DA 19-254 Small Entity Compliance Guide Rules and Policies to Promote New Entry and Ownership Diversity in the Broadcasting Services FCC 18-114 MB Docket No. 17-289 This Guide is prepared in accordance with the requirements of section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. It is intended to help small entities—small businesses, small organizations (non-profits), and small governmental jurisdictions—comply with the new rules adopted in the above-referenced FCC rulemaking dockets. This Guide is not intended to replace the rules and, therefore, final authority rests solely with the rules. Although we have attempted to cover all parts of the rules that might be especially important to small entities, the coverage may not be exhaustive. This Guide may, perhaps, not apply in a particular situation based upon the circumstances, and the FCC retains the discretion to adopt approaches on a case-by-case basis that may differ from this Guide, where appropriate. Any decisions regarding a particular small entity will be based on the statute and regulations. In any civil or administrative action against a small entity for a violation of rules, the content of the Small Entity Compliance Guide may be considered as evidence of the reasonableness or appropriateness of proposed fines, penalties or damages. Interested parties are free to file comments regarding this Guide and the appropriateness of its application to a particular situation; the FCC will consider whether the recommendations or interpretations in the Guide are appropriate in that situation. The FCC may decide to revise this Guide without public notice to reflect changes in the FCC’s approach to implementing a rule, or to clarify or update the text of the Guide. Direct your comments and recommendations, or calls for further assistance, to the FCC’s Consumer Center: 1-888-CALL-FCC (1-888-225-5322)   TTY: 1-888-TELL-FCC (1-888-835-5322)    Fax: 1-866-418-0232 I. OBJECTIVES OF THE PROCEEDING In the Report and Order (Order) Rules and Policies to Promote New Entry and Ownership Diversity in the Broadcasting Services, Report and Order, 33 FCC Rcd 7911Section V of this Compliance Guide includes an Internet link to electronic copies of the Order, available in PDF, Word, and plain text formats. in MB Docket No. 17-289, released August 3, 2018, the FCC adopted requirements for its broadcast incubator program to help promote new and diverse voices in the broadcasting industry. The incubator program offers established broadcasters an incentive to invest the time, money, and resources needed to enable a small, aspiring or struggling broadcaster to own and operate a full-service broadcast station independently. Through the program, an established broadcaster (i.e., the incubating entity) will provide a small, aspiring or struggling station owner (i.e., the incubated entity) with the training, financing, and access to resources that would be otherwise unavailable to the incubated entity. At the end of a successful incubation relationship, the incubated entity will own and operate a full-service broadcast station independently and the incubated station will be on a firmer footing if the station was struggling at the start of the relationship. If an established broadcaster successfully incubates a small, aspiring or struggling broadcaster as part of the incubator program, it will be eligible to receive a waiver of the Local Radio Ownership Rule 47 CFR § 73.3555(a)(1). following the successful conclusion of the incubation relationship. The waiver must be used in the same market as the incubated station or a comparable market as discussed in the Order. Order, 33 FCC Rcd at 7937-39, paras. 66-70. The market comparability requirement is covered in the section of this Guide that discusses “reward” waiver requests (see pages 8-9 below). The incubator program discussed in the Order will apply to full-service AM and FM radio broadcast stations. The Order adopts a two-pronged eligibility standard for potential incubated entities, consisting of both a numerical cap on the number of stations an incubated entity may own and an annual revenue cap. To ensure that those participating as incubated entities truly need the assistance provided by the incubator program, the Order requires that potential incubated entities certify that they could not successfully pursue their broadcast ownership goals absent incubation. The Order also discusses what is required for a relationship to qualify as incubation Order, 33 FCC Rcd at 7925-33, paras. 35-56. These requirements are covered in the sections of this Guide that discuss the written incubation contract and the certified statements that applicants must submit to the FCC (see pages 4-7 below). and adopts procedures for FCC approval and oversight of incubation relationships, Order, 33 FCC Rcd at 7936-45, paras. 64-88. The procedures for FCC approval and oversight of incubation relationships are discussed throughout this Guide (see pages 3-10 below). including criteria for determining whether an incubation relationship was successful Order, paras. 72-73, 33 FCC Rcd at 7940-41. The criteria for “successful” incubation relationships are covered in the section of this Guide that discusses the required showing for reward waivers (see page 8 below). and for granting a waiver of the Local Radio Ownership Rule to an incubating entity. Order, paras. 64-73, 33 FCC Rcd at 7936-41. The criteria for granting these waivers are covered in the sections of this Guide that discuss temporary waiver requests and “reward” waivers (see pages 7-9 below). All of these requirements are discussed in more detail below. II. COMPLIANCE REQUIREMENTS Eligibility Requirements for Incubated Entities. There are two basic eligibility requirements for potential incubated entities, and the applicant must demonstrate that it has met both of the following eligibility requirements for the three years preceding the submission date of its application: 1) Numerical Cap. The applicant has an attributable interest in no more than three full-service AM/FM radio stations and no TV stations (includes licensed stations and unbuilt construction permits); The standards and policies for determining whether an interest is “attributable” are set forth in section 73.3555 of the Commission’s rules, 47 CFR § 73.3555. and 2) Revenue Cap. The applicant qualifies as a “small business” under the Small Business Administration (SBA) standard for the radio industry. See 13 CFR § 121.201. Currently, under 13 CFR § 121.201, radio stations (North American Industry Classification System code 515112) with $38.5 million or less in annual revenues are considered small businesses. In addition, as discussed below (see “Certified Statement of Potential Incubated Entity” on page 6), the applicant must certify that it would not be able to acquire a full-service broadcast station or continue operating its struggling station without the support that the proposed incubation relationship will provide. Eligibility Requirements for Incubating Entities. The potential incubating entity must demonstrate that it has the commitment, resources, and experience needed to help a small, aspiring or struggling station owner establish itself in the industry. For an incubation relationship to be successful, the incubated entity must own and control the incubated station or a newly acquired full-service radio broadcast station at the end of the relationship and the incubated station must be on a firmer footing if it was struggling financially or operationally when the relationship started. Application Requirements. Before a qualifying incubation relationship begins, the participants must first file an incubation proposal with the FCC’s Media Bureau (Bureau) and have the proposal approved by the Bureau. The Bureau will approve the incubation proposal if the Bureau finds that the proposal is designed to help a small, aspiring or struggling broadcaster gain the ability to own and operate a full-service radio station independently and that the relationship otherwise qualifies and meets FCC requirements (discussed below) for the program. Incubation proposals must be filed with the Bureau as follows: 1) FCC Form 314, 315, or 301. If an applicant plans for the potential incubated entity to acquire the station chosen for incubation or to acquire a construction permit to build the station, the applicant must file its incubation proposal as an attachment to the required FCC application form(s) (FCC Form 314, 315, or 301); – OR – 2) Petition for Declaratory Ruling. If the incubation proposal is for a struggling station already owned by the entity to be incubated, the proposal must be filed with a petition for declaratory ruling in the Incubator docket, MB Docket No. 17-289, in the Commission’s electronic comment filing system (ECFS). Each incubation proposal must contain the following documents: 1) a written incubation contract; 2) a certified statement from the potential incubated entity; 3) a certified statement from the potential incubating entity; and 4) a request for a temporary waiver of the Local Radio Ownership Rule if the incubation proposal would cause the incubating entity to exceed the local radio ownership limits. The Bureau may also require the applicants to submit additional information if needed to determine whether the proposed incubation relationship is likely to promote the goals of the incubator program. Written Incubation Contract. The written incubation contract must demonstrate that the proposed incubation relationship meets FCC requirements for the incubator program. · Obligations of Each Party. The contract must specify the terms of the incubation relationship and the rights and obligations of each party, including the following: o Incubating Entity’s Financial Support. The contract must specify the financial support that the incubating entity will provide to enable the incubated entity to acquire the station and operate it effectively, including the financial resources that the incubated entity needs to hire enough employees to oversee the station, acquire and produce station programming, acquire and maintain station equipment and facilities, etc. The contract must also require that the incubating entity provide any additional financial support that the incubated entity needs to be able to own and operate the incubated station or another full-service AM or FM station independently at the end of the incubation relationship. o Incubated Entity’s Financial Contribution. The incubated entity is required to make a meaningful financial contribution to the incubation relationship, and the contract must specify the incubated entity’s financial contribution to the relationship. o Incubating Entity’s Operational Support. In addition, the contract must specify the operational support that the incubating entity will provide and require that the incubating entity provide any additional support that the incubated entity needs to be able to own and operate the incubated station, or another full-service AM or FM station, independently at the end of the incubation relationship. This may include operational assistance and training in the following areas: engineering/technical operations, office support, sales, programming, and management, including business planning, finances, and administration. · Independence of Incubated Entity. The contract must incorporate certain safeguards to ensure that the incubated entity retains independence. o Control of Station. The contract must require that the incubated entity retain control of the incubated station. § Licensee. The contract must require that the incubated entity be the licensee of the incubated station and maintain ultimate authority over station personnel, programming, and finances. § Control Test. In addition, the incubated entity must meet the following control test: 1) The incubated entity must hold more than 50 percent of the voting power of the licensee; and 2) If the incubated entity is not a publicly traded company (which will almost assuredly be the case), the incubated entity must also hold— i) at least 30 percent of the equity, or ii) at least 15 percent of the equity, provided that no other person or entity owns or controls more than 25 percent of the equity. o Ban on LMAs. The contract must prohibit local marketing agreements (LMAs, also known as time brokerage agreements) involving the incubated station. As defined in the Commission’s rules, an LMA is any agreement that involves “the sale by a licensee of discrete blocks of time to a ‘broker’ that supplies the programming to fill that time and sells the commercial spot announcements in it,” regardless of how the agreement is titled. 47 CFR § 73.3555, Note 2(j). o Restrictions on JSAs and SSAs. The contract must prohibit joint sales agreements (JSAs) and shared services agreements (SSAs) involving the incubated station after the first two years of the initial incubation relationship. Pursuant to the definitions in the Commission’s rules, a JSA is any agreement with the licensee of a brokered station that authorizes the broker to sell advertising time for the brokered station. Id., Note 2(k). An SSA is any agreement or series of agreements in which (i) a station provides any station-related services to a station that is not directly or indirectly under common de jure control permitted under the Commission’s regulations, or (ii) stations that are not directly or indirectly under common de jure control permitted under the Commission’s regulations collaborate to provide or enable the provision of station-related services. Id. § 73.3526(e)(18). The contract must require that these agreements, if used, be accompanied by proper training in the relevant area(s)—e.g., administrative, technical, sales, etc.—covered by any such agreement(s) involving the incubated station. These requirements will ensure that the incubated entity obtains or produces programming, sells advertising, and performs other core operating functions for the incubated station for at least one full year prior to the expiration of the incubation relationship. o Independent Management. The contract must prohibit any officer, director, managing partner, or managing member of the incubated entity from holding an attributable interest The standards and policies for determining whether an interest is “attributable” are set forth in Section 73.3555 of the Commission’s rules, 47 CFR § 73.3555. in the incubating entity. The contract must also prohibit such persons from being employees of the incubating entity. · Length of Incubation Relationship. The written incubation contract must require that the parties actively perform incubation for three years but allow the parties jointly to seek approval from the Bureau to end their incubation relationship early or extend their relationship for up to three additional years. (Extension requests and early termination requests are discussed on pages 7-8 below.) · Option to Purchase Incubated Station. The written incubation contract must give the incubated entity the right, but not the obligation, to purchase any equity interest(s) that the incubating entity holds in the incubated station and terminate any debtor-creditor relationship(s) between the incubating entity and the incubated entity. o The price and terms of this buy-out option must be commercially reasonable and must not strongly favor the incubating entity. o The purchase price must not exceed the fair market value of the station. · Alternative Option to Purchase Other Station. The written incubation contract must also give the incubated entity the alternative option of selling its interest in the incubated station and using the proceeds from the sale to buy another full-service AM or FM station. If the incubated entity chooses this option, the incubating entity must commit to helping the incubated entity 1) identify a full-service AM or FM station to buy and 2) obtain the financing necessary for the purchase. · Success Plan for Incubation Relationship. The written incubation contract must discuss how the parties plan to unwind their incubation relationship. The contract must also specify the steps that the parties will take to enable the incubated entity to own and operate a full-service AM or FM station independently, whether it is the incubated station or another station that the incubated entity will acquire at the end of the incubation relationship. Certified Statement of Potential Incubated Entity. The incubated entity’s certified statement must meet the following requirements: · Compliance with Eligibility Standard. The statement must certify that the applicant did not exceed the numerical and revenue caps discussed above (see “Eligibility Requirements for Incubated Entities” on pages 2-3) for the three years preceding its application. If the applicant held an attributable interest in any station(s) during that three-year period, the statement must also list the call sign, facility ID number, and community of license of each station. · Background of Applicant. The statement must discuss the background, qualifications, and resources of the applicant and how they will enable the applicant to complete incubation successfully. The statement must also explain why the applicant is unable to buy the incubated station, or to continue operating successfully a full-service station that the applicant already owns, without the proposed incubation relationship and the funding, support, and training the relationship will provide. · Compliance with Contract. The statement must certify that the applicant will comply with the written incubation contract (as approved by the Bureau) and retain control of the incubated station (as discussed above, see “Independence of Incubated Entity” on pages 4-5), including decisions regarding the programming, personnel, and finances of the station. · Additional Certifications and Disclosures. The statement must include the same certifications and attribution disclosures that applicants are required to make when filing FCC Form 314, 315, or 301 (if the incubation proposal is not being filed with one of these forms, i.e., the proposal is filed with a Petition for Declaratory Ruling). Certified Statement of Potential Incubating Entity. The incubating entity’s certified statement must meet the following requirements: · Background of Applicant. The statement must discuss the background, qualifications, and resources of the applicant and how they will enable the applicant to incubate the small, aspiring or struggling broadcaster successfully. The statement must certify that the applicant has the resources and experience necessary to help the potential incubated entity become an independent owner and operator of the incubated station or another full-service AM or FM station. The statement must certify that the applicant will devote those resources and experience to achieving that goal. · Compliance with Contract. The statement must certify that the applicant will comply with the written incubation contract (as approved by the Bureau) and that the incubated entity will retain control of the incubated station, including decisions regarding the programming, personnel, and finances of the station. · One-Per-Market Requirement. The statement must certify that the applicant will comply with the FCC’s “one-per-market” requirement for the incubator program, which allows each incubating entity to incubate no more than one station per market, as “market” is defined for purposes of determining compliance with the FCC’s Local Radio Ownership Rule. · Market Comparability Information. The statement must specify the size tier of the incubated station’s market under the FCC’s Local Radio Ownership Rule and the number of independent owners of full-service, commercial and noncommercial radio stations in that market. Temporary Waiver Requests. In some cases, a potential incubating entity may already hold attributable interests in the maximum number of stations permitted by the Local Radio Ownership Rule in the market where the entity seeks to engage in an incubation relationship. If the proposed incubation relationship would result in the incubating entity holding an otherwise impermissible attributable interest in the incubated station, the applicants may request a temporary waiver of the Local Radio Ownership Rule (including the AM/FM subcaps) for purposes of entering into the incubation relationship. · Filing Deadline. The waiver request must be filed with the incubation proposal. · Required Showing. The applicants must demonstrate that they are both eligible for, and intend to engage in, an incubation relationship that meets FCC requirements for the incubator program. · Duration of Temporary Waiver. If granted, the temporary waiver will expire when the incubation relationship ends (including any Bureau-approved extension of the relationship). · Automatic Extension of Temporary Waiver. If the incubating entity seeks to use its reward waiver on the incubated station at the end of the incubation relationship, then the temporary waiver will remain in effect during the Bureau’s review of the incubating entity’s timely filed reward waiver request (see “‘Reward’ Waivers” on pages 8-9). If the Bureau deems the incubation relationship to be unsuccessful and the incubating entity cannot receive the reward waiver, the Bureau will extend the temporary waiver for a set time period as necessary to give the parties an opportunity to unwind the relationship. Early Termination Requests. There may be instances in which an incubated entity makes exceptional progress towards becoming an independent owner and operator of the incubated station and seeks to acquire full equity ownership and independent control of the incubated station in less than three years. In such circumstances, the Bureau will consider granting requests from parties seeking to conclude their incubation relationship before the end of the standard three-year term. To receive a reward waiver, the incubating entity must demonstrate that it has completed a successful incubation relationship as discussed below (see “‘Reward’ Waivers” on pages 8-9). Extension Requests. If the parties need more than three years to complete incubation successfully, the parties may seek a one-time extension of their incubation relationship by filing an extension request with the Bureau. The length of the extension, if granted, will be no more than three years. · Filing Deadline. Parties seeking an extension must file an extension request at least 120 days before the end of the initial three-year period of their incubation relationship. · Required Showing. Extension requests must specify whether: (a) the incubated entity needs more time to gain the ability to own and operate the station independently or (b) additional time is needed for the parties to identify a full-service AM or FM station (other than the incubated station) for the incubated entity to buy or to close on the pending acquisition of a full-service AM or FM station. o The request must provide an assessment of the incubated entity’s progress and any areas where it needs additional training and support to be viable as an independent owner and operator of the incubated station or another full-service AM or FM station. o The Bureau expects the assessment to be informed by the incubated entity’s experience performing the core operating functions of the incubated station. o The parties must demonstrate that by the end of the requested extension they will have resolved the issues that resulted in the need for more time and that the incubated entity will be able to own a full-service AM or FM station and have demonstrated its ability to operate such a station independently. · Changes to Contract. If there are any revisions to the initial incubation contract, the proposed revised contract must be filed with the extension request. Unless otherwise specified by the parties and approved by the Bureau, the terms of the initial incubation contract will govern the incubation relationship during any Bureau-approved extension period. · Bureau Decisions. The Bureau will have 120 days to review the extension request and the revised contract. Absent Bureau action to the contrary within the 120-day period, the extension request will be deemed granted and the revised contract will be effective, assuming it does not involve an assignment or transfer of control of a station. “Reward” Waivers. After successfully completing an approved incubation relationship, the incubating entity will be eligible to receive a waiver of the Commission’s Local Radio Ownership Rule (including the AM/FM subcaps). · Waiver Requests. To obtain the reward waiver, the incubating entity must file a waiver request that meets the following requirements: o Filing Deadline. Generally, the waiver request must be filed within three years after the date the incubation relationship ends, together with any required FCC application form (e.g., FCC Form 314 or FCC Form 315). However, if the incubation relationship required a temporary waiver of the Local Radio Ownership Rule and the incubating entity seeks to use its reward waiver on the incubated station, then the reward waiver request must be filed contemporaneously with the parties’ final joint certified statement (see “Annual Joint Certified Statement” on pages 9-10). o Required Showing. In addition to meeting the market comparability requirements discussed below, the waiver request must demonstrate that the incubating entity completed a successful incubation relationship. To demonstrate that the incubation relationship was successful, the waiver request must include the following certifications from the incubating entity: 1) a certification that the incubating entity complied in good faith with the written incubation contract approved by the Bureau and the requirements of the FCC’s incubator program; and 2) either (a) a certification that the incubated entity holds a controlling interest in the incubated station or a newly acquired full-service AM or FM station, or (b) if the incubated station was a struggling station, a certification that the incubation relationship has eliminated the financial and/or operational difficulties that the owner of the previously struggling station faced prior to incubation and sought to remedy through the incubation relationship. o Market Comparability. A reward waiver may be used in the market where the incubation relationship occurred or a comparable market. Specifically, the waiver may be used to— 1) purchase an AM or FM station located in the same market as the incubated station; 2) purchase an AM or FM station located in a market that is comparable (as defined below) to the market in which the incubation relationship occurred; An incubating entity that uses a reward waiver in a comparable market may also choose to retain its non-controlling interest in the incubated station if permitted by the FCC’s broadcast ownership rules. or 3) if the incubated entity chooses not to exercise its option to buy out the incubating entity, the incubating entity may use the reward waiver to retain a non-controlling interest in the incubated station or to purchase the station outright if the incubated entity purchases another full-service AM or FM station consistent with program requirements. A reward waiver may be used in a market only if use of the waiver would not result in the incubating entity holding an attributable interest in more than 50 percent of the full-service, commercial and noncommercial radio stations in the market. o Definition of “Comparable Market”. A market is “comparable” to the market where the incubation relationship occurred if — 1) the two markets fall within the same market size tier under the Local Radio Ownership Rule; and 2) the number of independent owners of full-service, commercial and noncommercial radio stations in the chosen market is no fewer than (i.e., is greater or equal to) the number of such owners that were in the incubation market at the time the parties submitted their incubation proposal to the Bureau. o Required Attachments. The waiver request must be filed with a copy of the Bureau document(s) approving the incubation relationship, including any document(s) approving an extension of the original term. If the incubation relationship was approved as part of a standard FCC application form (e.g., FCC Form 314, FCC Form 315), the reward waiver request must also include the file number of the approved application. · One Waiver Per Market. An applicant that seeks to use a waiver of the Local Radio Ownership Rule granted under the incubator program may not use the waiver in a market where the applicant already holds an interest in a radio station pursuant to such a waiver. · Transferability of Reward Waivers. The cluster of stations that is initially formed using a reward waiver may be transferred intact to a buyer with authorization from the FCC. Due to the one-waiver-per-market limitation, the Bureau will not approve such a transfer if the buyer already owns a cluster of stations that was formed using a reward waiver in the same market. Similarly, the purchaser of a cluster of stations acquired by an incubating entity through the use of its reward waiver will not be able to incubate a station in any market in which the purchaser owns such a cluster of stations. · Station Swaps. An incubating entity may engage in an in-market station swap in accordance with FCC rules See 47 CFR § 73.3540. in the market where the entity receives its waiver. Annual Joint Certified Statement. Each year during the relationship the parties must jointly file a certified statement to enable the FCC and the public to assess the parties’ compliance with their written incubation contract and the incubated entity’s progress towards independence. · Filing Deadline. Each annual joint certified statement must be filed on the anniversary of the effective date of the written incubation contract. · Progress Report. Each joint certified statement must discuss: (a) what the parties did during the past year to fulfill their obligations under the incubation contract and (b) the incubated entity’s progress towards becoming an independent owner and operator of the incubated station or another full-service AM or FM station. · Final Result. In addition to providing a progress report as discussed above, the final joint certified statement filed at the end of the incubation relationship must also state whether the incubated entity has: (a) purchased a new station or (b) chosen either (i) to retain its controlling interest in the incubated station or (ii) to increase its ownership interest in the incubated station by exercising the buy-out option in the incubation contract. If the goal of the incubation relationship was to put a struggling station on a firmer footing, the final joint certified statement must describe the current status of the incubated station and whether and how it is now on a firmer footing than it was when the incubation relationship began. · Bureau Review of Final Statement. After the parties file their final joint certified statement, the Bureau will have 120 days to review the statement and to ensure that the parties met their obligations and all FCC requirements for the incubator program. The Bureau may extend this review period if needed. In the absence of any negative determination from the Bureau by the end of the review period, the incubating entity will then have three years to submit its reward waiver request. Plan for Successful Conclusion of Incubation Relationship. At least six months before the end of the incubation relationship (including any Bureau-approved extension of the relationship), the parties must file with the FCC a letter that states whether the incubated entity plans to keep the incubated station or buy a new station. If the incubated entity plans to keep the incubated station, the letter must state whether the incubated entity intends to exercise the buy-out option in the incubation contract (see “Option to Purchase Incubated Station” and “Alternative Option to Purchase Other Station” on page 5). If the incubated entity plans to buy a new station, the parties must work together to identify and secure another full-service AM or FM station for the incubated entity to acquire. III. RECORDKEEPING AND REPORTING REQUIREMENTS The compliance requirements for the incubator program include recordkeeping and reporting requirements, as discussed above (see pages 2-10). IV. IMPLEMENTATION DATES The Media Bureau will release a public notice to announce when the Bureau will begin accepting applications to participate in the incubator program. V. INTERNET LINKS Report and Order https://www.fcc.gov/document/fcc-establishes-incubator-program-increase-broadcaster-diversity Federal Register Summary of Report and Order https://www.gpo.gov/fdsys/pkg/FR-2018-08-28/pdf/2018-18289.pdf Broadcast Radio Incubator Program Webpage https://www.fcc.gov/broadcast-radio-incubator-program 11