Sec. 1.2110  Designated entities.

    (a) Designated entities are small businesses, businesses owned by 
members of minority groups and/or women, and rural telephone companies.
    (b) Definitions.
    (1) Small businesses. The Commission will establish the definition 
of a small business on a service-specific basis, taking into 
consideration the characteristics and capital requirements of the 
particular service.
    (2) Businesses owned by members of minority groups and/or women. 
Unless otherwise provided in rules governing specific services, a 
business owned by members of minority groups and/or women is one in 
which minorities and/or women who are U.S. citizens control the 
applicant, have at least 50.1 percent equity ownership and, in the case 
of a corporate applicant, a 50.1 percent voting interest. For applicants 
that are partnerships, every general partner either must be a minority 
and/or woman (or minorities and/or women) who are U.S. citizens and who 
individually or together own at least 50.1 percent of the partnership 
equity, or an entity that is 100 percent owned and controlled by 
minorities and/or women who are U.S. citizens. The interests of 
minorities and women are to be calculated on a fully-diluted basis; 
agreements such as stock options and convertible debentures shall be 
considered to have a present effect on the power to control an entity 
and shall be treated as if the rights thereunder already have been fully 
exercised. However, upon a demonstration that options or conversion 
rights held by non-controlling principals will not deprive the minority 
and female principals of a substantial financial stake in the venture or 
impair their rights to control the designated entity, a designated 
entity may seek a waiver of the requirement that the equity of the 
minority and female principals must be calculated on a fully-diluted 
basis. Members of minority groups include Blacks, Hispanics, American 
Indians, Alaskan Natives, Asians, and Pacific Islanders.
    (3) Rural telephone companies. A rural telephone company is any 
local exchange carrier including affiliates (as defined in 
1.2110(b)(4)), with 100,000 access lines or fewer.
    (4) Affiliate. (i) An individual or entity is an affiliate of an 
applicant or of a person holding an attributable interest in an 
applicant under Sec. 24.709 (both referred to herein as ``the 
applicant'') if such individual or entity--
    (A) directly or indirectly controls or has the power to control the 
applicant, or
    (B) is directly or indirectly controlled by the applicant, or
    (C) is directly or indirectly controlled by a third party or parties 
that also controls or has the power to control the applicant, or
    (D) has an ``identity of interest'' with the applicant.
    (ii) Nature of control in determining affiliation.

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    (A) Every business concern is considered to have one or more parties 
who directly or indirectly control or have the power to control it. 
Control may be affirmative or negative and it is immaterial whether it 
is exercised so long as the power to control exists.
    Example An applicant owning 50 percent of the voting stock of 
another concern would have negative power to control such concern since 
such party can block any action of the other stockholders. Also, the 
bylaws of a corporation may permit a stockholder with less than 50 
percent of the voting stock to block any actions taken by the other 
stockholders in the other entity. Affiliation exists when the applicant 
has the power to control a concern while at the same time another 
person, or persons, are in control of the concern at the will of the 
party or parties with the power to control.
    (B) Control can arise through stock ownership; occupancy of 
director, officer or key employee positions; contractual or other 
business relations; or combinations of these and other factors. A key 
employee is an employee who, because of his/her position in the concern, 
has a critical influence in or substantive control over the operations 
or management of the concern.
    (C) Control can arise through management positions where a concern's 
voting stock is so widely distributed that no effective control can be 
established.
    Example In a corporation where the officers and directors own 
various size blocks of stock totaling 40 percent of the corporation's 
voting stock, but no officer or director has a block sufficient to give 
him or her control or the power to control and the remaining 60 percent 
is widely distributed with no individual stockholder having a stock 
interest greater than 10 percent, management has the power to control. 
If persons with such management control of the other entity are persons 
with attributable interests in the applicant, the other entity will be 
deemed an affiliate of the applicant.
    (iii) Identity of interest between and among persons. Affiliation 
can arise between or among two or more persons with an identity of 
interest, such as members of the same family or persons with common 
investments. In determining if the applicant controls or has the power 
to control a concern, persons with an identity of interest will be 
treated as though they were one person.
    Example Two shareholders in Corporation Y each have attributable 
interests in the same PCS application. While neither shareholder has 
enough shares to individually control Corporation Y, together they have 
the power to control Corporation Y. The two shareholders with these 
common investments (or identity in interest) are treated as though they 
are one person and Corporation Y would be deemed an affiliate of the 
applicant.
    (A) Spousal Affiliation. Both spouses are deemed to own or control 
or have the power to control interests owned or controlled by either of 
them, unless they are subject to a legal separation recognized by a 
court of competent jurisdiction in the United States. In calculating 
their net worth, investors who are legally separated must include their 
share of interests in property held jointly with a spouse.
    (B) Kinship Affiliation. Immediate family members will be presumed 
to own or control or have the power to control interests owned or 
controlled by other immediate family members. In this context immediate 
family member means father, mother, husband, wife, son, daughter, 
brother, sister, father- or mother-in-law, son- or daughter-in-law, 
brother- or sister-in-law, step-father or -mother, step-brother or -
sister, step-son or -daughter, half brother or sister. This presumption 
may be rebutted by showing that the family members are estranged, the 
family ties are remote, or the family members are not closely involved 
with each other in business matters.
    Example A owns a controlling interest in Corporation X. A's sister-
in-law, B, has an attributable interest in a PCS application. Because A 
and B have a presumptive kinship affiliation, A's interest in 
Corporation Y is attributable to B, and thus to the applicant, unless B 
rebuts the presumption with the necessary showing.
    (iv) Affiliation through stock ownership.
    (A) An applicant is presumed to control or have the power to control 
a concern if he or she owns or controls or has the power to control 50 
percent or more of its voting stock.
    (B) An applicant is presumed to control or have the power to control 
a concern even though he or she owns, controls or has the power to 
control less than 50 percent of the concern's voting stock, if the block 
of stock he or she

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owns, controls or has the power to control is large as compared with any 
other outstanding block of stock.
    (C) If two or more persons each owns, controls or has the power to 
control less than 50 percent of the voting stock of a concern, such 
minority holdings are equal or approximately equal in size, and the 
aggregate of these minority holdings is large as compared with any other 
stock holding, the presumption arises that each one of these persons 
individually controls or has the power to control the concern; however, 
such presumption may be rebutted by a showing that such control or power 
to control, in fact, does not exist.
    (v) Affiliation arising under stock options, convertible debentures, 
and agreements to merge. Stock options, convertible debentures, and 
agreements to merge (including agreements in principle) are generally 
considered to have a present effect on the power to control the concern. 
Therefore, in making a size determination, such options, debentures, and 
agreements are generally treated as though the rights held thereunder 
had been exercised. However, an affiliate cannot use such options and 
debentures to appear to terminate its control over another concern 
before it actually does so.
    Example 1. If company B holds an option to purchase a controlling 
interest in company A, who holds an attributable interest in a PCS 
application, the situation is treated as though company B had exercised 
its rights and had come owner of a controlling interest in company A. 
The gross revenues of company B must be taken into account in 
determining the size of the applicant.
    Example 2. If a large company, BigCo, holds 70% (70 of 100 
outstanding shares) of the voting stock of company A, who holds an 
attributable interest in a PCS application, and gives a third party, 
SmallCo, an option to purchase 50 of the 70 shares owned by BigCo, BigCo 
will be deemed to be an affiliate of company A, and thus the applicant, 
until SmallCo actually exercises its option to purchase such shares. In 
order to prevent BigCo from circumventing the intent of the rule which 
requires such options to be considered on a fully diluted basis, the 
option is not considered to have present effect in this case.
    Example 3. If company A has entered into an agreement to merge with 
company B in the future, the situation is treated as though the merger 
has taken place.
    (vi) Affiliation under voting trusts.
    (A) Stock interests held in trust shall be deemed controlled by any 
person who holds or shares the power to vote such stock, to any person 
who has the sole power to sell such stock, and to any person who has the 
right to revoke the trust at will or to replace the trustee at will.
    (B) If a trustee has a familial, personal or extra-trust business 
relationship to the grantor or the beneficiary, the stock interests held 
in trust will be deemed controlled by the grantor or beneficiary, as 
appropriate.
    (C) If the primary purpose of a voting trust, or similar agreement, 
is to separate voting power from beneficial ownership of voting stock 
for the purpose of shifting control of or the power to control a concern 
in order that such concern or another concern may meet the Commission's 
size standards, such voting trust shall not be considered valid for this 
purpose regardless of whether it is or is not recognized within the 
appropriate jurisdiction.
    (vii) Affiliation through common management. Affiliation generally 
arises where officers, directors, or key employees serve as the majority 
or otherwise as the controlling element of the board of directors and/or 
the management of another entity.
    (viii) Affiliation through common facilities. Affiliation generally 
arises where one concern shares office space and/or employees and/or 
other facilities with another concern, particularly where such concerns 
are in the same or related industry or field of operations, or where 
such concerns were formerly affiliated, and through these sharing 
arrangements one concern has control, or potential control, of the other 
concern.
    (ix) Affiliation through contractual relationships. Affiliation 
generally arises where one concern is dependent upon another concern for 
contracts and business to such a degree that one concern has control, or 
potential control, of the other concern.
    (x) Affiliation under joint venture arrangements.
    (A) A joint venture for size determination purposes is an 
association of concerns and/or individuals, with interests in any degree 
or proportion, formed by contract, express or implied,

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to engage in and carry out a single, specific business venture for joint 
profit for which purpose they combine their efforts, property, money, 
skill and knowledge, but not on a continuing or permanent basis for 
conducting business generally. The determination whether an entity is a 
joint venture is based upon the facts of the business operation, 
regardless of how the business operation may be designated by the 
parties involved. An agreement to share profits/losses proportionate to 
each party's contribution to the business operation is a significant 
factor in determining whether the business operation is a point venture.
    (B) The parties to a joint venture are considered to be affiliated 
with each other.
    (c) The Commission may set aside specific licenses for which only 
eligible designated entities, as specified by the Commission, may bid.
    (d) The Commission may permit partitioning of service areas in 
particular services for eligible designated entities.
    (e) The Commission may permit small businesses (including small 
businesses owned by women, minorities, or rural telephone companies that 
qualify as small businesses) and other entities determined to be 
eligible on a service-specific basis, which are high bidders for 
licenses specified by the Commission, to pay the full amount of their 
high bids in installments over the term of their licenses pursuant to 
the following:
    (1) Unless otherwise specified, each eligible applicant paying for 
its license(s) on an installment basis must deposit by wire transfer in 
the manner specified in Sec. 1.2107(b) sufficient additional funds as 
are necessary to bring its total deposits to ten (10) percent of its 
winning bid(s) within ten (10) business days after the Commission has 
declared it the winning bidder and closed the bidding. Failure to remit 
the required payment will make the bidder liable to pay penalties 
pursuant to Sec. 1.2104(g)(2).
    (2) Within ten (10) business days of the grant of the license 
application of a winning bidder eligible for installment payments, the 
licensee shall pay another ten (10) percent of the high bid, thereby 
commencing the eligible licensee's installment payment plan. Failure to 
remit the required payment will make the bidder liable to pay default 
payments pursuant to Sec. 1.2104(g)(2).
    (3) Upon grant of the license, the Commission will notify each 
eligible licensee of the terms of its installment payment plan and that 
it must execute a promissory note and security agreement as a condition 
of the installment payment plan. Unless other terms are specified in the 
rules of particular services, such plans will:
    (i) Impose interest based on the rate of U.S. Treasury obligations 
(with maturities closest to the duration of the license term) at the 
time of licensing;
    (ii) Allow installment payments for the full license term;
    (iii) Begin with interest-only payments for the first two years; and
    (iv) Amortize principal and interest over the remaining term of the 
license.
    (4) A license granted to an eligible entity that elects installment 
payments shall be conditioned upon the full and timely performance of 
the licensee's payment obligations under the installment plan.
    (i) If an eligible entity making installment payments is more than 
ninety (90) days delinquent in any payment, it shall be in default.
    (ii) Upon default or in anticipation of default of one or more 
installment payments, a licensee may request that the Commission permit 
a three to six month grace period, during which no installment payments 
need be made. In considering whether to grant a request for a grace 
period, the Commission may consider, among other things, the licensee's 
payment history, including whether the licensee has defaulted before, 
how far into the license term the default occurs, the reasons for 
default, whether the licensee has met construction build-out 
requirements, the licensee's financial condition, and whether the 
licensee is seeking a buyer under an authorized distress sale policy. If 
the Commission grants a request for a grace period, or otherwise 
approves a restructured payment schedule, interest will continue to 
accrue and will be amortized over the remaining term of the license.

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    (iii) Following expiration of any grace period without successful 
resumption of payment or upon denial of a grace period request, or upon 
default with no such request submitted, the license will automatically 
cancel and the Commission will initiate debt collection procedures 
pursuant to part 1, subpart O.
    (f) The Commission may award bidding credits (i.e., payment 
discounts) to eligible designated entities. Competitive bidding rules 
applicable to individual services will specify the designated entities 
eligible for bidding credits, the licenses for which bidding credits are 
available, the amounts of bidding credits and other procedures.
    (g) The Commission may establish different upfront payment 
requirements for categories of designated entities in competitive 
bidding rules of particular auctionable services.
    (h) The Commission may offer designated entities a combination of 
the available preferences or additional preferences.
    (i) Designated entities must describe on their long-form 
applications how they satisfy the requirements for eligibility for 
designated entity status, and must list and summarize on their long-form 
applications all agreements that effect designated entity status, such 
as partnership agreements, shareholder agreements, management agreements 
and other agreements, including oral agreements, which establish that 
the designated entity will have both de facto and de jure control of the 
entity. Such information must be maintained at the licensees' facilities 
or by their designated agents for the term of the license in order to 
enable the Commission to audit designated entity eligibility on an 
ongoing basis.
    (j) The Commission may, on a service-specific basis, permit 
consortia, each member of which individually meets the eligibility 
requirements, to qualify for any designated entity provisions.
    (k) The Commission may, on a service-specific basis, permit 
publicly-traded companies that are owned by members of minority groups 
or women to qualify for any designated entity provisions.
[ 59 FR 44293 , Aug. 26, 1994;  60 FR 52865 , Oct. 11, 1995;  62 FR 13544 , 
Mar. 21, 1997]