FTC Business Opportunity Rule: FAQs and Disclosure Forms

FTC Business Opportunity Rule

What you need to know about the new FTC new business opportunity rule

FTC Business Opportunity Rule FAQs

Q: What is the FTC business opportunity rule?

A: The U.S. Federal Trade Commission (FTC) has issued a final rule covering the sale of business opportunities.

Q: When is the rule effective?

A: March 1, 2012.

Q: What is a “business opportunity” covered by the rule?

A: The FTC defines “business opportunity” as a commercial arrangement that possesses three required elements.

  • First, a seller must solicit a prospective purchaser to enter into a new business.
  • Second, the prospective purchaser of the business opportunity must make a “required payment.”
  • And third, the seller must represent that the seller or one or more designated persons will provide any of three types of business assistance:  (1) providing locations for the purchaser’s use or operation of equipment, displays, vending machines, or similar devices; (2) providing outlets, accounts, or customers to the prospective purchaser; or (3) buying back any or all of the goods or services that the purchaser makes, including providing payment for such services as, for example, stuffing envelopes from the purchaser’s home.

Q: What does “new business” mean?

A: For purposes of the business opportunity rule, a “new business” is a business in which the prospective purchaser is not currently engaged, or a new line or type of business. In other words, you could be an experienced entrepreneur yet still be protected by the business opportunity rule.

Q: Are multilevel marketing (MLM) companies covered by the business opportunity rule?

A: No. The FTC decided to exclude MLMs from the rule. However, deceptive practices by MLMs are still covered by Section 5 of the FTC Act.

Q: What about franchises? Do they have to obey the business opportunity rule?

A: No. Franchises are covered by the FTC’s Amended Franchise Rule.

Q: I’m confused. If MLMs and franchises aren’t covered, what types of companies have to obey the Business Opportunity Rule?

A: Here are a few examples of business opportunities…

  • A company that sells work-at-home opportunities stuffing envelopes
  • A business that sells vending machine route opportunities
  • A website that sells opportunities for you to make money online as the company’s exclusive SEO expert for the city where you live.
  • A company that sells you the opportunity to make money at home doing medical billing for local doctors.

Q: What’s the purpose of the FTC business opportunity rule?

A: The Federal Trade Commission wants to provide consumers considering the purchase of a business opportunity with material information they need to investigate the offering thoroughly so they can protect themselves from fraudulent claims, while minimizing the compliance burdens on sellers.

Q: Minimizing the burden on sellers? Are they serious?

A: Absolutely. Originally, the FTC wanted sellers of business opportunities to be required to disclose 20 different types of material information to prospective buyers. The final rule is “streamlined” down to 5 key types of information the FTC believes should be disclosed before purchase.

Q: Okay, so if I sell a business opportunity, what do I have to disclose to the prospective purchaser?

A: As mentioned just a minute ago, there are five key types of material info that you have to disclose as a seller:

  • First, sellers must state their name, business address, and telephone number, the name of the salesperson offering the opportunity, and the date when the disclosure document is furnished to the prospective purchaser.
  • Second, sellers must disclose whether or not they make earnings claims and, if so, must state the claim or claims in a separate earnings claims statement attached to the basic disclosure document. (Note: making deceptive earnings claims is the most common problem in the offer and sale of business opportunities).
  • Third, sellers must disclose prior civil or criminal litigation involving claims of misrepresentation, fraud, securities law violations, or unfair or deceptive business practices that involve the business opportunity or its key personnel.
  • Fourth, sellers must disclose any cancellation or refund policy.
  • Finally, sellers must provide contact information for at least 10 of their purchasers nearest to the prospective purchaser’s location.

Q: Wow! That’s a lot of information. How in the heck do I disclose all of that to a potential customer?

A: As part of issuing this final FTC business opportunity rule, the commission was kind enough to provide sample 1-page disclosure forms in both English and Spanish. Of course, if you’re marketing in another language, you’re supposed to disclose in that language to prospective purchasers even if the FTC didn’t provide you with a sample form for doing so.

Q: After looking at these sample disclosure forms, I’ve got even more questions about the biz opp rule? Mind if I ask them?

A: Fire away!

Q: What do I have to disclose about earnings claims for my business opportunity?

A: According to the FTC, an “earnings claim” is any oral, written, or visual representation, to a prospective purchaser that conveys, expressly or by implication, a specific level or range of actual or potential sales, or gross or net income or profits. For example, if you tell the prospective purchaser that your opportunity will make the buyer a millionaire, that’s an earnings claim. Similar, if you show the prospect the picture of a new Mercedes and imply that purchasing your business opportunity will generate enough cash flow for the buyer to get that car, that’s an earnings claim too.

Q: How do I calculate earnings for making claims?

A: The FTC says that when calculating the number and percentage of purchasers who attained at least the represented level of earnings, the business opportunity seller must include all purchasers who purchased the opportunity prior to the ending date of the time period on which the representation is based.

Q: My new business opportunity doesn’t have an earnings track record. What if I use industry averages for my earnings claims?

A: The new business opportunity rule lets you use industry information only if it is able to measure the performance of existing purchasers of that seller’s offered business opportunity and document that those existing purchasers’ typical performance equals or exceeds the average performance of purchasers of other business opportunities available in the industry.  If you have a start-up business opportunity with no or very limited prior sales, you probably would not be able to use industry statistics because it would lack a sufficient basis to demonstrate that the industry statistics reflect the typical or ordinary experience of your start-up’s prior purchasers.

Q: Are there any geographic restrictions on earnings claims?

A: Yes. Let’s say you sell a “winter clothing” business opportunity. Chances are purchasers of the opportunity in Buffalo, New York will earn more than someone who operates the same winter clothing opp in Phoenix, Arizona. You can’t take the good numbers from Buffalo as your average earnings and not disclose to prospects that purchasers of your biz opp in warm climates don’t make that much.

Q: What if I advertise in different media for my biz opp? Can I bypass the business opportunity rule?

A: Probably not. Just about any type of business opportunity advertising medium is covered by the rule. This includes television, radio, print, Internet, billboard, website, commercial bulk email, and mobile communications. The FTC monitors both electronic and print media.

Q: How often do I have to update this business opportunity disclosure?

A: At least on a quarterly basis. Until you have 10 purchasers identified in the disclosure (which is difficult if it is a new biz opp), you’ll need to update the disclosure at least monthly. Once you’ve got the 10 prior purchasers disclosed, be sure to update quarterly and whenever something material changes about the content of the form. For example, if your earnings claims are no longer valid, you better change them pronto in your disclosure to be accurate.

Q: What if there’s been a change right after I’ve made the disclosure?

A: You have to give an updated disclosure to the prospective purchaser if no contract has been entered or payment made yet. The FTC wants that prospect to have accurate info when making a buying decision.

Q: Isn’t disclosing prior purchasers’ contact information a violation of their privacy?

A: The FTC decided that if you disclosed the purchaser’s name, state, and contact telephone number, that information wasn’t an unreasonable encroachment on their privacy. Hey, at least they didn’t require you to disclose the purchasers’ home addresses.

Q: So when do I have to disclose the information to prospective buyers?

A: The business opportunity rule requires disclosure must be furnished at least seven (7) calendar days before one of two events:  either (1) the execution of any contract in connection with the business opportunity sale; or (2) the payment of any consideration to the seller.

Q: What if I just pretend to do it? Who is going to know differently?

A: No dice. The FTC already thought of that. Note that the sample disclosure form requires a signature and date. Of course, you’re allowed to get an electronic signature from the prospective purchaser but the burden is on you to prove you got it and when if the FTC comes knocking at your door wanting that info.

Q: Electronic signature?

A: Yes, the FTC is giving you the option of doing the disclosure electronically online. You have to obey the rule when you do it and they’re not going to exactly tell you how. Probably because technology changes so quickly that if they said you had to do it one way, that method would become obsolete online within a year.

Q: This seems like too much work. Can’t I just have a prospective purchaser waive or disclaim the right to the disclosures?

A: Nope. It is against the FTC business opportunity rule to have your prospective buyer waive or disclaim disclosure required by the rule.

Q: This is going to kill my sales. What if I just use my best marketing materials to make the sale and tell the prospect to ignore the disclosure as a bunch of government mumbo jumbo?

A: Hate to break it to you but it’s also against the business opportunity rule to make representations that are inconsistent with or contradict your disclosure.

Q: What if I hide the disclosure language in a bunch of other legalese so the prospect’s eyes glaze over and none of it gets read before the purchase takes place?

A: The FTC figured you might try that one too. You can’t add extraneous information to the disclosure. In fact, if your state law had additional disclosure requirements, you can’t combine everything into one document containing both the FTC and state disclosures.

Q: What if I just fake the earnings claims?

A: Hope you’re kidding. That would be a deceptive act that violates the business opportunity rule.

Q: Well, if I make earnings claims for my biz opp, who is going to check the data behind the claims? In other words, who is going to know I’ve created the claims out of thin air?

A: Under the biz opp rule, the prospective purchaser can ask you to substantiate your earnings claims and you’re supposed to provide the information supporting those claims. In addition, the FTC could request the information. You better have something to give them that’s more than a “my dog ate the data” excuse.

Q: What if my business opportunity pays out commissions for work by purchasers?

A: You can’t misrepresent what the payouts will be for the work performed. Similarly, you can’t lowball the costs the purchaser will incur while running the biz opp you sell.

Q: Are there any similar risks?

A: Yes. The business opportunity rule prohibits you misrepresenting how much post-sale help the purchaser is going to get from you. Hint: 24/7 customer support doesn’t mean a disconnected phone number and a support email address that bounces every time a purchaser emails for help.

Q: Does the FTC business opportunity rule affect refund or cancellation policies?

A. Yes. If you have such a policy, you must honor it. No weaseling out.

Q: What if I just sell my biz opp as an employment opportunity? Can I avoid the business opportunity rule that way?

A: No way. The rule prohibits marketing your business opportunity as if it was actual an offer of employment. And let’s face it. There’s also a bunch of tax and employment law reasons why pretending purchasers are your employees is a bad idea.

Q: What about exclusivity? Can I sell my biz opp territorially?

A: First, you want to make sure you’re actually selling a biz opp instead of a franchise. Franchise law is a whole different ball game with a lot more rules to follow. If you actually have a biz opp you’re piking, make sure you don’t play fast and loose with exclusivity. In other words, you can’t sell a territory as exclusive when it isn’t. You also can’t change your mind after selling an exclusive territory to one purchaser and then sell the same territory to others later.

Q: What about endorsements and the business opportunity rule?

A: The FTC says you can’t falsely imply that someone or an organization is endorsing your business opportunity. For example, if you’re selling an acai berry farming opp, it wouldn’t be a good idea to claim that Oprah has endorsed your biz opp when she hasn’t. Similarly, you can’t falsely tell prospects that your acai berry farm opp is affiliated with Starbucks and the Red Cross.

Q: Speaking of endorsements, how is the FTC going to know if the 10 prior purchasers I disclose actually bought my biz opp? Can I list fake purchasers?

A: Uh, you would be violating the business opportunity rule if you did this. Want to risk the consequences if the FTC finds out? Speaking of which, you can’t use paid shills as your prior purchasers. In addition, if you’ve got a personal relationship with a prior purchaser you’ve listed, you have to disclose that relationship too. You can’t list 10 of your buddies as prior purchasers without disclosing the fact that they’re your buddies and their word probably isn’t worth squat when it comes to your biz opp. Plus the FTC is going to frown upon you rigging your disclosure list with 10 friends instead of a representative sample of purchasers.

Q: How long to have I have to keep these #@3$!% records?

A: You’re supposed to retain the records for at least three (3) years. The FTC seems in favor of electronic record keeping and even mentions using spreadsheets as a means of tracking purchaser information.

Q: With this rule being so comprehensive in its requirements, does it replace state disclosure laws for business opportunities?

A: The FTC does not intend to preempt state or local business opportunity laws, except to the extent of any conflict with the new Business Opportunity Rule.

Q: Thanks for all the info. Can I read the actual rule now?

A: Sure thing!

Here is the FTC Business Opportunity Rule ….

[T]he Federal Trade Commission amends title 16,

Code of Federal Regulations, as follows:

1.  Revise Part 437 to read as follows:

PART 437 – BUSINESS OPPORTUNITY RULE

Sec.

437.1 Definitions.

437.2  The obligation to furnish written documents.

437.3 Disclosure document.

437.4 Earnings claims.

437.5  Sales conducted in Spanish or other languages besides English.

437.6  Other prohibited practices.

437.7 Record retention.

437.8 Franchise exemption.

437.9  Outstanding orders; preemption.

437.10 Severability.

Appendix A to Part 437 – DISCLOSURE OF IMPORTANT INFORMATION ABOUT

BUSINESS OPPORTUNITY

Appendix B to Part 437 – DIVULGACI?O?N DE INFORMACIO?N IMPORTANTE

SOBRE OPORTUNIDAD DE NEGOCIO

***

§ 437.1  Definitions.

The following definitions shall apply throughout this part:

(a)  Action means a criminal information, indictment, or proceeding; a civil complaint,

cross claim, counterclaim, or third party complaint in a judicial action or proceeding;

arbitration; or any governmental administrative proceeding, including, but not limited to,

an action to obtain or issue a cease and desist order, an assurance of voluntary

compliance, and an assurance of discontinuance.

(b)  Affiliate means an entity controlled by, controlling, or under common control with

a business opportunity seller.

(c)   Business opportunity means a commercial arrangement in which:

(1) A seller solicits a prospective purchaser to enter into a new business; and

(2) The prospective purchaser makes a required payment; and

(3) The seller, expressly or by implication, orally or in writing, represents that the

seller or one or more designated persons will:

(i) Provide locations for the use or operation of equipment, displays,

vending machines, or similar devices, owned, leased, controlled, or paid for by the

purchaser; or

(ii) Provide outlets, accounts, or customers, including, but not limited to,

Internet outlets, accounts, or customers, for the purchaser’s goods or services; or

(iii) Buy back any or all of the goods or services that the purchaser makes,

produces, fabricates, grows, breeds, modifies, or provides, including but not limited to

providing payment for such services as, for example, stuffing envelopes from the

purchaser’s home.

(d)  Designated person means any person, other than the seller, whose goods or

services the seller suggests, recommends, or requires that the purchaser use in

establishing or operating a new business.

(e)  Disclose or state means to give information in writing that is clear and

conspicuous, accurate, concise, and legible.

(f)  Earnings claim means any oral, written, or visual representation to a prospective

purchaser that conveys, expressly or by implication, a specific level or range of actual or

potential sales, or gross or net income or profits.  Earnings claims include, but are not

limited to:

(1)  Any chart, table, or mathematical calculation that demonstrates possible

results based upon a combination of variables; and

(2)  Any statements from which a prospective purchaser can reasonably infer

that he or she will earn a minimum level of income (e.g., “earn enough to buy a Porsche,”

“earn a six-figure income,” or “earn your investment back within one year”).

(g)  Exclusive territory means a specified geographic or other actual or implied

marketing area in which the seller promises not to locate additional purchasers or offer

the same or similar goods or services as the purchaser through alternative channels of

distribution.

(h) General media means any instrumentality through which a person may

communicate with the public, including, but not limited to, television, radio, print,

Internet, billboard, website, commercial bulk email, and mobile communications.

(i)  Material means likely to affect a person’s choice of, or conduct regarding, goods

or services.

(j)  New business means a business in which the prospective purchaser is not

currently engaged, or a new line or type of business.

(k)  Person means an individual, group, association, limited or general partnership,

corporation, or any other business entity.

(l)  Prior business means:

(1) A business from which the seller acquired, directly or indirectly, the major

portion of the business’ assets; or

(2) Any business previously owned or operated by the seller, in whole or in part.

(m)  Providing locations, outlets, accounts, or customers means furnishing the

prospective purchaser with existing or potential locations, outlets, accounts, or customers;

requiring, recommending, or suggesting one or more locators or lead generating

companies; providing a list of locator or lead generating companies; collecting a fee on

behalf of one or more locators or lead generating companies; offering to furnish a list of

locations; or otherwise assisting the prospective purchaser in obtaining his or her own

locations, outlets, accounts, or customers, provided, however, that advertising and general

advice about business development and training shall not be considered as “providing

locations, outlets, accounts, or customers.”

(n)  Purchaser means a person who buys a business opportunity.

(o)  Quarterly means as of January 1, April 1, July 1, and October 1.

(p)  Required payment means all consideration that the purchaser must pay to the

seller or an affiliate, either by contract or by practical necessity, as a condition of

obtaining or commencing operation of the business opportunity.  Such payment may be

made directly or indirectly through a third party.  A required payment does not include

payments for the purchase of reasonable amounts of inventory at bona fide wholesale

prices for resale or lease.

(q)  Seller means a person who offers for sale or sells a business opportunity.

(r)  Signature or signed means a person’s affirmative steps to authenticate his or her

identity.

It includes a person’s handwritten signature, as well as an electronic or digital form of

signature to the extent that such signature is recognized as a valid signature under

applicable federal law or state contract law.

(s)  Written or in writing means any document or information in printed form or in

any form capable of being downloaded, printed, or otherwise preserved in tangible form

and read.  It includes:  type-set, word processed, or handwritten documents; information

on computer disk or CD-ROM; information sent via email; or information posted on the

Internet.  It does not include mere oral statements.

§ 437.2  The obligation to furnish written documents.

In connection with the offer for sale, sale, or promotion of a business opportunity,

it is a violation of this Rule and an unfair or deceptive act or practice in violation of

Section 5 of the Federal Trade Commission Act (“FTC Act”) for any seller to fail to

furnish a prospective purchaser with the material information required by §§ 437.3(a) and

437.4(a) of this part in writing at least seven calendar days before the earlier of the time

that the prospective purchaser:

(a)  Signs any contract in connection with the business opportunity sale; or

(b)  Makes a payment or provides other consideration to the seller, directly or

indirectly through a third party.

§ 437.3  The disclosure document.

In connection with the offer for sale, sale, or promotion of a business opportunity,

it is a violation of this Rule and an unfair or deceptive act or practice in violation of

Section 5 of the FTC Act, for any seller to:

(a)  Fail to disclose to a prospective purchaser the following material information in a

single written document in the form and using the language set forth in Appendix A to

this part; or if the offer for sale, sale, or promotion of a business opportunity is conducted

in Spanish, in the form and using the language set forth in Appendix B to this part; or if

the offer for sale, sale, or promotion of a business opportunity is conducted in a language

other than English or Spanish, using the form and an accurate translation of the language

set forth in Appendix A to this part:

(1)  Identifying information.  State the name, business address, and telephone

number of the seller, the name of the salesperson offering the opportunity, and the date

when the disclosure document is furnished to the prospective purchaser.

(2)  Earnings claims.  If the seller makes an earnings claim, check the “yes”

box and attach the earnings statement required by § 437.4.  If not, check the “no” box.

(3)  Legal actions.

(i)  If any of the following persons has been the subject of any civil or

criminal action for misrepresentation, fraud, securities law violations, or unfair or

deceptive practices, including violations of any FTC Rule, within the 10 years

immediately preceding the date that the business opportunity is offered, check the “yes”

box:

(A) The seller;

(B)  Any affiliate or prior business of the seller; or

(C)  Any of the seller’s officers, directors, sales managers, or

any individual who occupies a position or performs a function similar to an officer,

director, or sales manager of the seller.

(ii)  If the “yes” box is checked, disclose all such actions in an

attachment to the disclosure document.  State the full caption of each action (names of the

principal parties, case number, full name of court, and filing date).  For each action, the

seller may also provide a brief accurate statement not to exceed 100 words that describes

the action.

(iii)  If there are no actions to disclose, check the “no” box.

(4)  Cancellation or refund policy.  If the seller offers a refund or the right to

cancel the purchase, check the “yes” box.  If so, state all material terms and conditions of

the refund or cancellation policy in an attachment to the disclosure document.  If no

refund or cancellation is offered, check the “no” box.

(5) References.

(i)  State the name, state, and telephone number of all purchasers who

purchased the business opportunity within the last three years.  If more than 10

purchasers purchased the business opportunity within the last three years, the seller may

limit the disclosure by stating the name, state, and telephone number of at least the 10

purchasers within the past three years who are located nearest to the prospective

purchaser’s location.  Alternatively, a seller may furnish a prospective buyer with a list

disclosing all purchasers nationwide within the last three years.  If choosing this option,

insert the words “See Attached List” without removing the list headings or the numbers 1

through 10, and attach a list of the references to the disclosure document.

(ii) Clearly and conspicuously, and in immediate conjunction with the

list of references, state the following:  “If you buy a business opportunity from the seller,

your contact information can be disclosed in the future to other buyers.”

(6)  Receipt.  Attach a duplicate copy of the disclosure document to be signed

and dated by the purchaser.  The seller may inform the prospective purchaser how to

return the signed receipt (for example, by sending to a street address, email address, or

facsimile telephone number).

(b)  Fail to update the disclosures required by paragraph (a) of this section at least

quarterly to reflect any changes in the required information, including, but not limited to,

any changes in the seller’s refund or cancellation policy, or the list of references;

provided, however, that until a seller has 10 purchasers, the list of references must be

updated monthly.

§ 437.4  Earnings claims.

In connection with the offer for sale, sale, or promotion of a business opportunity,

it is a violation of this Rule and an unfair or deceptive act or practice in violation of

Section 5 of the FTC Act, for the seller to:

(a)  Make any earnings claim to a prospective purchaser, unless the seller:

(1)  Has a reasonable basis for its claim at the time the claim is made;

(2)  Has in its possession written materials that substantiate its claim at the

time the claim is made;

(3)  Makes the written substantiation available upon request to the prospective

purchaser and to the Commission; and

(4)  Furnishes to the prospective purchaser an earnings claim statement.  The

earnings claim statement shall be a single written document and shall state the following

information:

(i) The title “EARNINGS CLAIM STATEMENT REQUIRED BY

LAW” in capital, bold type letters;

(ii)  The name of the person making the earnings claim and the date of

the earnings claim;

(iii) The earnings claim;

(iv)  The beginning and ending dates when the represented earnings

were achieved;

(v) The number and percentage of all persons who purchased the

business opportunity prior to the ending date in paragraph (a)(4)(iv) of this section who

achieved at least the stated level of earnings;

(vi)  Any characteristics of the purchasers who achieved at least the

represented level of earnings, such as their location, that may differ materially from the

characteristics of the prospective purchasers being offered the business opportunity; and

(vii)  A statement that written substantiation for the earnings claim will

be made available to the prospective purchaser upon request.

(b)  Make any earnings claim in the general media, unless the seller:

(1)  Has a reasonable basis for its claim at the time the claim is made;

(2)  Has in its possession written material that substantiates its claim at the

time the claim is made;

(3) States in immediate conjunction with the claim:

(i)  The beginning and ending dates when the represented earnings

were achieved; and

(ii) The number and percentage of all persons who purchased the

business opportunity prior to the ending date in paragraph (b)(3)(i) of this section who

achieved at least the stated level of earnings.

(c)  Disseminate industry financial, earnings, or performance information unless the

seller has written substantiation demonstrating that the information reflects, or does not

exceed,  the typical or ordinary financial, earnings, or performance experience of

purchasers of the business opportunity being offered for sale.

(d)  Fail to notify any prospective purchaser in writing of any material changes

affecting the relevance or reliability of the information contained in an earnings claim

statement before the prospective purchaser signs any contract or makes a payment or

provides other consideration to the seller, directly or indirectly, through a third party.

§ 437.5  Sales conducted in Spanish or other languages besides English.

(a)  If the seller conducts the offer for sale, sale, or promotion of a business

opportunity in Spanish, the seller must provide the disclosure document required by §

437.3(a) in the form and language set forth in Appendix B to this part, and the disclosures

required by §§ 437.3(a) and 437.4 must be made in Spanish.

(b)  If the seller conducts the offer for sale, sale, or promotion of a business

opportunity in a language other than English or Spanish, the seller must provide the

disclosure document required by § 437.3(a) using the form and an accurate translation of

the language set forth in Appendix A to this part, and the disclosures required by §§

437.3(a) and 437.4 must be made in that language.

§ 437.6  Other prohibited practices.

In connection with the offer for sale, sale, or promotion of a business opportunity,

it is a violation of this part and an unfair or deceptive act or practice in violation of

Section 5 of the FTC Act for any seller, directly or indirectly through a third party, to:

(a)  Disclaim, or require a prospective purchaser to waive reliance on, any statement

made in any document or attachment that is required or permitted to be disclosed under

this Rule;

(b)  Make any claim or representation, orally, visually, or in writing, that is

inconsistent with or contradicts the information required to be disclosed by §§ 437.3

(basic disclosure document) and 437.4 (earnings claims document) of this Rule;

(c)  Include in any disclosure document or earnings claim statement any materials or

information other than what is explicitly required or permitted by this Rule.  For the sole

purpose of enhancing the prospective purchaser’s ability to maneuver through an

electronic version of a disclosure document or earnings statement, the seller may include

scroll bars and internal links.  All other features (e.g., multimedia tools such as audio,

video, animation, or pop-up screens) are prohibited;

(d)  Misrepresent the amount of sales, or gross or net income or profits a prospective

purchaser may earn or that prior purchasers have earned;

(e)  Misrepresent that any governmental entity, law, or regulation prohibits a seller

from:

(1) furnishing earnings information to a prospective purchaser; or

(2)   disclosing to prospective purchasers the identity of other purchasers of the

business opportunity;

(f)  Fail to make available to prospective purchasers, and to the Commission upon

request, written substantiation for the seller’s earnings claims;

(g)  Misrepresent how or when commissions, bonuses, incentives, premiums, or other

payments from the seller to the purchaser will be calculated or distributed;

(h)  Misrepresent the cost, or the performance, efficacy, nature, or central

characteristics of the business opportunity or the goods or services offered to a

prospective purchaser;

(i)  Misrepresent any material aspect of any assistance offered to a prospective

purchaser;

(j)  Misrepresent the likelihood that a seller, locator, or lead generator will find

locations, outlets, accounts, or customers for the purchaser;

(k)  Misrepresent any term or condition of the seller’s refund or cancellation policies;

(l)  Fail to provide a refund or cancellation when the purchaser has satisfied the terms

and conditions disclosed pursuant to § 437.3(a)(4);

(m)  Misrepresent a business opportunity as an employment opportunity;

(n)  Misrepresent the terms of any territorial exclusivity or territorial protection

offered to a prospective purchaser;

(o)  Assign to any purchaser a purported exclusive territory that, in fact, encompasses

the same or overlapping areas already assigned to another purchaser;

(p)  Misrepresent that any person, trademark or service mark holder, or governmental

entity, directly or indirectly benefits from, sponsors, participates in, endorses, approves,

authorizes, or is otherwise associated with the sale of the business opportunity or the

goods or services sold through the business opportunity;

(q) Misrepresent that any person:

(1)  Has purchased a business opportunity from the seller or has operated a

business opportunity of the type offered by the seller; or

(2)  Can provide an independent or reliable report about the business

opportunity or the experiences of any current or former purchaser.

(r)  Fail to disclose, with respect to any person identified as a purchaser or operator of

a business opportunity offered by the seller:

(1)  Any consideration promised or paid to such person.  Consideration

includes, but is not limited to, any payment, forgiveness of debt, or provision of

equipment, services, or discounts to the person or to a third party on the person’s behalf;

or

(2)  Any personal relationship or any past or present business relationship

other than as the purchaser or operator of the business opportunity being offered by the

seller.

§ 437.7  Record retention.

To prevent the unfair and deceptive acts or practices specified in this Rule,

business opportunity sellers and their principals must prepare, retain, and make available

for inspection by Commission officials copies of the following documents for a period of

three years:

(a)  Each materially different version of all documents required by this Rule;

(b)  Each purchaser’s disclosure receipt;

(c)  Each executed written contract with a purchaser; and

(d)  All substantiation upon which the seller relies for each earnings claim from the

time each such claim is made.

§ 437.8  Franchise exemption.

The provisions of this Rule shall not apply to any business opportunity that

constitutes a “franchise,” as defined in the Franchise Rule, 16 CFR Part 436; provided,

however, that the provisions of this Rule shall apply to any such franchise if it is

exempted from the provisions of Part 436 because, either:

(a)  under § 436.8(a)(1), the total of the required payments or commitments to make a

required payment, to the franchisor or an affiliate that are made any time from before to

within six months after commencing operation of the franchisee’s business is less than

$500, or

(b)   Under § 436.8(a)(7), there is no written document describing any material term or

aspect of the relationship or arrangement.

§ 437.9  Outstanding orders; preemption.

(a)  A business opportunity required by prior FTC or court order to follow the

Franchise Rule, 16 CFR Part 436, may petition the Commission to amend the order or to

stipulate to an amendment of the court order so that the business opportunity may follow

the provisions of this part.

(b)  The FTC does not intend to preempt the business opportunity sales practices laws

of any state or local government, except to the extent of any conflict with this part.  A law

is not in conflict with this Rule if it affords prospective purchasers equal or greater

protection, such as registration of disclosure documents or more extensive disclosures.

All such disclosures, however, must be made in a separate state disclosure document.

§ 437.10  Severability.

The provisions of this part are separate and severable from one another.  If any

provision is stayed or determined to be invalid, the remaining provisions shall continue in

effect.

*****

Additional FTC Business Opportunity Rule Resources

English FTC Business Opportunity Rule Sample Disclosure Form (PDF file)

Spanish FTC Business Opportunity Rule Sample Disclosure Form (PDF file)

 

  

20 Responses to “FTC Business Opportunity Rule: FAQs and Disclosure Forms”

Read below or add a comment...

  1. Dan Kelly says:

    Thanks Mike!

    It might be be “sexy” but you’ve given us a ton of great, very important information.

    And, thanks for the sample 1-page disclosure form… it’s a fantastic resource!

    dK

    • Internet Lawyer says:

      Dan,
      Glad to know that you found the info helpful. As Ben Franklin said, an ounce of prevention is worth a pound of cure. That applies to compliance with the FTC Business Opportunity Rule.
      Best wishes,
      -Mike

  2. Peter Koning says:

    Great info Mike … as always.

    Btw it appears that the FTC’s definition of a biz opp does not include eg an ebook explaining how to make money doing x, where the seller is selling information and not a business.

    Of course it’s prudent to be clear and honest with testimonials, income proof, and the refund/guarantee policy in any case. But I’d be interested in your comments.

    • Internet Lawyer says:

      Peter,
      The FTC generally doesn’t go after claims in a book because of First Amendment constitutional protections. The primary exception to that policy that comes to mind is the FTC’s efforts to go after Kevin Trudeau. But the basis for their pursuit of him was his alleged violation of a 2004 consent order by misrepresentations the commission claimed were in the book.
      Trudeau’s “natural cures” books were arguably a thumb in the eye of the agency that had been after him for years for his antics and had forced him into the 2004 consent order as settlement of other claims.
      With Trudeau’s track record, he’s going to be on the FTC’s radar forever.
      That’s a different scenario than most books. Although one could see cases arise where the book is nothing more than a biz opp sales letter written by a copywriter with a CTA at the end for the biz opp. Let’s face it. There are few of those types out there on the shelves.
      Best wishes,
      -Mike

  3. Tony Black says:

    Very helpful Mike – great insights!

    Your question & answer section is truly invaluable – especially with this FTC rule going into effect. I read the rule and found it difficult to follow in a lot more places than I care to admit! I can see why internet marketers are so confused right now.

    I have two questions Mike – please help:
    1. Do affiliate marketing programs that have a 2-tier compensation plan qualify for the MLM exemption?
    2. Can you tell us what line or section of the final rule specifically excludes MLMs from the rule? I couldn’t find that and I’m more than a little intimidated by this rule as an internet marketer.

    Many Thanks Mike, I’m referring your site to all my contacts!

    Tony

    • Internet Lawyer says:

      Tony,

      Thanks for your kinds words.

      Of course, you should talk with your lawyer if you have specific legal issues that need to be addressed in your business. Can’t rely upon blog posts and comments for that.

      In that light, let me respond to your questions generally.

      1. The FTC did not specifically include or exclude a 2-tier affiliate marketing program. When issuing the final business opportunity rule, the FTC said that

      “[m]ulti-level marketing is one form of direct selling, and refers to a business model in
      which a company distributes products through a network of distributors who earn income
      from their own retail sales of the product and from retail sales made by the distributors’
      direct and indirect recruits. Because they earn a commission from the sales their recruits
      make, each member in the MLM network has an incentive to continue recruiting
      additional sales representatives into their ‘down lines.’”

      Although one could make the argument that a 2-tier affiliate marketing program constitutes an MLM, all references to MLMs in the FTC’s issuance of the rule referred to what one traditionally considers to be MLM companies, specifically companies like Amway, Pre-Paid Legal, Primerica, and Tupperware.

      In fact, there were more than 10,000 comments from people working in that MLM industry submitted to the FTC that opposed the original proposal to include MLMs in the business opportunity rule.

      2. When the FTC issued the final rule, it included about 180 pages of analysis with the rule explaining what it was doing and why. The Q&As above were based on that analysis (my interpretation of what the FTC is doing). The FTC discussed at length the opposition by the MLM industry to its proposed coverage by the rule. After analyzing this, the FTC

      “decided that the proposed Rule was too blunt an instrument to alleviate
      fraud in the sale of MLMs. The Commission therefore determined to continue to
      challenge unfair or deceptive practices in the MLM industry through law enforcement
      actions alleging violations of Section 5 of the FTC Act and not through the Business
      Opportunity Rule.”

      Looking at it objectively, the reasons given by the MLM industry for exclusion didn’t hold much merit. However, the industry does hold a lot of sway in D.C. Many politicians, including former U.S. Presidents, get treated well by MLM companies. In face of opposition, the FTC probably decided to get a quick win by enacting the business opportunity rule by excluding MLMs. Otherwise, the rule would have been tied up forever in the court system by MLM lawyers.

      Best wishes,

      -Mike

  4. Gary Graham says:

    Very good information provided here Mike, but I have one question that I really don’t understand if it falls under this rule or not.

    Are you required to adhere to this rule if you are selling websites that you create for specific products?

    say I create a site that sells products from Amazon. Do I have to comply with this rule?

    Or say I have created a sight that sells or promotes products from a site like eBay. Am I still required to comply?

    Or like on Fiverr.com I make an offer to create a web site, or a video or some other product, am I still required to comply?

    Very confusing on this issue.

    Thanks for all this great info.

    Gary

    • Internet Lawyer says:

      Gary,

      Appreciate your interest in this topic but your questions go beyond the hypothetical in to the realm of asking for legal advice (not the type of thing to give out on a blog).

      The scenarios you describe cover lots of ground and the specific facts of what’s actually being done will likely determine whether one is selling an info product, a service, or a business opportunity that falls within the rule.

      And until we get some case law and further clarification from the FTC, there are going to be gray areas.

      Best wishes,

      -Mike

  5. Hello, Mike, Iam Morgan Tharpe, III, General Counsel for SereniGy. Great information but I have a concern. When we learned about the Rule I immediately contacted Grimes and Reese to see there thoughts on the rule because they have been on the forefront of arquing against this rule since 2006. Even though they say the rule is murkey, it does or can apply to MLMs. Especailly if an MLM falls within the three prong provisions:

    1.Solicts a prospect….
    2.prospects makes a payment….
    3.seller designates one or more of the following….:
    a.provide a location….
    b.provide a outles, (ie internet sites)….
    c.buy back….
    I thouroughly read the rule and do not see any inference where they will let MLMs off the hook. Maybe it was done on purpose to creat grey areas.
    Appreciate you thoughts on this because I envsion a potential legal battle if FTC goes after an MLM based on this MLM killer rule.

    Morgan Tharpe

    • Internet Lawyer says:

      Morgan,
      Subsection C.1.c. of the text of the Federal Register notice (PDF file) seems to specifically exempt MLMs from the new FTC Business Opportunity Rule. The FTC is asserting that it already can handle deceptive practices within the MLM industry per Section 5 of the FTC Act rather than include MLMs within the scope of coverage of the new biz opp rule.
      If you’re seeing a different interpretation elsewhere, I’d be interested in knowing the source.
      Best wishes,
      -Mike

      • Mike;

        That was great information for a second time. If I do, you will be the first to know.

        Thank you sir.

      • Mike:

        Upon further reveiw. let me direct your attention to page 76824, of rule, citation 91. There, it says The final rule, however, does not explicitly exempt MLMs from coverage but instead contains a narrow definition of “buisness opportunity”. As discussed in section III.A.3…. Definition is noted there.

        Yes, you are correct in your assessment Mike, however, if your MLM falls within the narrow definition of the new rule, ie the three prongs, all three by the way, you can fall within BOR rule. This is all murky at best but can be good or bad for an MLM. It depends on how strong your MLM is at the time the FTC comes after you. This is my take at this point until more clarification.

        MLMs now would have to look at there application, payment considerations and assistance procedures to perspective prospects to make sure they at least do not fall within all three. If an MLM can eliminate one prong they will not fall within coverage of rule.

  6. Lorette says:

    Great information, VERY helpful !

  7. John says:

    Hi Mike,

    Thank you for your valuable information. A couple of questions, does the FTC Disclosure Requirement apply to garden variety affiliate marketing businesses? Said business involves signing up affiliate members who purchase a customized website and advertising for the site to attract viewers to the site. The affiliate member is paid a commission each time a potential customer fills out an application requesting additional info (which is passed on to a third-party vendor) regarding the services being advertised on the affiliate member site.

    Secondly, can the prospective customer consent (in writing) to waiver of the 7 day period, ie they want to move on with the opportunity without waiting. The business opportunity seller would still agree to provide a full refund if requested within the 7 day period which is the protection contemplated by the Rule.

    Thank you!

    John

    • Internet Lawyer says:

      John,

      My response should be considered general info. Not going to provide legal advice on a blog.

      With regard to your first question, it would appear under the rule that the answer would be very fact-specific to both what’s being offered and the conduct of those promoting it. If it is a biz opp that’s being marketed, I can’t see how affiliate marketers would get a free pass under the biz opp rule. This is particularly true if a biz opp vendor is using affiliates as a means to circumvent disclosure requirements. And remember that there’s always Section 5 of the Act for the FTC to use as a tool if the rule doesn’t cover the situation.

      With regard to your second question, it seems pretty clear in the FTC’s comments when issuing the final biz opp rule that waivers can’t be used to circumvent the rule’s requirements.

      Best wishes,

      -Mike

  8. Carey_PA says:

    Mike,

    Quick question..i’m getting stumped at the 3rd criteria. Let’s say someone is selling a course teaching people how to start their own vending business. They aren’t selling them routes, they are just teaching them how to go out and buy their own machines and find businesses on their own to place them in.

    From the sounds of things that is NOT consider a business opportunity that would apply to this new rule. What if that person still sells the course. But now down the line they offer folks a “done for you” service where they can pay x amount of dollars to the seller of the course to find “placements.”

    So this “placement” service does NOT come with the initial course. It’s just something that CAN be added on if the customer wants it.

    Do you think the new business opportunity rule would apply then?

    Thanks!

    Carey

    • Internet Lawyer says:

      Carey,
      Sorry. Even couched as a hypothetical, this treads into asking for legal advice…something I’m not going to give out on a blog (nor should any other lawyer).
      Best wishes,
      -Mike

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