[FOR RECORD ONLY] $// Order on Reconsideration, Competitive Bidding, PR Docket 93-253, FCC 94-240 //$ $/ 300.309(j) Competitive Bidding /$ $/ 24.309 Designated Entites /$ FCC 94-240 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. In the Matter of ) ) Implementation of Section 309(j) ) PP Docket No. 93-253 of the Communications Act - ) Competitive Bidding ) ORDER ON RECONSIDERATION Adopted: September 22, 1994 Released: September 22, 1994 By the Commission: Commissioner Barrett not participating. 1. In this Order, we reconsider on our own motion various decisions made with regard to designated entities in the Third Memorandum Opinion and Order in this docket. In addition, we take this opportunity to clarify other rules adopted in that Order. I. INSTALLMENT PAYMENTS FOR WOMEN AND MINORITY-OWNED BUSINESSES 2. In the Third Memorandum Opinion and Order, we adopted certain provisions to ensure the opportunity for businesses owned by women and minorities and small businesses to participate in the regional narrowband PCS auction to be held October 26, 1994. Specifically, we adopted a 40 percent bidding credit for women and minority-owned firms and installment payments for small businesses. Small businesses are defined as businesses with less than $40 million in annual gross revenues. On further reflection, we believe that to ensure that designated entities have the opportunity to participate in narrowband PCS, minority and women-owned companies, as opposed to just small businesses, should be allowed to pay their winning bids in installments. 3. As we noted in the Third Memorandum Opinion and Order, the original provisions adopted for designated entities in the narrowband PCS service were based on assumed relatively low capital entry costs. The experience in the nationwide narrowband PCS auction in July led us to adjust the designated entity provisions for the regional auction to take into account the much higher than expected prices paid for narrowband licenses. Specifically, we raised the bidding credit from 25 percent to 40 percent for women and minority-owned businesses and we raised the financial thresholds for businesses wishing to qualify as small businesses. We remain concerned, however, that, given these high costs, businesses owned by women and minorities will be unable to participate successfully in the upcoming regional auction without installment payments. 4. In the Fifth Report and Order in this proceeding, we documented the serious funding problems faced by women and minorities. Indeed, we noted that Congress had recognized that these problems were even more severe for minority and women-owned businesses than for small businesses. We also referred to a number of studies that supported the congressional findings regarding the difficulties minorities and women have accessing capital. 5. In its petition for reconsideration in this proceeding, Cook Inlet Region, Inc. asked us to reconsider the scope of the installment payment option for designated entities. It contended that failure to extend the availability of installment payments to all women and minority-owned companies, instead of just small businesses, will exclude a substantial number of designated entities from meaningful participation in spectrum-based services. Cook Inlet argued that this result is contrary to the intent of Congress. In response to this, we stated with respect to our generic auction rules that, while installment payments would not generally be available to all designated entities irrespective of their economic status, we retained the flexibility to expand or modify the installment payment option on a service-specific basis where the spectrum costs, capital infrastructure requirements and other economic barriers necessitate their application to other entities. "[T]his additional flexibility will allow us to take account of differences in capital requirements across services and license blocks, and to provide access to capital in ways that will give various groups of designated entities a realistic chance to participate in offering service." 6. In addition, in a recent ex parte filing, Essence Communications, Inc. further elaborates on the various broad congressional initiatives that have been aimed at helping minorities overcome obstacles to financing. For example, Essence notes that the Equal Credit Opportunity Act (ECOA) Amendments impose a federal ban on race-based denials of extension of credit. The legislative history to the ECOA Amendments highlights the challenges faced by entrepreneurs seeking credit to fund their businesses. In addition, Essence states that Congress recently amended the Community Reinvestment Act (CRA) to bolster the evaluations of financial institutions that subsidize minority banks in predominantly minority areas. According to Essence, this aspect of the CRA is entirely race-conscious and contains no financial thresholds. 7. Essence further asserts that both these congressional measures and the steps taken by the Commission to improve minority access to capital have had limited success in reducing the barriers to entry for minority entrepreneurs. Therefore, Essence emphasizes that the Commission must do more to ensure the opportunity for minority participation in narrowband PCS. It states that the Commission's conclusion that bidding credits are the most cost effective and efficient means of achieving this congressional objective was mistaken and that the July 1994 narrowband auction proved that "bidding credits do not and cannot sufficiently address financing obstacles nor provide a competitive advantage with regard to the national licenses." Accordingly, Essence argues that the Commission should either adopt an "entrepreneur block" scheme for the upcoming regional narrowband PCS auction or raise the small business financial threshold for minority-owned companies. 8. Based on this additional information, our experience from the recent nationwide narrowband auctions and upon further reflection, we agree that the funding problems faced by minority and women-owned companies, combined with the potentially high cost of purchasing a narrowband PCS license at auction, erect a significant hurdle for these entrepreneurs. Because of these difficulties, we already have adopted a 40 percent bidding credit for businesses owned by women and minorities, regardless of size, on two of the six regional narrowband PCS licenses. We think that allowing these applicants owned by women and minorities to pay for their licenses over time will go a long way toward overcoming this barrier to entry. It will also provide more meaningful opportunities for designated entities bidding in the upcoming regional auctions. Accordingly, we adopt an installment payment plan for women and/or minority-owned businesses that obtain a regional narrowband PCS license on Channel 13 and Channel 17. Similar to the installment payments for larger entities in the entrepreneurs' blocks for broadband PCS auctions, this plan provides for 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. Payments of interest only will be due for the first two years, with principal and interest payments amortized over the remaining years of the license. In addition, as we did for small businesses, we will permit businesses owned by minorities and women to pay only half of the down payment (or 10 percent of the bid price) five business days after close of the auction. The remaining 10 percent payment will be deferred until five days after grant of the license. II. DEFINITION OF BUSINESSES OWNED BY WOMEN AND MINORITIES 9. In the rules adopted pursuant to the Third Memorandum Opinion and Order, we changed the definition of a business owned by women and minorities for purposes of the regional narrowband PCS auction. See 47 C.F.R.  24.320(c). In particular, we departed from the definition adopted in the Second Report and Order that required minorities and/or women to have at least 50.1 percent ownership and a 50.1 percent controlling interest in the applicant. 47 C.F.R.  1.2110(b)(2). The new definition requires an applicant owned by women and/or minorities to establish a "control group" consisting entirely of women or minorities that has both de jure and de facto control of the applicant. It then gives the applicant two options for taking on passive investors. Under the first option, a single investor may hold as much as 49.9 percent of the applicant's passive equity if the control group holds at least 50.1 percent of the total equity. The second option allows the control group to reduce its equity stake to 25 percent provided that no single other investor holds more than 25 percent of the applicant's passive equity. Under either option, the control group must control the applicant and, in the case of corporations, hold at least 50.1 percent of the voting stock. For partnerships, all general partnership interests will be considered to be part of the control group. 10. In the Third Memorandum Opinion and Order we neglected, however, to explain this change in course. We take that opportunity here. We believe that the "control group" approach to defining a women or minority-owned business provides these designated entities with greater flexibility to access capital than the rule adopted in the Second Report and Order. In particular, it allows these companies to reduce by 25 percent the amount of equity the minority or women principals must hold. This ability to sell more equity will help designated entities raise the capital necessary to participate in the auctions as well as to construct their systems. Moreover, like the definition set forth in the Second Report and Order, the new rule gives a minority or women-owned company the option to partner with one large company instead of seeking multiple investors so long as the control group retains 50.1 percent of the equity. This option meets the needs of designated entities that are able to attract investors that desire a more substantial equity stake in the venture. Thus, we believe that modification of the definition of minority and/or women-owned businesses more fully satisfies the congressional mandate that the Commission provide the opportunity for companies owned by these designated entities to participate in spectrum-based services. 11. The new rule's requirement that investors take only passive interests also provides more assurance that the minority and women principals maintain control of their companies. As a result, we reduce the opportunity for fronts and help ensure that only bona fide designated entities will be able to take advantage of the 40 percent bidding credit and installment payments offered in the regional narrowband auctions. 12. In addition, we believe that modifying the definition in this manner provides consistency with the definition of a small business adopted in the Third Memorandum Opinion and Order, which also uses a "control group" approach. Thus, businesses will not have to satisfy disparate rules regarding levels of equity investment to receive both bidding credits and the installment payment option available to small businesses. 13. Although not explicitly stated in the Third Memorandum Opinion and Order, we also clarify here that we are departing from the provision in the Second Report and Order that bars publicly traded companies from qualifying as minority and women-owned businesses. This prohibition was based on our assumption that companies traded on the public market would not require government-sponsored measures to succeed in spectrum auctions. The high prices paid for the nationwide narrowband PCS licenses in the auction held in July 1994 has led us to conclude, however, that even publicly traded companies owned by women and minorities will require bidding credits and installment payments to participate successfully in the regional auction. We recognized these increased capital requirements in the Third Memorandum Opinion and Order by raising significantly the financial thresholds for qualifying for small business installment payments. The same rationale applies to our decision here to give publicly traded minority and women-owned applicants government assistance in the form of bidding credits and installment payments. We emphasize, however, that these companies must comply with the control group and equity investment requirements set out above and in our rules. 14. Finally, we do not intend to suggest that by clarifying this rule change here we have reached a decision regarding the designated entity issues raised by petitioners in the broadband PCS auction proceeding. After further analysis of those petitions, it is possible that we will make additional adjustments to our rules with regard to broadband PCS. In addition, if those changes loosen the restrictions on designated entities, we may decide to apply them to designated entity licensees in the regional narrowband service. III. CONCLUSION 15. Accordingly, IT IS ORDERED THAT Part 24 of the Commission's Rules is amended as set forth in the attached Appendix. 16. IT IS FURTHER ORDERED that the rules changes made herein WILL BECOME EFFECTIVE 30 days after their publication in the Federal Register. This action is taken pursuant to Sections 4(i), 303(r) and 309(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r) and 309(j). FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX RULES Part 24 of Chapter 1 of Title 47 of the Code of Federal Regulations is amended as follows: 1. The authority citation for Part 24 continues to read as follows: AUTHORITY: 47 U.S.C.  154, 301, 302, 303, 309 and 332, unless otherwise noted. 2. Section 24.309 is revised to read as follows: Sec. 24.309 Designated Entities. * * * * * (b) * * * (1) Installment payments. (i) Small businesses, including small businesses owned by members of minority groups and women, will be eligible to pay the full amount of their winning bids on any regional, MTA or BTA license in installments over the term of the license pursuant to the terms set forth in Section 1.2110(e) of this Chapter. (ii) Businesses owned by members of minority groups and women that are winning bidders for the regional licenses indicated by an (**) in Section 24.129 may pay the full amount of their winning bids (less the applicable bidding credit and down payment) in installments with (A) interest imposed based on the rate for ten-year U.S. Treasury obligations applicable on the date the license is granted, plus 2.5 percent; (B) interest-only payments for the first two years; and (C) principal and interest payments amortized over the remaining eight years of the license.