New Federal Trade Commission Rule Takes Aim At Business Opportunities, Many Info-Marketers Will Be Impacted

Download the Complete Proposed Federal Trade Commission Rule Here

The Federal Trade Commission is proposing a rule that purports to protect consumers from bogus business opportunities. While the rule is aimed at business opportunities commonly touted by fraudsters, it creates several new compliance issues for information marketers. Currently, the FTC brings law enforcement actions against fraudulent business opportunities under two laws, the Franchise Rule and the FTC Act. The FTC believes that scams are able to operate in spite of these laws and that additional rules are necessary.

The FTC has brought more than 200 enforcement actions against business opportunities using the Franchise Rule since it took effect in the 1970s and numerous cases against work-at-home and multilevel marketing companies under Section 5 of the FTC Act. Since 1995, the commission has conducted 12 sweeps on business opportunities.

The Business Opportunity Rule, if and when promulgated, will replace the business opportunities coverage under the current and proposed amended Franchise Rule.

The proposed Business Opportunity Rule will significantly increase the types of transactions and number of marketers that fall within its scope. As a result, many information marketers who to date have avoided coverage under franchise or business opportunity laws will now need to either comply or change their business models.

Effect on Current Franchisors, Product Distributors and Business Opportunity Sellers

  1. Franchisors currently covered by the Franchise Rule are not affected by the new Business Opportunity Rule. Although franchisors would fall under this rule’s “business opportunity” definition, the rule explicitly exempts franchisors that (a) satisfy the definitional elements of a “franchise” under the Franchise Rule; (b) use a written contract; and (c) require the purchaser to make a payment that meets the Franchise Rule’s minimum $500 payment requirement.
  2. Franchisors previously not needing to comply with the Franchise Rule because they avoided the rule’s “required payment” definitional element would need to comply with the new Business Opportunity Rule.
  3. Business opportunity sellers currently covered by the Franchise Rule would be covered by the Business Opportunity Rule. These companies would find their disclosure obligations significantly eased under the new rule.
  4. Many businesses that have had no compliance requirements would face detailed compliance and disclosure requirements if they meet the revised business opportunity definition.

“Business Opportunity” Defined
Under the proposed Business Opportunity Rule, a business opportunity exists whenever:
a. There is a solicitation to enter into a new business. This definition was intended to exclude current business-to-business sellers. However, the FTC within the Federal Register implies that offering new product lines or alternative merchandise to an existing business is considered a solicitation for a new business.
b. The buyer makes a payment to the seller in cash, check or any kind of installment sale agreement; and
c. The seller either:
(1) Makes an earnings claim; or
(2) Represents that some type of business assistance will be provided to the purchaser. Business assistance means the offer of material advice, information or support to a prospective purchaser. The proposed rule goes on to clarify that any of the following are automatically considered business assistance: (a) providing locations/customer accounts; (b) the promise that the business opportunity seller will buy the production from the business opportunity buyer; and (c) paying commissions based on the purchaser’s product sales or recruitment efforts.

Sellers’ Disclosure Obligations
For companies that fall under this proposed Business Opportunity Rule, the FTC has created a new one-page disclosure document. This new form focuses on four items of information the FTC believes are critical when a consumer makes a business opportunity purchase:

1. Earnings Claims - The disclosure form asks the seller to confirm he or she has received an “Earnings Claim Statement” about any implied level of sales, income or profit the buyer can make or other purchasers have made. Those Earnings Claim Statements must include:

  • the name of the person making the earnings clam;
  • the date of the earnings claim;
  • the beginning and ending dates when the represented earnings were achieved;
  • the number and percentage of all purchasers during the stated time period who achieved at least the stated level of earnings;
  • any characteristics of the purchasers who achieved at least the represented level of earnings; and
  • a statement that written substantiation for the earnings claim will be made available to the prospective purchaser upon request.

2. Legal Actions - The seller or seller’s key personnel must disclose any civil lawsuits or criminal action involving misrepresentation, fraud, securities law violation or unfair or deceptive practices within the past 10 years.

3. Cancellation or Refund Policy - The business opportunity seller must attach a statement describing its refund policy. There are extensive prohibitions for business opportunities that do not honor these stated refund policies.

4. References - The business opportunity seller must provide 10 purchaser references located nearest to the buyer. Information must include name, address and telephone number so the prospective buyer can contact those individuals to verify the seller’s claims. If there are fewer than 10 purchasers, the seller must provide information on all.

There are several other aspects to this proposed rule. If you have concerns whether your products and services would fall under the new business opportunity definition, you should discuss the proposed rule with your counsel. You can download a complete copy of the proposed rule, including a Model Business Opportunity Disclosures form, at www.Info-Marketing.org/FTC.

The FTC is now accepting public comment on the proposal. The FTC appears resolute about promulgating its proposed rule, having taken many years to create it. After the public comment period, the final rule will be released. The IMA Journal will keep members apprised of all developments as they occur.