[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56271-56274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28168]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23486; International Series Release No. 1162; 812-10998]


Formus Communications, Inc., et al.; Notice of Application

October 14, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'').

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SUMMARY OF APPLICATION: The order would permit applicants and certain 
of their controlled companies to participate in certain foreign 
telecommunication ventures without being subject to the provisions of 
the Act.

APPLICANTS: Forums Communications, Inc. (``Formus'') and Formus 
International, Inc. (``FII'').

FILING DATES: The application was filed on February 6, 1998. Applicants 
have agreed to file an amendment during the notice period, the 
substance of which is included in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on November 9, 
1998, and should be accompanied by proof of service on applicants, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 720 South Colorado

[[Page 56272]]

Boulevard, Suite 600N, Denver, Colorado 80246.

FOR FURTHER INFORMATION CONTACT:
J. Amanda Machen, Senior Counsel, at (202) 942-7120, or Christine Y. 
Greenlees, Branch Chief, at (202) 942-0564 (Division of Investment 
Management, Office of Investment Company Regulations).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. Formus, a Delaware corporation, was organied in 1996 to acquire 
local multipoint distribution services (``LMDS'') licenses in the 
United States and comparable spectrum in certain international markets, 
and to build, own, and operate telecommunications systems based on 
these licenses. Formus conducts its foreign operations primarily 
through FII, a wholly-owned subsidiary. In the future, Formus may 
acquire and hold interests in foreign telecommunications ventures 
through subsidiaries other than FII.
    2. FII, a Delaware corporation, is engaged through its subsidiaries 
in the acquisition, development, operation, and management of 
integrated voice, video, and data services through the development of 
LMDS and LMDS-like wireless networks in selected markets primarily 
outside the United States. At present, FII's primary focus is on doing 
business in European, Latin American and Asian/Pacific countries that 
have a market economy, stable political environment, and favorable 
regulatory framework. FII generally forms a separate subsidiary for 
each country in which it operates a LMDS system,\1\ which then forms a 
subsidiary to acquire licenses and build and operate the LMDS system 
within the respective country. FII typically works with local partners 
who are knowledgeable about local governmental regulations and local 
business practices. FII currently holds interests in telecommunications 
entities in Ecuador, Poland, New Zealand and Germany.
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    \1\ The subsidiary may be organized and operated in the United 
States.
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    3. Formus and FII request relief to permit them and each entity 
that is now or in the future controlled by, or under common control 
with, Formus or FII (each, including Formus and FII, a ``Covered 
Entity'') to engage, either directly or indirectly through 
subsidiaries, in certain foreign telecommunications ventures without 
being subject to the provisions of the Act. For purposes of the 
application, applicants represent that ``foreign telecommunications 
venture'' means any and all activities outside the United States 
involving: communications; media; the creation, storage, and 
transmission of analog or digital voice, video, or data; programming, 
including entertainment, news, information, and home shopping services; 
broadband and satellite distribution; over the air broadcast; 
telecommunications; wireless and wireline distribution and telephony; 
network construction; design, operation, and ownership of related 
transport construction; and any and all related similar activities, 
services, and assets.
    4. Applicants participate in foreign telecommunications ventures in 
either of two ways. In one, an applicant, directly or through one or 
more other Covered Entities, invests in a foreign telecommunications 
company. ``Foreign telecommunications company,'' as used in the 
application, means any corporation, partnership, joint venture, 
association, joint stock company, limited liability company, or other 
form of organization (i) substantially all of whose operations are 
conducted outside of the United States, (ii) that owns the assets of a 
foreign telecommunications venture (which may consist of capital assets 
or stock of operating subsidiaries), and (iii) whose business primarily 
relates to, or whose operations consist primarily of, the ownership, 
development, and operation of, or the provision of managment or 
operational services relating to, foreign telecommunications ventures. 
An applicant, directly or through one or more other Covered Entities, 
acquires a substantial interest in the foreign telecommunications 
company, and provides active developmental assistance to the foreign 
telecommunications company. For purposes of the application, applicants 
represent that ``substantial interest'' means any ownership interest 
that represents at least a 10% economic or voting interest. In 
addition, applicants represent that ``active developmental assistance'' 
means material involvement in the creation, development or operation 
of, the provision of material managerial, advisory, technical, or 
operations services relating to, or significant input on material 
decisions affecting the development or operations of, a foreign 
telecommunications venture.
    5. The second way applicants participate in foreign 
telecommunications ventures is to invest, either directly or through 
one or more other Covered Entities, in a telecommunications 
partnership. Applicants represent that, for purposes of the 
application, a ``telecommunications partnership'' means any 
partnership, joint venture, limited liability company or other 
unincorporated association (i) substantially all of whose operations 
are conducted outside the United States, and (ii) whose purpose is to 
acquire interests in, and to develop, operate, or provide management 
services to, one or more foreign telecommunications companies. 
Representatives of an applicant or other Covered Entity participate on 
the management committee or similar governing body of the 
telecommunications partnership. An applicant, directly or through one 
or more other Covered Entities, acquires a substantial interest in the 
telecommunications partnership which, in turn, directly or through one 
or more subsidiaries, acquires a substantial interest in one or more 
foreign telecommunications companies. An applicant or another Covered 
Entity, either directly or through the telecommunications partnership, 
would provide active developmental assistance to the foreign 
telecommunications ventures of the telecommunications partnership.
    6. Applicants represent that providing ``active developmental 
assistance'' requires an applicant or other Covered Entity to be or 
have been materially involved in providing such assistance. Thus, an 
applicant or another Covered Entity may rely on the exemptive order 
even though it no longer provides active developmental assistance so 
long as it continues to have a substantial interest in the foreign 
telecommunications venture, which is past the developmental stage, and 
a Covered Entity provided active developmental assistance during the 
venture's developmental stage. Similarly, if a Covered Entity acquires 
a substantial interest in a foreign telecommunications venture after 
the development stage and a Covered Entity provides active 
developmental assistance to the foreign telecommunications venture, 
then the first Covered Entity may continue to rely on the exemptive 
order, even though active developmental assistance ceases, so long as 
the first Covered Entity continues to have a substantial interest in 
the venture, and (i) the business of the foreign telecommunications 
venture was significantly enhanced by the active developmental 
assistance of a Covered Entity or (ii) such foreign

[[Page 56273]]

telecommunications venture (x) is merged or combined with, or acquired 
by, a company in the same or a related business, or (y) effects an 
initial public offering of voting stock.
    7. Applicants represent that Formus, FII, or another Covered Entity 
provides active developmental assistance to each foreign 
telecommunications venture in which it takes a substantial interest by 
either developing, conducting, or expanding the venture's operations. A 
Covered Entity gives assistance in four areas: network design and 
engineering; purchase of goods and services; recruitment and training 
of personnel; and the deployment and operations of telecommunication 
ventures.
    8. Network design and engineering services may begin before a bid 
is submitted for an LMDS-like license, and continue until completion of 
network build out. LMDS systems are based on radio transmission of 
signals from one point to another. Therefore, transmitters, or ``cell 
sites,'' must be placed at strategic sites within a transmission area, 
or ``cell.'' To permit efficient transmission of signals, cell sites 
are typically on the tallest buildings within a cell. Employees of a 
Covered Entity, with the assistance of consultants hired and supervised 
by such employees, survey both the physical layout of a service area as 
well as the demographics of potential end-users within an area. The 
location of cell sites and the hardware and software used in building a 
particular network are based on the interplay between the physical area 
serviced (i.e., the availability of appropriate cell sites) and the 
needs of the users in that area. For example, if a cell is dominated by 
businesses, network design will be different from the design for an 
area dominated by individual users. Design also takes into account any 
regulatory limitations. Applicants state, for example, that the license 
held in a particular country may be limited to television transmission 
while in another country it may cover any and all services that could 
be transmitted on a particular bandwidth. Another factor considered by 
the Covered Entity's employees is preexisting competition from other 
transmission systems (for example, cable television systems). System 
design also includes specifications for the ``central switching sites'' 
that control the flow of signals among cell sites.
    9. Active developmental assistance also includes assistance with 
purchasing goods and services (including hardware and software) 
necessary in building an LMDS network. FII is currently negotiating 
bulk purchasing arrangements with a variety of vendors that it believes 
provide quality equipment, software, or services. In Formus' 
experience, most foreign telecommunications ventures do not have 
contacts or knowledge of the vendors of the necessary goods and 
services. These arrangements will make goods and services readily 
available, on prenegotiated terms and at discounted prices, to any 
foreign telecommunications venture in which a Covered Entity holds a 
substantial interest'.
    10. Covered Entities also provide assistance with recruiting and 
training qualified senior personnel to operate a foreign 
telecommunications venture. To date, senior personnel of the 
applicants' foreign telecommunications ventures in Poland and New 
Zealand have been recruited from among former employees or consultants 
of the applicants. FII is currently establishing a training program 
which will permit it to bring key personnel of a foreign 
telecommunications venture to the United States for training in various 
aspects of the business, including engineering, installation, field 
maintenance, sales, and marketing and customer service.
    11. Covered Entities also will provide assistance in deploying and 
operating the networks of foreign telecommunications ventures. This 
will include matters such as operating an in-country or regional net 
fault center (i.e., a computer system to monitor and identify faults in 
an operating network), oversight of administration, including field 
operations and the supervision of customer service personnel, 
maintenance of operating networks, provisioning of signal (i.e., 
developing computer programs to tell a network what facilities and 
capabilities are available to best provide a particular service 
requested by a particular customer), and the development and deployment 
of billing and financial systems and training personnel to operate 
them.
    12. Applicants' participation in foreign telecommunications 
ventures with local or strategic partnerships is a result of both 
restrictions on ownership of foreign telecommunications ventures under 
the laws of many countries, as well as various benefits, both tangible 
and intangible, that an applicant may obtain from joining with 
strategic partners to create, develop and operate such ventures. 
Applicants' structure was not established for the purpose of creating 
an investment company within the contemplation of the Act. While 
applicants believe that today they are not required to register under 
the Act, they are seeking the requested relief as they are increasingly 
constrained in structuring their foreign telecommunications ventures by 
the requirements of the Act.

Applicants' Legal Analysis

    1. Section 3(a)(1)(C) of the Act defines an ``investment company'' 
to include any issuer that is engaged in the business of investing, 
reinvesting, owning, holding, or trading in securities, and owns 
investment securities having a value exceeding 40% of the value of the 
issuer's total assets (exclusive of Government securities and cash 
items). Section 3(a)(2) of the Act defines ``investment securities'' to 
include, in pertinent part, all securities except securities issued by 
majority-owned subsidiaries of the owner which are not investment 
companies and which are not excepted from the definition of investment 
company by section 3(c)(1) or section 3(c)(7). Section 2(a)(24) defines 
a ``majority-owned subsidiary'' of a person as a company 50% or more of 
the outstanding voting securities of which are owned by the person, or 
by a company which, with the meaning of section 2(a)(24), is a 
majority-owned subsidiary of the person.
    2. Rule 3a-1 under the Act deems certain issuers that meet the 
statutory definition of investment company in section 3(a)(1)(C) of the 
Act not to be investment companies, provided the issuer meets certain 
criteria. An issuer can qualify for this exemption only if no more then 
45% of its total assets consist of, and no more than 45% of its net 
income is derived from, securities other than, among others, securities 
of certain companies controlled primarily by the issuer.\2\
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    \2\ ``Primary control'' under rule 3a-1 means a degree of 
control that is greater than that of any other person. See Health 
Communications Services, Inc. (pub. avail. Apr. 26, 1985).
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    3. Applicants represent that they seek to acquire a majority voting 
interest in their foreign telecommunications ventures or, where such an 
interest is not permitted under applicable foreign investment laws or 
is inadvisable for business reasons, seek to acquire interests that 
grant them primary control. Applicants assert that these ownership 
thresholds are prohibitively large, as the applicants often seek to 
join with two or three strategic partners in a foreign 
telecommunications venture. Applicants represent that each partner 
typically desires an interest in, and rights over, the venture that is 
equal to that of the other partners. Hence, applicants state that the 
acquisition of a

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majority interest, or the largest interest, in a foreign 
telecommunications venture is often impossible.
    4. Applicants state that they may participate in a foreign 
telecommunications venture through a ``joint venture,'' in which an 
applicant's interest may not be a ``security'' for purposes of the Act. 
However, applicants state that whether an arrangement is a joint 
venture is sometimes difficult to determine.
    5. Applicants assert that the need to structure their participation 
in foreign telecommunications ventures in a manner that complies with 
the Act has resulted in severe constraints on their ability to operate 
effectively and efficiently and grow their business. Applicants state 
that if a Covered Entity is unable to obtain either a majority interest 
or primary control for purposes of section 3(a)(1)(C) or rule 3a-1, or 
a degree of control that will allow it to obtain an opinion of counsel 
that it can classify its participation as a joint venture interest, 
then the Covered Entity most likely will abstain from participating in 
that foreign telecommunications venture.
    6. Applicants also state that as a venture grows out of the 
development stage, it will often seek to expand its businesses through 
acquisitions, or will seek public financing. Applicants note that these 
goals are often in direct conflict with the Covered Entity's need to 
maintain its ownership interest at a level that permits the interest to 
be classified as a non-investment security. Applicants submit that this 
can result in serious delays in the development of their foreign 
telecommunications ventures, as they seek to structure transactions 
around the requirements of the Act. Applicants state that at times, 
especially when the Covered Entity's interest would fall below the 
level of presumptive control as set forth in section 2(a)(9) of the 
Act, the Covered Entity may have to deny the foreign telecommunications 
venture permission to undertake a transaction that would have been in 
the best interest of the Covered Entity and that venture.
    7. Section 6(c) provides that the SEC may exempt any person, 
security, or transaction from any provision of the Act or any rule or 
regulation under the Act, if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request an order under section 
6(c) to permit applicants and the other Covered Entities to engage, 
directly or through subsidiaries, in foreign telecommunications 
ventures without being subject to the Act.
    8. Applicants believe that the requested exemption is necessary and 
appropriate in the public interest. Applicants assert that their 
interests in the foreign telecommunications ventures, unlike the assets 
of investment companies, are not liquid, mobile or otherwise readily 
negotiable because Formus, directly or indirectly, will be actively and 
materially involved in the business activities of the foreign 
telecommunications ventures. Applicants also state that they are not a 
so-called ``special situation'' investment company that takes a 
controlling position in other issuers primarily for the purpose of 
making a profit in the sale of the controlled company's securities. 
Instead, applicants state that the Covered Entities will provide active 
developmental assistance for the purpose of participating in the 
profits from the foreign telecommunications ventures. Applicants 
maintain that their active developmental assistance, which requires 
personnel with expertise in planning, operating, managing, and 
providing services to a foreign telecommunications venture, requires 
resources far beyond those available to the manager of an investment 
company. Accordingly, applicants assert that the Covered Entities 
engage in business activities that do not entail the types of abuses 
that the Act was designed to address.
    9. Applicants believe that the requested relief is consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act. Applicants believe that the 
requirements of their business, their strategy that each Covered Entity 
own or hold directly or indirectly a substantial interest in a foreign 
telecommunications company or partnership, and their representation 
that each Covered Entity will provide active developmental assistance 
to a foreign telecommunications ventures demonstrate that none of the 
applicants is of the type that engages in the activities which the Act 
was designed to address.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. No covered Entity that proposes to rely on the requested relief 
will hold itself out as being engaged in the business of investing, 
reinvesting, or trading in securities.
    2. A Covered Entity may rely on the order granting the requested 
relief only if the manner in which it is involved in foreign 
telecommunications ventures does not differ materially from that 
described in the application.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28168 Filed 10-20-98; 8:45 am]
BILLING CODE 8010-91-M