Tuesday, March 6, 2012

FTC's New Business Opportunity Rule Has Taken Effect

On March 1st 2012, the FTC's new "Business Opportunity" rule took effect. The rule amends federal regulation governing the sale of business opportunities in the United states.

Under federal law, if your business offering qualifies as "business opportunity," certain mandatory disclosure obligations must be made to a prospective purchaser. As compared with former regulation, the new business opportunity rule significantly reduces a sellers disclosure obligations to a prospective purchaser.  The previous FTC rule provided that sellers offerings and solicitations needed to have disclosure statements containing twenty separate items of required information. Luckily, the new rule has reduced a seller's disclosure obligations to a prospective purchaser to a 1-page form requiring 5 items of information that the seller is required to disclose.

However, the new rule also applies to companies not currently covered by the old rule. These new companies covered by the rule include work-at-home programs, such as jewelry assembly and envelope stuffing.  

Under the new FTC rule, the definition of a "business opportunity," which would subject a seller to disclosure obligations contains three requirements:

(1)  The seller must solicit a prospective purchaser to enter into a new business (one in which he prospective purchaser is not currently engaged or a new line or type of business);

(2) The purchaser must make a "required payment." This means that some sort of payment is made by the purchaser to a seller or an affiliate as a condition to obtaining or commencing the operation of the business opportunity. There is an except for payment for the purchase of a reasonable amount of inventory at bona fide wholesale prices for resale or lease; and 

(3) The seller must represent, orally or in writing, that the seller, or some third party will provide any of the three types of assistance to the purchaser: (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 or jewelry assembly from the purchaser's home.
         
The new business opportunity rule exempts franchisers covered by the FTC Franchise Rule and multi-level marketing arrangements.  

If you are a business that offers franchises or business opportunities, it is important that you consult with an attorney in your state or local area to find out the exact disclosure requirements, prohibitions, record retention rules, and other state and federal laws which govern the sale of business opportunities in your location.  Laws vary in each state and there can be serious ramifications if they are not followed.