Last Updated: March 24, 2023
What is the FTC Business Opportunity Rule?
The current FTC Business Opportunity Rule ("Biz Opps Rule") was adopted by FTC in 2012, under the authority of the Federal Trade Commission Act.
The purpose of the BiZ Opp Rule is to help prospective buyers evaluate a business opportunity by requiring certain specific disclosures from sellers in the offer process.
A Business Opportunity is Not the Same as a Franchise
In very general terms, the Biz Opps Rule has some similarities with the offer of a franchise.
However, while both business opportunities and franchises involve selling a business concept or system to a buyer, there are significant differences between the two.
A franchise is a specific business model in which the franchisor grants the franchisee the right to use the franchisor's trademark, products, and services and provides ongoing support and training.
The franchisee operates under the franchisor's established business system. In exchange for the right to use the franchisor's brand and systems, the franchisee pays an initial franchise fee and ongoing royalties.
A Business Opportunity is a More General Term
In contrast, a business opportunity is a more general term that refers to any arrangement in which a seller offers to provide a buyer with the means to start or operate a new business but does not necessarily provide ongoing support or training.
Business opportunities can take many forms, including distributorships, network marketing plans, and work-at-home schemes.
The main difference between a franchise and a business opportunity is the level of control and ongoing support the seller provides.
While franchises are highly regulated and require strict compliance with the franchisor's established system, business opportunities are generally more flexible and allow the buyer more control over the operation of the business.
The Biz Opps Rule specifically applies to business opportunities, while a separate set of franchise laws governs franchises.
What is Biz Opps?
Definition of Business Opportunity
The current definition of a business opportunity ("Biz Opps" or a "Biz Opp") under the Biz Opps Rule includes a "commercial arrangement" in which:
* A "seller solicits a prospective purchaser to enter into a new business";
* The "prospective purchase makes a required payment";
* The "seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will”:
- Provide "locations" for the purchaser's equipment (such as a vending machine);
- Provide "outlets, accounts, or customers, including but not limited to, Internet outlets, accounts, or customers" for the purchaser's goods or services; or
- "Buy back" any or all goods or services the purchaser makes or provides.
There is this exception: "... advertising and general advice about business development and training shall not be considered as “providing locations, outlets, accounts, or customers.”
Who is Regulated Under the Biz Opps Rule?
Anyone who sells an opportunity for a "new business," that is defined as a "business opportunity" above, is regulated by the Biz Opps Rule, and all of the requirements of the Biz Opps Rule apply.
Earnings Claims are Optional
An earnings claim (an ad claim related to making money) includes:
"...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”).
If an earnings claim is made, the net impression of each earnings claim must be substantiated with a "reasonable basis" to support the claim.
More Information: Ad Claims & Substantiation
More Information: Puffery
FTC Biz Opps Rule Enforcement v. DK Automation (2022)
In the FTC press release dated November 16, 2022, the FTC announced its enforcement action against DK Automation and its owners (individually), Kevin David Hulse and David Shawn Arnet.
The FTC alleged that the defendants sold business opportunities to consumers throughout the U.S. consisting of Amazon business packages, business coaching, and cryptocurrency programs.
The Complaint attached the image below of this advertisement of Hulse and Arnet pitching their Biz Opp.
The FTC also alleged the following violations.
Deceiving Consumers about potential earnings: The defendants made multiple claims about huge profits consumers could make, often with testimonials claiming actual results. Disclaimers were presented by the defendants, but the FTC alleged that they were in such small type or removed from the claims that they were essentially useless.
Suppressing Negative Reviews: The FTC alleged that the defendants manipulated online reviews by falsifying positive reviews and flagging negative reviews, which resulted in their removal.
Not providing required disclosures: The FTC alleged that defendants regularly failed to give consumers the information that is required by the Biz Opps Rule.
Personal liability: Note that thHulse and Arnet were named as defendants, resulting in personal liability claims.
The Complaint also attached a copy of the image below that shows unsupported ad claims.
Samuel Levine, Director of the FTC's Bureau of Consumer Protection, stated: "DK Automation ripped off consumers by manipulating reviews and making empty promises of big returns on cryptocurrency investment schemes and bogus business programs. They ignored warnings (penalty notice letters) that these practices were illegal, and now they are paying the price."
State Business Opportunity Laws
Twenty-six states have laws regulating the sale of business opportunities.
The specifics of business opportunity laws vary by state. However, many states have laws that require companies to provide a disclosure document, often called a "disclosure statement," to potential buyers. This document typically includes information about the company's business model, earnings claims, litigation history, and other important information that a potential buyer would need to make an informed decision.
Some states also require companies to register with a state agency before selling business opportunities within the state. Registration typically involves submitting a copy of the company's disclosure statement and paying a fee.
In addition, some states have laws that limit the types of fees that companies can charge. For example, some states may prohibit companies from charging a fee for training or other services that are not actually provided.
The FTC Biz Opps Rule does not preempt state biz opp laws. States are allowed to regulate bizz ops under their own rules and regulations.
FTC Biz Opps Rule Disclosure Requirements
The Disclosure Document
Download the Disclosure Document .pdf: Click Here
The Biz Opps Rule requires the business opportunity seller to provide a completed disclosure document to each prospective purchaser at least seven calendar days prior to signing or paying money.
As indicated on the image above, there is a series of questions with yes or no answers.
* Legal Actions. Has the seller or any of its affiliates or key personnel been the subject of a civil or criminal action involving misrepresentation, fraud, securities law violation or unfair or deceptive practices within the past 10 years? If yes, the seller must attach descriptions.
* Cancellation or Refund Policy. Does the seller offer a cancellation or refund policy? If yes, the seller must attach a statement describing the policy.
* Earnings. Has the seller or its salesperson discussed how much money a purchaser can earn or purchasers have earned? Have they stated or implied that purchasers can earn a specific level of sales, income or profit? If yes, the seller must attach an earning claims statement.
- As discussed above, if an earnings claim is made, the net impression of each earnings claim must be substantiated with a "reasonable basis" to support the claim.
- The earnings claim statement is required to state the beginning and ending dates when the represented earnings were achieved and the number and percentage of all purchasers who achieved at least the stated level of earnings during the indicated period.
* References. The seller is required to state the names and telephone numbers of all people who have purchased the business opportunity within the last three years. If there are more than 10, the disclosure document may optionally include the 10 that are nearest to the prospective purchaser's location.
There is no filing requirement.
Recommended Do's and Don'ts
* Do add all required information the disclosure document requires. Don't add anything else.
* Don't say too much regarding earnings claims - the amount, percentages, etc. The net impression of the prospective purchaser is the key, so be careful with implied claims and context.
* Don't say anything about a "job." You're selling a business opportunity.
* Don't mention any territory, both non-exclusive and exclusive.
* Don't mention anyone who has bought the business opportunity.
* Do discuss the material terms of the offer, including price, terms, payment frequency, cancellation, and payment reminders.
* Recordkeeping is not optional. Maintain offer and related records relating to the sign-up and earnings claims for three (3) years. Remember, a well-documented file of all relevant documents is your best defense if issues arise.
The FTC Has Initiated Rulemaking for Biz Opps
In November 2022, the FTC announced an Advanced Notice of Proposed Rulemaking (ANPR) to explore updates to the Biz Opps Rule. The public comment period was later extended to January 31, 2023.
The FTC's request for public comment focuses on the rule's effectiveness and, specifically, on the potential expansion of the rule to cover new types of money-making opportunities, such as coaching or mentoring programs, e-Commerce opportunities, and investment opportunities.
The FTC's objective in expanding the scope of the Biz Opps Rule is clear based on the remarks of FTC Chair Lina M Kahn.
"The ANPR notes several varieties of scams that may fall outside the scope of the
existing rule. These include certain kinds of business coaching and work-from-home
programs, investment programs, and e-commerce opportunities. A classic example
is someone selling an online course that purports to teach you how to make big
profits trading stocks or cryptocurrency in your home—risk-free. These scams may
not meet the precise definition of a business opportunity under the letter of the rule.
But they can violate its spirit by luring consumers with false promises of easy money."
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