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January 2012 : The FTC's Business Opportunity Rule

by Joseph Sanscrainte, an attorney with Bryan Cave, LLP, specializing in telemarketing law.

The FTC announced in November of 2011 that it had approved changes to its Business Opportunity Rule. For those just tuning in, a brief (very brief) history: the FTC created the original "Franchise Rule" way back in 1978, which regulated franchises and a very limited set of business opportunities. In 1995, the FTC concluded that two sets of rules, one covering franchises, and one covering business opportunities, was required - and this led to the creation of the "Interim Business Opportunity Rule" in 2007. Since then, the FTC has been amassing comments and revising its rules related to how best to expand the scope of its regulation of business opportunities to protect consumers, while at the same time factoring in the needs of legitimate business opportunity sellers.

If you are a seller of business opportunities, or a call center engaged by such a seller, understanding this new rule is of paramount importance. The first question to answer is: am I offering a "business opportunity" as that term is defined under the new rule? The FTC defines a "business opportunity" as:

. . . a commercial arrangement in which: 1) a seller solicits a prospect to enter into a new business; and 2) the prospect makes a required payment; and 3) the seller represents that the seller will: i) provide locations for displays, vending machines, or similar devices owned or in some way controlled by the purchaser; or ii) provide outlets, accounts or customers; or iii) buy back the goods or services that purchaser produces.

Note the selective underlining above - to meet the definition overall, the seller must do ALL three things identified. If a seller falls within this definition, the rule requires it to provide a prospect with a Disclosure Document designed to give the prospect information sufficient to make an informed decision whether or not to purchase the opportunity being presented by the seller. (It's this Disclosure Document that is the centerpiece of the regulation.) The Disclosure Document is a form created by the FTC that requires the seller to provide the following information to the prospect at least seven days before any contract is signed or money is paid:

  1. Identifying/contact information
  2. Whether or not "earnings claims" are being made, and if so, supporting information on a form entitled "Earnings Claim Statement Required by Law" that includes specifics on any such claim, including the period of time when such earnings were made, and most importantly, the number and percentage of all persons who purchased the business opportunity who achieved at least the same level of earnings;
  3. Whether the seller, its affiliates, or key personnel have been involved on the seller as well as key personnel have been the subject of an action for fraud or deceptive practices within the prior ten years;
  4. Cancellation or refund policy;
  5. Last but not least - a list of all people who purchased the business opportunity within the prior three years. BUT - if there's more than 10 such people, the seller may choose to limit this disclosure to 10 purchasers within the past three years who are located nearest to the prospective purchasers location.

There are many entities out there that sell information and related services to consumers, and the purpose of this information and related services is to enable the consumer to start up a business. The majority of these entities will need to carefully review these rules and figure out whether they are a "business opportunity" as that term has been defined now by the FTC. Given the onerous nature of the disclosures required, my sense is that many of these entities will do what is necessary to ensure that they fall outside this definition.

Joseph Sanscrainte

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