FTC Issues Final Business Opportunity Rule

'Man Controlling Trade.' Statue outside FTC Building.

WASHINGTON — The Federal Trade Commission released its final amended Business Opportunity Rule today, which will go into effect on March 1, 2012. The new disclosure regulation aims to lighten the federal compliance burden for business opportunity sellers and help their prospective buyers assess the risks. Biz ops such as vending machines, rack display routes and assemble-at-home crafts are covered, but not franchises.

FTC Commissioners Jon Leibowitz, Tom Rosch, Edith Ramirez and Julie Brill voted unanimously for the new regulation.

Simplified one-page disclosure

Franchise attorney Lee Plave, co-founding partner of law firm Plave Koch PLC, thinks that for better or worse, the new simple one-page disclosure document makes it easier for businesses to comply with regulations and reduces costs. "The FTC's new Business Opportunity Rule puts significant distance between the regulations applicable to more complex arrangements — such as franchises — and those that apply to what the Commission described as 'comparatively low-cost transactions' — such as business opportunities," states Plave. The Virginia-based attorney counsels distributors and franchisors. His work includes drafting and negotiating license and disclosure agreements for complex franchise and distribution transactions.

New York-based Harold Kestenbaum, a partner at Gordon & Rees LLP, also helps franchisors and business licensors to prepare their disclosure documents and launch their systems. "Compliance will be easier," observes Kestenbaum. The one-page document requires business opportunity sellers to disclose whether they want to make an earnings claim, if their key personnel have been involved in significant legal actions, and to provide a list of those who have already bought the opportunity in the previous three years.

The FTC Commissioners hope the new disclosure documents will help "consumers" who buy business opportunities to better fact-check a business licensor's sales pitch.

The FTC cites Teresa Yeast as an example. She purchased a craft-assembly work-at-home business from a company called Darling Angel Pin Creations. The FTC filed a law enforcement action against that company in February 2010 for allegedly claiming that consumers could make hundreds of dollars assembling angel pins at home. "It's important to be skeptical and to be cautionary when you're approached with ... a business opportunity," Ms. Yeast said. "I saw an opportunity that looked great, and took it. They took my money."

Broader scope

Attorney Kestenbaum observes that this final Business Opportunity Rule is broader in scope than the interim Business Opportunity Rule. "I think that compliance will be easier, but now that the Rule's scope has been broadened, it will capture more businesses than it did prior to these changes," says Kestenbaum. He adds that the Rule covers such businesses as home-based envelope stuffing and medical billing, which had not been included before.

"Although the scope of coverage is broader, the compliance burden is lighter under the final Rule than under the [old] interim Business Opportunity Rule," writes the FTC. "Specifically, in contrast to the extensive disclosures previously required, the final Rule (pdf) now requires that business opportunity sellers provide prospective customers with a substantially simplified and streamlined one-page disclosure document."

Multi-level marketing excluded

The Commission decided to exclude multi-level marketing in its new Rule. In a 201-page report, the Commission explained, "While the Commission recognizes that problems may exist within the MLM industry, it continues to find that the Business Opportunity Rule is not the appropriate vehicle through which to address them. Rather, the Commission will continue to challenge unfair or deceptive practices in the MLM industry through Section 5 of the FTC Act. Thus, the final Rule has been crafted to avoid broadly sweeping in MLMs."

Section 5 prohibits entities from engaging in unfair or deceptive practices in interstate commerce.