The Federal Trade Commission recently proposed a regulation that would require onerous paperwork obligations for the sale of all business opportunity programs.
The proposed rulemaking is a continuation of a proceeding that began nearly a decade ago, in 1997. Though this proposed rule took an inordinate amount of time to be drafted, it remains poorly structured and has the potential to unfairly chill the sale of legitimate services. However, the proposed rule is not final, so changes still may be made.
As proposed, what does the rule consider to be a “business opportunity” to which these new obligations apply? The answer is essentially any commercial arrangement in which a seller solicits a purchaser to enter into a new business in which there is either an earnings claim or a representation that the purchaser will be provided with business assistance.
Business assistance is defined broadly and can mean as little as providing locations for displays or vending machines, providing outlets or potential accounts, buying back products that the purchaser makes, paying commissions based on the sale of goods or services or recruitment fees, or advising or training on the promotion, operation or management of a new business. One can imagine various services, such as coaching services designed to help an individual start a new business, coming under this definition.
So what happens if a marketer is considered to be selling a business opportunity? At least seven days in advance of the contracting or payment for the business opportunity, the seller must disclose to the potential purchaser many undesirable facts that the seller may be aware of.
The seller must include in these disclosures all legal actions he or she has faced in the past 10 years involving either the seller or any prior business of the seller or its management or any salespeople involving fraud, deceptive acts or practices, or securities law violations. The rule would require disclosure of not just the cancellation and refund policy, but the number of oral and written cancellation requests received in the past two years. The rule also would require the seller to provide the buyer with a list of at least 10 customers in nearby areas who purchased, or disclosure of all customers within the past three years.
Earnings claims have an entire section in the proposed rule. Not only must a seller possess adequate substantiation for an earnings claim (which has always been required), but the seller must state in immediate conjunction with an advertised claim the beginning and end dates in which the represented earnings were made, the number and percentage of purchasers during that time who achieved the represented earnings and provide a written earning statement along with the mandatory disclosure statement.
These are just some of the proposed requirements. Other proposed requirements and prohibitions include a record-keeping requirement (three years) and restrictions on the types of claims that can be made.
Perhaps most troubling is that the regulation has the potential to essentially stop the sale of business opportunities by requiring that the mandatory disclosures be provided seven days prior to concluding the sale.
This requirement could devastate the sale of all business opportunity programs and services. Though there exists a complex federal regulatory structure for franchises, which kicks in at $500, the current proposed rule would have no minimum threshold. Accordingly, all business opportunities would be required to comply with the rule.
Worse, not only would business need to comply with this regulation, but the FTC would maintain in place the existing state business opportunity laws. Thus, businesses would face a new federal law as well as the existing hodgepodge of state laws.
The FTC is accepting comments on the proposed regulation until June 16, and a short rebuttal period will follow. Presumably, even though it has taken the FTC a decade to reach this stage, a final rule is not too far down the road. Stay tuned to see what requirements will be in store for the industry.
