Alert: The FTC's Amended Business Opportunity Rule Became Effective March 1, 2012

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March 12, 2013

The Federal Trade Commission (FTC) has approved revisions to the Business Opportunity Rule (hereinafter the "New Rule"), which became effective Thursday, March 1, 2012. The entire rule can be found at 16 CFR Part 437. The New Rule includes three primary changes to the existing FTC rule: (1) expands the definition of “business opportunity”; (2) simplifies the disclosure requirement to a one-page document; and (3) adds affirmative prohibitions on misrepresentations and omissions.

Business Opportunity Defined
Under the New Rule, a business opportunity is defined as a commercial arrangement in which: (1) a seller solicits a prospective purchaser to enter into a new business; (2) a purchaser makes a required payment; and (3) a seller, either expressly or implicitly, represents that the seller or some other designated person will: (a) provide locations for the use or operation of equipment or displays; (b) provide outlets, accounts or customers for the purchaser’s goods/services; or (c) buy back all goods that the purchaser makes, produces, grows, etc.

The New Rule has been expanded to cover additional business opportunities that have been historically associated with deceptive practices. The expansion of the New Rule was accomplished by eliminating two loopholes used by companies to avoid the requirement of complying with the FTC’s business opportunity rule.

First, the New Rule has no minimum threshold payment requirement. The old rule required a payment or investment of $500 or more in order for the FTC rule to apply. Many business opportunity ventures would avoid application of the FTC rule simply by making sure that the required payment(s) was less than $500. 

Second, the old rule limited its application to business opportunities in which products were sold directly to end-users. This limitation effectively excluded many work-at-home businesses such as envelope stuffing or craft making. Business opportunity companies would avoid the application of the rule by having the purchaser sell the products back to the business opportunity seller who would in turn sell/distribute them to the end user. Under the New Rule, covered business opportunities are not limited to those in which goods/services are sold to individuals other than the business opportunity seller.

Franchises that are covered by another rule of the FTC (16 CFR part 436) are expressly exempted from coverage under the New Rule. In addition, the FTC comments regarding the New Rule indicate that while multi-level marketing businesses (MLMs) are not expressly exempt, the New Rule was specifically drafted to avoid broadly sweeping in all MLMs.  

Numerous states have their own business opportunity laws. The New Rule does not override these state laws unless the specific state law conflicts with the FTC Rule. In other words, the state law can provide the consumer with protection equal to or greater than the FTC Rule (i.e. more disclosure requirements), but it cannot lessen the requirements imposed on businesses.

Disclosure Requirements
The amendments, which became effective on March 1, make significant changes to the disclosure requirements. Under the old rule, the required disclosures were 20 pages in length, complex and seemingly unhelpful to the consumer. The disclosures required under the New Rule have been simplified to a one-page document. The disclosure document must be provided to the prospective purchaser at least seven days before the purchaser can sign an agreement or make any type of payment to the seller. The disclosure document must provide the following information:

1. Identification and Disclosure Information: Name, address and telephone number of the direct selling company; the name of the business opportunity sales person; and the date on which the disclosure document was provided.

2. Legal Claims/Lawsuits: The seller must disclose if it, or any of its affiliates or key personnel, have been the subject of any civil or criminal action pertaining to misrepresentations, unfair or deceptive trade practices, fraud or securities law violations in the past 10 years.  The seller must disclose the names of the parties, case number, full name of court and filing date and may describe the action in 100 words or less.

3. Refunds/Cancellation Policy: The seller must identify if it has a refund/cancellation policy, and if it does, the seller must provide details of the terms of the refund/cancellation policy. 

4. Reference List: The seller must disclose the name, state and telephone number of all individuals who have purchased the business in the last three years. If more than 10 people have purchased the business in the last three years, the seller can elect to identify the name, city, state and telephone number of the 10 people who have purchased the business opportunity in the last three years who are located nearest to the potential purchaser’s location. The disclosure statement must also provide notice that if the prospect purchases the business opportunity, their personal contact information may be disclosed to others.

5. Earnings Claims: The seller must disclose if it is making any earnings claims. Earnings claims include actual statements or implied statements of potential earnings. For example, “you will earn enough to buy a Porsche” could constitute an earnings claim.

To make an earnings claim statement, the seller must: (1) have a reasonable basis for the claim; (2) have in its possession at the time the claim is made written materials that substantiate the claim; (3) make the substantiation materials available upon request; and (4) furnish an earnings claim statement that adheres to certain specific requirements, including the following: (a) the earnings claim must be clearly identified with the words “EARNINGS CLAIM STATEMENT REQUIRED BY LAW” in capital, bold type letters; (b) the earnings claim must identify the person making the claim and the date of the claim; (c) the earnings claim document must provide detailed information regarding the basis for the claim, including: (i) the beginning and ending dates when the earnings were achieved; (ii) the number and percentage of all purchasers who achieved that level of earnings during that time period; (iii) any unique information about the purchaser that would vary from the prospective purchaser that may impact the earnings (for example, location); and (iv) that the substantiation for the earnings claim will be made available upon request, including the name of the person who will supply such documentation.

The purchaser must sign the disclosure statement and return it to the seller. The New Rule requires the seller to maintain a copy of all signed disclosure statements for three years and to update their disclosure information each quarter. In addition to keeping the executed disclosure statements, the seller must keep the following documentation for three years:  (1) each materially different version of all documents required by the New Rule; (2) each written contract executed by a purchaser; and (3) all documentation supporting each earnings claim that is made. Finally, the New Rule provides that if the seller conducts sales in languages other than English, the disclosures must be provided in the language in which the sale is conducted. 

Prohibitions on Misrepresentations and Omissions
The New Rule contains various expressed prohibited practices which are primarily aimed at eliminating misrepresentations and omissions that are intended to deceive or mislead the prospective purchaser. Some of the restrictions include, prohibiting the seller:

1. from disclaiming, or requiring a purchaser to waive, any aspect of the New Rule;

2. from making claims or misrepresentations that are inconsistent with or contradict the information required to be provided in the disclosure documents;

3. from making misrepresentations as to potential earnings;

4. from misrepresenting when payments will be made or commissions paid;

5. from misrepresenting a business opportunity as an employment opportunity;

6. from failing to provide a refund or cancellation when those requirements have been met;

7. from assigning a purported exclusive territory which is not in fact exclusive; and

8. from misrepresenting any aspect of the assistance that will be provided by the seller.

A complete list of all prohibited practices can be found at 16 CFR § 437.6.