Last week the Federal Trade Commission (FTC) released a new final business opportunity rule which takes effect on March 1, 2012 … but who cares and what does it have to do with franchises?
Well, the bright line between a “franchise” and a “business opportunity” has never been dazzling and this is always a concern to those who wish to comply with the law (sellers) and those who may benefit from it (buyers). The FTC has been working on this project to amend or restructure the original 1978 Trade Regulation Rule – “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” – for over 15 years! (Who says government is adopting too many regulations too quickly?)
The FTC explains that it has broadened the scope of the Rule but simplified the requirements – apparently the “less is more approach.” While space does not allow a full rendition of the definition (the full text of the Rule can be found Here), the FTC says that it revised the Rule to:
- expand its scope to cover many business opportunities that were not covered previously (examples include work-at-home opportunities like envelope stuffing or craft assembly where the seller offers to buy back merchandise)
- streamline pre-sale disclosures
- prohibit various specific misrepresentations and other misleading practices often engaged in by fraudulent business opportunity sellers; and
- require disclosures be made in alternative language (Spanish) if initial offer is provided in language other than English
While the 15-year effort may not have brightened the line, the FTC, for better or worse, has certainly simplified the disclosure requirements for a “business opportunity” – literally reducing the disclosures (previously about 20 items) to a one-page form labeled: DISCLOSURE OF IMPORTANT INFORMATION ABOUT BUSINESS OPPORTUNITY.
The form now requires only five categories of information:
- the seller’s identifying information
- whether the seller makes a claim about the purchaser’s likely earnings (and, if the seller checks the “yes” box, the seller must provide information supporting any such claims);
- whether the seller, its affiliates or key personnel have been involved in certain legal actions (and, if yes, a separate list of those actions)
- whether the seller has a cancellation or refund policy (and, if yes, a separate document stating the material terms of such policies); and
- a list of persons who bought the business opportunity within the previous three years (a maximum of 10 suffices).
Business sellers who are on the franchise-business opportunity borderline may want to study the details as qualifying under the new Rule will unequivocally reduce the disclosure burden; while business opportunity buyers may want to conduct further due diligence in light of the stripped-down disclosures.
A final word of guidance: As with the original Biz Opp Rule and the Amended FTC Franchise Rule (adopted 2007), the FTC rules DO NOT override state law unless they conflict with the FTC rules – this means, as noted in the new Rule: state law is not in conflict with the Rule if it affords prospective purchasers equal or greater protection, such as registration of disclosure documents or more extensive disclosures. So be sure to check state law, especially if you are a business opportunity seller.
For more information go to the FTC page.
And, here is an FTC video that explains the new Rule.
Jim Meaney is a lawyer with Zaino & Humphrey, LPA in Columbus, Ohio who has represented franchisors and franchisees for nearly 30 years. Jim is a co-author of “Starting a Franchise System: Practical Considerations, Planning and Development” and author of How to Buy a Franchise. Visit www.fddlawyer.com or www.ohiofranchiselawyer.com for more information or contact Jim directly at 614.975.9876 or email@example.com.