FTC Finalizes New Business Opportunity Rule

As of March 1, 2012, business opportunity sellers will be required to comply with the Federal Trade Commission’s (FTC) new and finalized Business Opportunity Rule. The Final Rule now applies to previously excluded work-at-home business opportunities including envelope stuffing and craft assembly while maintaining its jurisdiction over those opportunities that were already covered by the interim rule, which has been in place for some time. It also includes opportunities where the seller promises to help the buyer to obtain customers, accounts or locations to sell its products or services.

According to the FTC, “The changes simplify the disclosures that business opportunity sellers must provide to prospective buyers” and help consumers to assess risk while “minimizing compliance burdens on businesses.” Central to the claim that the Final Rule lowers the compliance burden on business opportunity sellers is a new disclosure document, which takes the mandated seller-to-buyer exchange of information down from some 20 items to a single page.

The FTC stipulates that the new one-page document― entitled “Disclosure of Important Information about Business Opportunity”―be provided by a business opportunity seller to a prospective buyer at least seven days before any contract is signed or money is paid. Furthermore, it clearly states on the form that the prospective buyer should “Make sure that this information is the same as what the salesperson told you about this opportunity.” Finally, prospective buyers are instructed to sign and date the form and return it to the seller for his or her records.

More specifically, the new one-page document requires the business opportunity seller to disclose five key pieces of information:

1. Identifying/contact information, including name, address, phone number, salesperson and the date

2. Whether or not he/she or his/her key personnel have been the subject of any legal action within the past 10 years and, if so, a list of those actions must be provided

3. Whether or not there is a cancellation or refund policy and, if so, a clear description of said policy

4. A substantiated Earnings Claim Statement, if any potential earnings are stated or implied; and

5. References, along with a note indicating that, should a purchase be made, that buyer’s contact information will also be disclosed to other potential buyers in the future.

The FTC further requires business opportunity sellers to keep the Disclosure Document current and update it every quarter. And in those cases where English is not the primary language used in a potential business opportunity sale, the new rule mandates that the Document and all of its disclosures be in the alternative language as well.

(Click here to obtain a copy of the Disclosure Document.)

Given the Final Rule’s length of some 50 pages, the FTC is making a concerted effort to simplify it for business opportunity sellers as much as possible. Among its online resources aimed at making these new regulations more understandable is a video focusing on “The Business Opportunity Rule,” as well as a summary document entitled “Selling a Work-at-Home or Other Business Opportunity? Revised Rule May Apply to You.”

Any business opportunity seller who meets the definition set forth in the new final rule must meet three key legal responsibilities, all of which are the primary focus of the resources named above:

1. As already mentioned, maintaining a current Disclosure Document is critical

2. If sellers make an earnings claim, it has to be clearly substantiated in a separate document that is headlined with a banner reading “EARNINGS CLAIM STATEMENT REQUIRED BY LAW;” and

3. Sellers must avoid all deceptive practices and misleading claims. For instance, it is not simply ill advised, but in fact it is illegal for business opportunity sellers to say anything that contradicts what is in their Disclosure Document. Additionally, sellers cannot claim they are offering a prospect a job when they’re really promoting a business opportunity―and so forth and so on.

While comprehensive in its scope as it affects the business opportunity industry, the new rule does not apply to franchises in their most literal definition. In fact, many would assert that it actually puts even greater distance between the two―reinforcing the fact that franchises traditionally constitute much more involved arrangements, while the comparatively low-cost business opportunity now involves far less complexity.

The rule also does not apply to multi-level marketing (MLM) concerns. While the FTC does recognize that there are a number of problems inherent to the MLM industry, it has determined for the time being that the Business Opportunity Rule is not the best outlet for addressing them. Rather, it has pledged to continue to challenge unfair and deceptive practices in that industry through Section 5 of the FTC Act.

Lastly, business opportunity sellers should note that―as was the case with the original Business Opportunity Rule and the amended Franchise Rule of 2007―FTC rules do not take precedence over state law unless those laws conflict with the FTC rules. Put more simply, state law is not superseded by the current Rule if it affords prospective buyers equal or greater protection. That being the case, it’s every bit as important for business opportunity sellers to understand the state laws that affect them as much as or even more so than those at the federal level.