[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21015]
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[Federal Register: August 26, 1994]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 24
[PP Docket No. 93-253; FCC 94-219]
Implementation of Section 309(j) of the Communications Act--
Competitive Bidding
AGENCY: Federal Communications Commission.
ACTION: Further notice of proposed rulemaking.
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SUMMARY: In this Third Memorandum Opinion and Order and Further Notice
of Proposed Rulemaking, the Commission seeks comment on certain
proposals to increase opportunities for smaller entities, including
entities owned by minorities and women to participate in narrowband PCS
auctions and in the provision of narrowband PCS services. These
proposed rules will promote economic opportunity and competition, and
disseminate licenses among a wide variety of applicants, including
small business and businesses owned by members of minority groups and
women.
DATES: Comments are due September 16, 1994; Reply comments are due on
October 3, 1994.
FOR FURTHER INFORMATION CONTACT: Jackie Chorney Office of Plans and
Policy, (202) 418-2030.
SUPPLEMENTARY INFORMATION: Pursuant to applicable procedures set forth
in Sections 1.415 and 1.419 of the Commission's Rules, 47 CFR 1.415 and
1.419, interested parties may file comments on or before September 16,
1994 and reply comments on or before October 3, 1994. To file formally
in this proceeding, you must file an original and four copies of all
comments, reply comments, and supporting comments. If you want each
Commission to receive a personal copy of your comments, you must file
an original plus nine copies. You should send comments and reply
comments to Office of the Secretary, Federal Communications Commission,
Washington, DC 20554. Comments and reply comments will be available for
public inspection during regular business hours in the FCC Reference
Center of the Federal Communications Commission, Room 239, 1919 M
Street, NW., Washington, DC 20554. The complete text of this document
may be purchased from the Commission's copy contractor, International
Transcription Service, 1919 M Street, Room 236, Washington, DC 20554,
telephone (202) 857-3800.
In the matter of Implementation of Section 309(j) of the
Communications Act--Competitive Bidding Narrowband PCS, PP Docket
No. 93-253 and Amendment of the Commission's Rules to Establish New
Narrowband Personal Communication Services, GEN Docket No. 90-314,
ET Docket No. 92-100.
Third Memorandum Opinion and Order and Further Notice of Proposed
Rulemaking
Adopted: August 16, 1994.
Released: August 17, 1994.
Comment Date: September 16, 1994.
Reply Comment Date: October 3, 1994.
By the Commission:
Table of Contents
I. Proposed designated entity provisions for MTA and BTA auctions 1
A. Introduction................................................ 1
B. Summary of special provisions for designated entities....... 8
C. Summary of eligibility requirements and definitions......... 16
1. Entrepreneurs' blocks and small business eligibility...... 16
2. Definition of women and/or minority-owned business........ 17
D. The entrepreneurs' blocks................................... 19
E. Bidding credits............................................. 24
F. Installment payments........................................ 29
G. Upfront payments............................................ 36
H. Definitions and Eligibility................................. 38
1. Eligibility to bid in the entrepreneurs' blocks........... 38
2. Attribution rules for the entrepreneurs' blocks........... 39
3. Definition of women and minority-owned business........... 44
4. Definition of an affiliate................................ 55
I. Limit on licenses awarded in entrepreneurs' blocks.......... I56
J. Redesignated of certain narrowband PCS spectrum blocks...... 59
II. Procedural matters........................................... 60
A. Further notice--initial analysis............................ 60
B. Ex parte rules.............................................. 67
C. Comment dates............................................... 68
I. Proposed Designated Entity Provisions for MTA and BTA Auctions
A. Introduction
1. In the Budget Act, Congress recognized the novelty of auctions
as a licensing method and encouraged us to experiment with a variety of
techniques to ensure that small businesses and those owned by women and
minorities have an opportunity to participate in spectrum-based
services. While we believe that measures taken with respect to the
regional narrowband PCS auctions will provide substantial opportunities
for designated entities to participate in narrowband PCS, we seek
comment on whether it may be necessary to adopt alternative provisions
such as entrepreneurs' blocks or higher bidding credits to encourage
investment in minority- and women-owned businesses in future auctions.
As we have learned, narrowband PCS licenses may be auctioned for large
sums of money in the competitive bidding process. It therefore may be
necessary to do more to ensure that designated entities have the
opportunity to participate in narrowband PCS than may be necessary in
other, less costly spectrum-based services. In our view, we must
consider whether these steps and any others we may adopt are required
to fulfill Congress's mandate that designated entities have the
opportunity to participate in the provision of PCS. We believe that the
measures we propose today would increase the likelihood that designated
entities will win licenses in the auctions and become strong
competitors in the provision of narrowband PCS service. We also will
review the results of the regional auction in making our decision on
the rules proposed in this Further Notice.
2. As we noted in the Fifth Report and Order, by instructing the
Commission to ensure the opportunity for designated entities to
participate in auctions and spectrum-based services, Congress was well
aware of the difficulties these groups encounter in accessing
capital.\1\ Indeed, less than two years ago, Congress made specific
findings in the Small Business Credit and Business Opportunity
Enhancement Act of 1992, that ``small business concerns, which
represent higher degrees of risk in financial markets than do large
businesses, are experiencing increased difficulties in obtaining
credit.''\2\ Because of these problems, Congress resolved to consider
carefully legislation and regulations ``to ensure that small business
concerns are not negatively impacted'' and to give priority to passage
of ``legislation and regulations that enhance the viability of small
business concerns.''\3\
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\1\Fifth Report and Order at 97, in PP Docket No. 93-253, FCC
94-178, adopted June 29, 1994, released July 15, 1994, 59 FR 37566
(Jul 29, 1994), (Fifth Report and Order).
\2\Small Business Credit and Business Opportunity Enhancement
Act of 1992, Section 331(a)(3), Pub. Law 102-366, Sept. 4, 1992.
\3\Id., Section 441(b)(2),(3).
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3. Congress also recognized that these funding problems are even
more severe for minority and women-owned businesses, who face
discrimination in the private lending market. For example, Congress
explicitly found that businesses owned by minorities and women have
particular difficulties in obtaining capital and that problems
encountered by minorities in this regard are ``extraordinary.''\4\ A
number of studies also amply support the existence of widespread
discrimination against minorities in lending practices. As we noted in
the Fifth Report and Order, in October, 1992, the year prior to passage
of the auction law, the Federal Reserve Bank of Boston released an
important and highly-publicized study demonstrating that a black or
Hispanic applicant in the Boston area is roughly 60 percent more likely
to be denied a mortgage loan than a similarly situated white
applicant.\5\ The researchers measured every variable mentioned as
important in numerous conversations with lenders, underwriters, and
examiners and found that minority applicants are more likely to be
denied mortgages even where they have the same obligation ratios,
credit history, loan to value and property characteristics as white
applicants. The lending discrimination that occurs, the study found,
does not involve the application of specific rules, but instead occurs
where discretionary decisions are made. Based on the Boston study, we
found that it is reasonable to expect that race will affect business
loans that are based on more subjective criteria to an even greater
extent than the mortgage loan process, which uses more standard rules.
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\4\Id., Section 12(4); 331(a)(4).
\5\Mortgage Lending in Boston: Interpreting HMDA Data, Federal
Reserve Bank of Boston, Working Paper 92-7 (October 1992).
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4. Similarly, evidence presented in testimony before the House
Minority Enterprise Subcommittee on May 20, 1994 indicates that African
American business borrowers have difficulty raising capital mainly
because they have less equity to invest, they receive fewer loan
dollars per dollar of equity investment, and they are less likely to
have alternate loan sources, such as affluent family or friends.
Assuming two hypothetical college-educated, similarly situated male
entrepreneurs, one black, one white, the testimony indicated that the
white candidate would have access to $1.85 in bank loans for each
dollar of owner equity invested, while the black candidate would have
access to only $1.16. According to the testimony, the problems
associated with lower incomes and intergenerational wealth, as well as
the discriminatory treatment minorities receive from financial
institutions, make it much more likely that minorities will be shut out
of capital intensive industries, such as telecommunications. This
testimony also noted that African American representation in
communications is so low that it was not possible to generate
meaningful summary statistics on underrepresentation.\6\
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\6\Testimony of Dr. Timothy Bates, Visiting Fellow, The Woodrow
Wilson Center, before the U.S. House of Representatives Committee on
Small Business, Subcommittee on Minority Enterprise, Finance, and
Urban Development (House Minority Enterprise Subcommittee), May 20,
1994.
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5. We also stated in the Fifth Report and Order that inability to
access capital is also a major impediment to the successful
participation of women in PCS auctions. In enacting the Women's
Business Ownership Act in 1988, Congress made findings that women, as a
group, are subject to discrimination that adversely affects their
ability to raise or secure capital.\7\ AWRT documents that these
discriminatory barriers still exist today. Indeed, AWRT reports that
while venture capital is an important source of funding for
telecommunications companies, women-owned companies received only
approximately one percent of the $3 billion invested by institutional
venture capitalists in 1993. Citing a 1992 National Women's Business
Council report, AWRT further argues that even successful women-owned
companies did not overcome these financing obstacles after they had
reached a level of funding and profitability adequate for most other
businesses.\8\
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\7\Pub. L. 100-533 (1988). In 1991, Congress enacted the Women's
Business Development Act of 1991 to further assist the development
of small businesses owned by women. See Pub. L. 102-191 (1991).
\8\See Letter of AWRT to the Honorable Kweisi Mfume, Chairman,
House Minority Enterprise Subcommittee, June 1, 1994.
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6. A study prepared in 1993 by the National Foundation for Women
Business Owners (NFWBO) further illustrates the barriers faced by
women-owned businesses. For example, it finds that women-owned firms
are 22 percent more likely to report problems dealing with their banks
than are businesses at large. In addition, the NFWBO study finds that
the largest single type of short-term financing used by women business
owners is credit cards and that over half of women-owned firms use
credit cards for such purposes, as compared to 18 percent of all small
to medium-sized businesses, which generally use bank loans and vendor
credit for short-term credit needs. With regard to long-term financing,
the study states that a greater proportion of women-owned firms are
turning, or are forced to turn, to private sources, and to a wider
variety of sources, to fulfill their needs. Based on these findings,
the NFWBO study concludes that removal of financial barriers would
encourage stronger growth among women-owned businesses, resulting in
much greater growth throughout the economy.\9\
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\9\See The National Foundation for Women Business Owners,
Financing the Business, A Report on Financial Issues from the 1992
Biennial Membership Survey of Women Business Owners, October 1993.
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7. If we are to meet the congressional goals of promoting economic
opportunity and competition by disseminating licenses among a wide
variety of providers, we must find ways to counteract effectively these
barriers to entry. As chronicled in the Fifth Report and Order, both
Congress and the Commission have tried various methods to enhance
access to the broadcast and cable industries by minorities and
women.\10\ These efforts however, have met with limited success. The
record shows that women and minorities have not gained substantial
ownership representation in either the broadcast or non-broadcast
telecommunications industries. For example, a 1993 report conducted by
the National Telecommunications and Information Administration's (NTIA)
Minority Telecommunications Development Program shows that, as of
August 1993, only 2.7 percent of commercial broadcast stations were
owned by minorities. Another study commissioned by the Commerce
Department's Minority Business Development Agency in 1991 found that
only one half of one percent of the telecommunications firms in the
country were minority owned. The study also identified only 15 minority
cable operators and 11 minority firms engaged in the delivery of
cellular, specialized mobile radio, radio paging or messaging services
in the United States.\11\ And, according to the last available U.S.
Census, only 24 percent of the communications firms in the country were
owned by women, and these women-owned firms generated only
approximately 8.7 percent of the revenues earned by communications
companies.\12\ When companies without paid employees are removed from
the equation, firms with women owners represent only 14.5 percent of
the communications companies in the country.\13\ One result of these
low numbers is that there are very few minority or women-owned
businesses that bring experience or infrastructure to narrowband PCS.
They thus face an additional barrier relative to many existing service
providers.
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\10\See Fifth Report and Order at 103-106.
\11\See Testimony of Larry Irving, Assistant Secretary for
Communications and Information, U.S. Department of Commerce, before
the House Minority Enterprise Subcommittee, May 20, 1994. In his
testimony at this same hearing, FCC Chairman Reed Hundt cited some
of these statistics and noted that in light of this serious
underrepresentation, there remains ``a fundamental obligation for
both Congress and the FCC to examine new and creative ways to ensure
minority opportunity.'' Testimony of Reed E. Hundt, Chairman,
Federal Communications Commission, before the House Minority
Enterprise Subcommittee, May 20, 1994.
\12\See Women-Owned Businesses, 1987 Economic Censuses, U.S.
Department of Commerce, issued August 1990, at 7,147. The census
data includes sole proprietorships, partnerships, and subchapter S
corporations. We have no statistics regarding women representation
among owners of larger communications companies.
\13\Id.
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8. Small businesses also have not become major participants in the
telecommunications industry. For instance, one commenter asserts that
ten large companies--six Regional Bell Operating Companies (RBOCs),
AirTouch (formerly owned by Pacific Telesis), McCaw, GTE and Sprint--
control nearly 86 percent of the cellular industry. This commenter
further contends that nine of these ten companies control 95 percent of
the cellular licenses and population in the 50 BTAs that have one
million or more people.\14\
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\14\Ex parte filing of DCR Communications, May 31, 1994.
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9. In the new auction law, Congress directed the Commission to
remedy this serious imbalance in the participation by certain groups,
especially minorities and women. The auction law itself contemplates
that requiring payment for initial licenses through competitive
bidding, unlike existing licensing methods such as comparative hearings
or lotteries, may inhibit participation by those with limited access to
capital and could further diminish opportunities for designated
entities. The first nationwide auction demonstrated that a 25 percent
bidding credit may not be sufficient to ensure that designated entities
have the opportunity to participate where narrowband PCS values are
high. The regional auctions will demonstrate whether a 40 percent
bidding credit for women- and minority-owned firms combined with
installment payments for eligible small businesses is sufficient to
provide meaningful opportunities for designated entities at the
regional level. We further propose to examine the use of measures we
specified in the Fifth Report and Order to carry out Congress's
directive to provide meaningful opportunities for small entities and
businesses owned by women and minorities to provide PCS services. If,
based on the results of the regional auction, we conclude that the 40
percent bidding credit is insufficient, we may decide that these
measures, which are expressly designed to address the funding problems
faced by these groups, may be necessary to achieve Congress's goals
with respect to narrowband PCS.
B. Summary of Special Provisions for Designated Entities
10. While there was significant designated entity participation in
the nationwide narrowband PCS auction, we are concerned that the high
license values in that auction and the substantial involvement by
large, incumbent firms with significant financial resources suggests
that designated entities may have difficulties in competing in future
narrowband PCS auctions. We recognize that larger incumbent firms are
able to pay much higher license prices than smaller firms because of
the significant infrastructure and cost of capital advantages these
firms enjoy. Because of these factors, we believe that additional
measures may be necessary to achieve Congress's mandate that we ensure
the opportunity for designated entities to participate in the
competitive bidding process and in the provision of spectrum-based
services. In this regard, we propose additional provisions for
businesses owned by women and/or minorities and small businesses
similar to those employed in the auction rules for broadband PCS.
11. To fulfill Congress's mandate that we ensure that designated
entities have the opportunity to participate in providing narrowband
PCS; we propose to reserve up to four MTA frequency blocks--19, 21, 22
and 24--, and both BTA frequency blocks--25 and 26--for bidding
exclusively by entities with annual gross revenues of less than $125
million and total assets of less than $500 million (``entrepreneurs'
blocks''). We believe that excluding large companies from bidding in
the proposed entrepreneurs' blocks, and limiting the total number of
licenses that one entity can obtain in these blocks, would
significantly enhance opportunities for smaller entities to become PCS
providers and thereby ensure that narrowband PCS licenses will be
disseminated ``among a wide variety of applicants,'' as required by
Section 309(j)(3)(B).
12. We recognize, however, that reserving blocks for bidding only
by relatively small companies may not, by itself, be sufficient to
ensure that small businesses and businesses owned by members of
minority groups and women have the opportunity to obtain narrowband PCS
licenses. Businesses owned by members of minority groups and women face
discrimination that poses additional obstacles for these firms.
Accordingly, we propose a number of related steps to assist small
businesses and businesses owned by woman and/or minorities in
attracting the capital necessary to obtain a narrowband PCS license.
13. First, to encourage large companies to invest in designated
entities and to assist designated entities without large investors to
overcome the additional hurdle presented by auctions, we propose to
make bidding credits available to designated entities within the
entrepreneurs' blocks. More specifically, we propose to provide small
businesses with a 10 percent bidding credit. Businesses owned by
minorities and women would receive a 15 percent bidding credit to
compensate for the substantial problems they face in attracting
capital.\15\ The credits would be cumulative, so that a business owned
by minorities or women that also qualified as a small business would
receive a 25 percent bidding credit. Second, we propose to allow most
successful bidders within the entrepreneurs' block to pay for their
licenses in installments and to ``enhance'' those installment payments
for small businesses and businesses owned by minorities and women by
varying the moratorium on principal and the interest rate. Third, we
propose to continue to extend our tax certificate policies to promote
participation by minorities and women in the provision of narrowband
PCS. Fourth, we propose to reduce the upfront payment for all eligible
bidders in the entrepreneurs' blocks from $0.02 per MHz per pop to
$0.015 per MHz per pop.
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\15\Although this bidding credit would be less than the bidding
credit available for selected nationwide and regional licenses (25
percent and 40 percent respectively), the 15 percent bidding credit
would be available within the entrepreneurs' block rather than in a
block where all companies could participate.
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14. Finally, we propose to redesignate the two BTA licenses as
regional licenses organized in the same configuration set forth in
Section 24.102 of the rules. We also seek comment on other means to
achieve larger geographic license sizes such as designating these BTA
licenses as nationwide licenses or by maintaining the BTA designation,
but allowing combinatorial bidding for the designated regions. We also
seek comment on whether some of the MTA and BTA response channels
should be redesignated as larger license areas with bidding limited
only to those entities eligible to bid for entrepreneurs' block
licenses.
15. The following chart highlights the major provisions proposed
for businesses bidding in the proposed entrepreneurs' blocks.\16\
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\16\This table is not comprehensive and therefore it does not
present all the provisions established for designated entities,
especially those available outside the entrepreneurs' blocks.
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Bidding Tax
credits Installment payments certificates
(Percent) for investors
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Entrepreneurial 0 Interest only for 1 No.
businesses (in year; rate equal to
excess of $40 MM and 10-year Treasury
less than or equal note plus 2.5
to $125 MM in percent; (for
revenue and less businesses with
than $500 MM in revenues greater
total assets). than $75 MM,
available only in
regional and MTA
markets)
Small businesses (not 10 Interest only for 2 No.
in excess of $40 MM years; rate equal to
in revenues and less 10-year Treasury
than $500 MM in note plus 2.5
total assets). percent;
Businesses owned by 15 Interest only for 3 Yes.
minorities and/or years; rate equal to
women (in excess of 10-year Treasury
$40 MM and less than note;
or equal to $125 MM
in revenues and less
than $500 MM in
total assets).
Small businesses 25 Interest only for 5 Yes.
owned by minorities years; rate equal to
and/or women (not in 10-year treasury
excess of $40 MM in note;
revenues and less
than $500 MM in
total assets.
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C. Summary of Eligibility Requirements and Definitions
1. Entrepreneurs' Blocks and Small Business Eligibility
16. The following points summarize the principal rules we propose
regarding eligibility to bid in the entrepreneurs' blocks and have
adopted above to qualify as a small business. In addition, they
summarize the attribution rules we will propose to use to assess
whether an applicant satisfies the various financial thresholds. More
precise details are discussed in the subsections that follow.
Proposed Financial Caps
Entrepreneurs' Blocks: To bid in the entrepreneurs'
blocks, the applicant, including attributable investors and affiliates,
must cumulatively have less than $125 million in gross revenues and
less than $500 million in total assets. No individual attributable
investor or affiliate may have $100 million or more in personal net
worth.
Small Business: To qualify for special measures accorded a
small business, the applicant, including attributable investors and
affiliates, must cumulatively have not in excess of $40 million in
gross revenues. No individual attributable investor or affiliate may
have in excess of $40 million in personal net worth. (Note: this is the
small business definition we have adopted above). We seek comments on
whether in an entrepreneur's block we should define small businesses
differently.
Proposed Attribution Rules
Control Group. The gross revenues, total assets and
personal net worth of certain investors are not considered so long as
the applicant has a ``control group'' consisting of one or more
individuals or entities that control the applicant, hold at least 25
percent of the equity and, for corporations, at least 50.1 percent of
the voting stock.
The gross revenues, total assets and personal net worth of
each member of the control group are counted toward the financial caps.
Other Investors. Where the applicant has a control group,
the gross revenues, total assets and personal net worth of any other
investor are not considered unless the investor holds 25 percent or
more of the applicant's passive equity (which, for corporations, will
include as much as 15 percent of the voting stock).
Passive Equity. Passive equity is limited partnership or
non-voting stock interests or voting stock interests of 15 percent or
less of the issued and outstanding voting stock.
Proposed Option for Minority or Woman-Owned Applicants. If
the control group (consisting entirely of women and/or minorities) owns
at least 50.1 percent of the equity and, or corporation, at least 50.1
percent of the voting stock, then the gross revenues, total assets and
personal net worth of any other investor are not considered unless the
investor holds more than 49.9 percent of the applicant's passive equity
(which, for corporations, includes no more than as 15 percent of the
voting stock).
Affiliates. The gross revenues, assets and personal net
worth of outside interests held by the applicant (and the attributable
investors in the applicant) are counted toward the financial caps if
the applicant (or the attributable investors in the applicant) control
or have power to control the outside interests or if the applicant (or
the attributable investors in the applicant) is under the control of
the outside interests. The financial interests of spouses are also
attributed to each other.
2. Definition of Women and/or Minority-Owned Business
17. The points below summarize the two structural options proposed
to be available to firms that wish to qualify for the special
provisions adopted for businesses owned by minorities and women. These
options will be discussed in more detail in the text that follows.
50.1 Percent Equity Option
If woman and/or minority principals control the applicant
and own at least:
50.1 percent of the equity, and;
50.1 percent of the voting stock, in the case of
corporations.
Then any other investor may hold:
not more than 49.9 percent of the passive equity (which,
for corporations, includes as much as 15 percent of the voting stock).
25 Percent Equity Option
If women and/or minority principals control the applicant
and own at least:
25 percent of the equity, and;
50.1 percent of the voting stock, in the case of
corporations.
Then any other investor may hold:
25 percent or less of the passive equity (which, for
corporations, includes as much as 15 percent of the voting stock).
18. We also request comment on alternatives intended to deter shams
and fronts and to prevent abuse of the incentives for designated
entities. The Commission would enforce vigorously any requirements
adopted. These proposals include a holding and limited transfer period
for licensees in the entrepreneurs' blocks and repayment provisions
associated with bidding credits and installment payments. These steps
and our eligibility and affiliation rules are intended to ensure that
the benefits of any measures we take flow to the entities Congress
intended. Ultimately, we believe that we will best fulfill our
statutory mandate by creating powerful incentives for bona fide
designated entities to attract the capital necessary to compete both in
auctions for narrowband PCS and in the provision of service. We
therefore specifically request that comments address in detail the
impact any of these alternatives would likely produce on the
opportunity for designated entities to acquire narrowband PCS licenses.
D. The Entrepreneurs' Blocks
19. As discussed above, because the auction process itself requires
additional expenditures of capital to acquire licenses, this new
licensing procedure in many respects holds the potential to erect an
additional barrier to entry that had not existed even under the Act's
previous licensing methods, comparative hearings and lotteries. As
reflected in the House Committee Report, Congress was well aware of
that possibility and wanted to ensure that competitive bidding should
not exclude smaller entities from obtaining licenses.\17\ The inability
of small businesses and businesses owned by women and minorities to
obtain adequate private financing creates a serious imbalance between
these companies and large businesses in their prospects for competing
successfully in narrowband PCS auctions.
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\17\See H.R. Rep. No. 103-111 at 255.
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20. We anticipate that the results of the narrowband regional
auctions as well as the comments we seek in this Notice will be
relevant to our final conclusion of whether an entrepreneurs' block is
appropriate in narrowband PCS. We seek comments on what results in the
regional auction would or would not justify the use of an entrepeneurs'
block in subsequent narrowband auctions. The $125 million gross
revenue/$500 million asset caps have the effect of excluding the large
companies that would easily be able to outbid designated entries and
frustrate Congress' goal of disseminating licenses among a diversity of
licensees. At the same time, this restriction does not exclude many
firms that, while not large in comparison with other telecommunications
companies, nevertheless are likely to have the financial ability to
provide sustained competition for the PCS licensees. For example, the
$125 million gross revenue figure corresponds roughly to the
Commission's definition of a Tier 2, or medium-sized, local exchange
carrier,\18\ and would include virtually all of the independently owned
rural telephone companies, while excluding the largest incumbent paging
licensees. Limiting the personal net worth of any individual investor
or affiliate of the applicant to $100 million would prevent a very
wealthy individual from leveraging his or her personal assets to allow
the applicant to circumvent the size limitations of the entrepeneurs'
blocks.
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\18\Local exchange carriers are categorized as Tier 1 and Tier 2
companies by applying the criterion that Sections 32.11(a) and
32.11(e) of the Commission's Rules use to distinguished Class A and
Class B companies, respectively. Class A companies are those
companies having annual revenues from regulated telecommunications
operations of $100 million or more; Class B companies are those
companies having annual revenues from regulated telecommunications
operations of less than $100 million. The initial classification of
a company is determined by its lowest annual operating revenues for
the five immediately preceding years. A company's classification is
changed when its annual operating revenue exceeds or is under the
$100 million mark in each of five consecutive years. The Commission
imposes more relaxes regulatory requirements on Tier 2 LECs than on
Tier 1 LECs. See Automated Reporting Requirements for Certain Class
A and Tier 1 Telephone Companies, 2 FCC Rcd 5770, 5772 (1987), 52 FR
35918 (Sept. 24, 1987), Commission Requirements for Cost Support
Material to be Filed with 1994 Annual Access Tariffs and for Other
Cost Support Material, 9 FCC Rcd 1060 n. 3 (Comm. Carr. Bur. 1994),
Commission Requirements for Cost Support Material to be Filed with
Access Tariffs on March 1, 1985, Public Notice, Mimeo No. 2133
(Comm. Carr. Bur. released Jan. 25, 1985).
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21. In determining which of the blocks in each market should
constitute the entrepreneurs' blocks, we seek to make sufficient
opportunity available to businesses that would qualify for the
entrepreneurs' blocks and to those that would not. We seek comment on
whether it would be appropriate to include all of those remaining
blocks designated for bidding credits and to add one additional MTA
block and one additional BTA block if we decide to adopt the proposal.
We seek comment on the choice of blocks and the number of blocks that
should be included in the entrepreneurs' blocks. We want to choose
blocks to provide adequate amounts of spectrum and geographic territory
necessary to ensure that the eligible bidders will be able to compete
effectively. We believe that designating a variety of frequency blocks
as entrepreneurs' blocks would satisfy the needs of those parties who
believe they must have larger amounts of spectrum to compete
effectively as well as the needs of other designated entities who
require smaller blocks. Finally, it would not foreclose opportunities
for other parties.\19\
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\19\In addition, incumbent paging licensees would have the
opportunity to bed on 2,176 MTA and BTA response channel licenses
reserved for existing paging licensees.
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22. Holding and Limited Transfer Period. Because we interpret the
congressional goal of giving designated entities the opportunity to
provide spectrum-based services to extend beyond merely obtaining a
license, we seek comment on whether we should prohibit licensees in the
entrepreneurs' blocks from voluntarily assigning or transferring
control of their licenses for a period of three years from the date of
the license grant.\20\ We further ask commenters to address whether,
for the next two to seven years of the license term, we should permit
the licensee to assign or transfer control of its authorization only to
an entity that satisfies the entrepreneurs' blocks entry criteria.\21\
Comments should address whether any restrictions of this type would
accurately balance the goal of promoting access to capital by
designated entities with the need to assure the integrity of our
process. During this limited transfer period, licensees would continue
to be bound by the financial eligibility requirements, as set forth
below.\22\ In addition, a transferee or assignee who receives an
entrepreneurs' block license during this period would remain subject to
the transfer restrictions for the balance of the holding period.\23\
Should any of these proposals be adopted, the Commission would conduct
random pre- and post-auction audits to ensure that applicants receiving
preferences are in compliance with the FCC's rules.
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\20\We propose considering exceptions to this three-year holding
period rule on a case-by-case basis in the event of a judicial order
decreeing bankruptcy or a judicial foreclosure if the licensee
proposes to assign or transfer its authorization to an entity that
meets the financial thresholds for bidding in the entrepreneurs'
blocks. In addition, we note that a transfer is considered
``involuntary'' if it is made pursuant to a court decree requiring
the sale or transfer of the licensee's stock or assets. Paramount
Pictures, Inc., 43 FCC 453 (1949); Cf. William Penn Broadcasting, 16
FCC 2d 1050 (1969).
\21\We note that a licensee assigning its authorization pursuant
to this limited transfer period might be subject to the repayment
provisions associated with installment payments and bidding credits.
See infra 28, 35.
\22\See infra 38-43. In addition, for purposes of the
installment payment and bidding credit provisions set forth below,
licensees will continue to be bound by the financial eligibility
requirements throughout the term of the license.
\23\For example, if an entrepreneurs' block authorization is
assigned to an eligible business in year four of the license term,
it would be required to hold that license until the original holding
period expires, subject to the same exceptions that applied to the
original licensee.
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23. Our goals are to create significant opportunities for
entrepreneurs, small businesses, and businesses owned by minorities and
women to compete in auctions for licenses and attract sufficient
capital to build-out those licenses and provide service. We recognize
the critical need to attract capital, which requires flexibility. We
are very concerned, however, that such flexibility not undermine our
more fundamental objective, which is to ensure that designated entities
retain de facto and de jure control of their companies. The holding and
limited transfer period upon which we seek comment, may help promote
this objective. We seek comment on the effect that any rules of this
sort are likely to have on the achievement of our goals of meaningful
long-term participation by designated entities and how such a rule
would impact the ability to raise capital.
E. Bidding Credits
24. In the Third Report and Order we adopted a 25 percent bidding
credit for businesses owned by minorities and women. We concluded that
the use of bidding credits would be an effective tool to ensure that
women and minority-owned businesses have opportunities to participate
in the provision of narrowband services.\24\ And, in this Order, we
raised this bidding credit to 40 percent for the regional narrowband
auctions. While we do not think that a bidding credit of this magnitude
is required when used in conjunction with an insulated entrepreneurs'
block, we continue to believe that a bidding credit is necessary to
ensure that women and minority-owned businesses have the opportunity to
participate in narrowband PCS. In addition, we believe that a small
bidding credit is warranted to help small businesses overcome financing
obstacles. Accordingly, we propose to continue to provide a bidding
credits in the proposed entrepreneurs' blocks that would give small
businesses a 10 percent credit, women and minority-owned businesses a
15 percent credit, and small businesses owned by women and minorities
an aggregate credit of 25 percent.
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\24\See Third Report and Order at 72, in PP Docket No. 93-252,
9 FCC Rcd 2941, 59 FR 26741 (May 24, 1994), (Third Report and
Order).
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25. In ex parte presentations to the Commission, many commenters
have indicated that, without spectrum set-asides for narrowband PCS,
bidding credits would not be sufficient to assist designated entities
in outbidding very large entities who are likely to bid for licenses in
this service. PCSD states, for example, that all of the existing large
paging companies can justify much larger payments for licenses than
could an individual entrepreneur, regardless of a bidder's credit.
Therefore, it believes no entrepreneur will win a bid for any PCS
market that is desirable to any of the large companies.\25\ As
described above, in order to afford designated entities a realistic
opportunity to obtain licenses in the narrowband PCS service, we
propose to exclude very large businesses from bidding for licenses in
the entrepreneurs' blocks. These measures would enhance the value of
the bidding credits for small businesses and businesses owned by
minorities and women. In this context, we believe that bidding credits
can have a significant effect on the ability of small businesses and
businesses owned by women and minorities to participate successfully in
auctions for licenses in entrepreneurs' blocks.
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\25\Ex parte filing of PCSD Development Corporation (PCSD),
August 9, 1994.
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26. As explained above, the capital access problems faced by small
firms and women and minority-owned firms make special provisions like
bidding credits appropriate for these designated entities in narrowband
PCS.\26\ In effect, the bidding credit would function as a discount on
the bid price a firm would actually have to pay to obtain a license
and, thus, will address directly the financing obstacles encountered by
these entities. Moreover, as noted previously, women and minorities
face discrimination in lending and other barriers to entry not
encountered by other firms, including other designated entities.
Therefore, as one of the measures designed to counter these increased
capital formation difficulties, we propose to provide them with a
slightly higher bidding credit than small businesses. Thus, women and
minorities would receive a 15 percent payment discount that is applied
against the amounts they bid on licenses. Absent such measures targeted
specifically to women and minorities, it might be impossible to assure
that these groups achieve any meaningful measure of opportunity for
actual participation in the provision of narrowband PCS. Similarly, it
is reasonable to assume that small firms owned by women and minorities
suffer the problems endemic to both groups. Therefore, we propose a
cumulative bidding credit of 25 percent for these groups. We believe
that these measures will help women and minorities to attract the
capital necessary for obtaining a license and constructing and
operating a narrowband PCS system, consistent with the intent of
Congress. We seek comments on these proposals.
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\26\Although we did not previously grant bidding credits to
small businesses in the Third Report and Order, we now believe that,
given the exponentially greater expense likely to be incurred in
acquiring broadband PCS licenses, bidding credits might be a proper
means to ensure that these firms have the opportunity to participate
in this service.
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27. As discussed below, we have also proposed to modify the
definition of a minority and women-owned firm.\27\ To receive a 10
percent bidding credit, we propose that a small business must satisfy
the same gross revenue test adopted for installment payments. As
explained more fully in the small business definition section, we
propose that a consortium consisting entirely of small businesses also
be eligible for a 10 percent bidding credit even if the combined gross
revenues of the consortium exceed the small business gross revenues
threshold. In addition, we propose that a small business that is owned
by women and minorities must satisfy the definition of a business owned
by minorities and women as well as the small business definition to
receive a 25 percent bidding credit. Finally, we propose that a
consortium of small firms owned by women and/or minorities is eligible
for a 25 percent bidding credit, provided that each member of the
consortium meets the definition of a small business and a minority and/
or women-owned firm.
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\27\See infra 44-54.
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28. Repayment Policies Applicable to Bidding Credits. To ensure
that bidding credits benefit the parties to whom they are directed, we
inquire whether we should adopt strict repayment policies: if, within
the original 10-year term, a licensee applies to assign or transfer
control of a license to for example, an entity that is not eligible for
as a high a level of bidding credit, then the difference between the
bidding credit obtained by the assigning party and the bidding credit
for which the acquiring party would qualify would have to be paid to
the U.S. Treasury as a condition of approval of the transfer. Thus, an
assignment of a license from a small minority-owned firm to a women-
owned firm with revenues greater than $40 million would require
repayment of 10 percent of the original bid price (25 percent less 15
percent) to the Treasury. A sale to an entity that would not qualify
for bidding credits would entail full repayment of the original bidding
credit as a condition of transfer. Small businesses also would be bound
by the financial eligibility rules during the entire license term as
set forth below. Thus, if after licensing an investor purchases an
``attributable'' interest in the business and, as a result, the gross
revenues of the firm exceed the $40 million small business cap, this
repayment provision would apply.\28\ If such a proposal were to be
adopted, we would envision that these repayment provisions apply
throughout the original term of the license to help promote the long-
term holding of licenses by those parties receiving bidding credits.
Nevertheless, as in the case of the holding period and transfer
restrictions discussed at 88-89 above we seek comment on any effects
such rules may have on the ability of designated entities to attract
capital. We therefore ask commenters to address in detail whether this
type of restriction would further the goal of increasing the number of
designated entities participating in the provision of narrowband PCS
services.
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\28\See infra 39-43, for a discussion of which investor
interests would be ``attributable'' for purposes of calculating the
gross revenues caps.
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F. Installment Payments
29. A significant barrier for most businesses small enough to
qualify to bid in the proposed entrepreneurs' blocks would be access to
adequate private financing to ensure their ability to compete against
larger firms in the PCS marketplace.\29\ In the Third Report and Order,
we concluded that installment payments are an effective means to
address the inability of small businesses to obtain financing and will
enable these entities to compete more effectively for the auctioned
spectrum. We also determined that small businesses eligible for
installment payments would only be required to pay half of the down
payment (10 percent of the winning bid, as opposed to 20 percent) five
days after the auction closes, with the remaining 10 percent payment
deferred until five days after grant of the license. Finally, we
indicated that installment payments should be made available to small
businesses at an interest rate equal to the rate for U.S. Treasury
obligations.\30\
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\29\See e.g., comments of SBA Chief Counsel of Advocacy at 6,
20-21, NTIA at 27; SBAC Report at 2 (September 15, 1993).
\30\See Third Report and Order at 86-90.
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30. In light of the expected substantial capital required to
acquire narrowband PCS licenses, we proposed that installment payments
be available to most businesses that obtain narrowband PCS licenses in
the proposed entrepreneurs' blocks. By allowing payment in
installments, the government would in effect be extending credit to
licensees, thus reducing the amount of private financing needed prior
to and after the auction. Such low cost government financing would
promote long-term participation by these businesses, which, because of
their smaller size, lack access to sufficient capital to compete
effectively with larger PCS licensees. Under the rules we propose
today, installment payments would be available to smaller entities that
do not technically qualify as small businesses for purposes of other
measures we have proposed, such as bidding credits. We believe,
however, that, given the significant costs of narrowband PCS licenses
and the likelihood of very large participants in the other blocks, this
option would be fully consistent with the congressional intent in
enacting Section 309(j)(4)(A) to avoid a competitive bidding program
that has the effect of favoring incumbent providers of other
communications services, with established revenue streams, over smaller
entities.\31\
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\31\See H.R. Rep. No. 103-111 at 255 (Commission has the
authority to design alternative payment schedules in order that the
auction process does not inadvertently favor only those with ``deep
pockets'' over new or small companies).
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31. Under the plan we propose here, all licenses that satisfy the
gross revenues, total assets and personal net worth criteria to bid in
the entrepreneurs' blocks would be allowed to pay in installments for
regional and MTA licenses granted in those blocks. With respect to the
BTA licenses in those blocks, however, only businesses owned by women
and minorities and those licensees with less than $75 million in gross
revenues would be able to use installment payments.\32\ This
distinction is based on the expected lower costs to acquire licenses
and construct systems in the BTAs. However, if we adopt our proposal to
redesignate BTA licenses as nationwide or regional licenses, we propose
extending installment payments on those blocks to all parties eligible
for the entrepreneurs' blocks. Thus, with the exception of companies
owned by women or minorities, which face additional problems accessing
capital, we do not think that a firm with gross revenues exceeding $75
million would require government financing to be competitive for the
BTA licenses.\33\
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\32\We will apply the same $500 million total assets and $100
million personal net worth standards for purposes of determining
eligibility for installment payments in the BTA entrepreneurs'
blocks. The attribution rules set forth with regard to eligibility
to bid will also apply in all of the BTA entrepreneurs' blocks.
\33\We note that a consortium of small businesses would be
eligible for installment payments in any market so long as each
member of the consortium satisfies the definition of a small
business, as set forth in Section V.A., infra.
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32. The installment payment option would enable qualified
businesses to pay their winning bid over time. These businesses would
still make the applicable upfront payment in full before the auction,
but would be required to make a post-auction down payment equaling only
ten percent of their winning bids, half of which will be due five
business days after the auction closes. Payment of the other half of
the down payment would be deferred until five business days after the
license is granted. In general, the remaining 90 percent of the auction
price would be paid in installments with interest charges to be fixed
at the time of licensing at a rate equal to the rate for ten-year U.S.
Treasury obligations plus 2.5 percent. Under this general rule, only
payments of interest would be due for the first year with principal and
interest payments amortized over the remaining nine years of the
license. Timely payment of all installments would be a condition of the
license grant and failure to make such timely payment would be grounds
for revocation of the license.\34\ We seek comment on this installment
payment proposal.
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\34\As described in the Second Report and Order, in PP Docket
No. 93-253, 9 FCC Rcd 2348, 59 FR 22980 (May 4, 1994), (Second
Report and Order), the Commission may, on a case-by-case basis,
permit a three to six month grace period within which a licensee may
seek a restructuring of the payment plan.
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33. Enhanced Installment Payments. As explained previously, small
businesses and businesses owned by minorities and women face capital
access difficulties not encountered by other firms and, thus, require
special measures to ensure their opportunity to participate in
narrowband PCS. Accordingly, we propose an ``enhanced'' installment
payment plan for these entities. Pursuant to this enhanced installment
payment plan, small businesses who win licenses in the proposed
entrepreneurs' blocks would be required to pay interest only for the
first two years of the license term at the same interest rate as set
forth in the general rule. Businesses owned by women and/or minorities
would be able to make interest-only payments for three years. Interest
would accrue at the Treasury note rate without the additional 2.5
percent.\35\ And finally, businesses that are both small and owned by
women and/or minorities would be required to pay only interest for five
years. Interest would accrue at the Treasury note rate.
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\35\To be eligible for these ``enhanced'' installment payments,
a firm would have to satisfy either of the two alternative
definitions of a woman or minority-owned business, as set forth in
44-54, infra, as well as the applicable financial caps.
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34. These proposed enhanced installment payments are narrowly
tailored to the needs of the various designated entities, as reflected
in the record in this proceeding. We believe that varying the
moratorium on principal in the early years of the loan and varying the
interest rate based on these needs would allow small businesses and
companies owned by women and/or minorities to bid higher in auctions,
thereby increasing their chances for obtaining licenses. In addition,
it would allow them to concentrate their resources on infrastructure
build-out and, therefore, it would increase the likelihood that they
become viable narrowband PCS competitors. We request comment on these
proposed enhancements to the installment payment plan.
35. Unjust Enrichment Applicable to Installment Payments. To ensure
that large businesses do not become the unintended beneficiaries of
measures meant for smaller firms, we propose to retain the unjust
enrichment provisions adopted in the Third Report and Order applicable
to installment payments. Specifically, if a licensee that was awarded
installment payments seeks to assign or transfer control of its license
to an entity not meeting the applicable eligibility standards set out
above during the term of the license, we would require payment of the
remaining principal and any interest accrued through the date of
assignment as a condition of the license assignment or transfer.\36\
Moreover, if an entity seeks to assign or transfer control of a license
to an entity that does not qualify for as favorable an installment
payment plan, the installment payment plan, if any, for which the
acquiring entity qualifies would become effective immediately upon
transfer. Thus, a higher interest rate and earlier payment of principal
may begin to be applied. For example, a transfer of a license in the
fourth year after license grant from a small minority-owned firm to a
small non-minority owned firm would require that the firm begin
principal payments and the balance would begin accruing interest at a
rate 2.5 percent above the rate that had been in effect. Finally, if an
investor subsequently purchases an ``attributable'' interest in the
businesses and, as a result, the gross revenues or total assets of the
business exceed the applicable financial caps, this unjust enrichment
provision would also apply.\37\ We seek comment on these proposals.
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\36\See Third Report and Order at 89.
\37\See infra 39-43, for a discussion of which investor
interests would be ``attributable'' for purposes of calculating the
gross revenues and total assets thresholds.
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G. Upfront Payments
36. As previously indicated in the Third Report and Order, the
upfront payment requirement was designed to ensure that bidders are
qualified and serious and to provide the Commission with a source of
funds in the event that it becomes necessary to assess default or bid
withdrawal penalties.\38\ The upfront payment ensures that bids during
the course of the auction are bona fide and convey information about
the value of the underlying licenses. Our standard upfront payment for
narrowband PCS is $0.02 per MHz per pop. As an additional means of
enhancing the opportunity of designated entities to participate in
competitive bidding we propose to reduce the required upfront payment
for those applicants. As we concluded in the Fifth Report and Order, we
are concerned that the $0.02 per MHz per pop upfront payment
requirement might impose a barrier for smaller entities wishing to
participate in the auctions. Moreover, we note that most bidders in the
proposed entrepreneurs' blocks would be entitled to pay for their
licenses in installments, which would require a down payment of only
five percent of the winning bid. We are concerned that requiring an
upfront payment that may be larger than the down payment that the
winning bidder is required to tender could discourage auction
participation.
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\38\Third Report and Order,Secs. 41-45.
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37. For these reasons, we propose to reduce the upfront payment
requirement to $0.015 per MHz per pop for bidders in the entrepreneurs'
blocks. This 25 percent discount should facilitate auction
participation by capital-constrained companies and would permit them to
conserve resources for infrastructure development after winning a
license. Moreover, since the upfront payment is still substantial, we
believe that insincere bidding would be discouraged and the Commission
would have access to funds if it must collect default or bid withdrawal
penalty payments.
H. Definitions and Eligibility
1. Eligibility to Bid in the Proposed Entrepreneurs' Blocks
38. As noted previously, eligibility to bid in the proposed
entrepreneurs' blocks would be limited to companies that, together with
their affiliates and investors, had gross revenues of less than $125
million in each of the last two years and have total assets of less
than $500 million at the time their short form applications are filed.
In addition, we propose to prohibit an applicant from bidding in these
blocks if any one attributable individual investor or principal in the
applicant has $100 million or greater in personal net worth at the
short form application filing date.
2. Attribution Rules for the Proposed Entrepreneurs' Blocks
39. For purposes of determining whether an entity qualifies to bid
in the entrepreneurs' blocks, we propose to follow the control group
and attribution rules set forth with regard to eligibility to bid as a
small business. In particular, winning bidders would be required to
identify on their long-form applications a control group that controls
the applicant, owns at least 25 percent of the equity, and in the case
of a corporation, holds at least 50.1 percent of the voting stock. For
partnership applicants, we propose that every general partner be
considered part of the group. The gross revenues and total assets of
each member of the control group and each member's affiliates would be
counted toward the $125 million/$500 million thresholds, regardless of
the size of the member's total interest in the applicant. The $100
million personal net worth limitation would also apply to each member
of the control group. We would not consider the gross revenues or
personal net worth of any other investor unless the investor holds 25
percent or more of the outstanding passive equity in the applicant,
which, as defined above, includes as much as fifteen percent of the
voting stock in a corporate applicant.
40. We also propose more relaxed attribution standard with regard
to investors in small businesses owned by minorities and women.
Specifically, we would not consider the gross revenues or personal net
worth of a single passive investor in a minority or female-owned small
business unless the investor holds in excess of a 49.9 percent passive
interest (which includes as much as fifteen percent of a corporate
applicant's voting stock), provided the women or minority control group
maintains at least 50.1 percent of the equity and, in the case of a
corporate applicant, at least 50.1 percent of the voting stock. We
believe that such revenue attribution would ensure that only bona fide
small businesses are able to take advantage of the special provisions
we have proposed, but would allow those businesses to attract
sufficient equity capital to be truly viable contenders in the PCS
industry.
41. In addition, we propose to allow a consortium of small
businesses to qualify for any of the measures adopted in this order
applicable to individual small businesses including the ability to bid
in the entrepreneurs' block. As used here, the term ``consortium''
means a conglomerate organization formed as a joint venture among
mutually-independent business firms, each of which individually
satisfies the definition of a small business.
42. We explain how these attribution rules would apply with regard
to any holding and limited transfer period for entrepreneurs' block
licensees should such rules ultimately be adopted. During this holding
period, an entrepreneurs' block licensee could not sell more than 25
percent of its passive equity to a single investor if the resulting
attribution of that investor's gross revenues or total assets would
bring the company over the $125 million gross revenues/$500 million
personal net worth cap. Similarly, while individual members of the
control group could change (if it would not result in a transfer of
control of the company), the control group would have to maintain
control and at least 25 percent of the equity and 50.1 percent of the
voting stock.\39\ A company would be permitted to grow beyond these
gross revenues/total assets caps, however, through equity investment by
non-attributable (i.e. passive) investors, debt financing, revenue from
operations, business development or expanded service.\40\
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\39\A minority of woman-owned company would have to continue to
adhere to the attribution rules applicable to it, set out above.
\40\These rules would continue to apply in this manner
throughout the license term with regard to firm's continuing
eligibility for installment payments, ``enhanced'' installment
payments and bidding credits.
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43. We seek comment on these proposed eligibility requirements for
the entrepreneurs' blocks. In particular, parties should discuss the
equity and control requirements for the control group and investors in
both the corporate and partnership context. In addition, commenters
should discuss the alternative option for women and minority-owned
companies and the ability of small businesses to form consortia. With
regard to all of these issues, parties are asked to comment on the
proposals' impact on the ability of entities to obtain financing as
well as on the Commission's goals of deterring shams and fronts.
3. Definition of Women and Minority-Owned Business
44. As discussed above, we have proposed steps in this order to
address the special funding problems faced by minority and women-owned
firms and thereby to ensure that these groups have the opportunity to
participate and become strong competitors in the narrowband PCS
service.\41\ We previously adopted a tax certificate program for women
and minorities to allow more sources of potential funding, and in this
Order have relaxed the attribution standard used to determine
eligibility as a qualified small business.
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\41\We proposed to use the same criteria set forth in the Second
Report and Order, and consider the members of the following groups
``minorities'' for purposes of our rules: ``[T]hose of Black,
Hispanic Surnamed, American Eskimo, Aleut, American Indian and
Asiatic American extraction.'' See Statement of Policy on Minority
Ownership of Broadcasting Facilities, 68 FCC 2d 979, 980 n.8 (1978);
Commission Policy Regarding the Advancement of Minority Ownership in
Broadcasting, 92 FCC 2d 849, 489 n.1 (1982). Moreover, as adopted in
the Second Report and Order, minority and women-owned businesses
would be eligible for special measures only if the minority and
women principals are also United States citizens.
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45. For purposes of implementing these steps, we propose to depart
from the definition of a minority and women-owned firm that was adopted
in the Third Report and Order. We have adopted relaxed attribution
standards for businesses owned by women and minorities for purposes of
qualifying for small business provisions. We are proposing relaxed
standards for businesses owned by women and minorities to qualify for
the entrepreneurs' blocks. In the Third Report and Order, we found
generally that to establish ownership by minorities and women, a strict
eligibility standard should be adopted that required minorities or
women to have at least 50.1 percent equity stake and a 50.1 percent
controlling interest in the designated entity. Third Report and Order
at 68; 47 CFR Sec. 1.2110(b)(2). For future narrowband PCS auctions,
we propose to retain the requirement that minorities and/or women
control the applicant and hold at least 50.1 percent of a corporate
applicant's voting stock. However, to establish their eligibility for
certain benefits, summarized below, we propose an additional
requirement that, even where minorities and women hold at least 50.1
percent of the applicant's equity, other investors in the applicant may
own only passive interests, which, for corporate applicants, is defined
to include as much as fifteen percent of the voting stock. In addition,
provided that certain restrictions are met, we propose to allow women
and minority-owned firms the option to reduce to 25 percent the 50.1
percent minimum equity amount that must be held.
46. We emphasized in the Third Report and Order that we did not
intend to restrict the use of various equity financing mechanisms and
incentives to attract financing, provided that the minority and women
principals continued to own 50.1 percent of the equity, calculated on a
full-diluted basis, and that their equity interest entitled them to a
substantial stake in the profits and liquidation value of the venture
relative to the non-controlling principals. We noted, however, in the
Second Report and Order that different standards that meet the same
objectives may be appropriate in other contexts. Second Report and
Order at 278. In view of the evidence of discriminatory lending
experiences faced by minority and women entrepreneurs and the
exceptionally great financial resources believed to be required by
narrowband PCS applicants, we conclude that it may be appropriate to
allow more flexibility with regard to the 50.1 percent equity
requirements for this service in order to open doors to more sources of
equity financing for women and minority-owned firms.
47. We propose therefore to allow women and minority-owned firms
the following options. First, they may satisfy the general definition
set forth in the Second Report and Order, which requires the minority
and/or female principals to control the applicant, own at least 50.1
percent of its equity and, in the case of corporate applicants, hold at
least 50.1 percent of the voting stock. Under this option, other
investors may own as much as a 49.9 percent passive equity interest. As
noted above regarding eligibility to bid in the entrepreneurs' blocks,
passive equity in the corporate context means only non-voting stock may
be held, or stock that includes no more than fifteen percent of the
voting interests.\42\ For partnerships, the term means limited
partnership interests that do not have the power to exercise control of
the entity. We ask commenters specifically to address whether the
proposed fifteen percent voting interest limitation strikes the correct
balance, or whether a higher percentage would facilitate capital
formation without unduly contributing to a proliferation of shams. In
addition, the Second Report and Order, all investor interests would be
calculated on a fully-diluted basis, meaning that agreements such as
stock options, warrants and convertible debentures generally would be
considered to have a present effect and would be treated as if the
rights thereunder already have been fully exercised.\43\ We recognize
that the requirement that other investors own only passive interests
would be a departure from the definition of a minority or women-owned
business adopted in the Second Report and Order, but because of the
very significant financial contribution that may be made by such other
investors in designated entities, we believe that the passive equity
requirement may be appropriate as an additional safeguard. In addition,
we seek comments on whether these rules as currently framed may affect
the ability of legitimate designated entities to obtain the capital
needed to participate in the auction.
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\42\For example, under this option, a corporate applicant with
two classes of issued and outstanding stock, 100 shares of voting
stock and 100 shares of non-voting stock, could sell to a single
non-eligible entity 49.9 percent of the applicant's equity,
consisting of 5 shares of the corporation's voting stock and 94
shares of its non-voting stock. Under this scenario, eligible
minorities or women, in order to retain at least 50.1 percent of the
value of all outstanding shares of the corporation's stock, must own
all of the corporation's remaining shares of stock; that is, 95
shares of voting stock and six shares of non-voting stock.
\43\As also noted in the Second Report and Order, we will
consider departing from the requirement that the equity of investors
in minority and women-owned businesses must be calculated on a
fully-diluted basis only upon a demonstration, in individual cases,
that options or conversion rights held by non-controlling principals
will not deprive the minority and women principals of a substantial
financial stake in the venture or impair their rights to control the
designated entity. See Second Report and Order at 277.
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48. As a second proposed option, women and minority-owned firms
would be able to sell up to 75 percent of the company's equity,
provided that no single investor may hold 25 percent or more of the
firm's passive equity, which is defined in the same manner as above.
For example, a corporation with 100 shares of voting stock and 100
shares of non-voting stock, with the 200 shares representing the total
outstanding shares of the company, could qualify as a minority or
women-owned business under the following circumstances. The minority or
women principals would have to own at least 51 shares of voting stock,
which satisfies the requirement that they have voting control and, in
this case, also meets the requirement that they hold at least 25
percent of the equity. Two other investors could each own 34 shares of
non-voting stock and fifteen shares of voting stock, which represents
24.5 percent of the company's equity for each of the shareholders. A
third investor could own the remaining 32 shares of non-voting stock
and fifteen shares of the voting stock, or 23.5 percent of the equity.
The remaining 4 shares of voting stock may be sold to other investors.
49. Whichever option is chosen, we would require establishment of a
``control group'' for women and minority-owned firms in much the same
way we did for purposes of eligibility to bid in the entrepreneurs'
blocks. Specifically, winning bidders, transferees or assignees would
have to identify on their long-form applications a control group
(consisting entirely of minorities and/or women or entities 100 percent
owned and controlled by minorities and women) that has de jure and de
facto control of the applicant and holds either at least 50.1 or 25
percent of the applicant's equity, depending upon which option is
elected.
50. We believe that a modification of our 50.1 percent equity
requirement would best achieve the Congressional objective of providing
effective and long-term economic opportunities for women and minority-
owned firms in narrowband PCS. At the same time, we propose to maintain
strict enforcement of the requirement that actual control reside with
the qualified designated entities. Thus, to establish their eligibility
for tax certificates, enhanced installment payments, bidding credits
and relaxed cellular attribution rules, women and minority-owned
applicants electing to use the 25 percent equity option could not in
any instance allow an individual investor who is not in the control
group to own more than a 25 percent passive equity interest. This
restriction would apply even in circumstances in which allowing an
investor to exceed these limitations would not result in the
applicant's exceeding the gross revenues and other financial standards
that apply to other bidders in the entrepreneurs' blocks and other
situations involving financial caps. These structural safeguards, as
well as the general requirement that other investors hold only passive
interests in women and minority-owned applicants, would help to ensure
that control truly remains with the women and minority designated
entities.
51. For example, a women or minority-owned firm electing to use the
25 percent option may have a non-eligible investor with more than 25
percent passive stake and still qualify to bid in the entrepreneurs'
blocks or for benefits that apply to small businesses, as long as the
attributable revenues of the investor do not cause the applicant to
exceed the gross revenues/total asset caps. In these contexts, no
additional restrictions would be necessary, because women and minority-
owned applicants, like other applicants, would be eligible to bid in
these blocks and to qualify as small businesses so long as they comply
with the same restrictions on financial eligibility that apply to other
applicants. Since the attribution rule itself operates to ensure
compliance with size limitations, it would not be necessary to impose
additional restrictions on the size of interests held by investors with
attributable interests. This firm would not qualify, however, for
special measures applicable only to women and minority-owned
businesses, such as ``enhanced'' installment payments or the 15 or 25
percent bidding credits, because it has a single non-eligible investor
with more than 25 percent passive interest. In circumstances in which
women and minorities are required to retain only 25 percent of the
firm's equity, this additional structural restriction would be
appropriate because the objective in this context is to ensure not
merely financial eligibility, but that women and minorities retain
control of the license.
52. We set forth previously rules defining more explicitly the term
``control'' for purposes of determining whether a ``control group''
maintains de facto as well as de jure control of an applicant.\44\ We
propose to apply those rules equally to the minority and women
principals of minority and women-owned applicants. Consistent with our
general policies with regard to women-owned applicants for purposes of
our multiple ownership and cross-ownership rules in this broadcast
context, we do not propose to adopt, at this time, any special rules or
presumptions to determine whether women-owned applicants exercise
independent control of their firms. See In the Matter of Clarification
of Commission Policies Regarding Spousal Attribution, 7 FCC Rcd. 1920,
57 FR 08845 (Mar 13, 1992).
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\44\See supra 49.
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53. We also note here that we are proposing to depart from the
provision in the Third Report and Order that bars publicly traded
companies from qualifying as minority and women-owned businesses for
purposes of participating in auctions. Most of the steps proposed to
assist these designated entities in this Further Notice (e.g., bidding
credits and installment payments) are confined to winning bidders in
the entrepreneurs' blocks, where there would be a financial limit on
the size of participants. Because of the large capital entry costs of
narrowband PCS, we now believe that even publicly traded companies
owned by women and minorities that qualify to bid in entrepreneurs'
blocks require additional measures, such as bidding credits and
installment payments, to be able to participate successfully.
54. As noted above, we propose that applicants owned by women and
minorities must meet the limitations on gross revenues, total assets
and personal net worth to qualify for entry into the entrepreneurs'
blocks. The size limitations would not apply, however, to all measures
designed to assist applicants owned by minorities and/or women. The tax
certificate policy applies to all narrowhead PCS licenses and would not
be limited to licenses in the entrepreneurs' blocks. Therefore,
businesses owned by minorities and women need not meet the gross
revenue and other financial restrictions to qualify for tax
certificates. But minority and women-owned firms would have to satisfy
the Commission's structural ownership requirements to receive the
benefits of tax certificates; that is, they would be subject to the
limitation that interests held by investors who are not women and
minorities must be passive.
4. Definition of an Affiliate
55. In the Second Report and Order, we referenced the SBA's
affiliation rules for purposes of defining generally whether an entity
qualifies as a small business and gave examples of how the affiliation
rules would be applied. In the Fifth Report and Order, we expanded on
the SBA's affiliation rules in establishing detailed affiliation
standards for narrowband PCS to be used when designated entities must
include ``affiliates'' to determine their eligibility for special
designated entity provisions. In the Second Memorandum Opinion and
Order\45\ that we adopted in this docket, we incorporate into our
generic auction rules the affiliation standards that we established for
narrowband PCS in the Fifth Report and Order. We propose to apply these
affiliation standards to narrowband PCS for purposes of determining any
of the above described, size-based eligibility criteria for designated
entities seeking special treatment under the provisions adopted herein.
These standards would give applicants clear guidance regarding the
relationships that we will attribute for purposes of applying any of
our sized-based eligibility criteria.
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\45\Second Memorandum Opinion and Order at 46, in PP Docket No.
93-253, FCC No. 94-215, released Aug. 15, 1994, (Second Memorandum
Opinion and Order).
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I. Limit on Licenses Awarded in Entrepreneurs' Blocks
56. The special provisions which we propose for designated entities
are based, in part, on our mandate to fulfill the congressional goal
that we disseminate licenses among a wide variety of applicants. 47
U.S.C. Sec. 309(j)(3)(B). Therefore, in proposing the financial
assistance measures set forth in this Further Notice, we are concerned
about the possibility, even if remote, that a few bidders will win a
very large number of the licenses in the entrepreneurs' blocks. As a
consequence, the benefits that Congress intended for designated
entities would be enjoyed, in disproportionate measure, by only a few
individuals or entities. Congress, in our view, did not intend that
result. We therefore propose steps to ensure that the financial
assistance provided through our rules is dispersed to a reasonable
number of applicants who win licenses in these blocks.
57. To achieve a fair distribution of the benefits intended by
Congress, we propose a limit on the total number of licenses within the
entrepreneurs' blocks that a single entity could win at auction. In
setting this limit, we would avoid imposing a restriction that would
prevent applicants from obtaining a sufficient number of licenses to
create large and efficient nationwide or regional services.
Specifically, we propose a limitation that no single entity may win
more than 10 percent of the licenses available in the entrepreneurs'
blocks. These licenses could be in any combination of frequency blocks.
Such a limit would ensure that at least 10 winning bidders enjoy the
benefits of the entrepreneurs' blocks. At the same time, it would allow
bidders to effectuate aggregation strategies that include large numbers
of licenses and extensive geographic coverage.
58. Further, this limitation would apply only to the total number
of licenses that may be won at auctions in these proposed
entrepreneurs' blocks; it would not be an ownership cap that applies to
licenses that might be obtained after the auctions. For purposes of
implementing this restriction, we would consider licenses to be won by
the same entity if an applicant (or other entity) that controls, or has
the power to control licenses won at the auction, controls or has the
power to control another license won at the auction.
J. Redesignation of Certain Narrowband PCS Spectrum Blocks
59. Finally, we are concerned that there are companies that would
be eligible for an entrepreneurs' block license that may desire larger
license areas than MTAs and BTAs. It appears that over half of the
bidders in the nationwide auction would have qualified for an
entrepreneurs' block license. As a result, we propose to redesignate
the two BTA licenses as regional licenses organized in the same
configuration set forth in section 24.102 of the rules. Doing so would
give designated entities an opportunity to bid on a larger and more
valuable license under the rules for entrepreneurs' blocks. We also
seek comment on other means to achieve larger geographic license sizes
such as designating these BTA licenses as nationwide licenses or by
maintaining the BTA designation, but allowing combinatorial bidding for
the designated regions. Commenters should also address the appropriate
premium we should adopt for comparison of combinatorial and BTA license
bids if we allow combinatorial bidding. We also seek comment on whether
some of the MTA and BTA response channels should be redesignated as
larger license areas with bidding limited only to those entities
eligible to bid for entrepreneurs' block licenses.
II. Procedural Matters and Ordering Clause
A. Further Notice--Initial Analysis
60. Reason for the Action. The purpose of the Further Notice is to
implement competitive bidding rules and regulations rules consistent
with the Commission's competitive bidding authority that will carry out
the statutory mandates that certain designated entities, including
small entities, are afforded an opportunity to participate in the
competitive bidding process and in the provision of spectrum-based
services.
61. Objectives of this Action. The Omnibus Budget Reconciliation
Act of 1993 and the subsequent Commission actions to implement it are
intended to establish a system of competitive bidding for choosing
among certain applications for initial licenses, and will carry out
statutory mandates that certain designated entities, including small
entities, are afforded an opportunity to participate in the competitive
bidding process and in the provision of narrowband PCS services.
62. Legal Basis. Authority for the Further Notice can be found in
the Omnibus Budget Reconciliation Act of 1993 and in Sections 2(a),
4(i) 303(r), 309(i) and 309(j) of the Communications Act of 1934, as
amended, 47 U.S.C. Secs. 152(a), 154(i), 303(r), 309(i) and 309(j).
63. Reporting, Recordkeeping and Other Compliance Requirements. The
proposals under consideration in this Further Notice include the
possibility of new reporting and recordkeeping requirements for a
number of small business entities.
64. Federal Rules Which Overlap, Duplicate or Conflict With These
Rules. None.
65. Description, Potential Impact, and Number of Small Entities
Involved. The rule changes proposed in this Further Notice could effect
smaller entities if they have mutually exclusive applications for
initial licenses or permits for narrowband PCS licenses. The Further
Notice proposes to establish certain narrowband PCS spectrum blocks for
bidding exclusively by smaller entities and to provide installment
payments and bidding credits to certain eligible entities within those
blocks.
66. Any Significant Alternatives Minimizing the Impact on Small
Entities Consistent with the Stated Objectives. The Further Notice
proposes certain provisions for smaller entities designed to ensure
that such entities have the opportunity to participate in the
competitive bidding process and in the provision of narrowband PCS
services.
B. Ex Parte Rules
67. This is a non-restricted notice and comment rule making
proceeding. Ex Parte presentations are permitted, except during the
Sunshine Agenda period, provided they are disclosed as provided in
Commission rules. See generally 47 CFR Secs. 1.1202, 1.1203, and
1.120(a).
C. Comment Dates
68. Pursuant to applicable procedures set forth in sections 1.415
and 1.419 of the Commission's Rules, 47 CFR Secs. 1.415 and 1.419,
interested parties may file comments on or before September 16, 1994
and reply comments on or before October 3, 1994. To file formally in
this proceeding, you must file an original and four copies of all
comments, reply comments, and supporting comments. If you want each
Commissioner to receive a personal copy of your comments, you must file
an original plus nine copies. You should send comments and reply
comments to Office of the Secretary, Federal Communications Commission,
Washington, DC 20554. Comments and reply comments will be available for
public inspection during regular business hours in the FCC Reference
Center of the Federal Communications Commission, Room 239, 1919 M
Street, NW., Washington, DC 20554. The complete text of this document
may be purchased from the Commission's copy contractor, International
Transcription Service, 1919 M Street, room 236, Washington, DC 20554,
telephone (202) 857-3800.
List of Subjects in 47 CFR Part 24
Administrative practice and procedure, Reporting and recordkeeping
requirements, Telecommunications.
Federal Communications Commission.
LaVera F. Marshall,
Acting Secretary.
[FR Doc. 94-21015 Filed 8-25-94; 8:45 am]
BILLING CODE 6712-01-M