Are You an ‘Eligible Entity’?

The new rules have not taken effect as of this writing, but they are all likely to be in place later this year.
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Picking up where it left off more than a decade ago, the Federal Communications Commission has cranked up its “diversification” machinery in an effort to bring more minorities and women into broadcast ownership ranks through a broad series of rule changes and proposals.

There’s a little bit of something here for everybody, as the FCC has tried to sweeten the pot for all concerned. Whether any of its efforts will prove successful, however, is far from clear.

The new rules have not taken effect as of this writing, but they are all likely to be in place later this year. Given their scope, we can expect that they will affect most licensees in some way, so it would be a good idea to familiarize yourself with them sooner rather than later.

Diversity initiative

Historically, minorities and women have not been represented in ownership ranks in the same proportion as their numbers in the overall U.S. population. While the FCC may view it as desirable policy to try to change that, the Constitution generally prohibits race-based (and, to a lesser degree, gender-based) governmental policies except under certain limited circumstances not present here.

To get around that pesky constitutional problem, the FCC has taken a route favored by other governmental units facing the same question.

Rather than give preferential treatment only to minorities and/or women, the commission has decided to accord preferences to small businesses and new entrants (dubbed “Eligible Entities”), the theory being that such entities are more likely to be constituted of minorities and/or women.

Of course, since the operative definition does not limit the term, a white Anglo-Saxon Protestant male will be able to benefit from the new rules just as much as an African-American Muslim woman, if they both meet the Eligible Entity criteria.

For purposes of the new rules, the FCC derived its definition of Eligible Entities from a similar concept used by the Small Business Administration.

Businesses are deemed to be “small” based on industry grouping (for example, radio is one such grouping, TV another) and revenue. A radio station is considered a small business if it has annual receipts of no more than $6.5 million.

Before you start trying to figure out ways to fit into those definitions, be aware that the revenues of any parent and/or affiliate companies are also included in the calculation. And there are several “control” tests designed to ensure that any governmental benefit does in fact flow to a qualified entity.

Relax, relax

The following summary reflects the variety of new rules adopted in the Diversity Initiatives order.

CP extensions — Currently, CP extensions are generally not permitted. But under the new rules, if an Eligible Entity acquires an unbuilt construction permit, it will have at least 18 months (or the remainder of the original permit term, whichever is longer) from the purchase of an expiring permit to complete the construction.

EDP calculations — The new rules relax the existing Equity/Debt Plus attribution rules for multiple ownership limits.
Under EDP, an entity may find itself with an attributable interest in a broadcast licensee even if it is not an owner of that licensee. That occurs when the non-owner is (a) either a significant program supplier or an attributable owner of another same-market station holder and (b) holds a 33 percent or greater equity and/or debt position in the licensee. The rule is designed to prevent the aggregation of multiple non-attributable interests in a way that could have an actual significant (but unreported) influence on licensees.
The FCC has amended that rule to allow up to 50 percent equity and/or debt interest in a small business licensee or a debt interest alone (no equity) of up to 80 percent of the asset value of a station.
These new limits will also apply when determining if a bidder in a broadcast license auction qualifies for the “new entrant” bidding credit.

Distress sale policy — The FCC has modified its “distressed station sale” policy.
Under the original policy, a station owner whose license had been designated for a revocation or non-renewal hearing could assign the license as long as (a) the buyer was minority-controlled and (b) the price was no more than 75 percent of the station’s fair market value.
To avoid potential constitutional problems, the FCC has modified its rules so that a distressed station sale can be made to any Eligible Entity.
The practical usefulness of the distress sale policy is limited because it can’t come into play unless some station’s license gets designated for hearing. The commission has historically not dumped many stations into hearing, and it shows no sign of changing that.
So the number of stations that might move into the hands of Eligible Entities through that policy is likely to be extremely low.
(Of course, if that prediction were to prove inaccurate and the number turns out to be large, that would not bode well for broadcasters, since it would suggest an aggressive, enforcement-minded commission suddenly designating license renewals for hearing — not something the industry as a whole is likely to want to hear.)

Non-discriminatory agreements — The FCC has adopted two new rules prohibiting discrimination — on the basis of race, gender or related protected categories — in the sale of stations and in the sale of broadcast advertising time.
With respect to station sales, proposed sellers will be required to certify compliance with this rule by checking the appropriate boxes on newly designed assignment application forms.
The ban on discriminatory advertising contracts specifically prohibits certain advertising contracts that apparently have contained “No Urban/no Spanish” clauses. The new rule requires licensees to certify in their license renewal applications “that their advertising contracts do not discriminate on the basis of race or gender and that such contracts contain nondiscrimination clauses.”

“Zero Tolerance” of ownership fraud — The FCC is also implementing a “Zero-Tolerance” policy to prevent ownership fraud.
Previous FCC attempts to promote minority and women ownership have been fraught by sham companies, in which the real owners are in fact neither minorities nor women. The FCC thinks that by having “zero-tolerance” for such fraud, it will deter and detect any such fraud in the future.
The details are still a little sketchy about how this will be implemented — the only concrete item being a new policy of seeking to resolve ownership fraud complaints within 90 days (fast-as-lightning in terms of FCC typical actions). Good luck with that.
It’s difficult to take the self-imposed 90-day turnaround time seriously. History indicates that the factual issues surrounding possible “sham” ownership structures are notoriously difficult to sort out.
And in a number of instances (at least), the commission’s conclusions seemed difficult to square with its rhetoric (for example, the FCC found one TV applicant to be “minority-controlled” even though the only minority involved in the entity had contributed a mere $200 of the entity’s $22 million capital).
Whether a particular ownership structure constitutes fraud or good public policy often depends on the eye of the beholder.

Divestiture flexibility — For situations in which a merger of broadcasting companies requires divestiture of one or more stations in order to meet the FCC’s multiple ownership caps, the FCC will now allow extended deadlines to divest the extra stations if the merging companies have actively solicited bids for such stations from Eligible Entities.
Merging companies getting this extension will, however, be required to actually sell the spin-off station(s) to an Eligible Entity or place the station(s) in an irrevocable trust for the sale to an Eligible Entity in order to prevent abuse of the extension process.

Grandfathered clusters — The FCC’s rules for grandfathered station cluster sales (i.e., sales of station groups that exceed the current multiple ownership caps, but that are permitted since they were in existence before the current ownership limits took effect) requires the cluster to be sold to Eligible Entities in order to keep the “grandfathering” exemption intact.
The FCC is now modifying that rule to allow any buyer to retain the grandfathering so long as it agrees to re-sell the excess station(s) to an Eligible Entity within 12 months of the purchase.

More to come?

In addition to the amendments which the FCC adopted, it also threw out for public comment a number of proposed changes.

The three proposals which are likely to be of most interest to radio licensees involve (a) possible sale/lease of HD Radio channels, (b) expanded AM band stations, and (c) possible conversion of TV Channels 5 and/or 6 for FM radio use.

As to the HD-R channels, the commission thinks it might be a good idea to allow FM stations operating with multiple digital streams to sell or lease one or more of those streams to Eligible Entities.

On the AM expanded band side of things, as matters now stand, AM licensees with expanded band authorizations are expected to turn one of their licenses (either their expanded band license or their original, non-expanded band authorization) in after five years. The FCC is now thinking that it might make sense to allow the AM licensee to sell one of the two to an Eligible Entity, rather than turn the station off.

As to the re-purposing of Channels 5 and/or 6, don’t get your hopes up. While the FCC seems bullish on the idea in its diversification order (“this proposal could yield tremendous opportunities for new entrants, and we seek comment on it”), it apparently changed its mind in short order.

The very next day after issuing the diversification order, the commission issued an order in the DTV transition proceeding in which it addressed the proposal to use TV Channels 5 and/or 6 for FM. There the FCC noted that the “well-established determination that the additional opportunities for increasing FM noncommercial coverage do not outweigh the costs of eliminating Channel 6 from TV service.”

And with that, the commission expressly said that it was denying the proposal. So we really aren’t that optimistic that this notion will be a happening thing at any time in the foreseeable future.

Related

Ownership: You Are Always in Sales

In the first two articles of this three-part series, I presented factors to consider when looking for a radio station to buy and additional items relative to financing the deal.