The U.S. Federal Communications Commission (FCC) reviews foreign investment in FCC common carrier, broadcast and aeronautical radio licenses. The reviews include applications for new licenses, transfer of control, and assignment of existing licenses involving non-U.S. ownership. Limitations on holding and transferring of licenses apply to foreign governments, non-U.S. citizens and non-U.S. corporations — collectively classified as "foreign entities."

U.S. Telecom Market Restrictions and the WTO

It is essential to mention that since 1997, the FCC has taken great strides to liberalize foreign entity participation in the U.S. telecom market. This measure was in response to a commitment made in the World Trade Organization (WTO) Basic Telecom Agreement which has the purpose of opening markets, promoting competition and preventing anti-competitive conduct. Although entry to the U.S. telecommunications market is less restrictive for foreign entities from WTO members, foreign entities from non-WTO members can still enter the U.S. market.

Foreign Participation in the U.S. Telecom Market

The U.S. Communications Act prohibits direct ownership of FCC licenses by foreign entities, however, there is currently no prohibition for foreign entities to obtain ownership rights in a U.S. domestic company that controls an FCC licensee. For example, a non-U.S. corporation (fictional MexicoTel) can acquire ownership rights in a U.S. corporation (USA-Holdings) that holds an interest in another U.S. corporation (USATel), which is the holder of an FCC license. The percent ownership that MexicoTel can hold on USATel depends mainly on the extent of control that USA-Holdings has over USATel.

The Issue of Control

At the heart of the indirect ownership matter is the issue of control; that is, whether the foreign entity is investing in a U.S. domestic company that has a controlling or non-controlling interest in the FCC licensee. In turn, the issue of control is determined by looking at all the relevant factors, including equity, voting shares and the daily corporate activities, such as who actually determines company policy.

Percent Benchmarks on Foreign Ownership

For foreign entities with ownership interests in a U.S. domestic company that has an interest in an FCC licensee, the U.S. Communications Act has imposed the following percentage benchmarks:

• If a foreign entity has a non-controlling interest in the licensee, foreign ownership is limited to 20 percent.
• If a foreign entity has a controlling interest in the licensee, foreign ownership is limited to 25 percent. However, the FCC has discretion to allow higher levels of foreign ownership.
• If a foreign entity has a controlling interest in the licensee, and the FCC finds that foreign ownership is consistent with the public interest, the FCC may allow up to 100 percent foreign ownership. The evaluation depends on whether the foreign entity is from a WTO member country. For foreign entities from WTO member countries, the FCC has presumed that ownership up to 100 percent is in the public interest. On the other hand, a foreign entity from a non-WTO member country would have to demonstrate, as a condition of exceeding the 25 percent benchmark, that no legal or practical restrictions on U.S. investment exist in its home telecom market.

Summary

Limitations on foreign investment should not discourage a foreign entity from participating in the U.S. telecommunications market. Nevertheless, it is important to analyze each situation on a case-by-case basis, particularly in mergers and acquisitions where transfer of control or assignment of FCC licenses take place. At the same time, if the FCC already has permitted certain foreign ownership percentage benchmarks, FCC authority must be sought to increase this benchmark.