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The Leadership Conference on Civil and Human Rights

The Nation's Premier Civil and Human Rights Coalition
The Leadership Conference on Civil and Human Rights & The Leadership Conference Education Fund
The Nation's Premier Civil and Human Rights Coalition

Successes and Failures of the 1996 Telecommunications Act

Section 714 - The Telecommunications Development Fund: Making a Difference?

By S. Jenell Trigg, Esq.

Introduction

The Telecommunications Act of 1996 (" 1996 Act" or "Act") 1 was largely framed by and designed for large business interests. Believe it or not, there are two provisions of the big-business oriented 1996 Act that were included to specifically benefit small business, including those that are minority and women-owned. One provision was Section 257, Market Entry Barriers, and the other was the Telecommunications Development Fund (" TDF"), embodied in Sections 707 and 714 of the Act. 2 The 1996 Act was a major over-haul of the Communications Act of 1934, which was characterized as having "swept away 62 years of telecommunications policy [and] paved the way for a more dynamic superhighway." 3 In light of this revolutionary shift in regulatory paradigms, there was great concern by small businesses, trade associations, legal and policy advocates that represented small business, that the dynamics of the new industry would preclude small telecommunications businesses -- thus the creation of TDF. The purpose of TDF, as mandated by Congress, is simple and straightforward: "( 1) to promote access to capital for small business in order to enhance competition in the telecommunications industry; (2) to stimulate new technology development, and promote employment and training; and (3) to support universal service and promote delivery of telecommunications services to underserved rural and urban areas." 4 TDF's implementing statute defines the telecommunications industry very broadly. 5

TDF is capitalized, in part, by interest earned on deposits of upfront payments from companies or individuals that wish to participate in the Federal Communications Commission's (" FCC" or "Commission") various spectrum auctions. 6 Additional funds are received from returns received on TDF's investments, and other forms of fundraising yet to be conducted. 7

Both the Market Entry Barriers and TDF provisions have had varying degrees of success since passage of the Act in 1996 and throughout the fast-consolidating and dynamic telecommunications industry precipitated by the 1996 Act. In fact, industry professionals, other federal government agencies, consumer interest and civil rights organizations have criticized the FCC's implementation of both statutory provisions. 8 Within the current uncertainty about the state of the telecommunications industry, particularly in the current economic downturn, there is no doubt that TDF's promise of providing financing to small telecommunications business has been realized, albeit not at the magnitude nor scope that was first envisioned upon its creation.

TDF's Passage into Law

TDF was the brainchild of Representative Edolphus Towns (D-10 th ) from New York, who served on the U. S. House of Representatives' Committee on Commerce. 9 Congressman Towns recognized that one of the primary, if the not the only, obstacles and market entry barriers for small business was access to debt and equity capital. In seeking financing, women and minority-owned businesses faced additional hurdles based on racial or gender discrimination. 10 Extensive documentation throughout the years by Congress, the FCC and other federal agencies, illustrate that the lack of access to capital to these entities (including debt at reasonable interest rates and collateralization) prohibits both entry and growth in the vast sectors of the telecommunications industry. 11

Also of great concern to the Congressman, members of the Congressional Black Caucus, and the civil rights community, were changes in the national legal and political landscape that primarily impacted minority-owned businesses. 12 Such developments were compounded by the harsh economic reality of financing a new or established telecommunications business. However, the language of TDF is purposefully directed to small businesses, and not to minority-owned businesses, because of the same anti-affirmative action climate that led to the need for its development. The creation of a 'minority fund' would have faced considerable opposition in Congress (and ultimately in the courts) and certainly would not have enjoyed the nominal scrutiny, if any, that TDF enjoyed upon its amendment to H. R. 1555 and passage as part of 1996 Act.

Sponsored by Congressman Towns, TDF was introduced to H. R. 1555 on July 31, 1995, and approved as part of the Manager's Amendment (Item #27, adding Sections 10 and 111) on August 4, 1995. 13 Congresswoman Cardiss Collins (D-7th) from Illinois, although in opposition to the House bill, was in full support of TDF and the small business market entry barriers provision. 14 She remarked, "I fully support the Telecommunications Development Fund language included in Chairman Bliley's manager's amendment. This language ensures that deposits from the FCC received through auctions be placed in an interest-bearing account and the interest from such deposits be used to increase access capital for small telecommunications firms." 15 The Senate's version of the bill, S. 625, had no compa-rable provision. Therefore, to become part of the final bill that would ultimately be signed into law, the TDF amendment needed to survive the often contentious conference committee process in which conflicting provisions and mutually exclusive provisions between H. R. 1555 and S. 625 must be reconciled into one bill. 16 The Conferees, selected from both houses of Congress and several committees and subcommittees, deferred to the House provisions for TDF and thus, former Sections 10 and 111 of H. R. 1555 became Sections 707 and 714 of the final reconciled bill, S. 625. 17 S. 625, now titled "The Telecommunications Act of 1996," was voted on by both the Senate and House on February 1, 1996. 18 Upon its passage by the House, Congressman Towns remarked, "I am pleased that this conference report contains a new initiative to assist in the development of capital funds for small businesses. This telecommunications development fund will provide low-interest loans to small businesses with $50 million or less through up-front spectrum auction payments. I would like to thank the leadership of the committee for bringing this momentous legislation forward and for supporting my efforts to assist small businesses." 19 The 1996 Act was signed into law by then-President Clinton on February 8, 1996.

To Be, or Not to Be a Part of 'Uncle Sam'

The extent of TDF's legal and structural relationship with the federal government has been a major point of confusion. Such confusion exists because of TDF's genesis, statutory provisions, and legislative history. It was envisioned by Congress that TDF would serve as a quasi-governmental entity. 20 Press accounts have erroneously characterized TDF as a government-sponsored program. 21 Government sponsorship implies funding support from Congress, either by its appropriations process or via grants. Indeed, TDF was established by Congress, and Congress created the mechanism and authority to provide for TDF's source of funding, but TDF receives no direct or indirect funds or appropriations from the federal government. Furthermore, TDF is not part of the FCC or the U. S. Small Business Administration (" SBA"). Pursuant to its charter under the 1996 Act, TDF is organized as a self-sustaining, private venture capital corporation incorporated in the District of Columbia. 22

The FCC's Office of Communications Business Opportunities (" OCBO") provided the principal support for the initial administration of TDF immediately after passage of the 1996 Act, with the assistance of the Office of General Counsel (" OGC"). 23 However, once the Board of Directors, corporate structure and management were determined, and the Auction Escrow Account( s) for the upfront auction deposits were established, 24 TDF had nominal ties to the federal government regarding its funding and day-to-day operations. Granted, TDF's seven-person Board of Directors is appointed by the Chairman of the FCC and must include one representative from the FCC, the SBA, and the Treasury Department, but the majority of the Board is filled from persons in the private sector. 25 The Chairman must also be from the private sector. 26 The statute provides for the Board "to determine the general policies which shall govern the operations of the Fund." 27 TDF's Board of Directors are not involved in the details of its investment decisions. 28

A Storm of Criticism Amidst High Expectations

Many in the industry and telecommunications bar had high, maybe too high, expectations for TDF. Almost immediately after the passage of the 1996 Act, there was a storm of criticism regarding TDF from a surprisingly diverse variety of individuals and organizations involved in, or representing, the telecommunications industry, consumer and civil rights organizations. Such criticism included the selection of its Chairman, the selection process and composition of its Board of Directors, the relatively long time-period until the first investment was made, the types of businesses/ industries it invests in, and the form of such investments. In many ways, TDF's creation was very personal to the small business and minority business community. Many persons expected that TDF would immediately solve the access to capital problems of small minority businesses or would help stem the declining rate of minority-owned radio and television stations.

The Selection of a Chairman and Board of Directors

Much of the early criticism was directed to then-Chairman of the FCC, Reed E. Hundt, who selected Solomon D. Trujillo as the interim Chairman for TDF. 29 The 1996 Act requires the FCC Chairman to appoint a Chairman from the private sector within thirty days after the date of enactment of the 1996 Act. 30 There was concern from the small and minority business community that Trujillo, then-Chairman and CEO of US WEST Communications Group, 31 was too big business-oriented to guide TDF in its mandate to serve small business. However, Trujillo, also of Hispanic heritage, had previous experience in addressing the needs of small business (albeit from a corporate perspective) given his former position as Vice President and General Manager of US WEST Communications Small Business Group, serving nearly 800,000 small business customers across 14 states. 32 He was also appointed by the Governors of the States of Arizona, Colorado and New Mexico to serve on each state's economic development and educational commissions. 33 FCC Chairman Hundt remarked in his support for Trujillo, that Trujillo's "experience with finance issues affecting small and large businesses, combined with his commitment to fostering economic development will be a tremendous asset to [TDF]." 34 Trujillo served as Interim Chairman from March 1996 to July 1997, until the appointment of W. Don Cornwall, Chairman of Granite Broadcasting Corporation, as the full-term Chairman of TDF.

As a matter of law, TDF's Board of Directors must include four mem-bers from the private sector with experience in the areas of finance, investment banking, government banking, communications law and administrative practice, and public policy. 35 In the effort to select the private sector members, the FCC requested nominations from the public. 36 Nonetheless, the ultimate selection of TDF's initial private sector members was criticized as political and driven by a "desire to recruit women and minorities." 37 Other concerns included the poten-tial of a conflict of interest for TDF Board members that also work for companies that are considered competitors to the small businesses seeking financing from TDF. Although the Board does not determine what applicants receive funding support from TDF, some entrepreneurs still feel uncomfortable about sharing any part of their business plan with TDF.

Show Me The Money!

As previously noted, TDF's investment funds do not come from the federal government. This is the biggest mischaracterization and source of criticism of TDF, that it is funded, directly or indirectly, by the federal government. The federal government authorized the establishment of an Auction Escrow Account(s), which is the mechanism for funding TDF. 38 TDF receives the interest earned from the escrow account from Mellon Bank. The funds deposited in the escrow account are actually from private companies or individuals (i. e., "bidders") that have submitted a payment to the FCC as a prerequisite to participate in an FCC auction. 39 Such deposits are to be returned to the bidder if the bidder withdraws from the auction or fails to win a bid, usually within 45 days. 40 But the interest accrued by funds in the escrow account during the interim period between the deposit of payments with Mellon Bank and transfer to the Treasury Department (or, alternatively, returned to the participating bidder) is transferred to TDF directly from Mellon Bank.

Significantly, this is the first time that any auction payments have been deposited in an interest-bearing account since Congress first granted authority to the FCC to conduct auctions in 1993. 41 Prior to TDF, all deposits to the FCC for participation in an auction were sent to Mellon Bank, but did not earn interest for the FCC, or for the participating bidders. Mellon Bank was the sole beneficiary of FCC auction deposits. As of January 17, 2002 (upon the close of Auction No. 43 for Multi-Radio Services), the FCC has conducted a total of thirty- eight (38) auctions since grant of auction authority in 1993, raising a total of $ 41,637.8 billion dollars for the U. S. Treasury. 42

With the creation of TDF, at least the upfront auction payments earn interest, however, not the down payment deposits that are required to be submitted to the FCC from the winning bidders within a designated time after the auction has closed. It has been stated that the initial congressional intent of TDF was for it to benefit from all auction deposits. 43

Regardless of the source and type of auction deposits, capitalization by interest earned is unpredictable and sporadic because TDF has no control of the FCC's scheduling of auctions, the value placed on the specific service and spectrum to be auctioned, or the number of bidders, and thus the amount of deposits to be generated any given time is unknown. Early in its development, the Congressional Budget Office estimated that TDF would have a capitalization north of $350 million, most likely based on accrued interest anticipated from both the deposits of upfront payments and down payments. In reality it took TDF almost four years to receive $25 million in funding. Today, TDF is capitalized in the amount of $50 million. 44 But in the context of the high cost of telecommunications properties and capital intensive nature of starting new telecommunications services particularly post the 1996 Act, $50 million is not a lot of money. 45

TDF's Investment Strategy

TDF exclusively provides equity capital investments in start-up small businesses. The amount of its first round of investment ranges from $375,000 to $1 million. This equity-only strategy was adopted upon extensive market research and input from the SBA's Office of Advocacy, which reported that the greatest need for capital for an emerging small telecommunications business was not in the area of debt, but equity capital. 46 Historically, the companies in the telecommunications industry were the first or second largest sector to receive venture funding, placing second only to technology-based companies. 47 But start-up firms and firms with annual gross revenue between $250,000 and $2 million have the most difficulty in securing equity investments. 48

Two factors have reduced the availability of venture capital money for small businesses. One, the success of venture funds "in raising money from pension funds has moved them to much larger investments. The small (below $2 million) deal is hard to find.... As the amount of funds flowing into the industry has increased, the number of deals has remained essentially static. Thus, the average size of a deal has increased dramatically." 49 The second reason is that it takes almost the same amount of due diligence, including the services of accounting, legal and if necessary, engineering professionals to close a small deal as is required to close a large deal. 50 Thus, the transaction costs for a large deal are more economical and efficient than a small deal, reducing the overall cost of doing business.

To provide additional information on the state of the venture capital industry TDF commissioned a study in 1997 from The Gazelle Group, Inc. (" Gazelle Group Report"), an independent market-research firm, to identify underserved areas of entrepreneurial activity, geographic areas, and services within the telecommunications industry that would provide good market opportunities for TDF. 51 So as not to duplicate the work and scope of established venture capital firms, the Gazelle Group Report also profiled other firms and government programs that provided seed or expansion stage financing for small businesses and/ or businesses in the telecommunications industry. 52

This strategy to focus on start-up small businesses appears to be even more pertinent six years post the enactment of the 1996 Act. "Today, there is still a huge need for equity investments in start-up small businesses," affirms Ginger Lew, Chief Executive Officer of TDF. "The VC [venture capital] market has retreated and fewer companies are investing in start-ups. For example, in Washington, DC, there are approximately one hundred VC firms, but fewer than six support emerging small businesses." 53

Nonetheless, TDF's limitation of equity-only investments and the absence of debt financing of any type from its investment options has raised yet another area of criticism and scrutiny. 54 Industry professionals have claimed that TDF is required by law to provide "loans or other credit-based investments in small businesses." 55 Indeed, the purpose of TDF, as expressed by Congress in its legislative history, was to "provide low interest loans as well as financial guarantees." 56

However, the statutory language is much broader and provides for "the making of loans, investments, or other extensions of credits to eligible small businesses ...." 57 TDF is also authorized to provide equity investments. The issue is whether TDF must also provide debt investments as well.

This decision to not operate as a lender was based on practical and legal considerations. The statute requires TDF to make loans in "accordance with subsection (f)," which mandates that TDF comply with the provisions of the Federal Credit Reform Act of 1990. 58 TDF explains that "[ u] nder that standard, most small, start-up businesses do not have the assets or collateral to qualify for credit-worthy loans." 59 Nonetheless, there is a great need for favorable debt instruments allocated for small businesses, especially minority businesses. 60 A business that needs an infusion of capital should secure a balance of equity and debt, preserving as much ownership and control of its business as possible. 61 Since the fall of the dot-com industry and the decline of the telecommunications sector in 2001, the debt market has become more difficult for all sizes of businesses, especially small and minority-owned businesses. Industry professionals expect that debt will become even more difficult to obtain in the next few years, compounded by the recent bankruptcy filings of several telecommunications and energy companies, failings that will have major repercussions on the banking industry overall. 62 Nonetheless, it is not likely that TDF would enter into the lending business anytime soon, especially given the concerns about the credit-worthiness of emerging small businesses with little or no collateral and assets. "TDF has an obligation to make prudent investment decisions," explains Lew. 63 "And the best use of our funds, resources and expertise is to fill a niche that is not being served, and that is providing equity investments for small start-up telecommunications companies." 64

What, No Radio and TV Deals!?

Others have criticized TDF because of its conservative investment strategy and the absence of radio and TV deals. Upon its passage, it was anticipated that TDF would serve to increase the fast-declining ranks of minority-owned radio and television owners. 65 However, broadcast consolidation immediately post the 1996 Act and subsequent changes in the FCC's attribution and ownership rules, have increased the cost of radio and TV properties to record-high levels. 66 TDF has chosen not to invest in radio and TV at this time because of the high cost and the difficulties faced by small and minority owners in meeting profit performance and delivering an expected return on investment, especially for stand-alone owners or small group owners in small markets. 67 With increased funding and changes in the broadcast and wireless market, TDF may find that it would have the flexibility to invest in such properties, but only if the deal makes sense.

TDF's first investment closed in December 1999 in a Northern Virginia-based firm called Invertix. "Invertix provides innovative, high quality products and services which ensure the delivery of Internet content and e-commerce transactions to wireless networks and other emerging telecommunications networks." 68 It is reported that TDF invested $750,000 in Invertix as part of a $2.9 million seed round in conjunction with several other investment firms. 69 Although many of the businesses TDF has invested in are wireless or Internet focused, offering software, security services, and access technologies, TDF did not get involved in the dot-com investment feeding frenzy of 1999-2000. "We could not figure out where the revenue comes from," remarked Lew on TDF's review of Internet financing proposals. "At the end of the day, we ask: Is a company going to make money?" 70 According to its website, TDF has invested in eleven firms; the majority have a focus on Internet applications or new technologies. 71 Seven portfolio firms are minority-led: 72 Netilla Networks, Kobalt Interactive, Wisor Telecom, Synovial Inc., Invertix, New Media Technology and TelePulse. HandSignal is woman-led. 73 One company, Elisar Software Corporation, from New Mexico, is fulfilling TDF's statutory mandate to "promote delivery of telecommunications services to underserved rural and urban areas." 74

Funding of the FCC's Adarand Study

It was also anticipated during the development of TDF that it would be an ideal source of funding for the FCC's long anticipated Adarand study. 75 Section 714 provides for TDF to fund the "preparation of research, studies, or financial analyses." 76 However, approval of such a massive study would need to be justified in cost and be consistent with TDF's obligation to make such expenditures in a manner that is race and gender neutral. 77 TDF has not been approached to undertake such a study. However, Lew recommended that the cost of a major Adarand study be shared between the FCC, SBA and NTIA. 78

A Small Business is Born

In essence, TDF is a small business itself, with all of the obstacles and difficulties that a start-up small business endures. In fact, it took several years after the passage of the 1996 Act for TDF to make its first investment. "When we first started, we could not get health insurance because we did not have enough employees." Lew remarked. She added, "that it took some time to determine what our investment strategy would be, hire a competent staff and almost four years to have enough funds to open our doors to receive applications." 79

Limited personnel and resources are also one of the reasons that TDF has not become a Small Business Investment Company (" SBIC"), which is a type of private investment company that is licensed by the SBA. 80 The major obstacle is that the SBA, authorized by statute to establish SBICs, determined that under the Small Business Investment Act of 1958 TDF does not qualify because its genesis was from a federal act -- even though the government is not its source of funds. 81 According to the SBA, a change in the law is required to make TDF eligible to qualify as an SBIC. 82 While there may be some advantages to becoming an SBIC, 83 TDF is somewhat ambivalent about pursuing this battle. 84 There are several reasons for this reluctance: a tremendous amount of recordkeeping and paperwork, controls, reporting requirements and restrictions on administration of an SBIC. It would be necessary for TDF to hire a full-time person to handle the administration of an SBIC program. Such efforts are simply not a priority at this time. 85

Limitations of the Statutory Language in the 1996 Act and The Impact on TDF

Interest Earned and Type of Escrow Account

The statutory language of Sections 707 and 714 of the 1996 Act has operated to limit TDF in its development and success in several ways. From the start, there was controversy over the type of interest bearing account the auction deposits can be deposited in based on the Treasury Department's interpretation of Section 707 and 714. 86 The types of account and the interest rate for that account have a direct impact on how much and how fast interest accrues to fund TDF. In fact, according to Lew, when the TDF Board of Directors held its first meeting in November 1996, TDF was capitalized at less than $5 million, considered to be too little of an amount to open the doors of a private equity investment business. 87 As a result, TDF's first investment was not funded until December 1999.

Limitation of the Type of Auction Deposits

The biggest limitation of TDF's statutory language is that it has been interpreted to include only upfront payments and not all of the deposits made throughout the FCC's auction process that are to be deposited into the escrow account( s). This restriction of deposits to only upfront payments was, allegedly, not the original intent of TDF. 88 However, the FCC's interpretation to limit the type of deposit to only upfront payments is supported by the statutory language that states that "[ a] ny deposits the Commission may require for the qualifications of any person to bid in a system of competitive bidding pursuant to this subsection shall be deposited in an interest bearing account ...." 89 In its implementation of its auction rules (i. e., "system of competitive bidding"), the FCC requires an 'upfront payment' to be submitted with an entity's short form application (FCC Form 175), which are the initial requirements before an entity is eligible to participate in an auction. 90 A 'down payment' is required not for an entity's initial qualification to bid in an auction, but is a subsequent requirement after the auction has been completed to qualify for the FCC's further processing of an application pending grant of the actual permit or license. 91 Thus, the language of Section 707 is reasonably interpreted to mean the 'upfront payments' that are required for the FCC to determine the initial qualifications of a potential bidder.

The difference in the dollar amount between upfront payments and down payments is substantial. For example, the FCC's Auction No. 35 for the Reauction of Personal Communications Services (" PCS") licenses first won by NextWave Personal Communications, Inc. (" NextWave") and Urban Communicators PCS LP (" Urban Communicators"), 92 generated a record-breaking net total of $16.857 billion in winning bids. 93 Of the reported $3.1 billion in total deposits made to the FCC, $1.85 billion were for upfront payments, which were deposited in TDF's auction escrow account to accrue interest until the funds were transferred to Treasury. 94 Ten days after the release of the public notice announcing the close of the auction on January 26, 2001, all winning bidders were required to have on deposit with Mellon Bank enough funds to cover a 20% down payment of their net total winning bids, collectively for all winning bidders, a total of $3.37 billion (20% of $16.857 billion net total for the entire auction). 95 If a winning bidder's upfront payment was not sufficient to cover its entire 20% down payment, the winning bidder was required to deposit additional funds. Therefore, additional deposits of $1.52 billion in down payments were sent to Mellon Bank, but were not deposited in an interest bearing account, and were subsequently transferred to the Treasury Department. The additional down payments have earned zero interest for the past year pending final resolution of the NextWave proceeding.

Thus, TDF's implementing statute has inadvertently served to impede its own access to capital. Any future modifications to correct the technical deficiencies of TDF should include provisions to include auction down payments in the TDF escrow account( s), as well as provide increased flexibility for the government to negotiate the best form of interest bearing account to maximize the account's full earning potential.

Partnerships and A Prime Source of Information, Resources and Training for Entrepreneurs

TDF frequently participates in syndicated transactions with other venture capital firms in an effort to leverage its participation and spread its resources. As a member of the National Association of Investment Companies (" NAIC"), a trade association of investment firms that are dedicated to the growth and development of the minority- oriented venture capital industry, TDF looks for opportunities with many NAIC members to provide capital, as well as deal flow information about potential investments.

TDF also looks for investment opportunities where traditional VC firms, especially Wall Street-oriented firms, are not. 96 This includes university towns where there may be increased entrepreneurial activity. It also sponsors and actively participates in the renowned Springboard Venture Capital Forum Series, which has showcased 175 select women entrepreneurs and their companies in 7 venture forums across the country, raising over $650 million in capital since its start in January 2000. 97 TDF was also a founding sponsor of the inaugural Southeast iDealFlow Forum in Atlanta, Georgia, November 2001, in conjunction with AOL Time Warner Company, Turner Broadcasting System (a division of AOL Time Warner), and The Coca-Cola Company. This Forum was modeled after the successful format of the Springboard Forums for women entrepreneurs, but highlighted a diverse selection of racial and ethnic minority entrepreneurs. A total of sixteen companies were selected as finalists from hundreds of applications to present to VC firms from around the country in an extensive screening, review and coaching process. It was the first such event of its kind in Atlanta. TDF's participation in the Southeast iDealFlow Forum, as well as the support provided from other NAIC members, included payment of a nominal sponsorship fee, recruitment of presenting companies, reviewing applications and business plans, and coaching presenters. 98

An area in which TDF has excelled is the area of education and dissemination of information regarding the investment industry and training material on raising capital for new and experienced entrepreneurs. Penny K. Pickett, TDF's Business Director, notes "that many of the entrepreneurs that first approached TDF were asking the same questions and needed similar areas of guidance." 99 In response, TDF developed its online multi-media tutorial, "Equity Financing Course," in conjunction with the SBA, the Mason Enterprise Center at George Mason University and the Dingman Center at University of Maryland. 100

TDF's webpage offers an excellent compilation of resource providers, including Business Advisors with Internet links, and entrepreneurial training materials. The training materials include a white paper authored by Lew as produced in association with the Telecommunications Industry Association (" TIA"). 101 It is titled "Getting VC's Attention: Telling Them What They Want to See and Hear."

Conclusion

Six years after enactment of the Telecommunications Act of 1996, the Telecommunications Development Fund has invested a total of $2.5 million in small women and minority-owned start-up telecommunications businesses during one of the most tumultuous periods in the telecommunications and financing industries. In summary, TDF has indeed made a difference, particularly to eleven small start-up telecommunications companies. Despite the continued criticism, TDF has stayed true to its mission of serving an underserved niche in the availability of equity funding for small start-up telecommunications businesses.

TDF is not, and should not be, all things to all people. The telecommunications and civil rights community should not put all of its "access to capital" eggs in one basket. The desire for TDF to expand the scope and size of its investments clearly illustrates that there is a critical need for additional funding sources and incentives from both the public and private sectors that will specifically benefit small, minority and women-owned businesses. Only with such support, will the promise of true and vigorous competition as embodied in the 1996 Act between all types of providers, large and small, be fully realized.

Endnotes

1. Pub. L. No. 104-104, 110 Stat. 154-157 (1996) (enacted February 8, 1996).

2. TDF is codified at 47 U. S. C. §§ 309( j)( 8)( C) and 614, respectively.

3. Dan Carney, Congress Fires Its First Shot In Information Revolution, Congressional Quarterly, Feb. 3, 1996, at 289.

4. 47 U. S. C. § 614( a).

5. The term "telecommunications industry" is defined as "communications businesses using regulated or unregulated facilities or services and includes broadcasting, telecommunications [wireless and wireline telepho-ny], cable, computer, data transmission, software, programming, advanced messing and electronics businesses." 47 U. S. C. § 614 (k)( 3). This section was added to Sec. 10 in the August 1, 1995 revised version of the Amendment to H. R. 1555, As Reported Offered By Mr. Bliley of Virginia (Manager's Amendment).

6. The FCC has conducted auctions since 1993, also known as competitive bidding, under § 309( j) of the Communications Act of 1934, as amended. Various services subject to auction have primarily been wireless telecom-munications services, such as Personal Communications Services (" PCS"), Multichannel Multipoint Distribution Services (" MMDS"), and Local Multipoint Distribution Services (" LMDS"). In 1997, the FCC received extended authority from Congress to conduct auctions for com-mercial television and radio broadcast services pursuant to the 1997 Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat. 251, § 3002( a)( 1), codified as 47 U. S. C. § 309( j)( 1).

7. TDF is chartered as a 501( c)( 4) not-for-profit entity; thus charitable con-tributions to TDF are authorized but are not tax-deductible.

8. See, e. g, Jeffrey Silva, Small business fund to take equity positions in firms, RCR, Nov. 16, 1998, at 10; see also In re Section 257 Proceeding to Identify and Eliminate Market Entry Barriers for Small Businesses, Report, 12 FCC Rcd. 16802, 16827-29 ¶¶ 39-41 (1997) (citing to com-ments in its Notice Of Inquiry and participants in the FCC's Section 257 Public Forum) (" 1997 Market Entry Barriers Report").

9. A close advisor to Congressman Towns in the development of TDF was Thomas A. Hart, Jr., Esq., a communications attorney in Washington and currently Vice Chairman of TDF's Board of Directors.

10. See, e. g., Adarand Constructors, Inc. v. Slater, 228 F. 3d 1147, 1169-70 (10 th Cir. 2000) (citing to "striking" government evidence that documented discriminatory lending and venture capital financing practices against ethnic minorities), cert. granted sub nom Adarand Constructors, Inc. v. Mineta, 121 S. Ct. 1401, and cert. dismissed 122 S. Ct. 511 (2001).

11. In re Commission Policy Regarding the Advancement of Minority Ownership in Broadcasting, Policy Statement and Notice of Proposed Rulemaking, 92 FCC 2d 849, 853 ¶6 (1992) (determining that access to capital was the "single greatest obstacle to minority entry into the telecommunications industry"); see also 1997 Market Entry Barriers Report, at 16826- 27 ¶37. "The SBA is aware that small businesses in the media industry often have difficulty raising capital or borrowing money." Statement of John T. Spotilla, General Counsel, U. S. Small Business Administration, Before the Committee on Small Business, Subcommittee on Minority Enterprise, Finance and Urban Development, House of Representatives on Discrimination in Telecommunications 5 (May 20, 1994) (" Spotilla Testimony"); see also Small Business Administration, Media Policy Rule, 13 CFR Parts 108,120 and 123, Final Rule, 59 Fed. Reg 36,042, 36,044 (repealing the SBA's "Opinion Molder Rule"). For specifics on the Opinion Molder Rule, see infra note 50. The National Telecommunications and Information Administration (" NTIA"), a division of the U. S. Department of Commerce, which serves as the telecommunications policy advisor to the White House, also recognized that small, especially minority-owned, telecommunications businesses had difficulty in obtaining financing. Testimony of Larry Irving, Assistant Secretary for Communications and Information, U. S. Department of Commerce, on Development of Minority Business Enterprises in the Telecommunications Industry, Before the Subcommittee on Minority Enterprise, Finance, and Urban Development, Committee on Small Business, U. S. House of Representatives (May 20, 1994) (providing data on the paucity of minority participation in telecommunications, commenting on access to capital market entry barriers and NTIA's Minority Telecommunications Development Program and the Commerce Department's Minority Business Development Agency's efforts to encourage minority ownership of telecommunications businesses) http://www.iitf.nist.gov/documents/speeches/irving_test520_minent.txt.

12. In the spring of 1995, almost one year prior to the passage of the 1996 Act, the first formal anti-affirmative act of the new Republican-controlled Congress was to repeal what was known as the FCC's Minority Tax Certificate, Section 1071 of the Internal Revenue Code. 26 U. S. C.§ 1071( a). The tax certificate, which had been in effect for 47 years, was repealed in the Self-Employed Health Insurance Act of 1995, Pub. L. No. 104-7, 109 Stat. 93 (1995). The tax certificate was the most successful tool used by the FCC to increase minority ownership in radio and television properties, increasing minority-owned broadcast stations from 40 in 1978, to 350 in 1995. See generally, Kofi Asiedu Ofori and Mark Lloyd, New Approaches to Minority Media Ownership, Columbia Institute for Tele-Information, Columbia University: The Value of the Tax Certificate, 51 Fed. Comm. L. J. 693 (1999) (" The Value of the Tax Certificate"); Erwin G. Krasnow and Lisa M. Fowlkes, New Approaches to Minority Media Ownership, Columbia Institute for Tele-Information, Columbia University: The FCC's Minority Tax Certificate Program: A Proposal for Life After Death, 51 Fed. Comm. L. J. 665 (1999). Congress first created Section 1071 in 1943 to provide tax relief to major broadcast corporations that were forced to divest a network or individual radio stations due to the FCC's concerns about undue concentration of ownership and unfair competition. The Value of the Tax Certificate, at 695. The tax certificate was later used to bring broadcasters in compliance with the FCC's multiple ownership rules. Id., at 696. Section 1071 of the IRS code was adopted in 1978 by the FCC as one of several incentives including the Distress Sale Policy and comparative hearing preferences to promote minority ownership. 1978 Broadcast Policy Statement on Minority Ownership of Broadcast Facilities, 68 F. C. C. 2d 979 (1978), aff 'd by Metro Broadcasting, Inc. v. FCC, 497 U. S. 547 (1990) (upholding the FCC's minority ownership incentives under the intermediate scrutiny standard).

With the support of current FCC Chairman, Michael K. Powell, there is great interest to reinstate some form of a tax incentive program as a means to spur economic development and promote diversity in the highly-concen-trated broadcast, wireless and wireline industries. See In re Section 257 Report to Congress, Identifying and Eliminating Market Entry Barriers for Entrepreneurs and Other Small Businesses, Report, 15 FCC Rcd 15376, 15445 ¶184 (2000) (recommending a new tax incentive program similar to the previous tax certificate). There has been little legislative activity on this effort to date. See S. 1711, the Telecommunications Ownership Diversification Act of 1999, introduced October 8, 1999, by then-Chairman of the Senate Committee on Commerce, Science and Transportation, and then-Chairman of the Subcommittee on Communications, Senators John McCain (R-AZ) and Conrad Burns (R-MT), respectively. The bill was read twice and referred to the Committee on Finance. There was no further action.

The summer of 1995 brought the U. S. Supreme Court's landmark decision in Adarand Constructors, Inc. v. Pe--a, 115 S. Ct. 2097 (1995) (" Adarand III"), which had a substantial impact on small, minority and women-owned businesses in telecommunications. Immediately upon the release of Adarand III on June 12, 1995, the FCC suspended all of its rules and poli-cies that provided incentives or benefits to licensees, potential licensees and auction participants based on race or ethnicity, and as a safeguard the FCC also eliminated gender-based provisions. See In re Implementation of Section 309( j) of the Communications Act -- Competitive Bidding Amendment of the Commission's Cellular PCS Cross-Ownership Rule, Sixth Report and Order, 11 FCC Rcd 136, 139 ¶4 (1995) (commenting that the Adarand III case was decided only three days before the short form applications were due for Auction No. 5 (PCS C Block), resulting in postponement of the auction until the FCC could evaluate its impact) (" PCS Sixth Report and Order"); see also S. Jenell Trigg, The Federal Communications Commission's Equal Employment Opportunity Program and the Effect of Adarand Constructors Inc. v. Pena, 4 CommLaw Conspectus 237 (1996). In its effort to fulfill a congressional mandate to diversify its licensing practices via competitive bidding, the FCC had provided for bidding credits and installment payments (i. e. government financing of winning auction bids) to eligible businesses based on size, race and/ or gender. See generally, PCS Sixth Report and Order. Specifically, Congress required that the FCC strive to promot[ e] economic opportunity and competition and [to] ensur[ e] that new and innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and business owned by members of minority groups and women.

47 U. S. C. § 309( j)( 3)( B). The FCC ultimately held that its race and gender-based provisions were not supported by record evidence and thus, were substituted with small business or entrepreneurial provisions, which were race, ethnic and gender-neutral. PCS Sixth Report and Order, at 143 ¶¶ 11-12.

13. 141 Cong. Rec. H8481, H8507 (daily ed. August 4, 1995).

14. Id. at H8501 (statement of Representative Collins).

15. Id.

16. The precursor bills to the 1996 Act were S. 625, the "Telecommunications Competition and Deregulation Act of 1995," and H. R. 1555, "The Communications Act of 1995," and were approved by the Senate and House on June 15, 1995, and August 4, 1995, respectively. 141 Cong. Rec. S8417, S8480 (daily ed. June 15, 1995) and 141 Cong. Rec. H8481, H8506-07 (daily ed. August 4, 1995).

17. H. R. 1555 was ultimately incorporated into the Senate bill, S. 625, with the amendments as approved by the conference committee process. Joint Explanatory Statement of the Committee of the Conference, S. Conf. Rep. No. 104-230 (1996) (" Joint Conference Report").

18. 142 Cong. Rec. S687 (daily ed. February 1, 1996) and 142 Cong. Rec. H1145 (daily ed. February 1, 1996).

19. 142 Cong. Rec. H1145, H1168 (daily ed. February 1, 1996) (statement of Congressman Towns).

20. Joint Conference Report, at 210. However, the legislative history for TDF offers no additional insight as to what quasi-governmental actually means in this instance.

21. See, e. g., Leon Lazaroff, FCC to return NextWave deposits, The Deal. com, Jan. 16, 2002.

22. 47 U. S. C. § 614( b).

23. See 1997 Market Entry Barriers Report, at 16832 ¶48. During TDF's ini-tial implementation the Director of OCBO was Catherine J. K. Sandoval, Esq., and the FCC's General Counsel was William E. Kennard, Esq., who subsequently served as Chairman of the FCC from 1997 -- 2001. Chairman Kennard also served on TDF's Board of Directors during his tenure as Chairman.

24. The FCC and the U. S. Department of Treasury (" Treasury Department") established the Auction Escrow Account( s) for TDF with Mellon Bank in Pittsburgh. All monies sent to the FCC for regulatory fees, upfront and down payments for auctions are sent to Mellon Bank, which serves as the government's clearinghouse before funds are transferred to the Treasury Department.

25. 47 U. S. C. § 614( c)( 1).

26. Id.

27. 47 U. S. C. § 614( c)( 3).

28. Telephone interview conducted on January 11, 2002, by the author with Ginger Ehn Lew, Esq., Chief Executive Officer, and Penny K. Pickett, Business Director of TDF, with subsequent follow-up conversations and/ or e-mails with either principal (collectively, "TDF Interview"). Prior to joining TDF, Lew was the Deputy Administrator and Chief Operating Officer of the SBA, managing the agency's $42 billion loan portfolio. She also served as General Counsel at the U. S. Department of Commerce. Lew's private sector experience included Ernst & Young and a member of a start-up technology firm in California. She was also the SBA's representative to the TDF Board in its first year of formation. Pickett is the former Senior Advisor to the Deputy Administrator of the SBA. In this capacity, she was instrumental in developing several investment-oriented seminars and workshops for small businesses including the SBA-Federal Reserve cooperative workshops on access to capital for women and minority-owned business. Prior to the SBA, she was a founding partner and owner of a small business, guest lecturer and adjunct instructor.

29. FCC News, Chairman Hundt Announces Appointment of Solomon Trujillo as Interim Chairman of the Telecommunications Development Fund, 1996 LEXIS 1200, March 8, 1996 (" FCC Trujillo Press Release").

30. 47 U. S. C. § 614( c)( 1).

31. US WEST was one of the original seven "Baby Bell" telephone compa-nies spun off due to the court-mandated divestiture of AT& T. Quest Communications International, Inc. acquired it in 2000.

32. FCC OCBO Fact Sheet, The Telecommunications Development Fund, June 7, 1996, at 2.

33. FCC Trujillo Press Release.

34. Id.

35. 47 U. S. C. § 614( c)( 1). As of the writing of this article, the members of TDF's Board of Directors are; Chairman W. Don Cornwell, Chairman of Granite Broadcasting Corp.; Thomas A. Hart, Jr., Partner, Shook, Hardy And Bacon, LLP; Debra L. Lee, President and Chief Operating Officer, BET Holdings, Inc.; Richard L. Fields, Managing Director, Allen & Company Incorporated; and Michael K. Powell, Chairman, Federal Communications Commission. There are two public sector vacancies, and the Board's representatives for the SBA and Treasury Department are expected to be announced upon the agencies' transition in personnel due to the new presidential administration.

36. FCC Public Notice, Extension of Time for Board of Director Nominations, 1996 FCC LEXIS 955 (February 26, 1996) (OCBO and OGC announcing extension of the previous February 23, 1996 deadline established by Public Notice (rel. Feb. 13, 1996) to a new deadline date of March 1).

37. Jeffrey Silva, Small business fund to take equity positions in firms, RCR Wireless News, Nov. 16, 1998, at 10 (" Silva Article"). Robert Schwaniger, General Counsel for Small Business in Telecommunications, a trade asso-ciation that represents small wireless firms, expressed his concerns about the Board's nomination process and composition. Id. He also claimed that Jere W. Glover, Chief Counsel for Advocacy, Office of Advocacy, SBA, was "the only white man represented" on the Board. Id. Glover was the SBA's official representative to TDF's Board of Directors.

38. 47 U. S. C. § 309( j)( 8)( C).

39. "We have transferred $780 million in auction upfront payment into an interest bearing account to earn interest for the Telecommunications Development Fund...." Hearing on FY Budget Estimates Before the Subcommittee on Commerce, Justice, State, The Judiciary and Related Agencies, Committee on Appropriations, U. S. House of Representatives, 104th Cong, 1996 FCC LEXIS 2383 *5 (1996) (statement of Reed E. Hundt, Chairman, Federal Communications Commission).

40. 47 U. S. C. § 309( j)( 8)( C) (requiring within 45 days following the conclu-sion of competitive bidding the return of deposits to unsuccessful bidders and the transfer of interest accrued to TDF's account).

41. Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, Title VI, § 6002( b), 107 Stat. 312 (1993), codified as 47 U. S. C. § 309( j).

42. The total of money raised via auctions is based on the net total funds raised at the close of each auction as reported by the FCC on its auctions webpage, http://wireless.fcc.gov/auctions/.

43. 145 Cong. Rec. E2501 (daily ed. November 19, 2001) (statement of Representative Towns introducing H. R. 3498 requiring, inter alia, auction down payments to be used in funding TDF). "Implementation of these two items will effectuate my original intent. . . to maximize the availability of investment capital." Id. See also, infra note 88 and accompanying text.

44. TDF Interview. In fact, TDF manages two funds in the amount of $25 mil-lion each. Fund I is currently active with one or two investments still to be made. TDF plans to preserve funds to be used, as necessary, for additional investments in its current portfolio firms.

45. 1997 Market Entry Barriers Report, at 16827-28 ¶39 (discussing several commenters' concerns that TDF would be "substantially undercapitalized" and suggestions to increase TDF's funding potential). "[ I] f the Fund could amass $50 million in capital over the next three years, it would be able to provide seed money for only 10-15 businesses." Id.

46. "Venture capital investments provide the needed cash for companies to develop technologies and products which, in turn, generate jobs, exports, and taxes that keep the United States competitive." Office of Advocacy, U. S. Small Business Administration, Trends in Venture Capital Funding in the 1990s 1 (August 1997) (citing to Coopers & Lybrand, Fourth Annual Economic Impact of Venture Capital Study) (" Trends in Venture Capital Report"); see also Office of Advocacy, U. S. Small Business Administration, The Process and Analysis Behind ACE-Net 3 (October 1996) (" Rapidly growing companies need equity capital investments to maintain their employment growth and marketing investments.

Technology companies need it for R& D.") (" ACE-Net Report"). ACE-Net, created by the Office of Advocacy, SBA, is a nationwide Internet-based listing service that allows "angel" investors to obtain information about small businesses that seek $250,000 to $5 million in patient equity financing. SBA Programs & Services, General SBA Information, U. S. Small Business Administration, 3 rd Ed., at 6. For more information on ACE-Net, go to: http://www.sba.gov/advo/acenet.html.

47. Trends in Venture Capital Report, at 4 (citing to Coopers & Lybrand, Money Tree Reports for 1995-97 Q1).

48. "Fifteen years ago it was common for even the most successful venture capitalists to place investments on the order of $250,000 to $1 million in small entrepreneurial operations." ACE-Net Report, at 15. Today, there is a significant gap in equity funding for smaller companies that have exhausted personal resources and contributions from founders, friends and family, the primary source of capital for many small businesses. These personal resources include second mortgages and credit card advances. Id.

49. Id.

50. See ACE-Net Report, at 5.

51. For example, the Gazelle Group Report recommended that TDF invest in firms that are located in geographic areas outside of the traditional areas of venture capital support, which are California's Silicon Valley and the high-tech corridor in Massachusetts. See The Gazelle Group, Inc., Telecommunications Development Fund Market Evaluation (March 19, 1997), at 3. (See infra note 96, for more information on the historical geographic concentration of venture capital support .) The report also identified the need for expertise in investing in underserved niche markets such as telemedicine and distance learning. Gazelle Group Report, at 3. It was also recommended that TDF consider multiple approaches for exit from an investment, in addition to an initial public offering. Id.

52. The SBA has a range of loan financing programs for small businesses, none of which are really helpful or conducive for start-up small or minority telecommunications companies. See Spotilla Testimony, supra note 11 (commenting on the SBA's disappointing level of financial assistance to minority-owned firms in the telecommunications industry from 1989- 1994). In fact, the SBA's "Opinion Molder Rule" originally adopted in 1953, prohibited the SBA from granting loans or loan guarantees for any media entity, including small radio and broadcast stations, cable television companies and television program suppliers to the media entity. Such investments were considered an impermissible government endorsement of speech, or an attempt by the government to "control editorial freedom by subsidizing media or communication for political or propaganda purposes." SBA Media Policy Rule, 13 CFR Parts 108, 120 and 123, Final Rule, 59 Fed. Reg. 36,042 (1994). The Rule was not repealed until 1994. Id. Small Business Investment Companies (" SBIC") were not subject to the Rule. Although licensed by the SBA, SBICs conduct private transactions that do not carry a SBA guaranty, and thus, were permitted to provide equity or loan financing for small media companies. Id. at 36,044.

More established small or minority telecommunications businesses, including broadcast and cable television stations, may now benefit from SBA programs such as the Certified and Preferred Lenders Program (to secure a loan guaranteed by the SBA at a financial institution) or the 504 Certified Development Company Program (to secure long-term, fixed-rate financing for major fixed assets, such as land and buildings). However, few, if any, of the programs administered by the SBA provide sufficient funding support for the acquisition of FCC licenses or construction permits, whether obtained on the private market or at an FCC auction. Ivy Planning Group PLLC, Market Entry Barriers, Discrimination and Changes in Broadcast and Wireless Licensing 1950 to Present (Dec. 2000) at 19-20 (commenting on the real value of SBA's loan guarantee program's maximum loan amount of $750,000 in today's marketplace) (" FCC Historical Discrimination in Licensing Study") (Sec. 257 Market Entry Barrier Study Commissioned by the FCC).

53. TDF Interview; see also Nicholas Johnston, Seed Money Unlikely to Root Soon, The Wash. Post, Feb. 1, 2002, at E5 (reporting on the general sentiments on fundraising at the Early Stage Capital Forum for start-up companies sponsored by the Washington DC Technology Council, Greater Baltimore Technology Council and the Northern Virginia Technology Council). "The weather has been warm, but don't expect to see investors planting seed money in start-ups this winter or spring ...." Id. Darrell A. Williams, TDF's Chief Investment Officer participated in the forum and offered advice to entrepreneurs on the VC process. Id.

54. Silva Article, supra note 37.

55. Id. (quoting Robert Schwaniger, Small Businesses in Telecommunications).

56. Joint Conference Report, see supra note 17, at 210 (citing to Rep. Towns' statement upon passage of TDF's amendment in the House, that TDF "will provide low interest loans").

57. 47 U. S. C. § 614( e)( 1).

58. Id.

59. TDF Interview; see also TDF FAQS at http://www.tdfund.com.

60. See e. g., William D. Bradford, Ph. D., University of Washington, Discrimination in Capital Markets, Broadcast/ Wireless Spectrum Service Providers and Auction Outcomes (Dec. 2000) (" FCC Broadcast/ Wireless Capital Markets Study") (Sec. 257 Market Entry Barrier Study Commissioned by the FCC). "It was found that minority broadcast license holders were less likely to be accepted in their applications for debt financing, after controlling for the effect of the other variables on the lending decision." Id. at vi. "[ R] ace matters in a lender's decision on interest rates charger to borrowers." Id. at 21.

61. "Businesses need strong balance sheets to support their growth. Additional debt must be balanced with increased equity." ACE-Net Report, at 3.

62. See Robert O'Harrow, Enron's Impact on Banks Grows, The Washington Post, Jan. 17, 2002, at E1; see also Christopher Stern, Global Crossing Files for Bankruptcy, The Wash. Post, Jan. 29, 2002, at E1 (commenting on the "once-highflying" telecommunications company's difficulties in servicing its debt load).

63. TDF Interview.

64. Id.

65. In 2000, NTIA reported modest increases in radio ownership; 4% of a total of 10,577 stations in the United States were minority-owned. But the report also identified a disturbing decline in the ownership of television stations. Minorities owned only 1.9% of the country's 1,288 full power stations, a mere twenty-three in number. Changes, Challenges, and Charting New Courses: Minority Commercial Broadcast Ownership in the United States, U. S. Department of Commerce, National Telecommunications and Information Administration, December 2000, Executive Summary at xi-xii.

66. Id., at 24 (" Relaxation of the ownership rules and consolidation have con-tributed to higher broadcast station prices. The skyrocketing prices, in some instances up to 20 times or more the amount of a station's actual cash flow, have exacerbated minority broadcasters' historic difficulty accessing sufficient capital for entry or expansion. (citations omitted)).

67. TDF Interview.

68. http://www.tdfund.com.

69. Vyvyan Tenorio, Lew leads TDF's telecom investments, TheDeal. com, Sept. 1, 2000.

70. TDF Interview.

71. See http://www.tdfund.com.

72. "Minority-led" or "woman led" is defined as a firm that has a founder or a key management position with significant equity held by a minority or woman. "Significant equity" is a relative term for firms that receive venture capital support and the amount is usually less than 50% of the stock of the company. The traditional '51% ' model of equity ownership or control used by the FCC, SBA and other government agencies to define a small, women or minority-owned business is not appropriate, or reasonable in a venture capital context. Venture capital firms provide equity funding for a percentage share of a firm's stock. If the entrepreneur has invested a significant amount of his own money, he may be able keep 51% of the shares of stock in his company, even with venture capital support. (If an entrepreneur has that amount of capital support already, arguably, he does not need VC assistance.) However, many VC deals are with firms in which the founding entrepreneur does not have such access to capital and needs VC money to develop and grow. The quid pro quo for VC money is giving up a significant share of the equity ownership, and in some instances, actual control of a firm.

73. TDF Interview.

74. 47 U. S. C. § 614( a)( 3).

75. After Adarand III, the FCC acknowledged that it needed to conduct a comprehensive study that provided both anecdotal and statistical data regarding discriminatory practices against minority and women telecom-munications firms. See 1997 Market Entry Barriers Report, at 16809 ¶10 and 16920 ¶213; see also Separate Statement of Commissioner Rachelle B. Chong, 1997 Market Entry Barriers Report, at 16948 (" Although I am pleased to see that we are once again pledging to proceed with the Adarand study, I am concerned abut the length of time that has taken to get the study underway.")

In 2000, the FCC released five small studies conducted by independent persons but commissioned by the FCC. The studies reported on a range of topics, several pertaining to access to capital issues: see supra note 60, FCC Broadcast/ Wireless Capital Markets Study; and supra note 52, FCC Historical Discrimination in Licensing Study. Collectively, the studies provide a wealth of information, anecdotal, historical, and some statistical evidence, yet not enough to sustain new regulations that will specifically benefit minority and women ownership in telecommunications. There is a very high evidentiary standard under Adarand III and its progeny. A considerable amount of research still needs to be completed. For example, the FCC needs to research and document statistical evidence on the impact of its award of broadcast licenses to non-minority newspapers compared to black owned newspapers; the number and type of licenses awarded to known segregationists and the impact of those decisions through the years; and a profile of the race and gender of successful and unsuccessful applicants that applied for a license during the FCC's Ultravision Rule which was in effect from 1965-1981. Under this rule, an applicant for a construction permit must have had a full year of operating capital, assuming no revenue, to qualify for the permit. See In re Revision of Application for Construction Permit for Commercial Broadcast Station (FCC Form 301); and Modifications of Processing Standard for Determining the Financial Qualifications of Broadcast Station Purchases, 87 FCC 2d 200 (1981). The FCC also needs to determine the success or failure of its small business classifications in the auction context, considered to be race-neutral measures, before it can propose a race-based solution.

76. 47 U. S. C. § 614( e)( 5).

77. TDF Interview.

78. Id.

79. Id.; see also The Gazelle Report, at 3 (concluding that it was necessary for TDF to be capitalized at $30 million minimum in order to attract a quali-fied management team, and to allow for sufficient portfolio diversification).

80. SBICs are privately-owned and managed, for-profit investment companies licensed by the SBA, whose own capital is supplemented with SBA-guar-anteed debentures or participating securities. They provide equity and long-term debt investments to small businesses. SBA Programs and Services, General SBA Information, U. S. Small Business Administration, 3 rd Ed., at 5.

81. See 15 U. S. C. § 662( 9)( A).

82. Legislation to make TDF eligible for the SBIC program has been intro-duced but never voted out of committee. See, infra note 88.

83. SBICs can be a relatively friendly source of venture capital given their understanding and commitment to the financing of small business. This is appealing to potential portfolio companies. An SBIC may also several options in the types of financing support it can provide (e. g., mezzanine, subordinated debt or equity) depending on the type of SBA funding mechanism used to leverage their own capital. For example, a debenture is a SBA loan that requires immediate repayment, whereas repayment for a preferred security can be deferred until the investment in a portfolio company produces income for the SBIC. SBICs historically provide more management and technical assistance to their portfolio companies. Some SBICs specialize in certain industries, or types of small business such as start-ups or those that offer new products and services. However, none specialize exclusively in telecommunications.

84. TDF Interview.

85. Id.

86. "Any deposits ... shall be deposited in an interest-bearing account at a financial institution designed for purposes of this subsection by the Commission (after consultation with the Secretary of the Treasury"). 47 U. S. C. § 309( j)( 8)( C); see also 47 U. S. C. § 614( d)( 1).

87. TDF Interview.

88. Since 1996, Congressman Towns has made two attempts to remedy certain "technical deficiencies" in TDF and improve its operations. Such deficiencies have included the limitation of upfront payments for deposit in the TDF escrow account and TDF's ineligibility for certification as an SBIC. "Implementation of these two items will effectuate my original intent as the author of the 1996 provision. The TDF provision was intended to maximize the availability of investment capital .... These technical oversights are depriving the TDF of millions of dollars of additional revenue." 145 Cong. Rec. E2501 (daily ed. November 19, 1999) (statement of Representative Towns). The following bills were introduced to the House Committee on Energy and Commerce: H. R. 1735, "The Telecommunications Development Fund Improvement Act" (147 Cong Rec. H1924 (daily ed. May 3, 2001)), and H. R. 3498, "The Telecommunications Development Fund Improvement Act" (145 Cong Rec. H12791 (daily ed. Nov. 19, 1999)). But see 142 Cong. Rec. H1145, H1168 (daily ed. February 1, 1996) (statement of Representative Towns) ("[ T] his telecommunications development fund will provide low-interest loans to small businesses with $50 million or less through up-front spectrum auction payments.") (emphasis added)).

89. 47 U. S. C. § 309( j)( 8)( C) (emphasis added).

90. 47 C. F. R. § 1.2106( c) (" If the applicant does not submit at least the minimum upfront payment, it will be ineligible to bid, its application will be dismissed and any upfront payment it has made will be returned.").

91. 47 C. F. R. § 1.2107( a), (b) (" After bidding has ended, the Commission will identify and notify the high bidder and declare the bidding closed ... [and] a high bidder must submit to the Commission's lockbox bank such additional funds.").

92. NextWave and Urban Communicators were the winning bidders in their respective Basic Trading Areas in the FCC's first PCS "C Block" Auction (Auction No. 5), which closed in January of 1996. The story of "C Block" has been a long and tortured saga of default and bankruptcy proceedings for many of the small businesses and entrepreneurs that participated. Such circumstances were due to numerous factors, including regulatory and industry developments that were arguably, outside of their control. See generally Letter to The Honorable Reed E. Hundt, Chairman, FCC, from Jere W. Glover, Chief Counsel and S. Jenell Trigg, Assistant Chief Counsel for Telecommunications, Office of Advocacy, U. S. Small Business Administration (Sept. 8, 1997) (providing comments on the FCC's C Block restructuring proposals and its implementation of further regulatory proceedings).

93. After the close of the PCS re-auction on January 26, 2001, the U. S. Court of Appeals for the D. C. Circuit ruled that the FCC improperly stripped NextWave's licenses from the company. NextWave Personal Communications, Inc. v. FCC, 254 F. 3d 130 (D. C. Cir. 2001). The NextWave decision also applies to Urban Communicator's licenses because it filed bankruptcy in the same court and thus is subject to the same holding and FCC proceedings as NextWave. Auction No. 35 has generated considerable controversy because of the failed settlement attempt between the FCC, NextWave and the winning bidders of the auc-tion, and the winning bidders' request for the FCC to return all down pay-ment deposits amounting to $3.1 billion that has not accrued interest for anyone since the controversy first arose. Refund of NextWave Auction Deposits Taking Longer Than Expected, Communications Daily, Jan. 30, 2002, at 1-2. "Re-auction winners have told the FCC they're losing $430,000 per day in interest on down payments, assuming conservative rate of 5%...." Id., at 2. Verizon Wireless' share of down payments is the largest and is reported to be $1.7 billion. Id. at 1.

94. FCC Public Notice, Auction of Licenses for the C and F Block Broadband PCS Spectrum, DA 00-2725 (Dec. 1, 2000), Attachment A: Auction ID: 35, Qualified Bidders -- Public Notice (sorted by Applicant), Report Date Dec. 1, 2000.

95. See FCC Public Notice, C and F Block Broadband PCS Auction Closes, DA 01-211 (Jan. 29, 2001), at 2.

96. Venture capital investments are primarily focused in two areas, with the States of California and Massachusetts collectively receiving more than 40 percent of the total annual venture funding in the United States. Trends in Venture Capital Report, supra note 46, at 3.

97. Springboard Enterprises will soon launch an educational module on its website in cooperation with the Kauffman Foundation to provide addition-al support and training for women entrepreneurs. For more information about Springboard Enterprises go to: http://www.springboard2000.org.

98. TDF Interview.

99. TDF Interview.

100. http://www.tdfund.com.

101. TIA is a trade association that assists its member companies with capital formation. The white paper was derived from a virtual seminar at TIA's venture capital forum, Ventures 2001, its second such effort.

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