 76, 85 (1979)

(same).

\18\ Adarand, 115 S. Ct. at 2113.

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8. In the FNPRM, the Commission noted that judicial precedent

indicates that only a record of discrimination against a particular

racial group would support remedial measures designed to benefit that

group and that generalized assertions of discriminations are

inadequate.19 The Commission tentatively concluded that, although

it has some general evidence of discrimination against certain racial

groups, the evidence in the record to date does not appear adequate to

satisfy the strict scrutiny standard of review. The Commission

requested comment on this tentative conclusion. The Commission also

requested comment on a number of questions related to this analysis,

including whether compensating for discrimination in lending practices

in the communications industry constitutes a compelling government

interest. The Commission also asked interested parties to comment on

other objectives that could be furthered by the minority-based

provisions and whether they could be considered compelling governmental

interests, such as increased diversity in ownership and employment in

the communications industry or increased industry competition. The

Commission asked commenters to submit statistical data, personal

accounts, studies, or any other data relevant to the entry of specific

racial groups into the field of telecommunications, and whether its

race-based provisions are narrowly tailored to serve the interests that

commenters assert to be compelling governmental interests. In the

FNPRM, the Commission also tentatively concluded that the present

record in support of its gender-based IVDS rules may be insufficient to

satisfy the intermediate scrutiny standard and asked commenters to

submit evidence relating to the entry of women into the field of

telecommunications. The Commission asked interested parties to comment

on whether there are any other goals that would satisfy the ``important

government objective'' requirement of the intermediate scrutiny

standard, such as increased participation of women in the FCC-licensing

process for auction spectrum, and whether its gender-based IVDS rules

are ``substantially related'' to the achievement of such objectives.

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\19\ FNPRM (citing Richmond v. J.A. Croson Co., 488 U.S. 469,

498 (1989) (quoting Wygant v. Jackson Bd. of Educ., 476 U.S. 267,

275 (1986))).

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9. In the FNPRM, the Commission also tentatively concluded that it

should not delay the IVDS auction for the amount of time it would take

to adduce sufficient evidence to support the race- and gender-based

IVDS provisions. The Commission also concluded that proceeding with the

IVDS auction with these rules intact would not serve the public

interest because it might result in litigation that ultimately would

further

[[Page 60200]]

delay the award of the IVDS licenses and postpone the introduction of

new competition to the marketplace.20 The Commission tentatively

concluded that in order to meet its Congressional mandate and

expeditiously proceed to auction the remaining IVDS licenses, it should

adopt race- and gender-neutral IVDS auction provisions, but continue to

maintain the provisions for small businesses which it believes

adequately benefit most of the businesses owned by minorities and/or

women.

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\20\ Id. The Commission observes that the D.C. Circuit Court of

Appeals stayed the C block auction under an intermediate scrutiny

standard on the basis of race- and gender-based provisions similar

to those adopted in the IVDS rules. Telephone Electronics Corp. v.

FCC, No. 95-1015 (D.C. Cir. Mar. 15, 1995) (order granting stay).

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10. Discussion. Upon review of the record before it, the Commission

revises the IVDS rules to make them race- and gender-neutral,

particularly since most of the commenters support this action.21

The other commenters failed to provide any specific anecdotal or

statistical evidence to supplement the record supporting race-based or

gender-based IVDS auction rules. IAC takes the position that, because

there is a lack of available equipment for constructing IVDS systems,

the Commission is moving too quickly in eliminating minority- and

gender-based preferences.22 IAC proposes that the Commission allow

parties additional time to establish a full record upon which to decide

whether the race- and gender-based preferences should be

eliminated.23 However, IAC does not present any support for the

proposition that a record could be developed in this proceeding if more

time was available, nor do any of the other commenters. Accordingly,

the Commission concludes that making the IVDS auction rules race- and

gender-neutral will serve the public interest by enabling it to

expeditiously auction the remaining IVDS licenses. Other commenters

also requested that the Commission delay the IVDS auction, but not for

the purpose of establishing a record to support race- and gender-based

rules.24 The Commission denies these requests to delay the

auction, and notes that applicants should factor the obligations and

uncertainties attendant to the auction process into their decision to

participate and the amount to bid.25

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\21\ See, e.g., Progressive Comments at 1; ITV/IALC Comments at

4.

\22\ IAC Comments at 5-7.

\23\ Id.; IAC Reply Comments at 1-2.

\24\ IVDS Licensees request that the Commission delay the

auction until certain technical, regulatory, and administrative

issues are resolved. IVDS Licensees Comments at 4-6. ITV/IALC

request that the auction not be held until resolution of all auction

default issues and action has been taken on the petitions for

reconsideration of the Commission's decision in Amendment of Part 95

of the Commission's Rules to Allow Interactive Video and Data

Service Licensees to Provide Mobile Service to Subscribers, Report

and Order, WT Docket No. 95-47, 61 FR 32710-01 (June 25, 1996), 11

FCC Rcd 6610 (1996). ITV/IALC Comments at 7-9. See also IAC Reply

Comments at 4-5 (agreeing with IVDS Licensees and ITV/IALC on these

points).

\25\ See Requests for Waivers in the First Auction of

Interactive Video and Data Service (IVDS) Licenses, Memorandum

Opinion and Order, 11 FCC Rcd 8211, 8213 (1996).

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11. While the Commission eliminates the race- and gender-based

provisions of the IVDS auction rules, it will retain provisions for

small businesses, as agreed to by all commenters.26 The Commission

concludes that nothing in the Adarand or VMI decisions calls its small

business provisions into question. Moreover, by retaining small

business preferences, the Commission believes it will continue to

fulfill the mandate under Section 309(j) to provide increased

opportunities for minority- and women-owned businesses,27 because

many minority- and women-owned entities are small businesses who

therefore will qualify for the same special provisions that would have

applied to them under the previous rules.28

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\26\ IVDS Licensees Comments at 2 (in light of the elimination

of race- and gender-based provisions, the small business preferences

provide ``one of the few avenues remaining for minority- and women-

owned businesses to enter the communications industry''); IAC

Comments at 8 (preferences for small businesses should be retained

to fulfill the Commission's statutory obligations under Section

309(j)); ITV/IALC Comments at 4 (preferences should be based on a

party's lack of economic strength); Progressive Comments at 1 (small

business provisions will give ``equal status to all small business

enterprises'').

\27\ 47 U.S.C. Section 309(j)(3).

\28\ See generally 1992 Survey of Minority-Owned Business

Enterprises, Agriculture and Financial Statistics Division, Bureau

of the Census, U.S. Department of Commerce (December 11, 1995); 1992

Survey of Women-Owned Businesses, Agriculture and Financial

Statistics Division, Bureau of the Census, U.S. Department of

Commerce (January 29, 1996).

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12. The Commission also has initiated a comprehensive rule making

proceeding to gather evidence regarding market barriers to entry faced

by minority- and women-owned firms as well as small businesses.29

If a sufficient record is adduced that will support race- and gender-

based provisions that will satisfy judicial scrutiny, it will consider

race- and gender-based provisions for future auctions. Toward this end,

the Commission will continue to request bidder information on the IVDS

short-form filings as to minority and/or women-owned status. In

analyzing the applicant pool and the auction results, the Commission

will monitor whether it has accomplished substantial participation by

minorities and women through the broad provisions available to small

businesses. This will also assist the Commission in preparing its

report to Congress on the success of designated entities in

auctions.30

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\29\ See Section 257 Proceeding to Identify and Eliminate Market

Entry Barriers for Small Businesses, Notice of Inquiry, GN Docket

No. 96-113, 61 FR 33066 (June 26, 1996), 11 FCC Rcd 6280

(1996)(Section 257 Notice of Inquiry). See also 47 U.S.C. Section

257.

\30\ See 47 U.S.C. Section 309(j)(12)(D).

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B. Special Provisions for Designated Entities

1. Small Business Definition

13. Background. In the current IVDS rules, the Commission adopted a

definition of ``small business,'' that requires an entity to

demonstrate that, together with its affiliates, its net worth is not

more than $6 million, and its annual profits are not more than $2

million for the previous two years. In the FNPRM, the Commission stated

its belief that the gross revenues of the applicant and its affiliates

is a more accurate indicator of its size than is its net worth or

annual profits, and the Commission proposed to revise the IVDS

definition of small business to match the three-year gross revenues

test that it has used to define ``small business'' for other

auctions.31 The Commission further stated that, because it expects

that the capital requirements for IVDS will be relatively low (as

compared to, for example, broadband PCS), IVDS may attract greater

participation by smaller businesses who lack access to capital. The

potential in IVDS for greater participation by smaller businesses also

justifies special provisions based on the size of the bidding entity,

such as a tiered bidding credits. Therefore, the Commission proposed to

redefine a ``small business'' as an entity with average gross revenues

not to exceed $15 million for each of the preceding three years. The

Commission also proposed to add a second tier of small businesses,

referred to as ``very small businesses,'' and defined as entities with

average gross revenues of not more than $3 million for each of the

preceding three years. The Commission requested comment on these

revised definitions. It also requested comment on whether to implement

a five percent

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attribution threshold for purposes of determining an entity's

eligibility as a small business. Alternatively, the Commission sought

comment on whether it should only count the gross revenues of the

controlling principals in the applicant and its affiliates for purposes

of determining small business status. Finally, the Commission sought

comment on its tentative conclusion to use a multiplier similar to the

one adopted in the CMRS Third Report and Order for the spectrum

aggregation cap to determine attribution when IVDS licensees are held

indirectly through intervening corporate entities.32

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\31\ FNPRM (citing 47 CFR Sections 24.320, 24.720, 90.912(b),

90.814(b)(1)). See also Implementation of Section 309(j) of the

Communications Act--Competitive Bidding, Second Order on

Reconsideration and Seventh Report and Order, PR Docket No. 89-553,

PP Docket No. 93-253, GN Docket No. 93-252, 60 FR 48913 (September

21, 1996), 11 FCC Rcd 2639, 2700-01 & n.320 (1995) (900 SMR Auction

Report and Order).

\32\ Id. (citing Implementation of Sections 3(n) and 332 of the

Communications Act--Regulatory Treatment of Mobile Services, Third

Report and Order, GN Docket No. 93-252, PR Docket No. 93-144, PR

Docket No. 89-553, 59 FR 59945 (November 21, 1996), 9 FCC Rcd 7988,

8114-15 (1994) (CMRS Third Report and Order)).

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14. Discussion. Based upon its experience with spectrum auctions,

the Commission believes that gross revenues-based definitions are a

more accurate indicator of an entity's size than the net worth/annual

profit definition which was previously used. Therefore, the Commission

will redefine a ``small business'' as an entity with average gross

revenues not exceeding $15 million for each of the preceding three

years, and a ``very small business'' as an entity with average gross

revenues not exceeding $3 million for each of the preceding three

years. IVDS Licensees and ITV/IALC support small business definitions

based upon gross revenues,33 and only Progressive takes the

position that the Commission should retain the previous small business

definition.34 The Commission further notes that the creation of a

subcategory of very small businesses enables it to tailor benefits to

better meet the needs of the smaller business entities likely to

participate in the IVDS auction. As discussed below, the Commission

finds that its goals can best be served by offering varying bidding

credits tailored to the applicant's size. The Commission also believes

that the $15 million/$3 million gross revenue financial thresholds are

appropriate and are consistent with the carefully-analyzed approach it

took in the auction of 900 MHz Specialized Mobile Radio (SMR)

licenses.35 Indeed, in this auction, the Commission expects

participation by a comparable group of smaller businesses that

participated in the 900 MHz SMR auction. Because the Commission

believes these are appropriate thresholds, it declines to adopt the

higher thresholds proposed by ITV/IALC.36

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\33\ See, e.g., IVDS Licensees Comments at 1-2; ITV/IALC

Comments at 4-5.

\34\ Progressive Comments at 1 (contending that differing

categories of small businesses will create problems for the

Commission in the future).

\35\ 900 SMR Auction Report and Order, 11 FCC Rcd at 2700.

\36\ ITV/IALC Comments at 4-5 (proposing small business average

gross revenues eligibility threshold of $18 million and very small

business average gross revenues eligibility threshold of $5 million

because IVDS licensees will more likely be financing their systems

from equity sources rather than debt).

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15. In determining whether an entity qualifies as a small business

at either threshold, the Commission will consider the gross revenues of

the small business applicant, its affiliates, and certain investors in

the applicant. Specifically, the Commission will attribute the gross

revenues of all controlling principals in the small business applicant

as well as the gross revenues of affiliates of the applicant.37 At

ITV/IALC's request,38 the Commission clarifies that personal net

worth is not included in the determination of eligibility for bidding

as a small business.39 In addition, the Commission will use the

multiplier adopted in the CMRS Third Report and Order for the spectrum

aggregation cap to determine when IVDS licensees are indirectly held

through intervening corporate entities.40 The Commission thus

chooses not to impose specific equity requirements on the controlling

principals that meet the small business definition.41 However, the

Commission will still require that, in order for an applicant to

qualify as a small business, qualifying small business principals must

maintain ``control'' of the applicant. The term ``control'' would

include both de jure and de facto control of the applicant.42

While the Commission is not imposing specific equity requirements on

the small business principals, the absence of significant equity could

raise questions about whether the applicant qualifies as a bona fide

small business.

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\37\ Both commenters addressing this issue supported the use of

gross revenues of controlling principals as the determinant of small

business status. See IVDS Licensees Comments at 2; ITV/IALC Comments

at 5 n.5.

\38\ ITV/IALC Comments at 5 n.5.

\39\ See, e.g., Implementation of Section 309(j) of the

Communications Act--Competitive Bidding, Fifth Memorandum Opinion

and Order, PP Docket No. 93-253, 59 FR 63210 (December 7, 1994), 10

FCC Rcd 403, 421 (1994) (Competitive Bidding Fifth Memorandum

Opinion and Order).

\40\ CMRS Third Report and Order, 9 FCC Rcd 7988, 8114-15. IVDS

Licensees supports this proposal. IVDS Licensees Comments at 2.

\41\ IVDS Licensees alternatively proposes a twenty-five percent

equity exception similar to that adopted in the Commission's

broadband PCS rules. 47 CFR Section 24.709(b)(3). IVDS Licensees

Comments at 2.

\42\ Typically, de jure control is evidenced by ownership of

50.1 percent of an entity's voting stock. De facto control is

determined on a case-by-case basis. An entity must demonstrate at

least the following indicia of control to establish that it retains

de facto control of the applicant: (1) the entity constitutes or

appoints more than 50 percent of the board of directors or

partnership management committee; (2) the entity has authority to

appoint, promote, demote and fire senior executives that control the

day-to-day activities of the licensees; and (3) the entity plays an

integral role in all major management decisions. See Competitive

Bidding Fifth Memorandum Opinion and Order, 10 FCC Rcd at 447.

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16. On a related matter, ITV/IALC seeks clarification in its

comments that once an entity qualifies as a small business, it would

not lose its status through financial growth in subsequent

years,43 and thereby lose its ability to make installment payments

as a small business under 47 CFR Section 95.816(d)(2). The Commission

addressed this concern in its broadband PCS rules. There it emphasized

its strong interest in seeing small businesses grow and succeed in the

wireless marketplace and stated that growth of the licensee's gross

revenues and assets, or growth as a result of a licensee acquiring

additional licenses, generally would not jeopardize continued

eligibility for designated entity preferences.44 The Commission

believes this policy equally should apply to IVDS licensees and,

therefore, incorporates this concept into its IVDS rules.45

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\43\ ITV/IALC Comments at 5 n.4.

\44\ Competitive Bidding Fifth Memorandum Opinion and Order, 10

FCC Rcd at 420. See also 47 CFR Section 24.711(c)(2) (``A licensee

(or other attributable entity's) increased gross revenues or

increased total assets due to nonattributable equity investments * *

*, debt financing, revenue from operations or other investments ,

business development or expanded service shall not be considered to

result in the licensee losing eligibility for installment

payments.'').

\45\ 47 CFR Section 95.816(e)(2) (as revised).

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2. Bidding Credits

17. Background. Under the current IVDS rules, businesses owned by

members of minority groups or women are granted a 25 percent bidding

credit. In the FNPRM, the Commission proposed to eliminate race-and

gender-based bidding credits in its IVDS rules and sought comment on

whether it should extend a single bidding credit to all small

businesses and, if so, the magnitude of that credit. The Commission

asked whether it should offer tiered bidding credits for small

businesses of different sizes, e.g., a 15 percent bidding credit for

very small businesses and a 10 percent bidding credit for small

businesses. The Commission tentatively concluded that given the

relatively low bids that IVDS garnered in the July 1994 auction, IVDS

may attract smaller businesses, thus justifying tiered bidding credits.

[[Page 60202]]

18. Discussion. The Commission will maintain bidding credits for

small businesses and will adopt a tiered bidding credit approach, as

supported by several commenters.46 The Commission agrees with IVDS

Licensees that preservation of the bidding credit is consistent with

its obligations under Section 309(j) to ``promote economic opportunity

for a wide variety of applicants, including small businesses and

businesses owned by minorities and women.'' 47 Furthermore, the

Commission believes that a tiered approach, which enhances the

discounting effect of bidding credits because not all entities receive

the same benefit, will encourage smaller businesses to participate in

the provision of IVDS services.48 The Commission also believes

that the 15 percent bidding credit for very small businesses and a 10

percent bidding credit for small businesses are appropriate and

consistent with the thresholds used in the 900 MHz SMR auctions.49

As noted above, the Commission expects auction participation by a group

of smaller businesses comparable to those that participated in the 900

MHz SMR auction. Moreover, the Commission does not believe a greater

bidding credit is justified here as it was for certain highly capital

intensive services, like broadband PCS. Therefore, the Commission

declines to adopt the higher bidding credits proposed by IVDS Licensees

and ITV/IALC.50 The two tiered approach and the magnitude of the

bidding credits the Commission adopts here are reasonable and equitable

and meet the concerns of the commenters. These credits are narrowly

tailored to the varying abilities of businesses to access capital and

also take into account that different small businesses will pursue

different strategies.

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\46\ See IVDS Licensees Comments at 2-3; ITV/IALC Comments at 6.

\47\ See IVDS Licensees Comments at 3 (quoting 47 U.S.C. Section

309(j)(4)(C)(ii)).

\48\ See id. (quoting DEF Report and Order, 11 FCC Rcd at 7849).

\49\ 900 SMR Auction Report and Order, 11 FCC Rcd at 2700.

\50\ IVDS Licensees Comments at 3; ITV/IALC Comments at 6

(suggesting a 25 percent bidding credit for very small businesses

and a 15 percent credit for small businesses).

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III. Upfront Payments

19. Background. The Commission recognized in the FNPRM that in

order to deter insincere, speculative bidding and guard against the

substantial number of defaults that occurred after the July 1994

auction, it needs to obtain a higher upfront payment from IVDS bidders

than the upfront payment currently required by the rules (i.e., $2,500

for every five licenses a bidder desires to win). In response to

several ex parte filings from IVDS bidders supporting increased upfront

payments, the Commission proposed to increase the initial upfront

payment to $9,000 per MSA license and $2,500 per RSA license, for the

maximum number of licenses on which the applicant wishes to bid.

20. Discussion. Based upon the record regarding IVDS upfront

payment amounts,51 the Commission adopts the proposed upfront

payment amounts and will amend Section 95.816(c)(3) of the Commission's

Rules. Specifically, the Commission raises the initial upfront payments

for participation in the IVDS auction to $9,000 per MSA license and

$2,500 per RSA license, for the maximum number of licenses on which an

entity wishes to bid. The Commission believes that this action is

consistent with the underlying purpose for upfront payments--to deter

insincere and speculative bidding and to ensure that bidders have the

financial capability to build out their systems.52 The Commission

also believes that the revised upfront payments will continue to

attract as many qualified bidders, while providing an adequate

deterrent against frivolous bidding. Thus, the Commission declines to

adjust the upfront payment amounts as proposed by ITV/IALC.53

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\51\ IVDS Licensees Comments at 3; IAC Comments at 9; ITV/IALC

Comments at 6-7; FNPRM at n.140 (list of ex parte filings supporting

increased upfront payments).

\52\ See, e.g., DEF Report and Order, 11 FCC Rcd at 7860.

\53\ ITV/IALC Comments at 6-7 (proposing that the MSA payment be

an even multiple of the RSA payment, e.g., per-market payments of

$7,500.00 for MSA's and $2,500.00 for RSA's, to reduce computational

complexity in figuring bidding eligibility as the auction proceeds

and to avoid ``stranding'' MSA upfront payments with no ability to

apply the entire amount to an RSA license).

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IV. Other Issues

21. Several commenters raise issues beyond the scope of the FNPRM.

For example, Progressive and IAC request that the Commission revise the

length of the IVDS license terms from 5 to 10 years.54 This

proposal requires formal rule making procedures and is beyond the scope

of this proceeding. Similarly, ITV/IALC seeks an exception to the

cross-ownership rule.55 Again, this type of relief falls outside

the scope of this proceeding. Finally, a number of policy questions

were raised in the comments regarding default issues.56 The

Commission notes that it will be addressing default issues in a future

proceeding regarding the general competitive bidding rules.

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\54\ Progressive Comments at 1; IAC Reply Comments at 4.

\55\ ITV/IALC Comments at 3-5.

\56\ IAC Comments at 7-8 (request not to reauction defaulted

licenses before the defaulting party's administrative and judicial

remedies are exhausted); id. at 9 (request the Commission clarify

how it evaluates requests for waiver of payment deadlines and other

IVDS auction-related rules); ITV/IALC Comments at 2 (request that

defaulting parties should not be eligible for future IVDS auctions);

IAC Reply Comments at 2-4 (opposition to ITV/IALC's request).

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V. Procedural Matters and Ordering Clauses

22. As required by the Regulatory Flexibility Act of 1980 (RFA), 5

U.S.C. Section 603, an Initial Regulatory Flexibility Analysis (IRFA)

was incorporated in the FNPRM. The Commission sought written public

comments on the expected impact of the rule changes proposed in the

FNPRM on small entities, including on the IRFA. The Commission's Final

Regulatory Flexibility Analysis (FRFA) in this Tenth Report and Order

conforms to the RFA, 5 U.S.C. Section 604, as amended by the Contract

with America Advancement Act of 1996 (CWAAA), Public Law No. 104-121,

110 Stat. 847 (1996).57

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\57\ Subtitle II of the CWAAA is ``The Small Business Regulatory

Enforcement Fairness Act of 1996'' (SBREFA), codified at 5 U.S.C.

Section 601, et seq.

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A. Need for and Objective of the Rules

23. This Tenth Report and Order adopts rule changes regarding the

Commission's auction of IVDS licenses. The rule changes are appropriate

because laws have changed since the rules were originally adopted. The

Supreme Court's decisions in Adarand 58 and VMI 59 raised

questions about the level of legal scrutiny that must be met by some of

the designated entity provisions in the Commission's rules which take

race and gender into account. The objective of the rule changes in the

Tenth Report and Order primarily is to ensure that the competitive

bidding rules comply with the appropriate legal standards by making the

rules race- and gender-neutral, while at the same time instituting

further rule changes that continue to promote participation of small

businesses in auctions for licenses to provide spectrum services.

Further, a secondary objective of some of the rule changes, such as the

small business definition, availability of bidding credits, and

increased upfront payments, is to apply the benefit of the

[[Page 60203]]

Commission's experience from the first IVDS auction to subsequent IVDS

auctions, and to increase the flexibility and opportunities available

to small businesses to participate in the provision of the services.

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

\58\ 115 S. Ct. 2097.

\59\ 116 S. Ct. 2264.

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B. Summary of Issues Raised by Public Comment on the Initial Regulatory

Flexibility Analysis

24. There were no petitions or comments which solely discussed or

addressed the IRFA. However, a number of commenters raised and

discussed issues effecting small businesses in their comments on the

Tenth Report and Order. Those comments are addressed and discussed,

where applicable, in the detailed sections below.

C. Projected Reporting, Recordkeeping and Other Compliance Requirements

of the Rules

25. The small businesses which choose to participate in these

services will be required to demonstrate that they meet the criteria

set forth to qualify as small businesses (or very small businesses),

just as was required by the prior rules. The changed rules will include

more businesses in the category of small businesses, which will be

eligible for designated entity preferences such as bidding credits and

installment payment plans. Any small business applicant wishing to

avail itself of those provisions will need to make the general

financial disclosures, as well as applicant and affiliate disclosures,

necessary to establish that the small business is in fact small (or

very small). The changed rules have eliminated the requirements that

small businesses owned by women or minorities demonstrate that their

owners are women or minorities. However, the Commission requests

voluntary reporting of minority and women ownership to comply with its

mandate to report its efforts to Congress. Accordingly, there are no

additional reporting or recordkeeping requirements being imposed by

these rules.

D. Description and Estimate of Small Entities Subject to the Rules

26. The Commission is directed by the Communications Act of 1934,

47 U.S.C. section 309(j), to make provisions to ensure that smaller

businesses, and other designated entities, have an opportunity to

participate in the auction process. To fulfill this statutory mandate

and comply with the current legal standards, these rule changes are

designed to ensure compliance with the new legal standards while

promoting participation by small entities, including minorities, women,

and rural telephone companies. The small businesses who will be subject

to the rules would be those which choose to operate IVDS, a class of

wireless communications services with a wide variety of uses. The

services will generally be offered to consumers who wish to subscribe

to those services.

27. IVDS is a communications-based service subject to regulation as

a wireless provider of pay television services under Standard

Industrial Classification 4841 (SIC 4841), which covers subscription

television services.60 The U.S. Small Business Administration

(SBA) defines small businesses in SIC 4841 as businesses with annual

gross revenues of $11 million or less. 13 CFR section 121.201. In this

Tenth Report and Order, the Commission extends special provisions to

small businesses with annual gross revenues of $15 million or less and

additional benefits to very small businesses with annual gross revenues

of $3 million or less. The Commission observes that this rule change is

consistent with its approach in other wireless services, e.g., the 900

MHz specialized mobile radio service, and is narrowly tailored to

address the lower capital requirements for IVDS. SBA approval for the

small business definitions is pending for this and other auctionable

services.

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\60\ Generally, IVDS services will be subscriber-based services

providing video communications which could be described as a form of

subscription television service.

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

28. The Commission's estimate of the number of small business

entities subject to the rules begins with the Bureau of Census report

on businesses listed under SIC 4841, subscription television services.

The total number of entities under this category is 1,788.61 There

are 1,463 companies in the 1992 Census Bureau report which are

categorized as small businesses providing cable and pay TV

services.62 The Commission knows that many of these businesses are

cable and television service businesses, rather than IVDS licensees.

Therefore, the number of small entities currently in this business

which will be subject to the rules will be less than 1,463.

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\61\ U.S. Small Business Administration 1992 Economic Census

Industry and Enterprise Report, Table 2D, SIC Code 4841 (Bureau of

the Census data adapted by the Office of Advocacy of the U.S. Small

Business Administration).

\62\ The Census table divides those companies by the amount of

annual receipts. There is a dividing point at companies with annual

receipts of $10 million. The next increment is annual receipts of

$17 million, a category that greatly exceeds the SBA definition of

small businesses that provide subscription television services.

However, there are 17 firms in this category, with revenues between

$10-$17 million. Approximately 1,480 SIC 4841 category firms have

annual gross receipts of $15 million or less. Only a small fraction

of those 1,480 firms provide interactive video and data services.

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29. The first IVDS auction resulted in 170 entities winning

licenses for 594 MSA licenses. Of the 594 licenses, 557 were won by

entities qualifying as a small business. For that auction, the

Commission defined a small business as an entity, together with its

affiliates, that has no more than a $6 million net worth and, after

federal income taxes (excluding any carry over losses), has no more

than $2 million in annual profits each year for the previous two

years.63 In the upcoming IVDS re-auction of approximately 100

licenses in MSA markets and auction of 856 licenses in RSA markets (two

licenses in each of 428 markets), while the Commission makes the rules

race and gender-neutral, it also modifies its definition of small

business to include a second tier of very small businesses, adopts

tiered bidding credits, and continues to include provisions for

installment payments in its rules to encourage participation by small

and very small businesses. The Commission cannot estimate, however, the

number of licenses that will be won by entities qualifying as small or

very small businesses under the rules. Given the success of small

businesses in past IVDS auctions, and that small businesses comprise

over 80 percent of firms in the subscription television services

industry, the Commission assumes for purposes of this FRFA that all of

the licenses may be awarded to small businesses, which would be

affected by the rule changes it has made. Some companies may win more

than one license, as was the situation in the earlier IVDS auction.

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\63\ Fourth Report and Order, 9 FCC Rcd at 2336.

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30. Applicants seeking to participate in the auction also will be

subject to these rule changes. It is impossible to accurately predict

how many small businesses will apply to participate in the auction. In

the last IVDS auction, there were 289 qualified applicants. The

Commission does not anticipate that there will be significantly more

participants in the subsequent IVDS auction. However, because of the

lower capital requirements for IVDS in general, there may be a greater

number of very small businesses participating.

E. Steps Taken to Minimize the Burdens on Small Entities

31. The changes made in the Tenth Report and Order are designed to

ensure compliance with the current legal standards applicable to

federal programs implemented to benefit minority and women-owned

businesses, while minimizing burdens on small

[[Page 60204]]

businesses and promoting participation of small businesses in spectrum

auctions. The extension of a two-tiered definition for small

businesses, as well as the provision for tiered bidding credits will

assist businesses owned by women and minorities. Based upon experience

to date, most of the businesses owned by women and minorities which

have participated in the Commission's auctions are small businesses or

very small businesses which, in the end, will benefit from these rule

changes. As discussed below, the Commission considered and rejected

alternatives, such as providing parties additional time to supplement

the record or to afford the industry more time to develop technology

and equipment, because there is no evidence that, given additional

time, the record will be sufficiently supplemented or the industry will

develop the technology any faster. While some may argue that the

increase in upfront payments may raise some entry barriers, such

concerns are outweighed by the need to maintain the integrity of the

auction process to ensure sincere bidders and, thus, create increased

opportunities for sincere small business bidders. Furthermore, the rule

change increasing the upfront payment amounts will ultimately benefit

the entities participating in the IVDS auctions, by ensuring that the

participants have the financial ability to pay for the licenses for

which they bid.

F. Significant Alternatives Considered and Rejected

Eliminating the Race and Gender-Based Provisions

32. In the Tenth Report and Order, the Commission concludes that

the possibility of legal challenges to the rules due to the race and

gender-based provisions could cause lengthy delays in issuing licenses

in this service and, therefore, revises those provisions in its

competitive bidding rules to make them race and gender-neutral. The

Commission has not been able to consider other alternatives to the rule

changes given that no alternatives were proposed by any of the

commenters, and the record was not supplemented during this proceeding

with any additional evidence of market entry barriers, anecdotal or

statistical evidence or any other factors which directly adversely

effect small businesses owned by minorities and/or women. Although one

commenter requested that the Commission provide parties with additional

time to supplement the record, and another requested that the

Commission delay any rule making determinations to afford the industry

additional time to develop equipment and technology for implementing

IVDS, the Commission rejected these requests, because there is no

evidence the record will be sufficiently supplemented or the industry

will develop the technology any faster. The Commission notes that it is

currently gathering evidence, through a Notice of Inquiry proceeding

pursuant to the Telecommunications Act of 1996, on barriers to market

entry for small businesses, including those owned by women and

minorities.64 The Commission believes that the rule changes

discussed below (for example, offering bidding credits based upon an

entity's size) will more than adequately benefit small businesses that

are owned by minorities or women.

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\64\ Section 257 Notice of Inquiry.

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Adoption of Two-Tiered Definition for Small Businesses

33. The Tenth Report and Order adopts a two-tiered definition to

define small businesses: (1) a small business is a business with

average gross revenues for each of the preceding three years that do

not exceed $15 million, and (2) a very small business is one which has

less than an average of $3 million in gross revenues in each of the

last three years. The Commission adopts this two-tiered definition

because its ongoing experience with spectrum auctions has affirmed its

belief that gross revenues-based definitions are a more accurate

indicator of size than a net worth/annual profit definition. Also, this

definition is consistent with the carefully-analyzed approach used in

other auctionable mobile radio services such as 900 MHz SMR

services.65 Although one commenter suggested altering the

financial thresholds for determining whether an entity is a ``small

business'' or ``very small business'' under the proposed definition,

the Commission believes that the adopted two-tiered definition is

appropriate given the likely participants in this auction and the

Commission's desire to maintain consistency between auctions. In

determining whether an entity qualifies as a small business under

either tier, the Commission will attribute the gross revenues of all

controlling principals, as well as the gross revenues of affiliates of

the applicant. Also, the Commission will use the multiplier adopted in

the CMRS Third Report and Order for the spectrum aggregation cap to

determine when IVDS licensees are indirectly held through corporate

entities. While the Commission chose not to impose specific equity

requirements on the controlling principals of qualifying small

businesses, it will still require that qualifying small businesses are

actually ``controlled'' by their principals.

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\65\ 900 SMR Auction Report and Order.

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Adoption of Tiered Bidding Credits

34. The Commission adopted tiered small business bidding credits

for the upcoming IVDS auction as follows: (1) 10 percent bidding

credits for small businesses and (2) 15 percent for very small

businesses. Although a few commenters proposed higher percentages for

each tier of bidding credits offered (for example, 15 percent for small

businesses and 25 percent for very small businesses), the Commission

declines to adopt their proposals because it does not believe a greater

bidding credit is justified here as it was for certain highly capital

intensive services, like broadband PCS. The Commission believes the

extent, magnitude and range of the bidding credits adopted meet the

varying needs of small and very small businesses who will participate

in the IVDS auctions.

Increase in Upfront Payment Amounts

35. The Tenth Report and Order adopts increased upfront payment

amounts of $9,000 per MSA license and $2,500 per RSA license for

businesses participating in IVDS auctions. These increased amounts are

designed to maintain the integrity of the auction by minimizing the

adverse impact of participation by speculators and other frivolous

bidders in the IVDS auction. Commenters agree that the previous upfront

payment was too low, and no other alternatives were suggested to deter

speculative or frivolous bidders who do not meet the commitments they

make in bidding in IVDS auctions. Based upon the record regarding IVDS

upfront payment values, the Commission believes that the revised

upfront payment values are set at appropriate levels and provide an

adequate deterrent against frivolous bidding, and therefore, the

Commission declined to adopt the approach of one commenter who

suggested it modify the multiplier for the MSA payment to an even

multiplier of the RSA payment. Moreover, the impact that increased

upfront payments may have on designated entities will be offset by the

fact that eligible entities may elect to make payments for their

licenses via installment payments, which eligibility shall not be

jeopardized due to normal projected growth of gross revenues and

assets.

[[Page 60205]]

G. Commission's Outreach Efforts to Learn of and Respond to the Views

of Small Entities Pursuant to 5 U.S.C. Section 609

36. The Commission sought specific comments regarding the views of

small entities with respect to the changes being made through

solicitation of comments and reply comments to its FNPRM, and the IRFA

that was contained therein. Although there were no comments on the

IRFA, there were a number of comments received in connection with the

FNPRM as noted herein. Further, the Commission's Office of

Communications and Business Opportunities has undertaken additional

outreach efforts through newsletters and other mailings to learn of the

views of, and respond to, small entities.

H. Report to Congress

37. The Commission shall send a copy of this Final Regulatory

Flexibility Analysis, along with this Tenth Report and Order, in a

report to Congress pursuant to the SBREFA, 5 U.S.C. Section

801(a)(1)(A). A copy of this Final Regulatory Flexibility Analysis will

also be published in the Federal Register.

38. Authority for issuance of this Tenth Report and Order is

contained in Sections 4(i), 303(r), and 309(j) of the Communications

Act of 1934, as amended, 47 U.S.C. Sections 154(i), 303(r) and 309(j).

39. Accordingly, IT IS ORDERED that, pursuant to the authority of

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

amended, 47 U.S.C. Sections 154(i), 303(r), and 309(j), this Tenth

Report and Order is adopted, and Part 95 of the Commission's Rules IS

AMENDED as set forth below.

40. IT IS FURTHER ORDERED that the rule changes made herein WILL

BECOME EFFECTIVE December 27, 1996.

41. For further information concerning this proceeding, contact

Howard Griboff or Christina Eads Clearwater at (202) 418-0660 (Auctions

Division, Wireless Telecommunications Bureau).

List of Subjects in 47 CFR Part 95

Communications equipment, Radio.

Federal Communications Commission

William F. Caton,

Acting Secretary.

Rule Changes

Part 95 of Chapter I of Title 47 of the Code of Federal Regulations

is amended as follows:

PART 95--PERSONAL RADIO SERVICES

1. The authority citation for Part 95 continues to read as follows:

Authority: Secs. 4, 303, 48 Stat. 1066, 1082, as amended; 47

U.S.C. 154, 303.

2. Section 95.816 is amended by revising paragraphs (c)(3) and

(d)(1), adding new paragraph (d)(4), redesignating paragraph (e) as

paragraph (e)(1) and revising it, and adding new paragraph (e)(2) to

read as follows:

Sec. 95.816 Competitive bidding proceedings.

* * * * *

(c) * * *

(3) Upfront payments. Each eligible bidder in the IVDS auction will

be required to submit an upfront payment of $9,000 per MSA license and

$2,500 per RSA license for the maximum number of licenses on which it

intends to bid pursuant to section 1.2106 of this chapter and

procedures specified by Public Notice.

* * * * *

(d) * * *

(1) Bidding credits.

(i) A winning bidder that qualifies as a small business (as defined

in 95.816(d)(4)(i) of this section) may use a bidding credit of 10

percent to lower the cost of its winning bid.

(ii) A winning bidder that qualifies as a very small business (as

defined in 95.816(d)(4)(ii) of this section) may use a bidding credit

of 15 percent to lower the cost of its winning bid.

* * * * *

(4) Definitions.

(i) Small business. A small business is an entity that, together

with its affiliates and persons or entities that hold interests in such

entity and their affiliates, has average annual gross revenues that are

not more than $15 million for the preceding three years.

(ii) Very small business. A very small business is an entity that,

together with its affiliates and persons or entities that hold

interests in such entity and their affiliates, has average annual gross

revenues that are not more than $3 million for the preceding three

years.

(iii) Gross revenues. Gross revenues shall mean all income received

by an entity, whether earned or passive, before any deductions are made

for costs of doing business (e.g., cost of goods sold), as evidenced by

audited financial statements for the relevant number of most recently

completed calendar years, or, if audited financial statements were not

prepared on a calendar-year basis, for the most recently completed

fiscal years preceding the filing of the applicant's short-form

application (Form 175). If an entity was not in existence for all or

part of the relevant period, gross revenues shall be evidenced by the

audited financial statements of the entity's predecessor-in-interest

or, if there is no identifiable predecessor-in-interest, unaudited

financial statements certified by the applicant as accurate. When an

applicant does not otherwise use audited financial statements, its

gross revenues may be certified by its chief financial officer or its

equivalent.

(iv) Controlling interest shall be attributable. Controlling

interest means majority voting equity ownership, any general

partnership interest, or any means of actual working control (including

negative control) over the operation of the licensee, in whatever

manner exercised.

(v) Multiplier. Ownership interests that are held indirectly by any

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 and application of the relevant

attribution benchmark to the resulting product, except that if the

ownership percentage for an interest in any link in the chain exceeds

50 percent or represents actual control, it shall be treated as if it

were a 100 percent interest.

(e) Unjust enrichment.

(1) Any business owned by minorities and/or women that has obtained

a IVDS license in the IVDS auction held in July 1994 through the

benefit of tax certificates shall not assign or transfer control of its

license within one year of its license grant date. If the assignee or

transferee is a business owned by minorities and/or women, this

paragraph shall not apply; provided, however, that the assignee or

transferee shall not assign or transfer control of the license within

one year of the grant date of the assignment or transfer.

(2) A licensee's (or other attributable entity's) increased gross

revenues due to nonattributable equity investments (i.e., from sources

whose gross revenues are not considered under 95.816(d)(4)(iv) of this

section), debt financing, revenue from operations or other investments,

business development or expanded service shall not be considered to

result in the licensee losing eligibility for preferences as a small

business or very small business under this section.

[FR Doc. 96-30358 Filed 11-26-96; 8:45 am]

BILLING CODE 6712-01-P