[authors: Jeffrey Cowman, Lynne M. Hanson, Kim I. McCullough, Garrett M. Tuttle]
The Federal Trade Commission has expanded the definition of a “business opportunity” to include work-at-home opportunities in a new Business Opportunity Rule that also simplifies the required disclosures to one page plus attachments.
The new rule, titled “Disclosure Requirements and Prohibitions Concerning Business Opportunities,” was issued in December 2011 and took effect in March 2012. It replaces a 1978 FTC rule that regulated unfair business practices in the sale of both franchises and business opportunities.
The new rule defines a “business opportunity” as a commercial arrangement that includes three elements. First, a seller must solicit a prospective purchaser to enter into a new business. Second, the prospective purchaser of the business opportunity must make a “required payment.” Third, the seller must represent that the seller or one or more designated persons will provide one of three types of business assistance:
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Providing locations for the purchaser’s use or operation of equipment, displays, vending machines, or similar devices
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Providing outlets, accounts, or customers to the prospective purchaser
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Buying back any or all of the goods or services that the purchaser makes, including payment for such services as stuffing envelopes from the purchaser’s home
Under this definition, the new Business Opportunity Rule continues to cover vending machine opportunities, rack displays, 900 number ventures, and similar arrangements, but has been expanded to apply to work-at-home opportunities such as envelope stuffing, product assembly, and medical billing. Similar to the New Franchise Rule, the definition of “required payment” under the Business Opportunity Rule does not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease.
The new Business Opportunity Rule has modified the original rule in many respects. The original rule did not apply if the total required payments, within six months after commencing operation of the business opportunity, was less than $500. The new Business Opportunity Rule has no minimum payment exemption—any “required payment” will suffice.
The new rule has also significantly shortened the disclosures required to be provided by the business opportunity seller to a purchaser. The disclosure must include:
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The seller’s identifying information
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Whether the seller makes an earnings claim and, if so, an earnings statement
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Whether the seller, its affiliates, or any of seller’s officers, directors, sales managers, or persons performing a function similar to these persons has been the subject of certain criminal or civil legal actions and, if so, a description of the legal action
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Whether the seller has a cancellation or refund policy and, if so, its material terms
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A list of purchasers who have bought the business opportunity in the last three years
The written disclosure document must be furnished at least seven calendar days before execution of any contract in connection with the business opportunity sale or the payment of any consideration to the seller.
An expanded list of prohibited deceptive practices in the new rule includes prohibitions against misrepresenting:
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The earnings that can be expected
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The seller’s refund policies
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The assistance that will be provided by the seller
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The likelihood of finding locations for equipment or accounts for services
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That the purchaser is receiving territorial exclusivity or other more limited territorial protections
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References, such as utilizing paid references or shills
If the seller conducts the sale, the offer for sale, or promotion of the business opportunity in Spanish or another language, the new rule mandates that the seller must provide the disclosure document in Spanish or other applicable language. A form one-page disclosure document is attached to the new rule in both English and Spanish.
To prevent any overlap between the new Franchise Rule and the new Business Opportunity Rule, the rule exempts from its coverage those business opportunities that (1) satisfy the requirements of a “franchise” under the new Franchise Rule, (2) involve a written contract between the business opportunity seller and purchaser, and (3) require the buyer to make a payment that meets the new Franchise Rule’s minimum payment requirement.
Similar to the new Franchise Rule, the new Business Opportunity Rule provides that it is not intended to preempt state or local business opportunity rules, except to the extent such rules conflict with the new Business Opportunity Rule. A state or local law does not conflict with the new rule if it affords equal or greater protection, such as a requirement for registration of a disclosure document or more extensive disclosures.
The attorneys in Ballard Spahr’s Franchise and Distribution Group regularly advise clients on complying with FTC rules. If you have any questions about the new Franchise Rule or the new Business Opportunity Rule, please contact Jeffrey Cowman at 303.299.7319 or cowmanj@ballardspahr.com; Lynne M. Hanson at 303.299.7347 or hansonlm@ballardspahr.com; Kim I. McCullough at 303.299.7318 or mcculloughk@ballardspahr.com; or Garrett M. Tuttle at 303.299.7340 or tuttleg@ballardspahr.com.
