[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21015]


[[Page Unknown]]

[Federal Register: August 26, 1994]


=======================================================================
-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 24

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

 

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

AGENCY: Federal Communications Commission.

ACTION: Further notice of proposed rulemaking.

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

SUMMARY: In this Third Memorandum Opinion and Order and Further Notice 
of Proposed Rulemaking, the Commission seeks comment on certain 
proposals to increase opportunities for smaller entities, including 
entities owned by minorities and women to participate in narrowband PCS 
auctions and in the provision of narrowband PCS services. These 
proposed rules will promote economic opportunity and competition, and 
disseminate licenses among a wide variety of applicants, including 
small business and businesses owned by members of minority groups and 
women.

DATES: Comments are due September 16, 1994; Reply comments are due on 
October 3, 1994.

FOR FURTHER INFORMATION CONTACT: Jackie Chorney Office of Plans and 
Policy, (202) 418-2030.

SUPPLEMENTARY INFORMATION: Pursuant to applicable procedures set forth 
in Sections 1.415 and 1.419 of the Commission's Rules, 47 CFR 1.415 and 
1.419, interested parties may file comments on or before September 16, 
1994 and reply comments on or before October 3, 1994. To file formally 
in this proceeding, you must file an original and four copies of all 
comments, reply comments, and supporting comments. If you want each 
Commission to receive a personal copy of your comments, you must file 
an original plus nine copies. You should send comments and reply 
comments to Office of the Secretary, Federal Communications Commission, 
Washington, DC 20554. Comments and reply comments will be available for 
public inspection during regular business hours in the FCC Reference 
Center of the Federal Communications Commission, Room 239, 1919 M 
Street, NW., Washington, DC 20554. The complete text of this document 
may be purchased from the Commission's copy contractor, International 
Transcription Service, 1919 M Street, Room 236, Washington, DC 20554, 
telephone (202) 857-3800.

    In the matter of Implementation of Section 309(j) of the 
Communications Act--Competitive Bidding Narrowband PCS, PP Docket 
No. 93-253 and Amendment of the Commission's Rules to Establish New 
Narrowband Personal Communication Services, GEN Docket No. 90-314, 
ET Docket No. 92-100.

Third Memorandum Opinion and Order and Further Notice of Proposed 
Rulemaking

    Adopted: August 16, 1994.
    Released: August 17, 1994.
    Comment Date: September 16, 1994.
    Reply Comment Date: October 3, 1994.
    By the Commission:

Table of Contents

I. Proposed designated entity provisions for MTA and BTA auctions      1
  A. Introduction................................................      1
  B. Summary of special provisions for designated entities.......      8
  C. Summary of eligibility requirements and definitions.........     16
    1. Entrepreneurs' blocks and small business eligibility......     16
    2. Definition of women and/or minority-owned business........     17
  D. The entrepreneurs' blocks...................................     19
  E. Bidding credits.............................................     24
  F. Installment payments........................................     29
  G. Upfront payments............................................     36
  H. Definitions and Eligibility.................................     38
    1. Eligibility to bid in the entrepreneurs' blocks...........     38
    2. Attribution rules for the entrepreneurs' blocks...........     39
    3. Definition of women and minority-owned business...........     44
    4. Definition of an affiliate................................     55
  I. Limit on licenses awarded in entrepreneurs' blocks..........    I56
  J. Redesignated of certain narrowband PCS spectrum blocks......     59
II. Procedural matters...........................................     60
  A. Further notice--initial analysis............................     60
  B. Ex parte rules..............................................     67
  C. Comment dates...............................................     68
                                                                        

I. Proposed Designated Entity Provisions for MTA and BTA Auctions

A. Introduction

    1. In the Budget Act, Congress recognized the novelty of auctions 
as a licensing method and encouraged us to experiment with a variety of 
techniques to ensure that small businesses and those owned by women and 
minorities have an opportunity to participate in spectrum-based 
services. While we believe that measures taken with respect to the 
regional narrowband PCS auctions will provide substantial opportunities 
for designated entities to participate in narrowband PCS, we seek 
comment on whether it may be necessary to adopt alternative provisions 
such as entrepreneurs' blocks or higher bidding credits to encourage 
investment in minority- and women-owned businesses in future auctions. 
As we have learned, narrowband PCS licenses may be auctioned for large 
sums of money in the competitive bidding process. It therefore may be 
necessary to do more to ensure that designated entities have the 
opportunity to participate in narrowband PCS than may be necessary in 
other, less costly spectrum-based services. In our view, we must 
consider whether these steps and any others we may adopt are required 
to fulfill Congress's mandate that designated entities have the 
opportunity to participate in the provision of PCS. We believe that the 
measures we propose today would increase the likelihood that designated 
entities will win licenses in the auctions and become strong 
competitors in the provision of narrowband PCS service. We also will 
review the results of the regional auction in making our decision on 
the rules proposed in this Further Notice.
    2. As we noted in the Fifth Report and Order, by instructing the 
Commission to ensure the opportunity for designated entities to 
participate in auctions and spectrum-based services, Congress was well 
aware of the difficulties these groups encounter in accessing 
capital.\1\ Indeed, less than two years ago, Congress made specific 
findings in the Small Business Credit and Business Opportunity 
Enhancement Act of 1992, that ``small business concerns, which 
represent higher degrees of risk in financial markets than do large 
businesses, are experiencing increased difficulties in obtaining 
credit.''\2\ Because of these problems, Congress resolved to consider 
carefully legislation and regulations ``to ensure that small business 
concerns are not negatively impacted'' and to give priority to passage 
of ``legislation and regulations that enhance the viability of small 
business concerns.''\3\
---------------------------------------------------------------------------

    \1\Fifth Report and Order at 97, in PP Docket No. 93-253, FCC 
94-178, adopted June 29, 1994, released July 15, 1994, 59 FR 37566 
(Jul 29, 1994), (Fifth Report and Order).
    \2\Small Business Credit and Business Opportunity Enhancement 
Act of 1992, Section 331(a)(3), Pub. Law 102-366, Sept. 4, 1992.
    \3\Id., Section 441(b)(2),(3).
---------------------------------------------------------------------------

    3. Congress also recognized that these funding problems are even 
more severe for minority and women-owned businesses, who face 
discrimination in the private lending market. For example, Congress 
explicitly found that businesses owned by minorities and women have 
particular difficulties in obtaining capital and that problems 
encountered by minorities in this regard are ``extraordinary.''\4\ A 
number of studies also amply support the existence of widespread 
discrimination against minorities in lending practices. As we noted in 
the Fifth Report and Order, in October, 1992, the year prior to passage 
of the auction law, the Federal Reserve Bank of Boston released an 
important and highly-publicized study demonstrating that a black or 
Hispanic applicant in the Boston area is roughly 60 percent more likely 
to be denied a mortgage loan than a similarly situated white 
applicant.\5\ The researchers measured every variable mentioned as 
important in numerous conversations with lenders, underwriters, and 
examiners and found that minority applicants are more likely to be 
denied mortgages even where they have the same obligation ratios, 
credit history, loan to value and property characteristics as white 
applicants. The lending discrimination that occurs, the study found, 
does not involve the application of specific rules, but instead occurs 
where discretionary decisions are made. Based on the Boston study, we 
found that it is reasonable to expect that race will affect business 
loans that are based on more subjective criteria to an even greater 
extent than the mortgage loan process, which uses more standard rules.
---------------------------------------------------------------------------

    \4\Id., Section 12(4); 331(a)(4).
    \5\Mortgage Lending in Boston: Interpreting HMDA Data, Federal 
Reserve Bank of Boston, Working Paper 92-7 (October 1992).
---------------------------------------------------------------------------

    4. Similarly, evidence presented in testimony before the House 
Minority Enterprise Subcommittee on May 20, 1994 indicates that African 
American business borrowers have difficulty raising capital mainly 
because they have less equity to invest, they receive fewer loan 
dollars per dollar of equity investment, and they are less likely to 
have alternate loan sources, such as affluent family or friends. 
Assuming two hypothetical college-educated, similarly situated male 
entrepreneurs, one black, one white, the testimony indicated that the 
white candidate would have access to $1.85 in bank loans for each 
dollar of owner equity invested, while the black candidate would have 
access to only $1.16. According to the testimony, the problems 
associated with lower incomes and intergenerational wealth, as well as 
the discriminatory treatment minorities receive from financial 
institutions, make it much more likely that minorities will be shut out 
of capital intensive industries, such as telecommunications. This 
testimony also noted that African American representation in 
communications is so low that it was not possible to generate 
meaningful summary statistics on underrepresentation.\6\
---------------------------------------------------------------------------

    \6\Testimony of Dr. Timothy Bates, Visiting Fellow, The Woodrow 
Wilson Center, before the U.S. House of Representatives Committee on 
Small Business, Subcommittee on Minority Enterprise, Finance, and 
Urban Development (House Minority Enterprise Subcommittee), May 20, 
1994.
---------------------------------------------------------------------------

    5. We also stated in the Fifth Report and Order that inability to 
access capital is also a major impediment to the successful 
participation of women in PCS auctions. In enacting the Women's 
Business Ownership Act in 1988, Congress made findings that women, as a 
group, are subject to discrimination that adversely affects their 
ability to raise or secure capital.\7\ AWRT documents that these 
discriminatory barriers still exist today. Indeed, AWRT reports that 
while venture capital is an important source of funding for 
telecommunications companies, women-owned companies received only 
approximately one percent of the $3 billion invested by institutional 
venture capitalists in 1993. Citing a 1992 National Women's Business 
Council report, AWRT further argues that even successful women-owned 
companies did not overcome these financing obstacles after they had 
reached a level of funding and profitability adequate for most other 
businesses.\8\
---------------------------------------------------------------------------

    \7\Pub. L. 100-533 (1988). In 1991, Congress enacted the Women's 
Business Development Act of 1991 to further assist the development 
of small businesses owned by women. See Pub. L. 102-191 (1991).
    \8\See Letter of AWRT to the Honorable Kweisi Mfume, Chairman, 
House Minority Enterprise Subcommittee, June 1, 1994.
---------------------------------------------------------------------------

    6. A study prepared in 1993 by the National Foundation for Women 
Business Owners (NFWBO) further illustrates the barriers faced by 
women-owned businesses. For example, it finds that women-owned firms 
are 22 percent more likely to report problems dealing with their banks 
than are businesses at large. In addition, the NFWBO study finds that 
the largest single type of short-term financing used by women business 
owners is credit cards and that over half of women-owned firms use 
credit cards for such purposes, as compared to 18 percent of all small 
to medium-sized businesses, which generally use bank loans and vendor 
credit for short-term credit needs. With regard to long-term financing, 
the study states that a greater proportion of women-owned firms are 
turning, or are forced to turn, to private sources, and to a wider 
variety of sources, to fulfill their needs. Based on these findings, 
the NFWBO study concludes that removal of financial barriers would 
encourage stronger growth among women-owned businesses, resulting in 
much greater growth throughout the economy.\9\
---------------------------------------------------------------------------

    \9\See The National Foundation for Women Business Owners, 
Financing the Business, A Report on Financial Issues from the 1992 
Biennial Membership Survey of Women Business Owners, October 1993.
---------------------------------------------------------------------------

    7. If we are to meet the congressional goals of promoting economic 
opportunity and competition by disseminating licenses among a wide 
variety of providers, we must find ways to counteract effectively these 
barriers to entry. As chronicled in the Fifth Report and Order, both 
Congress and the Commission have tried various methods to enhance 
access to the broadcast and cable industries by minorities and 
women.\10\ These efforts however, have met with limited success. The 
record shows that women and minorities have not gained substantial 
ownership representation in either the broadcast or non-broadcast 
telecommunications industries. For example, a 1993 report conducted by 
the National Telecommunications and Information Administration's (NTIA) 
Minority Telecommunications Development Program shows that, as of 
August 1993, only 2.7 percent of commercial broadcast stations were 
owned by minorities. Another study commissioned by the Commerce 
Department's Minority Business Development Agency in 1991 found that 
only one half of one percent of the telecommunications firms in the 
country were minority owned. The study also identified only 15 minority 
cable operators and 11 minority firms engaged in the delivery of 
cellular, specialized mobile radio, radio paging or messaging services 
in the United States.\11\ And, according to the last available U.S. 
Census, only 24 percent of the communications firms in the country were 
owned by women, and these women-owned firms generated only 
approximately 8.7 percent of the revenues earned by communications 
companies.\12\ When companies without paid employees are removed from 
the equation, firms with women owners represent only 14.5 percent of 
the communications companies in the country.\13\ One result of these 
low numbers is that there are very few minority or women-owned 
businesses that bring experience or infrastructure to narrowband PCS. 
They thus face an additional barrier relative to many existing service 
providers.
---------------------------------------------------------------------------

    \10\See Fifth Report and Order at 103-106.
    \11\See Testimony of Larry Irving, Assistant Secretary for 
Communications and Information, U.S. Department of Commerce, before 
the House Minority Enterprise Subcommittee, May 20, 1994. In his 
testimony at this same hearing, FCC Chairman Reed Hundt cited some 
of these statistics and noted that in light of this serious 
underrepresentation, there remains ``a fundamental obligation for 
both Congress and the FCC to examine new and creative ways to ensure 
minority opportunity.'' Testimony of Reed E. Hundt, Chairman, 
Federal Communications Commission, before the House Minority 
Enterprise Subcommittee, May 20, 1994.
    \12\See Women-Owned Businesses, 1987 Economic Censuses, U.S. 
Department of Commerce, issued August 1990, at 7,147. The census 
data includes sole proprietorships, partnerships, and subchapter S 
corporations. We have no statistics regarding women representation 
among owners of larger communications companies.
    \13\Id.
---------------------------------------------------------------------------

    8. Small businesses also have not become major participants in the 
telecommunications industry. For instance, one commenter asserts that 
ten large companies--six Regional Bell Operating Companies (RBOCs), 
AirTouch (formerly owned by Pacific Telesis), McCaw, GTE and Sprint--
control nearly 86 percent of the cellular industry. This commenter 
further contends that nine of these ten companies control 95 percent of 
the cellular licenses and population in the 50 BTAs that have one 
million or more people.\14\
---------------------------------------------------------------------------

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

    9. In the new auction law, Congress directed the Commission to 
remedy this serious imbalance in the participation by certain groups, 
especially minorities and women. The auction law itself contemplates 
that requiring payment for initial licenses through competitive 
bidding, unlike existing licensing methods such as comparative hearings 
or lotteries, may inhibit participation by those with limited access to 
capital and could further diminish opportunities for designated 
entities. The first nationwide auction demonstrated that a 25 percent 
bidding credit may not be sufficient to ensure that designated entities 
have the opportunity to participate where narrowband PCS values are 
high. The regional auctions will demonstrate whether a 40 percent 
bidding credit for women- and minority-owned firms combined with 
installment payments for eligible small businesses is sufficient to 
provide meaningful opportunities for designated entities at the 
regional level. We further propose to examine the use of measures we 
specified in the Fifth Report and Order to carry out Congress's 
directive to provide meaningful opportunities for small entities and 
businesses owned by women and minorities to provide PCS services. If, 
based on the results of the regional auction, we conclude that the 40 
percent bidding credit is insufficient, we may decide that these 
measures, which are expressly designed to address the funding problems 
faced by these groups, may be necessary to achieve Congress's goals 
with respect to narrowband PCS.

B. Summary of Special Provisions for Designated Entities

    10. While there was significant designated entity participation in 
the nationwide narrowband PCS auction, we are concerned that the high 
license values in that auction and the substantial involvement by 
large, incumbent firms with significant financial resources suggests 
that designated entities may have difficulties in competing in future 
narrowband PCS auctions. We recognize that larger incumbent firms are 
able to pay much higher license prices than smaller firms because of 
the significant infrastructure and cost of capital advantages these 
firms enjoy. Because of these factors, we believe that additional 
measures may be necessary to achieve Congress's mandate that we ensure 
the opportunity for designated entities to participate in the 
competitive bidding process and in the provision of spectrum-based 
services. In this regard, we propose additional provisions for 
businesses owned by women and/or minorities and small businesses 
similar to those employed in the auction rules for broadband PCS.
    11. To fulfill Congress's mandate that we ensure that designated 
entities have the opportunity to participate in providing narrowband 
PCS; we propose to reserve up to four MTA frequency blocks--19, 21, 22 
and 24--, and both BTA frequency blocks--25 and 26--for bidding 
exclusively by entities with annual gross revenues of less than $125 
million and total assets of less than $500 million (``entrepreneurs' 
blocks''). We believe that excluding large companies from bidding in 
the proposed entrepreneurs' blocks, and limiting the total number of 
licenses that one entity can obtain in these blocks, would 
significantly enhance opportunities for smaller entities to become PCS 
providers and thereby ensure that narrowband PCS licenses will be 
disseminated ``among a wide variety of applicants,'' as required by 
Section 309(j)(3)(B).
    12. We recognize, however, that reserving blocks for bidding only 
by relatively small companies may not, by itself, be sufficient to 
ensure that small businesses and businesses owned by members of 
minority groups and women have the opportunity to obtain narrowband PCS 
licenses. Businesses owned by members of minority groups and women face 
discrimination that poses additional obstacles for these firms. 
Accordingly, we propose a number of related steps to assist small 
businesses and businesses owned by woman and/or minorities in 
attracting the capital necessary to obtain a narrowband PCS license.
    13. First, to encourage large companies to invest in designated 
entities and to assist designated entities without large investors to 
overcome the additional hurdle presented by auctions, we propose to 
make bidding credits available to designated entities within the 
entrepreneurs' blocks. More specifically, we propose to provide small 
businesses with a 10 percent bidding credit. Businesses owned by 
minorities and women would receive a 15 percent bidding credit to 
compensate for the substantial problems they face in attracting 
capital.\15\ The credits would be cumulative, so that a business owned 
by minorities or women that also qualified as a small business would 
receive a 25 percent bidding credit. Second, we propose to allow most 
successful bidders within the entrepreneurs' block to pay for their 
licenses in installments and to ``enhance'' those installment payments 
for small businesses and businesses owned by minorities and women by 
varying the moratorium on principal and the interest rate. Third, we 
propose to continue to extend our tax certificate policies to promote 
participation by minorities and women in the provision of narrowband 
PCS. Fourth, we propose to reduce the upfront payment for all eligible 
bidders in the entrepreneurs' blocks from $0.02 per MHz per pop to 
$0.015 per MHz per pop.
---------------------------------------------------------------------------

    \15\Although this bidding credit would be less than the bidding 
credit available for selected nationwide and regional licenses (25 
percent and 40 percent respectively), the 15 percent bidding credit 
would be available within the entrepreneurs' block rather than in a 
block where all companies could participate.
---------------------------------------------------------------------------

    14. Finally, we propose to redesignate the two BTA licenses as 
regional licenses organized in the same configuration set forth in 
Section 24.102 of the rules. We also seek comment on other means to 
achieve larger geographic license sizes such as designating these BTA 
licenses as nationwide licenses or by maintaining the BTA designation, 
but allowing combinatorial bidding for the designated regions. We also 
seek comment on whether some of the MTA and BTA response channels 
should be redesignated as larger license areas with bidding limited 
only to those entities eligible to bid for entrepreneurs' block 
licenses.
    15. The following chart highlights the major provisions proposed 
for businesses bidding in the proposed entrepreneurs' blocks.\16\
---------------------------------------------------------------------------

    \16\This table is not comprehensive and therefore it does not 
present all the provisions established for designated entities, 
especially those available outside the entrepreneurs' blocks.

------------------------------------------------------------------------
                        Bidding                                Tax      
                        credits    Installment payments    certificates 
                       (Percent)                          for investors 
------------------------------------------------------------------------
Entrepreneurial                0  Interest only for 1    No.            
 businesses (in                    year; rate equal to                  
 excess of $40 MM and              10-year Treasury                     
 less than or equal                note plus 2.5                        
 to $125 MM in                     percent; (for                        
 revenue and less                  businesses with                      
 than $500 MM in                   revenues greater                     
 total assets).                    than $75 MM,                         
                                   available only in                    
                                   regional and MTA                     
                                   markets)                             
Small businesses (not         10  Interest only for 2    No.            
 in excess of $40 MM               years; rate equal to                 
 in revenues and less              10-year Treasury                     
 than $500 MM in                   note plus 2.5                        
 total assets).                    percent;                             
Businesses owned by           15  Interest only for 3    Yes.           
 minorities and/or                 years; rate equal to                 
 women (in excess of               10-year Treasury                     
 $40 MM and less than              note;                                
 or equal to $125 MM                                                    
 in revenues and less                                                   
 than $500 MM in                                                        
 total assets).                                                         
Small businesses              25  Interest only for 5    Yes.           
 owned by minorities               years; rate equal to                 
 and/or women (not in              10-year treasury                     
 excess of $40 MM in               note;                                
 revenues and less                                                      
 than $500 MM in                                                        
 total assets.                                                          
------------------------------------------------------------------------

C. Summary of Eligibility Requirements and Definitions

1. Entrepreneurs' Blocks and Small Business Eligibility
    16. The following points summarize the principal rules we propose 
regarding eligibility to bid in the entrepreneurs' blocks and have 
adopted above to qualify as a small business. In addition, they 
summarize the attribution rules we will propose to use to assess 
whether an applicant satisfies the various financial thresholds. More 
precise details are discussed in the subsections that follow.

Proposed Financial Caps

     Entrepreneurs' Blocks: To bid in the entrepreneurs' 
blocks, the applicant, including attributable investors and affiliates, 
must cumulatively have less than $125 million in gross revenues and 
less than $500 million in total assets. No individual attributable 
investor or affiliate may have $100 million or more in personal net 
worth.
     Small Business: To qualify for special measures accorded a 
small business, the applicant, including attributable investors and 
affiliates, must cumulatively have not in excess of $40 million in 
gross revenues. No individual attributable investor or affiliate may 
have in excess of $40 million in personal net worth. (Note: this is the 
small business definition we have adopted above). We seek comments on 
whether in an entrepreneur's block we should define small businesses 
differently.

Proposed Attribution Rules

     Control Group. The gross revenues, total assets and 
personal net worth of certain investors are not considered so long as 
the applicant has a ``control group'' consisting of one or more 
individuals or entities that control the applicant, hold at least 25 
percent of the equity and, for corporations, at least 50.1 percent of 
the voting stock.
     The gross revenues, total assets and personal net worth of 
each member of the control group are counted toward the financial caps.
     Other Investors. Where the applicant has a control group, 
the gross revenues, total assets and personal net worth of any other 
investor are not considered unless the investor holds 25 percent or 
more of the applicant's passive equity (which, for corporations, will 
include as much as 15 percent of the voting stock).
     Passive Equity. Passive equity is limited partnership or 
non-voting stock interests or voting stock interests of 15 percent or 
less of the issued and outstanding voting stock.
     Proposed Option for Minority or Woman-Owned Applicants. If 
the control group (consisting entirely of women and/or minorities) owns 
at least 50.1 percent of the equity and, or corporation, at least 50.1 
percent of the voting stock, then the gross revenues, total assets and 
personal net worth of any other investor are not considered unless the 
investor holds more than 49.9 percent of the applicant's passive equity 
(which, for corporations, includes no more than as 15 percent of the 
voting stock).
     Affiliates. The gross revenues, assets and personal net 
worth of outside interests held by the applicant (and the attributable 
investors in the applicant) are counted toward the financial caps if 
the applicant (or the attributable investors in the applicant) control 
or have power to control the outside interests or if the applicant (or 
the attributable investors in the applicant) is under the control of 
the outside interests. The financial interests of spouses are also 
attributed to each other.
2. Definition of Women and/or Minority-Owned Business
    17. The points below summarize the two structural options proposed 
to be available to firms that wish to qualify for the special 
provisions adopted for businesses owned by minorities and women. These 
options will be discussed in more detail in the text that follows.

50.1 Percent Equity Option

     If woman and/or minority principals control the applicant 
and own at least:
     50.1 percent of the equity, and;
     50.1 percent of the voting stock, in the case of 
corporations.
     Then any other investor may hold:
     not more than 49.9 percent of the passive equity (which, 
for corporations, includes as much as 15 percent of the voting stock).

25 Percent Equity Option

     If women and/or minority principals control the applicant 
and own at least:
     25 percent of the equity, and;
     50.1 percent of the voting stock, in the case of 
corporations.
     Then any other investor may hold:
     25 percent or less of the passive equity (which, for 
corporations, includes as much as 15 percent of the voting stock).
    18. We also request comment on alternatives intended to deter shams 
and fronts and to prevent abuse of the incentives for designated 
entities. The Commission would enforce vigorously any requirements 
adopted. These proposals include a holding and limited transfer period 
for licensees in the entrepreneurs' blocks and repayment provisions 
associated with bidding credits and installment payments. These steps 
and our eligibility and affiliation rules are intended to ensure that 
the benefits of any measures we take flow to the entities Congress 
intended. Ultimately, we believe that we will best fulfill our 
statutory mandate by creating powerful incentives for bona fide 
designated entities to attract the capital necessary to compete both in 
auctions for narrowband PCS and in the provision of service. We 
therefore specifically request that comments address in detail the 
impact any of these alternatives would likely produce on the 
opportunity for designated entities to acquire narrowband PCS licenses.

D. The Entrepreneurs' Blocks

    19. As discussed above, because the auction process itself requires 
additional expenditures of capital to acquire licenses, this new 
licensing procedure in many respects holds the potential to erect an 
additional barrier to entry that had not existed even under the Act's 
previous licensing methods, comparative hearings and lotteries. As 
reflected in the House Committee Report, Congress was well aware of 
that possibility and wanted to ensure that competitive bidding should 
not exclude smaller entities from obtaining licenses.\17\ The inability 
of small businesses and businesses owned by women and minorities to 
obtain adequate private financing creates a serious imbalance between 
these companies and large businesses in their prospects for competing 
successfully in narrowband PCS auctions.
---------------------------------------------------------------------------

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

    20. We anticipate that the results of the narrowband regional 
auctions as well as the comments we seek in this Notice will be 
relevant to our final conclusion of whether an entrepreneurs' block is 
appropriate in narrowband PCS. We seek comments on what results in the 
regional auction would or would not justify the use of an entrepeneurs' 
block in subsequent narrowband auctions. The $125 million gross 
revenue/$500 million asset caps have the effect of excluding the large 
companies that would easily be able to outbid designated entries and 
frustrate Congress' goal of disseminating licenses among a diversity of 
licensees. At the same time, this restriction does not exclude many 
firms that, while not large in comparison with other telecommunications 
companies, nevertheless are likely to have the financial ability to 
provide sustained competition for the PCS licensees. For example, the 
$125 million gross revenue figure corresponds roughly to the 
Commission's definition of a Tier 2, or medium-sized, local exchange 
carrier,\18\ and would include virtually all of the independently owned 
rural telephone companies, while excluding the largest incumbent paging 
licensees. Limiting the personal net worth of any individual investor 
or affiliate of the applicant to $100 million would prevent a very 
wealthy individual from leveraging his or her personal assets to allow 
the applicant to circumvent the size limitations of the entrepeneurs' 
blocks.
---------------------------------------------------------------------------

    \18\Local exchange carriers are categorized as Tier 1 and Tier 2 
companies by applying the criterion that Sections 32.11(a) and 
32.11(e) of the Commission's Rules use to distinguished Class A and 
Class B companies, respectively. Class A companies are those 
companies having annual revenues from regulated telecommunications 
operations of $100 million or more; Class B companies are those 
companies having annual revenues from regulated telecommunications 
operations of less than $100 million. The initial classification of 
a company is determined by its lowest annual operating revenues for 
the five immediately preceding years. A company's classification is 
changed when its annual operating revenue exceeds or is under the 
$100 million mark in each of five consecutive years. The Commission 
imposes more relaxes regulatory requirements on Tier 2 LECs than on 
Tier 1 LECs. See Automated Reporting Requirements for Certain Class 
A and Tier 1 Telephone Companies, 2 FCC Rcd 5770, 5772 (1987), 52 FR 
35918 (Sept. 24, 1987), Commission Requirements for Cost Support 
Material to be Filed with 1994 Annual Access Tariffs and for Other 
Cost Support Material, 9 FCC Rcd 1060 n. 3 (Comm. Carr. Bur. 1994), 
Commission Requirements for Cost Support Material to be Filed with 
Access Tariffs on March 1, 1985, Public Notice, Mimeo No. 2133 
(Comm. Carr. Bur. released Jan. 25, 1985).
---------------------------------------------------------------------------

    21. In determining which of the blocks in each market should 
constitute the entrepreneurs' blocks, we seek to make sufficient 
opportunity available to businesses that would qualify for the 
entrepreneurs' blocks and to those that would not. We seek comment on 
whether it would be appropriate to include all of those remaining 
blocks designated for bidding credits and to add one additional MTA 
block and one additional BTA block if we decide to adopt the proposal. 
We seek comment on the choice of blocks and the number of blocks that 
should be included in the entrepreneurs' blocks. We want to choose 
blocks to provide adequate amounts of spectrum and geographic territory 
necessary to ensure that the eligible bidders will be able to compete 
effectively. We believe that designating a variety of frequency blocks 
as entrepreneurs' blocks would satisfy the needs of those parties who 
believe they must have larger amounts of spectrum to compete 
effectively as well as the needs of other designated entities who 
require smaller blocks. Finally, it would not foreclose opportunities 
for other parties.\19\
---------------------------------------------------------------------------

    \19\In addition, incumbent paging licensees would have the 
opportunity to bed on 2,176 MTA and BTA response channel licenses 
reserved for existing paging licensees.
---------------------------------------------------------------------------

    22. Holding and Limited Transfer Period. Because we interpret the 
congressional goal of giving designated entities the opportunity to 
provide spectrum-based services to extend beyond merely obtaining a 
license, we seek comment on whether we should prohibit licensees in the 
entrepreneurs' blocks from voluntarily assigning or transferring 
control of their licenses for a period of three years from the date of 
the license grant.\20\ We further ask commenters to address whether, 
for the next two to seven years of the license term, we should permit 
the licensee to assign or transfer control of its authorization only to 
an entity that satisfies the entrepreneurs' blocks entry criteria.\21\ 
Comments should address whether any restrictions of this type would 
accurately balance the goal of promoting access to capital by 
designated entities with the need to assure the integrity of our 
process. During this limited transfer period, licensees would continue 
to be bound by the financial eligibility requirements, as set forth 
below.\22\ In addition, a transferee or assignee who receives an 
entrepreneurs' block license during this period would remain subject to 
the transfer restrictions for the balance of the holding period.\23\ 
Should any of these proposals be adopted, the Commission would conduct 
random pre- and post-auction audits to ensure that applicants receiving 
preferences are in compliance with the FCC's rules.
---------------------------------------------------------------------------

    \20\We propose considering exceptions to this three-year holding 
period rule on a case-by-case basis in the event of a judicial order 
decreeing bankruptcy or a judicial foreclosure if the licensee 
proposes to assign or transfer its authorization to an entity that 
meets the financial thresholds for bidding in the entrepreneurs' 
blocks. In addition, we note that a transfer is considered 
``involuntary'' if it is made pursuant to a court decree requiring 
the sale or transfer of the licensee's stock or assets. Paramount 
Pictures, Inc., 43 FCC 453 (1949); Cf. William Penn Broadcasting, 16 
FCC 2d 1050 (1969).
    \21\We note that a licensee assigning its authorization pursuant 
to this limited transfer period might be subject to the repayment 
provisions associated with installment payments and bidding credits. 
See infra  28, 35.
    \22\See infra  38-43. In addition, for purposes of the 
installment payment and bidding credit provisions set forth below, 
licensees will continue to be bound by the financial eligibility 
requirements throughout the term of the license.
    \23\For example, if an entrepreneurs' block authorization is 
assigned to an eligible business in year four of the license term, 
it would be required to hold that license until the original holding 
period expires, subject to the same exceptions that applied to the 
original licensee.
---------------------------------------------------------------------------

    23. Our goals are to create significant opportunities for 
entrepreneurs, small businesses, and businesses owned by minorities and 
women to compete in auctions for licenses and attract sufficient 
capital to build-out those licenses and provide service. We recognize 
the critical need to attract capital, which requires flexibility. We 
are very concerned, however, that such flexibility not undermine our 
more fundamental objective, which is to ensure that designated entities 
retain de facto and de jure control of their companies. The holding and 
limited transfer period upon which we seek comment, may help promote 
this objective. We seek comment on the effect that any rules of this 
sort are likely to have on the achievement of our goals of meaningful 
long-term participation by designated entities and how such a rule 
would impact the ability to raise capital.

E. Bidding Credits

    24. In the Third Report and Order we adopted a 25 percent bidding 
credit for businesses owned by minorities and women. We concluded that 
the use of bidding credits would be an effective tool to ensure that 
women and minority-owned businesses have opportunities to participate 
in the provision of narrowband services.\24\ And, in this Order, we 
raised this bidding credit to 40 percent for the regional narrowband 
auctions. While we do not think that a bidding credit of this magnitude 
is required when used in conjunction with an insulated entrepreneurs' 
block, we continue to believe that a bidding credit is necessary to 
ensure that women and minority-owned businesses have the opportunity to 
participate in narrowband PCS. In addition, we believe that a small 
bidding credit is warranted to help small businesses overcome financing 
obstacles. Accordingly, we propose to continue to provide a bidding 
credits in the proposed entrepreneurs' blocks that would give small 
businesses a 10 percent credit, women and minority-owned businesses a 
15 percent credit, and small businesses owned by women and minorities 
an aggregate credit of 25 percent.
---------------------------------------------------------------------------

    \24\See Third Report and Order at 72, in PP Docket No. 93-252, 
9 FCC Rcd 2941, 59 FR 26741 (May 24, 1994), (Third Report and 
Order).
---------------------------------------------------------------------------

    25. In ex parte presentations to the Commission, many commenters 
have indicated that, without spectrum set-asides for narrowband PCS, 
bidding credits would not be sufficient to assist designated entities 
in outbidding very large entities who are likely to bid for licenses in 
this service. PCSD states, for example, that all of the existing large 
paging companies can justify much larger payments for licenses than 
could an individual entrepreneur, regardless of a bidder's credit. 
Therefore, it believes no entrepreneur will win a bid for any PCS 
market that is desirable to any of the large companies.\25\ As 
described above, in order to afford designated entities a realistic 
opportunity to obtain licenses in the narrowband PCS service, we 
propose to exclude very large businesses from bidding for licenses in 
the entrepreneurs' blocks. These measures would enhance the value of 
the bidding credits for small businesses and businesses owned by 
minorities and women. In this context, we believe that bidding credits 
can have a significant effect on the ability of small businesses and 
businesses owned by women and minorities to participate successfully in 
auctions for licenses in entrepreneurs' blocks.
---------------------------------------------------------------------------

    \25\Ex parte filing of PCSD Development Corporation (PCSD), 
August 9, 1994.
---------------------------------------------------------------------------

    26. As explained above, the capital access problems faced by small 
firms and women and minority-owned firms make special provisions like 
bidding credits appropriate for these designated entities in narrowband 
PCS.\26\ In effect, the bidding credit would function as a discount on 
the bid price a firm would actually have to pay to obtain a license 
and, thus, will address directly the financing obstacles encountered by 
these entities. Moreover, as noted previously, women and minorities 
face discrimination in lending and other barriers to entry not 
encountered by other firms, including other designated entities. 
Therefore, as one of the measures designed to counter these increased 
capital formation difficulties, we propose to provide them with a 
slightly higher bidding credit than small businesses. Thus, women and 
minorities would receive a 15 percent payment discount that is applied 
against the amounts they bid on licenses. Absent such measures targeted 
specifically to women and minorities, it might be impossible to assure 
that these groups achieve any meaningful measure of opportunity for 
actual participation in the provision of narrowband PCS. Similarly, it 
is reasonable to assume that small firms owned by women and minorities 
suffer the problems endemic to both groups. Therefore, we propose a 
cumulative bidding credit of 25 percent for these groups. We believe 
that these measures will help women and minorities to attract the 
capital necessary for obtaining a license and constructing and 
operating a narrowband PCS system, consistent with the intent of 
Congress. We seek comments on these proposals.
---------------------------------------------------------------------------

    \26\Although we did not previously grant bidding credits to 
small businesses in the Third Report and Order, we now believe that, 
given the exponentially greater expense likely to be incurred in 
acquiring broadband PCS licenses, bidding credits might be a proper 
means to ensure that these firms have the opportunity to participate 
in this service.
---------------------------------------------------------------------------

    27. As discussed below, we have also proposed to modify the 
definition of a minority and women-owned firm.\27\ To receive a 10 
percent bidding credit, we propose that a small business must satisfy 
the same gross revenue test adopted for installment payments. As 
explained more fully in the small business definition section, we 
propose that a consortium consisting entirely of small businesses also 
be eligible for a 10 percent bidding credit even if the combined gross 
revenues of the consortium exceed the small business gross revenues 
threshold. In addition, we propose that a small business that is owned 
by women and minorities must satisfy the definition of a business owned 
by minorities and women as well as the small business definition to 
receive a 25 percent bidding credit. Finally, we propose that a 
consortium of small firms owned by women and/or minorities is eligible 
for a 25 percent bidding credit, provided that each member of the 
consortium meets the definition of a small business and a minority and/
or women-owned firm.
---------------------------------------------------------------------------

    \27\See infra 44-54.
---------------------------------------------------------------------------

    28. Repayment Policies Applicable to Bidding Credits. To ensure 
that bidding credits benefit the parties to whom they are directed, we 
inquire whether we should adopt strict repayment policies: if, within 
the original 10-year term, a licensee applies to assign or transfer 
control of a license to for example, an entity that is not eligible for 
as a high a level of bidding credit, then the difference between the 
bidding credit obtained by the assigning party and the bidding credit 
for which the acquiring party would qualify would have to be paid to 
the U.S. Treasury as a condition of approval of the transfer. Thus, an 
assignment of a license from a small minority-owned firm to a women-
owned firm with revenues greater than $40 million would require 
repayment of 10 percent of the original bid price (25 percent less 15 
percent) to the Treasury. A sale to an entity that would not qualify 
for bidding credits would entail full repayment of the original bidding 
credit as a condition of transfer. Small businesses also would be bound 
by the financial eligibility rules during the entire license term as 
set forth below. Thus, if after licensing an investor purchases an 
``attributable'' interest in the business and, as a result, the gross 
revenues of the firm exceed the $40 million small business cap, this 
repayment provision would apply.\28\ If such a proposal were to be 
adopted, we would envision that these repayment provisions apply 
throughout the original term of the license to help promote the long-
term holding of licenses by those parties receiving bidding credits. 
Nevertheless, as in the case of the holding period and transfer 
restrictions discussed at 88-89 above we seek comment on any effects 
such rules may have on the ability of designated entities to attract 
capital. We therefore ask commenters to address in detail whether this 
type of restriction would further the goal of increasing the number of 
designated entities participating in the provision of narrowband PCS 
services.
---------------------------------------------------------------------------

    \28\See infra 39-43, for a discussion of which investor 
interests would be ``attributable'' for purposes of calculating the 
gross revenues caps.
---------------------------------------------------------------------------

F. Installment Payments

    29. A significant barrier for most businesses small enough to 
qualify to bid in the proposed entrepreneurs' blocks would be access to 
adequate private financing to ensure their ability to compete against 
larger firms in the PCS marketplace.\29\ In the Third Report and Order, 
we concluded that installment payments are an effective means to 
address the inability of small businesses to obtain financing and will 
enable these entities to compete more effectively for the auctioned 
spectrum. We also determined that small businesses eligible for 
installment payments would only be required to pay half of the down 
payment (10 percent of the winning bid, as opposed to 20 percent) five 
days after the auction closes, with the remaining 10 percent payment 
deferred until five days after grant of the license. Finally, we 
indicated that installment payments should be made available to small 
businesses at an interest rate equal to the rate for U.S. Treasury 
obligations.\30\
---------------------------------------------------------------------------

    \29\See e.g., comments of SBA Chief Counsel of Advocacy at 6, 
20-21, NTIA at 27; SBAC Report at 2 (September 15, 1993).
    \30\See Third Report and Order at  86-90.
---------------------------------------------------------------------------

    30. In light of the expected substantial capital required to 
acquire narrowband PCS licenses, we proposed that installment payments 
be available to most businesses that obtain narrowband PCS licenses in 
the proposed entrepreneurs' blocks. By allowing payment in 
installments, the government would in effect be extending credit to 
licensees, thus reducing the amount of private financing needed prior 
to and after the auction. Such low cost government financing would 
promote long-term participation by these businesses, which, because of 
their smaller size, lack access to sufficient capital to compete 
effectively with larger PCS licensees. Under the rules we propose 
today, installment payments would be available to smaller entities that 
do not technically qualify as small businesses for purposes of other 
measures we have proposed, such as bidding credits. We believe, 
however, that, given the significant costs of narrowband PCS licenses 
and the likelihood of very large participants in the other blocks, this 
option would be fully consistent with the congressional intent in 
enacting Section 309(j)(4)(A) to avoid a competitive bidding program 
that has the effect of favoring incumbent providers of other 
communications services, with established revenue streams, over smaller 
entities.\31\
---------------------------------------------------------------------------

    \31\See H.R. Rep. No. 103-111 at 255 (Commission has the 
authority to design alternative payment schedules in order that the 
auction process does not inadvertently favor only those with ``deep 
pockets'' over new or small companies).
---------------------------------------------------------------------------

    31. Under the plan we propose here, all licenses that satisfy the 
gross revenues, total assets and personal net worth criteria to bid in 
the entrepreneurs' blocks would be allowed to pay in installments for 
regional and MTA licenses granted in those blocks. With respect to the 
BTA licenses in those blocks, however, only businesses owned by women 
and minorities and those licensees with less than $75 million in gross 
revenues would be able to use installment payments.\32\ This 
distinction is based on the expected lower costs to acquire licenses 
and construct systems in the BTAs. However, if we adopt our proposal to 
redesignate BTA licenses as nationwide or regional licenses, we propose 
extending installment payments on those blocks to all parties eligible 
for the entrepreneurs' blocks. Thus, with the exception of companies 
owned by women or minorities, which face additional problems accessing 
capital, we do not think that a firm with gross revenues exceeding $75 
million would require government financing to be competitive for the 
BTA licenses.\33\
---------------------------------------------------------------------------

    \32\We will apply the same $500 million total assets and $100 
million personal net worth standards for purposes of determining 
eligibility for installment payments in the BTA entrepreneurs' 
blocks. The attribution rules set forth with regard to eligibility 
to bid will also apply in all of the BTA entrepreneurs' blocks.
    \33\We note that a consortium of small businesses would be 
eligible for installment payments in any market so long as each 
member of the consortium satisfies the definition of a small 
business, as set forth in Section V.A., infra.
---------------------------------------------------------------------------

    32. The installment payment option would enable qualified 
businesses to pay their winning bid over time. These businesses would 
still make the applicable upfront payment in full before the auction, 
but would be required to make a post-auction down payment equaling only 
ten percent of their winning bids, half of which will be due five 
business days after the auction closes. Payment of the other half of 
the down payment would be deferred until five business days after the 
license is granted. In general, the remaining 90 percent of the auction 
price would be paid in installments with interest charges to be fixed 
at the time of licensing at a rate equal to the rate for ten-year U.S. 
Treasury obligations plus 2.5 percent. Under this general rule, only 
payments of interest would be due for the first year with principal and 
interest payments amortized over the remaining nine years of the 
license. Timely payment of all installments would be a condition of the 
license grant and failure to make such timely payment would be grounds 
for revocation of the license.\34\ We seek comment on this installment 
payment proposal.
---------------------------------------------------------------------------

    \34\As described in the Second Report and Order, in PP Docket 
No. 93-253, 9 FCC Rcd 2348, 59 FR 22980 (May 4, 1994), (Second 
Report and Order), the Commission may, on a case-by-case basis, 
permit a three to six month grace period within which a licensee may 
seek a restructuring of the payment plan.
---------------------------------------------------------------------------

    33. Enhanced Installment Payments. As explained previously, small 
businesses and businesses owned by minorities and women face capital 
access difficulties not encountered by other firms and, thus, require 
special measures to ensure their opportunity to participate in 
narrowband PCS. Accordingly, we propose an ``enhanced'' installment 
payment plan for these entities. Pursuant to this enhanced installment 
payment plan, small businesses who win licenses in the proposed 
entrepreneurs' blocks would be required to pay interest only for the 
first two years of the license term at the same interest rate as set 
forth in the general rule. Businesses owned by women and/or minorities 
would be able to make interest-only payments for three years. Interest 
would accrue at the Treasury note rate without the additional 2.5 
percent.\35\ And finally, businesses that are both small and owned by 
women and/or minorities would be required to pay only interest for five 
years. Interest would accrue at the Treasury note rate.
---------------------------------------------------------------------------

    \35\To be eligible for these ``enhanced'' installment payments, 
a firm would have to satisfy either of the two alternative 
definitions of a woman or minority-owned business, as set forth in 
44-54, infra, as well as the applicable financial caps.
---------------------------------------------------------------------------

    34. These proposed enhanced installment payments are narrowly 
tailored to the needs of the various designated entities, as reflected 
in the record in this proceeding. We believe that varying the 
moratorium on principal in the early years of the loan and varying the 
interest rate based on these needs would allow small businesses and 
companies owned by women and/or minorities to bid higher in auctions, 
thereby increasing their chances for obtaining licenses. In addition, 
it would allow them to concentrate their resources on infrastructure 
build-out and, therefore, it would increase the likelihood that they 
become viable narrowband PCS competitors. We request comment on these 
proposed enhancements to the installment payment plan.
    35. Unjust Enrichment Applicable to Installment Payments. To ensure 
that large businesses do not become the unintended beneficiaries of 
measures meant for smaller firms, we propose to retain the unjust 
enrichment provisions adopted in the Third Report and Order applicable 
to installment payments. Specifically, if a licensee that was awarded 
installment payments seeks to assign or transfer control of its license 
to an entity not meeting the applicable eligibility standards set out 
above during the term of the license, we would require payment of the 
remaining principal and any interest accrued through the date of 
assignment as a condition of the license assignment or transfer.\36\ 
Moreover, if an entity seeks to assign or transfer control of a license 
to an entity that does not qualify for as favorable an installment 
payment plan, the installment payment plan, if any, for which the 
acquiring entity qualifies would become effective immediately upon 
transfer. Thus, a higher interest rate and earlier payment of principal 
may begin to be applied. For example, a transfer of a license in the 
fourth year after license grant from a small minority-owned firm to a 
small non-minority owned firm would require that the firm begin 
principal payments and the balance would begin accruing interest at a 
rate 2.5 percent above the rate that had been in effect. Finally, if an 
investor subsequently purchases an ``attributable'' interest in the 
businesses and, as a result, the gross revenues or total assets of the 
business exceed the applicable financial caps, this unjust enrichment 
provision would also apply.\37\ We seek comment on these proposals.
---------------------------------------------------------------------------

    \36\See Third Report and Order at 89.
    \37\See infra 39-43, for a discussion of which investor 
interests would be ``attributable'' for purposes of calculating the 
gross revenues and total assets thresholds.
---------------------------------------------------------------------------

G. Upfront Payments

    36. As previously indicated in the Third Report and Order, the 
upfront payment requirement was designed to ensure that bidders are 
qualified and serious and to provide the Commission with a source of 
funds in the event that it becomes necessary to assess default or bid 
withdrawal penalties.\38\ The upfront payment ensures that bids during 
the course of the auction are bona fide and convey information about 
the value of the underlying licenses. Our standard upfront payment for 
narrowband PCS is $0.02 per MHz per pop. As an additional means of 
enhancing the opportunity of designated entities to participate in 
competitive bidding we propose to reduce the required upfront payment 
for those applicants. As we concluded in the Fifth Report and Order, we 
are concerned that the $0.02 per MHz per pop upfront payment 
requirement might impose a barrier for smaller entities wishing to 
participate in the auctions. Moreover, we note that most bidders in the 
proposed entrepreneurs' blocks would be entitled to pay for their 
licenses in installments, which would require a down payment of only 
five percent of the winning bid. We are concerned that requiring an 
upfront payment that may be larger than the down payment that the 
winning bidder is required to tender could discourage auction 
participation.
---------------------------------------------------------------------------

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

    37. For these reasons, we propose to reduce the upfront payment 
requirement to $0.015 per MHz per pop for bidders in the entrepreneurs' 
blocks. This 25 percent discount should facilitate auction 
participation by capital-constrained companies and would permit them to 
conserve resources for infrastructure development after winning a 
license. Moreover, since the upfront payment is still substantial, we 
believe that insincere bidding would be discouraged and the Commission 
would have access to funds if it must collect default or bid withdrawal 
penalty payments.

H. Definitions and Eligibility

1. Eligibility to Bid in the Proposed Entrepreneurs' Blocks
    38. As noted previously, eligibility to bid in the proposed 
entrepreneurs' blocks would be limited to companies that, together with 
their affiliates and investors, had gross revenues of less than $125 
million in each of the last two years and have total assets of less 
than $500 million at the time their short form applications are filed. 
In addition, we propose to prohibit an applicant from bidding in these 
blocks if any one attributable individual investor or principal in the 
applicant has $100 million or greater in personal net worth at the 
short form application filing date.
2. Attribution Rules for the Proposed Entrepreneurs' Blocks
    39. For purposes of determining whether an entity qualifies to bid 
in the entrepreneurs' blocks, we propose to follow the control group 
and attribution rules set forth with regard to eligibility to bid as a 
small business. In particular, winning bidders would be required to 
identify on their long-form applications a control group that controls 
the applicant, owns at least 25 percent of the equity, and in the case 
of a corporation, holds at least 50.1 percent of the voting stock. For 
partnership applicants, we propose that every general partner be 
considered part of the group. The gross revenues and total assets of 
each member of the control group and each member's affiliates would be 
counted toward the $125 million/$500 million thresholds, regardless of 
the size of the member's total interest in the applicant. The $100 
million personal net worth limitation would also apply to each member 
of the control group. We would not consider the gross revenues or 
personal net worth of any other investor unless the investor holds 25 
percent or more of the outstanding passive equity in the applicant, 
which, as defined above, includes as much as fifteen percent of the 
voting stock in a corporate applicant.
    40. We also propose more relaxed attribution standard with regard 
to investors in small businesses owned by minorities and women. 
Specifically, we would not consider the gross revenues or personal net 
worth of a single passive investor in a minority or female-owned small 
business unless the investor holds in excess of a 49.9 percent passive 
interest (which includes as much as fifteen percent of a corporate 
applicant's voting stock), provided the women or minority control group 
maintains at least 50.1 percent of the equity and, in the case of a 
corporate applicant, at least 50.1 percent of the voting stock. We 
believe that such revenue attribution would ensure that only bona fide 
small businesses are able to take advantage of the special provisions 
we have proposed, but would allow those businesses to attract 
sufficient equity capital to be truly viable contenders in the PCS 
industry.
    41. In addition, we propose to allow a consortium of small 
businesses to qualify for any of the measures adopted in this order 
applicable to individual small businesses including the ability to bid 
in the entrepreneurs' block. As used here, the term ``consortium'' 
means a conglomerate organization formed as a joint venture among 
mutually-independent business firms, each of which individually 
satisfies the definition of a small business.
    42. We explain how these attribution rules would apply with regard 
to any holding and limited transfer period for entrepreneurs' block 
licensees should such rules ultimately be adopted. During this holding 
period, an entrepreneurs' block licensee could not sell more than 25 
percent of its passive equity to a single investor if the resulting 
attribution of that investor's gross revenues or total assets would 
bring the company over the $125 million gross revenues/$500 million 
personal net worth cap. Similarly, while individual members of the 
control group could change (if it would not result in a transfer of 
control of the company), the control group would have to maintain 
control and at least 25 percent of the equity and 50.1 percent of the 
voting stock.\39\ A company would be permitted to grow beyond these 
gross revenues/total assets caps, however, through equity investment by 
non-attributable (i.e. passive) investors, debt financing, revenue from 
operations, business development or expanded service.\40\
---------------------------------------------------------------------------

    \39\A minority of woman-owned company would have to continue to 
adhere to the attribution rules applicable to it, set out above.
    \40\These rules would continue to apply in this manner 
throughout the license term with regard to firm's continuing 
eligibility for installment payments, ``enhanced'' installment 
payments and bidding credits.
---------------------------------------------------------------------------

    43. We seek comment on these proposed eligibility requirements for 
the entrepreneurs' blocks. In particular, parties should discuss the 
equity and control requirements for the control group and investors in 
both the corporate and partnership context. In addition, commenters 
should discuss the alternative option for women and minority-owned 
companies and the ability of small businesses to form consortia. With 
regard to all of these issues, parties are asked to comment on the 
proposals' impact on the ability of entities to obtain financing as 
well as on the Commission's goals of deterring shams and fronts.
3. Definition of Women and Minority-Owned Business
    44. As discussed above, we have proposed steps in this order to 
address the special funding problems faced by minority and women-owned 
firms and thereby to ensure that these groups have the opportunity to 
participate and become strong competitors in the narrowband PCS 
service.\41\ We previously adopted a tax certificate program for women 
and minorities to allow more sources of potential funding, and in this 
Order have relaxed the attribution standard used to determine 
eligibility as a qualified small business.
---------------------------------------------------------------------------

    \41\We proposed to use the same criteria set forth in the Second 
Report and Order, and consider the members of the following groups 
``minorities'' for purposes of our rules: ``[T]hose of Black, 
Hispanic Surnamed, American Eskimo, Aleut, American Indian and 
Asiatic American extraction.'' See Statement of Policy on Minority 
Ownership of Broadcasting Facilities, 68 FCC 2d 979, 980 n.8 (1978); 
Commission Policy Regarding the Advancement of Minority Ownership in 
Broadcasting, 92 FCC 2d 849, 489 n.1 (1982). Moreover, as adopted in 
the Second Report and Order, minority and women-owned businesses 
would be eligible for special measures only if the minority and 
women principals are also United States citizens.
---------------------------------------------------------------------------

    45. For purposes of implementing these steps, we propose to depart 
from the definition of a minority and women-owned firm that was adopted 
in the Third Report and Order. We have adopted relaxed attribution 
standards for businesses owned by women and minorities for purposes of 
qualifying for small business provisions. We are proposing relaxed 
standards for businesses owned by women and minorities to qualify for 
the entrepreneurs' blocks. In the Third Report and Order, we found 
generally that to establish ownership by minorities and women, a strict 
eligibility standard should be adopted that required minorities or 
women to have at least 50.1 percent equity stake and a 50.1 percent 
controlling interest in the designated entity. Third Report and Order 
at  68; 47 CFR Sec. 1.2110(b)(2). For future narrowband PCS auctions, 
we propose to retain the requirement that minorities and/or women 
control the applicant and hold at least 50.1 percent of a corporate 
applicant's voting stock. However, to establish their eligibility for 
certain benefits, summarized below, we propose an additional 
requirement that, even where minorities and women hold at least 50.1 
percent of the applicant's equity, other investors in the applicant may 
own only passive interests, which, for corporate applicants, is defined 
to include as much as fifteen percent of the voting stock. In addition, 
provided that certain restrictions are met, we propose to allow women 
and minority-owned firms the option to reduce to 25 percent the 50.1 
percent minimum equity amount that must be held.
    46. We emphasized in the Third Report and Order that we did not 
intend to restrict the use of various equity financing mechanisms and 
incentives to attract financing, provided that the minority and women 
principals continued to own 50.1 percent of the equity, calculated on a 
full-diluted basis, and that their equity interest entitled them to a 
substantial stake in the profits and liquidation value of the venture 
relative to the non-controlling principals. We noted, however, in the 
Second Report and Order that different standards that meet the same 
objectives may be appropriate in other contexts. Second Report and 
Order at  278. In view of the evidence of discriminatory lending 
experiences faced by minority and women entrepreneurs and the 
exceptionally great financial resources believed to be required by 
narrowband PCS applicants, we conclude that it may be appropriate to 
allow more flexibility with regard to the 50.1 percent equity 
requirements for this service in order to open doors to more sources of 
equity financing for women and minority-owned firms.
    47. We propose therefore to allow women and minority-owned firms 
the following options. First, they may satisfy the general definition 
set forth in the Second Report and Order, which requires the minority 
and/or female principals to control the applicant, own at least 50.1 
percent of its equity and, in the case of corporate applicants, hold at 
least 50.1 percent of the voting stock. Under this option, other 
investors may own as much as a 49.9 percent passive equity interest. As 
noted above regarding eligibility to bid in the entrepreneurs' blocks, 
passive equity in the corporate context means only non-voting stock may 
be held, or stock that includes no more than fifteen percent of the 
voting interests.\42\ For partnerships, the term means limited 
partnership interests that do not have the power to exercise control of 
the entity. We ask commenters specifically to address whether the 
proposed fifteen percent voting interest limitation strikes the correct 
balance, or whether a higher percentage would facilitate capital 
formation without unduly contributing to a proliferation of shams. In 
addition, the Second Report and Order, all investor interests would be 
calculated on a fully-diluted basis, meaning that agreements such as 
stock options, warrants and convertible debentures generally would be 
considered to have a present effect and would be treated as if the 
rights thereunder already have been fully exercised.\43\ We recognize 
that the requirement that other investors own only passive interests 
would be a departure from the definition of a minority or women-owned 
business adopted in the Second Report and Order, but because of the 
very significant financial contribution that may be made by such other 
investors in designated entities, we believe that the passive equity 
requirement may be appropriate as an additional safeguard. In addition, 
we seek comments on whether these rules as currently framed may affect 
the ability of legitimate designated entities to obtain the capital 
needed to participate in the auction.
---------------------------------------------------------------------------

    \42\For example, under this option, a corporate applicant with 
two classes of issued and outstanding stock, 100 shares of voting 
stock and 100 shares of non-voting stock, could sell to a single 
non-eligible entity 49.9 percent of the applicant's equity, 
consisting of 5 shares of the corporation's voting stock and 94 
shares of its non-voting stock. Under this scenario, eligible 
minorities or women, in order to retain at least 50.1 percent of the 
value of all outstanding shares of the corporation's stock, must own 
all of the corporation's remaining shares of stock; that is, 95 
shares of voting stock and six shares of non-voting stock.
    \43\As also noted in the Second Report and Order, we will 
consider departing from the requirement that the equity of investors 
in minority and women-owned businesses must be calculated on a 
fully-diluted basis only upon a demonstration, in individual cases, 
that options or conversion rights held by non-controlling principals 
will not deprive the minority and women principals of a substantial 
financial stake in the venture or impair their rights to control the 
designated entity. See Second Report and Order at 277.
---------------------------------------------------------------------------

    48. As a second proposed option, women and minority-owned firms 
would be able to sell up to 75 percent of the company's equity, 
provided that no single investor may hold 25 percent or more of the 
firm's passive equity, which is defined in the same manner as above. 
For example, a corporation with 100 shares of voting stock and 100 
shares of non-voting stock, with the 200 shares representing the total 
outstanding shares of the company, could qualify as a minority or 
women-owned business under the following circumstances. The minority or 
women principals would have to own at least 51 shares of voting stock, 
which satisfies the requirement that they have voting control and, in 
this case, also meets the requirement that they hold at least 25 
percent of the equity. Two other investors could each own 34 shares of 
non-voting stock and fifteen shares of voting stock, which represents 
24.5 percent of the company's equity for each of the shareholders. A 
third investor could own the remaining 32 shares of non-voting stock 
and fifteen shares of the voting stock, or 23.5 percent of the equity. 
The remaining 4 shares of voting stock may be sold to other investors.
    49. Whichever option is chosen, we would require establishment of a 
``control group'' for women and minority-owned firms in much the same 
way we did for purposes of eligibility to bid in the entrepreneurs' 
blocks. Specifically, winning bidders, transferees or assignees would 
have to identify on their long-form applications a control group 
(consisting entirely of minorities and/or women or entities 100 percent 
owned and controlled by minorities and women) that has de jure and de 
facto control of the applicant and holds either at least 50.1 or 25 
percent of the applicant's equity, depending upon which option is 
elected.
    50. We believe that a modification of our 50.1 percent equity 
requirement would best achieve the Congressional objective of providing 
effective and long-term economic opportunities for women and minority-
owned firms in narrowband PCS. At the same time, we propose to maintain 
strict enforcement of the requirement that actual control reside with 
the qualified designated entities. Thus, to establish their eligibility 
for tax certificates, enhanced installment payments, bidding credits 
and relaxed cellular attribution rules, women and minority-owned 
applicants electing to use the 25 percent equity option could not in 
any instance allow an individual investor who is not in the control 
group to own more than a 25 percent passive equity interest. This 
restriction would apply even in circumstances in which allowing an 
investor to exceed these limitations would not result in the 
applicant's exceeding the gross revenues and other financial standards 
that apply to other bidders in the entrepreneurs' blocks and other 
situations involving financial caps. These structural safeguards, as 
well as the general requirement that other investors hold only passive 
interests in women and minority-owned applicants, would help to ensure 
that control truly remains with the women and minority designated 
entities.
    51. For example, a women or minority-owned firm electing to use the 
25 percent option may have a non-eligible investor with more than 25 
percent passive stake and still qualify to bid in the entrepreneurs' 
blocks or for benefits that apply to small businesses, as long as the 
attributable revenues of the investor do not cause the applicant to 
exceed the gross revenues/total asset caps. In these contexts, no 
additional restrictions would be necessary, because women and minority-
owned applicants, like other applicants, would be eligible to bid in 
these blocks and to qualify as small businesses so long as they comply 
with the same restrictions on financial eligibility that apply to other 
applicants. Since the attribution rule itself operates to ensure 
compliance with size limitations, it would not be necessary to impose 
additional restrictions on the size of interests held by investors with 
attributable interests. This firm would not qualify, however, for 
special measures applicable only to women and minority-owned 
businesses, such as ``enhanced'' installment payments or the 15 or 25 
percent bidding credits, because it has a single non-eligible investor 
with more than 25 percent passive interest. In circumstances in which 
women and minorities are required to retain only 25 percent of the 
firm's equity, this additional structural restriction would be 
appropriate because the objective in this context is to ensure not 
merely financial eligibility, but that women and minorities retain 
control of the license.
    52. We set forth previously rules defining more explicitly the term 
``control'' for purposes of determining whether a ``control group'' 
maintains de facto as well as de jure control of an applicant.\44\ We 
propose to apply those rules equally to the minority and women 
principals of minority and women-owned applicants. Consistent with our 
general policies with regard to women-owned applicants for purposes of 
our multiple ownership and cross-ownership rules in this broadcast 
context, we do not propose to adopt, at this time, any special rules or 
presumptions to determine whether women-owned applicants exercise 
independent control of their firms. See In the Matter of Clarification 
of Commission Policies Regarding Spousal Attribution, 7 FCC Rcd. 1920, 
57 FR 08845 (Mar 13, 1992).
---------------------------------------------------------------------------

    \44\See supra 49.
---------------------------------------------------------------------------

    53. We also note here that we are proposing to depart from the 
provision in the Third Report and Order that bars publicly traded 
companies from qualifying as minority and women-owned businesses for 
purposes of participating in auctions. Most of the steps proposed to 
assist these designated entities in this Further Notice (e.g., bidding 
credits and installment payments) are confined to winning bidders in 
the entrepreneurs' blocks, where there would be a financial limit on 
the size of participants. Because of the large capital entry costs of 
narrowband PCS, we now believe that even publicly traded companies 
owned by women and minorities that qualify to bid in entrepreneurs' 
blocks require additional measures, such as bidding credits and 
installment payments, to be able to participate successfully.
    54. As noted above, we propose that applicants owned by women and 
minorities must meet the limitations on gross revenues, total assets 
and personal net worth to qualify for entry into the entrepreneurs' 
blocks. The size limitations would not apply, however, to all measures 
designed to assist applicants owned by minorities and/or women. The tax 
certificate policy applies to all narrowhead PCS licenses and would not 
be limited to licenses in the entrepreneurs' blocks. Therefore, 
businesses owned by minorities and women need not meet the gross 
revenue and other financial restrictions to qualify for tax 
certificates. But minority and women-owned firms would have to satisfy 
the Commission's structural ownership requirements to receive the 
benefits of tax certificates; that is, they would be subject to the 
limitation that interests held by investors who are not women and 
minorities must be passive.
4. Definition of an Affiliate
    55. In the Second Report and Order, we referenced the SBA's 
affiliation rules for purposes of defining generally whether an entity 
qualifies as a small business and gave examples of how the affiliation 
rules would be applied. In the Fifth Report and Order, we expanded on 
the SBA's affiliation rules in establishing detailed affiliation 
standards for narrowband PCS to be used when designated entities must 
include ``affiliates'' to determine their eligibility for special 
designated entity provisions. In the Second Memorandum Opinion and 
Order\45\ that we adopted in this docket, we incorporate into our 
generic auction rules the affiliation standards that we established for 
narrowband PCS in the Fifth Report and Order. We propose to apply these 
affiliation standards to narrowband PCS for purposes of determining any 
of the above described, size-based eligibility criteria for designated 
entities seeking special treatment under the provisions adopted herein. 
These standards would give applicants clear guidance regarding the 
relationships that we will attribute for purposes of applying any of 
our sized-based eligibility criteria.
---------------------------------------------------------------------------

    \45\Second Memorandum Opinion and Order at 46, in PP Docket No. 
93-253, FCC No. 94-215, released Aug. 15, 1994, (Second Memorandum 
Opinion and Order).
---------------------------------------------------------------------------

I. Limit on Licenses Awarded in Entrepreneurs' Blocks

    56. The special provisions which we propose for designated entities 
are based, in part, on our mandate to fulfill the congressional goal 
that we disseminate licenses among a wide variety of applicants. 47 
U.S.C. Sec. 309(j)(3)(B). Therefore, in proposing the financial 
assistance measures set forth in this Further Notice, we are concerned 
about the possibility, even if remote, that a few bidders will win a 
very large number of the licenses in the entrepreneurs' blocks. As a 
consequence, the benefits that Congress intended for designated 
entities would be enjoyed, in disproportionate measure, by only a few 
individuals or entities. Congress, in our view, did not intend that 
result. We therefore propose steps to ensure that the financial 
assistance provided through our rules is dispersed to a reasonable 
number of applicants who win licenses in these blocks.
    57. To achieve a fair distribution of the benefits intended by 
Congress, we propose a limit on the total number of licenses within the 
entrepreneurs' blocks that a single entity could win at auction. In 
setting this limit, we would avoid imposing a restriction that would 
prevent applicants from obtaining a sufficient number of licenses to 
create large and efficient nationwide or regional services. 
Specifically, we propose a limitation that no single entity may win 
more than 10 percent of the licenses available in the entrepreneurs' 
blocks. These licenses could be in any combination of frequency blocks. 
Such a limit would ensure that at least 10 winning bidders enjoy the 
benefits of the entrepreneurs' blocks. At the same time, it would allow 
bidders to effectuate aggregation strategies that include large numbers 
of licenses and extensive geographic coverage.
    58. Further, this limitation would apply only to the total number 
of licenses that may be won at auctions in these proposed 
entrepreneurs' blocks; it would not be an ownership cap that applies to 
licenses that might be obtained after the auctions. For purposes of 
implementing this restriction, we would consider licenses to be won by 
the same entity if an applicant (or other entity) that controls, or has 
the power to control licenses won at the auction, controls or has the 
power to control another license won at the auction.

J. Redesignation of Certain Narrowband PCS Spectrum Blocks

    59. Finally, we are concerned that there are companies that would 
be eligible for an entrepreneurs' block license that may desire larger 
license areas than MTAs and BTAs. It appears that over half of the 
bidders in the nationwide auction would have qualified for an 
entrepreneurs' block license. As a result, we propose to redesignate 
the two BTA licenses as regional licenses organized in the same 
configuration set forth in section 24.102 of the rules. Doing so would 
give designated entities an opportunity to bid on a larger and more 
valuable license under the rules for entrepreneurs' blocks. We also 
seek comment on other means to achieve larger geographic license sizes 
such as designating these BTA licenses as nationwide licenses or by 
maintaining the BTA designation, but allowing combinatorial bidding for 
the designated regions. Commenters should also address the appropriate 
premium we should adopt for comparison of combinatorial and BTA license 
bids if we allow combinatorial bidding. We also seek comment on whether 
some of the MTA and BTA response channels should be redesignated as 
larger license areas with bidding limited only to those entities 
eligible to bid for entrepreneurs' block licenses.

II. Procedural Matters and Ordering Clause

A. Further Notice--Initial Analysis

    60. Reason for the Action. The purpose of the Further Notice is to 
implement competitive bidding rules and regulations rules consistent 
with the Commission's competitive bidding authority that will carry out 
the statutory mandates that certain designated entities, including 
small entities, are afforded an opportunity to participate in the 
competitive bidding process and in the provision of spectrum-based 
services.
    61. Objectives of this Action. The Omnibus Budget Reconciliation 
Act of 1993 and the subsequent Commission actions to implement it are 
intended to establish a system of competitive bidding for choosing 
among certain applications for initial licenses, and will carry out 
statutory mandates that certain designated entities, including small 
entities, are afforded an opportunity to participate in the competitive 
bidding process and in the provision of narrowband PCS services.
    62. Legal Basis. Authority for the Further Notice can be found in 
the Omnibus Budget Reconciliation Act of 1993 and in Sections 2(a), 
4(i) 303(r), 309(i) and 309(j) of the Communications Act of 1934, as 
amended, 47 U.S.C. Secs. 152(a), 154(i), 303(r), 309(i) and 309(j).
    63. Reporting, Recordkeeping and Other Compliance Requirements. The 
proposals under consideration in this Further Notice include the 
possibility of new reporting and recordkeeping requirements for a 
number of small business entities.
    64. Federal Rules Which Overlap, Duplicate or Conflict With These 
Rules. None.
    65. Description, Potential Impact, and Number of Small Entities 
Involved. The rule changes proposed in this Further Notice could effect 
smaller entities if they have mutually exclusive applications for 
initial licenses or permits for narrowband PCS licenses. The Further 
Notice proposes to establish certain narrowband PCS spectrum blocks for 
bidding exclusively by smaller entities and to provide installment 
payments and bidding credits to certain eligible entities within those 
blocks.
    66. Any Significant Alternatives Minimizing the Impact on Small 
Entities Consistent with the Stated Objectives. The Further Notice 
proposes certain provisions for smaller entities designed to ensure 
that such entities have the opportunity to participate in the 
competitive bidding process and in the provision of narrowband PCS 
services.

B. Ex Parte Rules

    67. This is a non-restricted notice and comment rule making 
proceeding. Ex Parte presentations are permitted, except during the 
Sunshine Agenda period, provided they are disclosed as provided in 
Commission rules. See generally 47 CFR Secs. 1.1202, 1.1203, and 
1.120(a).

C. Comment Dates

    68. Pursuant to applicable procedures set forth in sections 1.415 
and 1.419 of the Commission's Rules, 47 CFR Secs. 1.415 and 1.419, 
interested parties may file comments on or before September 16, 1994 
and reply comments on or before October 3, 1994. To file formally in 
this proceeding, you must file an original and four copies of all 
comments, reply comments, and supporting comments. If you want each 
Commissioner to receive a personal copy of your comments, you must file 
an original plus nine copies. You should send comments and reply 
comments to Office of the Secretary, Federal Communications Commission, 
Washington, DC 20554. Comments and reply comments will be available for 
public inspection during regular business hours in the FCC Reference 
Center of the Federal Communications Commission, Room 239, 1919 M 
Street, NW., Washington, DC 20554. The complete text of this document 
may be purchased from the Commission's copy contractor, International 
Transcription Service, 1919 M Street, room 236, Washington, DC 20554, 
telephone (202) 857-3800.

List of Subjects in 47 CFR Part 24

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Telecommunications.

Federal Communications Commission.
LaVera F. Marshall,
Acting Secretary.
[FR Doc. 94-21015 Filed 8-25-94; 8:45 am]
BILLING CODE 6712-01-M