FTC's new business opportunity rule: reduced disclosure but increased coverage.

• Author: Kanouse, Keith J.
• Position: BUSINESS LAW

Effective March 1, 2012, the FTC's new business opportunity rule (1) became effective. The new business opportunity rule significantly reduces a business opportunity seller's disclosure obligation to a prospective purchaser, as the previous format (the FTC disclosure statement containing 20 items of required information) has been changed and reduced to a one-page form requiring five items of information that the seller is required to disclose. However, the new business opportunity rule applies to more companies since not only business opportunity sellers currently covered by the interim business opportunity rule will be subject to the new business opportunity rule, but also work-at-home programs, such as jewelry assembly and envelope stuffing, will meet the expanded definition of a business opportunity. While the new business opportunity rule is silent on the subject, this author believes that the new business opportunity rule does not apply to sales made outside of the United States or its territories. For Florida sellers of business opportunities and out-of-state sellers of business opportunities to Florida residents, the new business opportunity rule does not preempt compliance with the Florida Sales of Business Opportunities Act and requires the filing of an FTC business opportunity disclosure document and a Florida business opportunity disclosure document.

Companies Subject to the New Business Opportunity Rule

The definition of a "business opportunity" under the new business opportunity rule involves a commercial arrangement that includes the following three required elements:

1) The seller must solicit a prospective purchaser to enter into a new business (one in which the prospective purchaser is not currently engaged or a new line or type of business).

2) The purchaser must make a "required payment," that is, all consideration paid by the purchaser to the seller or an affiliate as a condition to obtaining or commencing the operation of the business opportunity. There remains the exception for payments for the purchase of a reasonable amount of inventory at bona fide wholesale prices for resale or lease.

3) The seller must represent that the seller or a designated person (such as a locator or lead generating company) will provide any of three types of assistance: a) providing locations for the purchaser's use or operation of equipment, displays, vending machines, or similar devices that the purchaser controls; b) providing outlets, accounts, or customers to the purchaser; or c) buying back any of the goods or services that the purchaser makes, including providing payment for such services, such as stuffing envelopes from home or jewelry assembly.

The new business opportunity rule continues to apply to those types of business opportunities covered by the interim business opportunity rule, including vending machines, rack displays (such as greeting cards), pay phones, and Internet kiosks. However, the definition of a business opportunity has been expanded to include work-at-home schemes and has eliminated the definitional element of the "payment of $500 or more on or before the first [six] months of operations" that was a required element of a "business opportunity venture" under the interim business opportunity rule. The new business opportunity rule exempts franchisors covered by the FTC franchise rule as well as multi-level marketing (MLM) arrangements.

FTC Business Opportunity Disclosure Document

The new business opportunity rule requires the business opportunity seller to provide to a prospective purchaser a one-page written disclosure document and certain attachments containing five items of information (FTC business opportunity disclosure document) at least seven calendar days (instead of the previous 10 business days) before a prospective purchaser may sign any documents or pay any money to the seller. (2)

The FTC business opportunity disclosure document must include the following:

1) Information Regarding Seller--The seller's identifying information including name, business address, telephone number, the name of the salesperson offering the business opportunity, and the date when the FTC business opportunity disclosure document was furnished to the purchaser.

2) Earnings Claim--Whether the seller makes an earning claim. The seller is not obligated to make an earning claim and can check the "no" box. However, if the seller does make an earnings claim, the seller must check the "yes" box and provide the purchaser with a separate earnings claim statement titled "Earnings Claim Statement Required by Law," setting forth a) the name of the person making the earnings claim; b) the date of the earnings claim; c) the actual earnings claim; d) the beginning and ending dates during which the represented earnings were achieved; e) the number and percentage of purchasers who achieved the represented level of earnings; f) any characteristics that distinguish purchasers who have achieved the represented level of earnings from those characteristics of the prospective purchasers; and g) other substantiating information.

The seller must have a reasonable basis for the earnings claim at the time the earnings claim is made. The seller can make an earnings claim in the general media, subject to the above requirements. A seller can use industry information only if the seller is able to measure the performance of existing purchasers and document instances in which the existing purchasers' typical performance equals or exceeds the average performance of other business opportunities available in the industry. The use of a chart, table, or mathematical calculation that demonstrates possible results based on a combination of variables constitutes an earnings claim.

3) Legal Actions--Whether the seller, its affiliates (including a parent or subsidiary), or key personnel (including in a prior business) have been involved in any civil or criminal "legal action" against the seller or its representatives (any sales manager, individual who occupies a position or performs a function similar to an officer, director, or sales manager of the seller) within the past 10 years that "involve fraud, misrepresentation, securities law violations, or deceptive or unfair practices including violation of any FTC rule." This includes matters in arbitration or governmental actions. If there is any such legal action, the seller must include a separate page setting forth the full caption of each action and may...