Friday, July 6, 2012

FTC Business Opportunity Rule

There are three requirements to qualify as a business opportunity under the new FTC Business Opportunity Rule. (1) There must be a solicitation to enter into a new business (if it is in the same line of business as a purchaser, it is not a business opportunity); (2) the purchaser must make a required payment; and (3) the seller must represent it will provide any of the following: (a) location for purchaser’s display, kiosk, machine, equipment, etc.; (b) that the seller will buy back any goods or services acquired or purchased from the seller; or (c) the outlet, accounts or customers for the purchaser.

The Federal Trade Commission’s new Business Opportunity Rule went into effect on March 1, 2012. Among the changes that were made was the removal of the dollar amount requirement to qualify as a business opportunity, the expansion to include at-home business programs, and the reduction of required disclosures to be made from 20 to 5.

The new rule does not preempt the various state business opportunity laws; therefore, if you are offering in one of the 25 states with a specific business opportunity law, you must also comply with those state-specific disclosure requirements.

The Required Disclosures
There are now five required disclosures under the Business Opportunity Rule.
1.      Information on the Seller: this includes the name of the business, the name of the seller of the business opportunity, the business address and telephone number.

2.      Earnings Claim: this is a check the box disclosure. If you check ‘yes’ that there is an earnings claim, additional disclosures are required.

3.      Litigation History: similar to the FTC Franchise Disclosure Item 3 requirements, a business opportunity must disclose its litigation history for the past 10 years for itself, affiliates, parents and subsidiaries.

4.      Cancellation and Refund Policy: this is a check the box disclosure. If you provide for cancellation or refund of the business opportunity, there are additional required disclosures.

5.      List of Purchasers: you must provide a list of all purchasers of your business opportunity for the prior 3 years, or just the 10 purchasers residing closest to your prospective buyer.

Under the Rule, every seller of a business opportunity must retain several documents for at least 3 years after the disclosure is made to a prospective buyer. These are:

·         The disclosure receipt page;
·         Every version of the disclosure document;
·         All signed contracts with the buyer;
·         All verbal or written cancellation or refund requests by the buyer;
·         All earnings claim substantiation records.

The new Business Opportunity Rule contains a long list of prohibited practices in making disclosures. Among these are the prohibition against making any representations (verbal or written) which contradict the disclosure document, providing extraneous information outside of the disclosure document; making false or unsubstantiated earnings claims; and requiring the buyer disclaim or waive reliance on any of the disclosures or representations.

The new Rule is comprehensive and you should become familiar with the requirements both on the federal and state levels.