By Nicole J. Harrell

The Federal Trade Commission’s final Business Opportunity Rule became effective March 1. While the seller’s disclosure obligations to a prospective buyer have been reduced to a one-page disclosure form, the scope of the rule has been broadened and applies to more sellers.

The rule makes clear what the seller must produce in connection with an earnings claim. It also re-emphasizes the FTC’s long-standing position that it is illegal to engage in unfair or deceptive practices in the promotion, marketing or sale of any business opportunity by stating the same and including a list of “dos” and “don’ts” for sellers.

The seller is not required to file its Business Opportunity Disclosure Document with the FTC, but the seller does have the burden of proving its compliance. The new rule does not pre-empt state business laws, and where applicable, the seller must comply with both federal and state law.

Who Is covered – The rule applies to arrangements with these three elements: the seller solicits a buyer to enter into a new business in which the buyer is not now engaged, the buyer must make a required payment to the seller as a condition to obtaining or commencing the operation of the business (excluding payments for the purchase of a reasonable amount of inventory at bona fide wholesale prices for resale or lease), and the seller expressly or implicitly makes claims it will provide any one of three types of assistance: funding locations for the buyer’s use or operation of equipment, vending machines or displays that the purchaser controls; funding outlets, accounts or customers; or buying back the goods or services the buyer makes.

The definition continues to apply to businesses previously covered by the prior rule, including vending machines, rack displays, payphones and Internet kiosks. The broadened scope now covers work-at-home business, such as craft assembly and envelope stuffing. Franchisers under the FTC’s Franchise Rule are exempt.

What disclosures must be made – The new rule streamlines the disclosures to a buyer. The seller must give the buyer a standard one-page disclosure document (with supplemental disclosures attached if necessary) at least seven days before the buyer signs a contract or pays any money.

The new disclosure document requires the seller to disclose information about the seller’s identity, whether the seller makes an earnings claim, legal actions against the seller, the seller’s cancellation or refund policy, and a list of buyers.

The seller’s identifying information must include the seller’s name, business address and phone number, the name of the salesperson offering the business opportunity, and the date the disclosure document is given to the prospective buyer.

The seller must disclose whether or not it makes an earnings claim. The seller is not obligated to make an earnings claim, and in such case would check the “no” box on the document. If the seller makes an earnings claim, it would check the “yes” box and it must provide the buyer with a separate earnings claim statement titled “Earnings claim statement required by law.”

The required earnings claim statement must include the name of the person making the claim, the date of the claim, the actual earnings claim itself, the beginning and end dates during which the represented earnings were achieved, the number and percentage of buyers who purchased the business opportunity prior to the end date who achieved the represented level of earnings, any characteristics of the buyers who achieved the represented level of earnings that differ materially from the characteristics of the prospective buyer and a statement that the seller will provide the buyer with written substantiation of the earnings claim upon request.

The seller must disclose whether it, its affiliates or prior business, or any of its key personnel have been the subject of a civil or criminal action for misrepresentation, fraud, securities law violations or unfair or deceptive trade practices within the previous 10 years. If there is or has been any legal action, the seller must provide an attachment that includes the caption of each such action, and may provide an accurate description of the action in 100 words or less.

If the seller offers a refund or the right to cancel the purchase, the seller much check the “yes” box and state all material terms and conditions of the refund or cancellation policy in an attachment to the disclosure document. A refund or cancellation policy, if offered by the seller, must state the period of time in which the buyer is allowed to cancel the purchase or request a refund, the specific steps to cancel the purchase or request a refund, any fees or penalties the buyer must pay for cancellation, and where unused inventory must be returned and by what method.

Finally, the seller must list the name, state and telephone number of all buyers within the prior three years. If the number exceeds 10, the seller may limit the disclosure to 10 buyers within the prior three years who are located closest to the prospective buyer’s location.

The seller must provide the buyer with a duplicate copy of the disclosure document signed and dated by the buyer. The seller can include instructions on how and where to return the document.

In the event a state also has a business opportunity statute, then the seller cannot simply add the required state disclosures to the form of disclosure document required by the FTC. Instead, the seller must have a separate state-specific disclosure document, compliant with state laws, and must provide the prospective buyer with the FTC form and the state compliant disclosure document.

The seller may provide the disclosure document to the buyer electronically. Electronic or digital signature by the buyer is permitted.

Virginia’s law – Virginia’s Business Opportunity Sales Act does not have a specific disclosure document, but Virginia does require a seller to provide the buyer with a written disclosure document. The contents of the disclosure document Virginia requires differ from those required by the FTC. Virginia requires the seller provide the buyer with a copy of the seller’s financial statements that are not more than 13 months old. A seller in Virginia is required to obtain a surety bond or establish an escrow account. A seller in Virginia will be required to give a buyer two separate disclosure documents – one compliant with federal law and the other compliant with Virginia law.

Updating the disclosure document – The seller must update its disclosure document quarterly each year, unless the seller has fewer than 10 buyers in which case the seller must update the list of buyers monthly until it has at least 10 buyers. In the event of any material change in the earnings claim contained in the disclosure document given to buyers, the seller must disclose the material change to the buyer before any purchase.

Prohibited actions – In connection with the offer, sale or promotion of a business opportunity, the seller is prohibited from:

1. Disclaiming, or requiring a prospective buyer to waive reliance on, any statement made in any document, including the disclosure document, that is required or permitted by the rule;
2. Making any representation, written, visual or oral, that is inconsistent with or contradicts information required to be disclosed in the disclosure document, any earnings claim statement or document, or any other attachment;
3. Including any extraneous information or materials in the disclosure document;
4. Making a false or misleading earnings claim;
5. Stating that any law or regulation prohibits the seller from making an earnings claim or disclosing the list of buyers;
6. Failing to provide written substantiation of the earnings claim to a prospective buyer and to the FTC upon request;
7. Misrepresenting how or when commissions, bonuses, incentives, premiums or other payments from the seller to the buyer will be calculated or distributed;
8. Misrepresenting the cost, performance, efficacy, nature or material characteristics of the business opportunity;
9. Misrepresenting any material aspect of any assistance offered to the prospective buyer;
10. Misrepresenting that the seller will find locations, outlets, accounts or customers for the buyer;
11. Misrepresenting the seller’s refund or cancellation policies;
12. Failing to provide a refund or cancellation when a right to one was given by the seller;
13. Misrepresenting a business opportunity as an employment opportunity;
14. Misrepresenting that the business opportunity has an exclusive territory or that territorial protection is offered;
15. Assigning a purported exclusive territory to another buyer;
16. Misrepresenting that any third party sponsors or endorses the business opportunity;
17. Misrepresenting any references from third parties about the business opportunity; and
18. Failing to disclose any consideration paid to a reference or prior buyer or the personal relationship with a reference or prior buyer.

Record retention – The seller must retain documents for at least three years: each materially different disclosure document and all attachments; each buyer’s disclosure receipt; each executed written contract with a buyer; and all substantiation upon which the seller relies for each earnings claim from the time such earnings claim is made. The seller must be able to produce the documents upon request of the FTC.

Penalties for failure to comply – A seller’s failure to comply entitles the FTC to bring an action, but does not entitle the buyer to bring an action. Virginia’s law, however, provides for a private right of action by a buyer. The law permits a buyer who has suffered damages as a result of a seller’s noncompliance with Virginia law to bring a civil action to recover damages, including reasonable attorneys’ fees.

Nicole Harrell is a partner with a commercial practice in the Norfolk office of Kaufman & Canoles. She can be reached by emailing njharrell@kaufcan.com.

This article orginially appeared in the April 16, 2012 issue of Inside Business and is reprinted with permission. Copyright 2012. Kaufman & Canoles. All Rights Reserved. The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.