PUBLIC
NOTICE

       Federal Communications Commission
       1919 M St., N.W.
       Washington, D.C. 20554

                                                               
                                                 April 15, 1996

C Block Bidders Reminded to Consider Distinctions Between Debt and Equity 
     For Foreign Ownership and Broadband PCS Auction Rules
Debt Arrangements Triggering Control Must Be Disclosed on Long-Form Applications
                                
     The Wireless Telecommunications Bureau ("Bureau") has received inquiries regarding
distinctions between debt and equity investments in broadband Personal Communications
Services (PCS) C block applicants.  In response to these inquiries, the Bureau strongly
encourages all bidders to revisit Commission precedent concerning treatment of debt and
equity.  

     For example, the Commission has said that "financing agreements may result in a
finding of affiliation if the debt relationship essentially gives the creditor the power to control
the enterprise [because] the size of the debt is particularly large, the terms of the loan are not
commercially reasonable, and the definition of default is not conventional."  See Second
Report and Order in PP Docket 93-252, 9 FCC Rcd 2348, at  272.  In a Public Notice, the
Bureau has also explained that "[d]ebt is not attributable unless it appears to be equity
disguised as debt.  Factors such as interest rate and length of repayment period would have to
be considered."  Answers to Questions Concerning Broadband PCS Auctions, Public Notice,
Mimeo No. 50295 (released Oct. 20, 1994).  In another Public Notice, the Bureau stated that,
"the interest rate that a debt instrument carries will not, by itself, result in a finding of
affiliation, attribution or control.  Additionally, the length of repayment period, by itself, will
not raise the same concerns.  However, if a debt instrument results in control being conferred
upon the debt holder, it could raise a question about de facto control of the applicant." 
Wireless Telecommunications Bureau Staff Responds to Questions About the Broadband PCS C
Block Auction, Public Notice, Mimeo No. 54270 (released June 8, 1995); see also Fifth
MO&O, 10 FCC Rcd 403, at  95.

     Bidders should also consider the Commission's decision in Fox Television Stations,
Inc., Second Memorandum Opinion and Order, FCC 95-313 (released July 28, 1995) (FTS II)
for guidance on how we may distinguish between debt and equity held in an applicant.  FTS II
considered distinctions between debt and equity in the context of assessing a licensee's
compliance with Section 310(b) of the Communications Act of 1934, as amended (47 U.S.C. 
310(b)).  The Commission stated that it would be guided, but not bound, by precedent
developed in the context of the Internal Revenue Code's distinction between debt and equity. 
For example, the Commission cited five factors that Congress has specified as relevant in
distinguishing debt from capital contribution under the Internal Revenue Code.  These factors
are (1) whether there is a written unconditional promise to repay the money on demand and
pay a fixed rate of interest; (2) whether there is subordination to or preference over any
indebtedness of the company; (3) the company's debt/equity ratio; (4) whether the alleged debt
is convertible to stock; and (5) the relationship between holdings of stock in the corporation
and holdings of interest in question.  FTS II at  16 (citations omitted).  The Commission also
discussed judicial precedent in the same area that could offer useful guidance.  Id. at  16-17. 


     Bidders are also reminded that under Section 24.709(c)(2)(ii) of the Commission's
rules, 47 C.F.R.  24.709(c)(2)(ii), winning bidders are required to list and summarize on
their long-form applications (FCC Form 600s) "all agreements or other instruments. . .that
support the applicant's eligibility for a license(s) for frequency Block C. . . including the
establishment of de facto and de jure control."  This rule requires applicants to disclose those
financing arrangements which may confer de facto or de jure control on the debt holder. 
Where financing arrangements are challenged through the petition-to-deny process, we will
analyze such situations on a case-by-case basis and will make decisions regarding any
unauthorized transfer of control of an applicant based on the totality of the circumstances. 

     Finally, we remind bidders that our rules prohibit the filing of frivolous petitions to
deny.  47 C.F.R.  1.52.  The Commission has stated that it intends to fully utilize its
authority to discourage and deter the filing of frivolous petitions and will impose sanctions
where such pleadings are filed.  Commission Taking Tough Measures Against Frivolous
Pleadings, Public Notice, FCC 96-42 (released February 9, 1996).      

For further information, please contact James W. Hedlund, Wireless Telecommunications
Bureau, Auctions Division at (202) 418-0660.