As a part of this investigation by the GAO, they made recommendations to prevent fraud within the ACP further. The suggestions are primarily around increasing rules and regulations to prevent fraud. These recommendations are similar to what they implemented with the Lifeline program. 

Immediately following the report, Senators John Thune and Ted Cruz released a statement18 saying, “The results of GAO’s findings reveal that the FCC’s ACP is subject to massive waste, fraud, and abuse of taxpayer dollars. We find it incredibly concerning that the FCC has failed to establish a process that regularly assesses fraud risks within the ACP. It is incumbent upon the Senate Commerce Committee, which has jurisdiction over the FCC, to have an oversight hearing to address GAO’s report and hold the FCC accountable to American taxpayers.” Additionally, Senator Thune launched a nationwide broadband oversight effort to hold these agencies accountable and ensure that previously authorized broadband funding is being used in the most efficient way possible to protect taxpayer dollars.

In response to the report from the GAO and statements from Senators John Thune and Ted Cruz, the FCC started a review of current policies and procedures and engaged in multiple enforcement actions against providers abusing the ACP. One of these enforcement actions was a fine of $62M to Q Link Wireless.19 Q Link Wireless is also a top 10 ACP provider and top Lifeline provider that is similar to SurgePays. The FCC accused Q Link of overcharging the ACP program for devices whose market value was much less than what was charged to the ACP. This violated FCC guidelines. Similarly to SurgePays, Q Link has had additional engagements with law enforcement. In 2021, the FBI, IRS, US Post Office, and Sheriff raided Q Link’s offices. The reason for the raid was undisclosed, but news reports state that the action was part of a two-year investigation and is believed to involve suspected fraud of the Lifeline program. 

Finally, there are large questions about the continued funding of the ACP. A recent report forecasted that ACP funding will run out by mid-2024.20 The ACP was approved with bipartisan support in 2021 but some Republican members of Congress are already objecting. Republicans are asking if the ACP should be further restricted to households that are completely “unconnected” and not acting as a subsidy to individuals already paying for broadband. 

We believe there is a large amount of political risk to the ACP and therefore SurgePays. If there are increases in regulations, decreases in the number of eligible subscribers, or a large cut in funding SurgePays revenue could decline materially.  

Part 4: Rules and Regulations

The amount of ACP (and its predecessor, the Emergency Broadband Benefit Program (EBB)) disbursements made by USAC per provider was recently disclosed as a part of the FCC’s response to statements by Senators Ted Cruz and John Thune21. SurgePays is in the top 25 providers for EBB distributions and if you combine SurgePays and Torch Wireless (affiliate), SurgePays would be in the top 15 for the ACP. Over the life of the ACP (and EBB), SurgePays received over $104M (through Feb 2023). This amount of disbursement puts SurgePays in a similar category as telecom giants: AT&T, Comecast, T-Mobile, Verizon, etc.

We believe that SurgePays rapid ACP revenue growth was fueled by potential violations of FCC regulations around agent registration and compensation. If found in violation of these rules, SurgePays could be fined over $100M.

Rules regulating the ACP state the FCC “requires all participating providers to have their agents and other enrollment representatives registered with the Representative Accountability Database (RAD), as is currently required for the Lifeline and EBB Programs, as a way to minimize waste, fraud, and abuse… A participating provider shall require that enrollment representatives register with the Administrator before the enrollment representative can provide information directly or indirectly to the National Lifeline Accountability Database or the National Verifier.”22

An enrollment representative is defined as “an employee, agent, contractor, or subcontractor, acting on behalf of a participating provider or third-party entity, who directly or indirectly provides information to the Administrator for the purpose of eligibility verification, enrollment, subscriber personal information updates, benefit transfers, or de-enrollment”.23

We inquired with SurgePays Investor Relations on whether the individuals in the stores or the individuals running the pop-up registration tents are considered enrollment agents and therefore registered with RAD. They responded, “Stores on the network are not registered with the accountability database as they don’t actually sign anyone up. The stores simply provide a link to SurgePays and information about the ACP. The SurgePays team, which is registered, signs up/qualifies the person/householder.”24

However, Mr. Cox stated something contrary in SurgePays Q3 2022, earning calls. “We believe we've only scratched the surface of the (ACP) program and there's significant room for growth, which is why we're so excited about being able to do enrollments and activations over our SurgePays' software platform inside convenience stores…Our platform enables the clerk at these stores to take prepaid wireless payments and can now initiate ACP customer enrollments at the checkout counter…We have created a way for the clerk to quickly enter the data we need at the time of purchase for our compliance team to work directly with the customer to enroll and activate them. The store owner is compensated for helping his customers gain access to this valuable benefit.”

These statements show that individuals in the field (stores or pop-up tents) are providing indirect information to Surgepays representatives for eligibility verification, enrollment, and subscriber personal information updates and therefore should be considered enrollment representatives and required to register with the RAD.

Additionally, rules regulating the ACP state the following on agent compensation:

A participating provider shall not offer or provide to enrollment representatives, their direct supervisors, or entities that operate on behalf of the participating provider, any form of compensation that is—

(1) Based on the number of consumers or households that apply for or are enrolled in the Affordable Connectivity Program with the participating provider;

(2) Based on revenues that the participating provider has received or expects to receive in connection with the Affordable Connectivity Program, including payments for connected devices;

(3) Based on the participating provider permitting the retention of cash payments received from the subscriber as part of the required contribution for a connected device;

(4) Shifted, characterized or otherwise classified as compensation paid in connection with other services, business operations, or unrelated to Affordable Connectivity Program activities that is based on Affordable Connectivity Program applications, enrollments, or revenues.25

Surgepays is paying commissions per sign-up to the ACP based on transcripts from their earnings calls and filings with the Securities Exchange Commission (SEC). In SurgePays Q1 2023 earnings call Mr. Cox stated “When we're paying folks out there in tents that go out and set up the pop up tents, that's their only source of income. They're traveling hotels, gas, and their only source of income is doing the ACP program. So at the end of the day, those people require a much higher, you know, let's call it a spiff, a bounty, the payment for that….Now we're paying the store $10 to $12 as opposed to paying someone in the field $50.” Also, their Q3‘22 10-Q26 says "Cost of revenues for the nine months ended September 30, 2022, increased by $ 53,649,241 from the same period ended September 30, 2021, as a result of the purchases of devices ($25,590,039), data usage expenses ($13,024,793) and commission paid ($13,176,925) for the ACP program. Anecdotally, SurgePays changed the language in their Q1 2023 10-Q from “commissions for the ACP Program” to “marketing services for ACP program.”

We inquired with SurgePays Investor Relations if they violate these rules and why the change in terminology in their filings. They stated, “the expense labeled as commission paid and marketing services paid are the same buckets of expenses. When USAC issued their guidelines that you couldn’t pay commissions, the company changed the accounting line item…The company can confirm all policies and procedures are vetted and compliant.” 

Our view is that changing accounting nomenclature from “commissions” to “marketing” is the exact definition of compensation that is “Shifted, characterized or otherwise classified as compensation paid in connection with other services, business operations, or unrelated to Affordable Connectivity Program activities that is based on Affordable Connectivity Program applications, enrollments, or revenues.”

We believe SurgePays is potentially in violation of agent registrations and compensation rules. Surgepays will claim the individuals running the registration tents and signing up customers in the stores are simply providing marketing and are not doing any enrollment activities, therefore do not have to comply with the rules. We disagree and Mr. Cox’s statements in earnings calls and filing with the SEC show that these individuals are enrollment representatives or entities that operate on behalf of SurgePays and are subject to the rules governing ACP registration and compensation.

In fact, we have a first hand account of potential FCC violations from Mississippi Public Service Commissioner, Brandon Presley. In January of 2022, Commissioner Presley sent a letter to the FCC Inspector General asking for a Cease and Desist against SurgePays for blatant violations of FCC guidelines that govern the ACP.27 Commissioner Presley’s letter to the FCC Inspector General outlining what he saw is below: 

Yesterday, I was in Amory, Mississippi and saw a tent in a shopping center parking lot advertising "Free Service+Tablet" with a long line of customers. Because of the PSC's jurisdiction over designating Eligible Telecommunications Carriers for participation in the Lifeline program and the apparent transient nature of this event, I stopped to ask some questions. I first approached a lady who was walking away with a tablet. I asked her who was this company and she said, "I don't know, they just told me to get my Medicaid card and I would get this free tablet." I asked if she had any documents from the company and she did not. I continued to stand in line with around ten customers and watched several interact with representatives of this company who (a) did not even disclose who they were with, (b) did not articulate any of the required information in the Affordable Connectivity Program ("ACP") related to consumer protection, choice or nature of service and (c) were obtaining personal information and noting certain things in a spiral bound notebook. I should stress that these interactions were taking around two minutes each. It appeared the sales agents were solely looking at the qualifying documents, using the ACP portal and handing out these tablets in an obvious rush to the next person in line. I've truly never seen anything like it before in my twenty plus years in public life. Once my time in line came, I asked what company they were with and the lady said they were with "Surge" and were giving away "free internet and tablets" for a $10 connection fee. I should add here that no one was getting a receipt for their $10, which I confirmed later with another consumer. I explained who I was and why I was questioning their practices, gave her and her colleague a business card and asked them to have their supervisor contact me and conveyed that their actions were in possible violation of consumer protections standards set out by the FCC. I further explained that I would be reporting this to you. I also asked for a simple business card, which they did not have. These ladies stated that they were from Oklahoma and were just giving away the tablets. After posting on social media that consumers should beware of this business practice and this particular carrier, I received dozens of messages stating that this same carrier had been set up, with a tent, in many more cities in Mississippi. I also received a call from a constituent from my hometown who stated that they had received the tablet, never were told anything about the service, the price or anything related to the terms and conditions and knew of, at least, one case where a household received more than one device and enrollment by simply going from one town to the next. I am highly concerned about the waste, fraud and abuse of federal dollars aimed at helping bridge the digital divide that is possible with this business practice which is solely driven by apparent exploitation of unassuming citizens. I am also extremely worried about consumers being snookered by Surge. Consumers who are given ZERO information about who or what they are signing up with are highly likely to exceed data plans and be stuck with high bills all because they were lured to a tent in a shopping center because of the promise of a free tablet. I personally witnessed these sales agents in action and can attest that they in NO WAY informed consumers of anything. Their entire business operations consisted of a tent with a banner advertising free tablets (photo included) anchored by cat litter containers, a table, two chairs, two spiral bound notebooks and a plastic container filled with tablets. By way of this letter, I am asking you to please take immediate, appropriate action to have Surge cease and desist operations until your office can properly investigate this matter. Because the ACP does not allow state commissions jurisdiction in these matters, I am turning to you for help. These practices, that I personally witnessed, are prime for waste, fraud and abuse of the ACP. I will also be forwarding a copy of this letter to the Mississippi Attorney General in the event these instances rise to a violation of the Mississippi Consumer Protection Act. I am available to discuss further by way of email at brandon.presley@psc.ms.gov or by phone at 1- 800-637-7722.

This letter to the FCC from Commissioner Presley was never mentioned by SurgePays management. 

If found in violation, SurgePays could face a large fine. Section 503(b) of the Communications Act of 1934 (Communications Act) authorizes the Commission to impose a forfeiture against any entity that “willfully or repeatedly fail[s] to comply with any of the provisions of [the Communications Act].” Under this ruling, the FCC can assess a forfeiture against SurgePays of up to $237,268.00 for each day of a continuing violation.28 These rules have been in effect for the ACP since January 14, 2022. That means that SurgePays has potentially been in violation for 523 days (if we don't count any potential violations of the EBB). At $237,268 per day, that equates to a potential $124M dollar fine for SurgePays or a $248M fine if levied across both violations (agent registration and commission).

If required to abide by these rules, SurgePay's business model implodes. Unable to provide commissions, SurgePays network value proposition is invalidated and SurgePays would be required to hire enrollment agents on a non-commission basis in order to grow subscriber count. The addition of payroll overhead would almost certainly decimate any hopes of profitability. 

Summary and Questions for SurgePays Management and the FCC

Overall, we believe that SurgePays management is misleading investors and operating a business violating FCC regulations. The CEO has a history of alleged abuses of FCC programs, he continues to mislead investors about the expansion of the SurgePays network and potentially violates multiple FCC regulations regarding payment and registration of agents subscribing customers onto the ACP. 

Below are our questions for SurgePays management:

• How does your current business model abide by FCC rules around commissions and agent registration?

• Are you paying commissions to agents of SurgePays signing up customers to the ACP?

• If you are not paying commissions to agents, who are the commissions going to? 

• How many individuals does SurgePays have registered with the Representative Accountability Database(RAD)?

• How are you determining who is and is not an agent and therefore subject to FCC commission and registration rules?

• What customer information/data is being provided to your sales reps in the field and store owners enrolling subscribers to the ACP?

• Why did SurgePays relabel “commissions” to “marketing” in 2023 if commissions have been prohibited since the inception of the ACP?

• What percentage of your ACP signups are via network stores versus pop-up tents vs other channels?

• Can you provide details of the stores on your network currently and the number of ACP registrations associated with those stores?

• How many pop-up tents do you operate in a given month? 

• Can you provide the status of your partnership with AATAC?

• Can you provide a status on your goal of 25,000 stores by the end of 2023? Why was the goal of 40,000 not hit in 2019?

• Why did the store count on the SurgePays network drop from 9,800 to 8,000 from 2019-2020?

• Can you provide updated information regarding your acquisition of Commander Communications and its 500 stores?

• Can you provide an update on the status of True Wireless’s $5.5M fine by the FCC?

• Can you provide details on daily active users on your FinTech platform? Monthly Active Users?

Below are the questions we have for the FCC:

• Are SurgePays individuals in tents or stores required to register with RAD based on current ACP rules?

• Are SurgePays agents in tents and stores eligible to receive a commission based on current ACP rules?

• What actions did the FCC take after the request for a Cease and Desist by Mississippi Public Service Commissioner?

• How many agents does SurgePays have registered with RAD? How does this compare to providers of similar ACP distribution amounts?

• What are the specs of the devices provided by SurgePays and Torch Wireless that were filed with USAC via the Connected Device Form?

• What is the market value of that device? What amount per device is SurgePays requesting from the ACP?

• Did SurgePays list Torch Wireless as an affiliate when registering for ACP?

• Is there any evidence of duplicate subscriptions between SurePays and Torch Wireless?

Disclosure: We Are Short Shares of SurgePays, Inc (NASDAQ: SURG)

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Endnotes

1. FCC Response to Senators Cruz and Thune

2.SurgePays Q1 23 Earnings Announcement

3. Management - SurgePays IR

4.  Complaint about ATMS to FL  

5.Three Men Charged with Allegedly Defrauding the FCC of Approximately $32 Million | United States Department of Justice

6.  Kevin Brian Cox Indictment Document

7.Federal case fizzled as prosecutor left to seek Hillsborough office

8.  $5.5M Penalty Proposed Against True Wireless for Lifeline Violations | Federal Communications Commission

9. Empresa y extranjero señalados de lavar $221,536 de EUA - La Prensa Gráfica

10.  FCC Filing Acquisition of Angles Communication

11. Surge Holdings Partners With AATAC To Place SurgePays Blockchain Portal Into 40,000 Retail Locations

12. DRIP Agreement between SurgePays and AATAC

13. Surge Holdings Announces Asset Purchase Resulting in the

14. SurgePays 2020 10-K

15.  SurgePays Acquires Commander Communications

16.  SurgePays announces distribution agreement with Capital Candy

17.  SurgePays 2020 10-K

18. Thune, Cruz Statement on the FCC’s Mismanagement of a Taxpayer-Funded Broadband Subsidy Program - Press Releases

19. FCC Adopts Q Link Notice of Apparent Liability for EBB Violations

20.  When Will Affordable Connectivity Program Funding Run Out? — The Vernonburg Group

21.  https://www.fcc.gov/ecfs/document/10602023731290/1

22.  47 CFR 54.1807(a)

23.  47 CFR 54.1800(k)

24.  SurgePays IR Email

25. 47 CFR 54.1807(b)

26.  SurgePays Q3 2022 10-Q

27.  https://twitter.com/BrandonPresley/status/1485992203751239690

28.  47 CFR 1.80(b)(2)