Proposed Rule: Trade Regulation Rules: Business Opportunity Rule Fraud and Unfair or Deceptive Practices Prevention

Wednesday,
April 12, 2006
Part IV
Federal Trade
Commission
16 CFR Part 437
Business Opportunity Rule; Notice of
Proposed Rulemaking
cchase on PROD1PC60 with PROPOSALS2
VerDate Aug<31>2005 20:56 Apr 11, 2006 Jkt 208001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\12APP2.SGM 12APP2
19054 Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Proposed Rules
FEDERAL TRADE COMMISSION Comments filed in electronic form submit data, views, and arguments on
should be submitted by clicking on the the proposed Business Opportunity
16 CFR Part 437 following weblink: https:// Rule and, specifically, on the questions
secure.commentworks.com/ftc- set forth in Section K of this notice. The
Business Opportunity Rule bizopNPR/ and following the comment period will remain open until
AGENCY: Federal Trade Commission. instructions on the web-based form. To June 16, 2006. To the extent practicable,
ACTION: Notice of proposed rulemaking. ensure that the Commission considers all comments will be available on the
an electronic comment, you must file it public record and placed on the
SUMMARY: The Federal Trade on the web-based form at the https:// Commission’s Web site: http://
Commission (the ‘‘Commission’’ or secure.commentworks.com/ftc- www.ftc.gov/os/publiccomments.htm.
‘‘FTC’’) is commencing a rulemaking to bizopNPR/ weblink. If this notice After the close of the comment period,
promulgate a trade regulation rule appears at http://www.regulations.gov, the record will remain open until July
entitled ‘‘The Business Opportunity you may also file an electronic comment
7, 2006, for rebuttal comments. If
Rule’’ (or ‘‘the Rule’’), based upon the through that Web site. The Commission
necessary, the Commission also will
comments received in response to an will consider all comments that
Advance Notice of Proposed regulations.gov forwards to it. You may hold hearings with cross-examination
Rulemaking (‘‘ANPR’’) and other also visit the FTC Web site at http:// and post-hearing rebuttal submissions,
information discussed in this notice. www.ftc.gov/opa/2006/04/ as specified in section 18(c) of the FTC
The proposed Business Opportunity newbizopprule.htm to read the Notice of Act, 15 U.S.C. 57a(c). Parties who
Rule would prohibit business Proposed Rulemaking and the news request a hearing must file a comment
opportunity sellers from failing to release describing this proposed Rule. in response to this notice and a
furnish prospective purchasers with The FTC Act and other laws the statement explaining why they believe a
material information needed to combat Commission administers permit the hearing is warranted, how they would
fraud and would prohibit other acts or collection of public comments to participate in a hearing, and a summary
practices that are unfair or deceptive consider and use in this proceeding as of their expected testimony, on or before
within the meaning of section 5 of the appropriate. All timely and responsive June 16, 2006. Parties testifying at a
Federal Trade Commission Act (‘‘FTC public comments, whether filed in hearing may be subject to cross-
Act’’). paper or electronic form, will be examination. For cross-examination or
considered by the Commission, and will rebuttal to be permitted, interested
DATES: Written comments must be
be available to the public on the FTC parties must also file a comment and
received on or before June 16, 2006.
Web site, to the extent practicable, at request to cross-examine or rebut a
Rebuttal comments must be received on http://www.ftc.gov/os/
or before July 7, 2006. witness, designating specific facts in
publiccomments.htm. As a matter of dispute and a summary of their
ADDRESSES: Interested parties are discretion, the FTC makes every effort to
invited to submit written comments. expected testimony, on or before July 7,
remove home contact information for 2006. In lieu of a hearing, the
Comments should refer to ‘‘Business individuals from the public comments it
Opportunity Rule, R511993’’ to facilitate Commission will also consider requests
receives before placing those comments to hold one or more informal public
the organization of comments. A on the FTC Web site. More information,
comment filed in paper form should workshop conferences to discuss the
including routine uses permitted by the issues raised in this notice and
include this reference both in the text Privacy Act, may be found in the FTC’s
and on the envelope, and should be comments.
privacy policy, at http://www.ftc.gov/
mailed or delivered, with two complete ftc/privacy.htm. Section A. Background
copies, to the following address: Federal Comments on any proposed filing,
Trade Commission/Office of the recordkeeping, or disclosure The Commission is publishing this
Secretary, Room H–135 (Annex W), 600 requirements that are subject to Notice of Proposed Rulemaking (‘‘NPR’’)
Pennsylvania Avenue, NW., paperwork burden review under the pursuant to section 18 of the FTC Act,
Washington, DC 20580. The FTC is Paperwork Reduction Act should 15 U.S.C. 57a et seq., and part 1, subpart
requesting that any comment filed in additionally be submitted to: Office of B, of the Commission’s Rules of
paper form be sent by courier or Information and Regulatory Affairs, Practice. 16 CFR 1.7, and 5 U.S.C. 551
overnight service, if possible, because Office of Management and Budget, et seq. This authority permits the
U.S. postal mail in the Washington area Attention: Desk Officer for the Federal Commission to promulgate, modify, and
and at the Commission is subject to Trade Commission. Comments should repeal trade regulation rules that define
delay due to heightened security be submitted via facsimile to (202) 395– with specificity acts or practices that are
precautions. Moreover, because paper 6974 because U.S. Postal Mail is subject unfair or deceptive in or affecting
mail in the Washington area and at the to lengthy delays due to heightened commerce within the meaning of
Agency is subject to delay, please security precautions. section (5)(a)(1) of the FTC Act. 15
consider submitting your comments in FOR FURTHER INFORMATION CONTACT: U.S.C. 45(a)(1).
electronic form, as prescribed below. Steven Toporoff (202) 326–3135, or
Comments containing confidential Craig Tregillus (202) 326–2970, Division 1. FTC Regulation of Franchising and
material, however, must be filed in of Marketing Practices, Room 238, Business Opportunity Ventures
paper form, must be clearly labeled Bureau of Consumer Protection, Federal
‘‘Confidential,’’ and must comply with In the 1970s, the Commission
Trade Commission, 600 Pennsylvania promulgated a trade regulation rule
Commission Rule 4.9(c).1
Avenue, NW., Washington, DC 20580. entitled ‘‘Disclosure Requirements and

1 The comment must be accompanied by an
SUPPLEMENTARY INFORMATION: The Prohibitions Concerning Franchising
explicit request for confidential treatment, Commission invites interested parties to and Business Opportunity Ventures’
including the factual and legal basis for the request, (the ‘‘Franchise Rule’’) to address
and must identify the specific portions of the Commission’s General Counsel, consistent with
comment to be withheld from the public record. applicable law and the public interest. See
deceptive and unfair practices in the
The request will be granted or denied by the Commission Rule 4.9(c), 16 CFR 4.9(c). sale of franchises and business
Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / Proposed Rules 19055
opportunity ventures.2 Based upon the prospective purchaser may incur high locations or accounts.14 Thus, the
original rulemaking record, the financial losses if the seller withholds Commission incorporated this
Commission found that franchise and material information, the benefit for characteristic into the Rule’s
business opportunity fraud was purchasers of the Rule’s pre-sale definitional elements to ensure coverage
widespread, causing serious economic disclosure requirements outweighs the of demonstrably injurious schemes.
harm to consumers. To prevent cost to sellers of making those Other forms of assistance that business
fraudulent practices in the sale of disclosures. By contrast, when the opportunity sellers frequently offer—
franchises and business opportunities, required investment to purchase a such as training 15 and the buy-back and
the Commission adopted a pre-sale business opportunity is comparatively resale of goods assembled by the
disclosure rule. small, prospective purchasers face a purchaser (an element of many craft
The Franchise Rule does not purport relatively small financial risk. In such assembly opportunities) 16—do not
to regulate the substantive terms of a circumstances, compliance costs may bring a business opportunity within the
franchise or business opportunity outweigh the benefits of pre-sale scope of the Franchise Rule’s coverage.
contract. Rather, it is designed to disclosure. Therefore, the Franchise In addition to these limits on the
prevent fraud by prohibiting sellers Rule does not reach opportunities that scope of the Franchise Rule’s coverage—
from failing to disclose material charge lower fees.11 driven by balancing prospective
information to prospective buyers. The Second, the ‘‘inventory exemption’’ purchasers’ need for pre-sale disclosure
Franchise Rule is posited on the notion excludes certain types of payments from against the burden imposed on business
that a fully informed consumer can the Rule’s $500 minimum cost opportunity sellers—another aspect of
determine whether a particular offering the Rule’s language further limits the
threshold. The ‘‘inventory exemption’’
is in his or her best interest. Rule’s scope of coverage. Specifically,
is the franchise industry’s shorthand
The Franchise Rule requires extensive the Rule provides that a business
disclosures, including information term for the Commission’s
determination that, as a matter of policy, opportunity is covered only if the
about the seller; 3 the business purchaser of the opportunity sells goods
background of its principals and their voluntary purchases of reasonable
amounts of inventory at bona fide or services directly to end-users other
litigation and bankruptcy histories; 4 the than the business opportunity seller.17
terms and conditions of the offer; 5 wholesale prices for resale do not count
toward the required threshold The effect of this limitation is to exclude
statistical analyses of existing most work-at-home opportunities—such
franchised and company-owned payment.12 An important consequence
of this policy determination is to as envelope stuffing and craft assembly
outlets; 6 prior purchasers, including the ventures—from Franchise Rule
names and addresses of at least 10 eliminate from Franchise Rule coverage
many pyramid marketing plans because coverage. In those opportunities, the
purchasers nearest the prospective purchaser typically works directly for
buyer; 7 and audited financial the participants in such plans typically
do not make a required payment of or the seller or produces various goods for
statements.8 Additional disclosure and
exceeding $500, but instead make the seller, who then purportedly
substantiation provisions apply if the
voluntary purchases of inventory in distributes them to end-users.18
seller chooses to make any financial
reasonable amounts and at bona fide The proposed Business Opportunity
performance representations.9
The Commission recognized that wholesale prices for resale.13 Rule calls for streamlined disclosures
requiring these extensive disclosures Third, the Commission focused the that, compared to the Franchise Rule,
would likely impose significant Franchise Rule on the types of business substantially reduce the compliance
compliance costs on covered businesses. opportunities that the record showed burden. Therefore, the kinds of limits
It therefore sought to strike the proper were likely to result in significant written into the Franchise Rule are not
balance between prospective purchaser injury. The record showed necessary to achieve an appropriate
purchasers’ need for pre-sale disclosure that vending machines, rack displays, balance between prospective
and the burden imposed on those and similar opportunities frequently purchasers’ need for pre-sale disclosure
selling business arrangements. As a were sold through deception. A feature and the burden imposed on business
result of this balancing, the Commission common to these types of schemes is the opportunity sellers. Accordingly, the
limited the scope of the Franchise promise of assistance in securing proposed Rule has no minimum cost
Rule’s coverage in three significant threshold, no inventory exemption, and
ways. no limit on scope based on the type of
(‘‘Interpretive Guides’’) accompanying the
First, the Franchise Rule covers only Franchise Rule: ‘‘The Commission’s policy assistance promised as part of the offer.
those opportunities that require a buyer determination [is that] a significant financial Nor is the coverage of the proposed Rule
to make a payment of at least $500 investment is a necessary element of a franchise.’’ limited to transactions where the
Interpretive Guides, 44 FR 49966, 49968 (August purchaser of the opportunity sells goods
within the first six months of 24, 1978).
operation.10 In transactions where a 11 Nevertheless, deceptive and unfair conduct by or services directly to end-users other
a business opportunity seller falling below the than the business opportunity seller. In
2 16 CFR part 436. See also Statement of Basis and Franchise Rule’s $500 threshold may constitute a short, the scope of coverage of the
Purpose (‘‘SBP’’), 43 FR 59614 (Dec. 21, 1978). violation of section 5 of the FTC Act. E.g., FTC v. proposed Rule is much broader than
3 16 CFR at 436.1(a)(1) and (3). Med. Billers Network, Inc., No. 05 CIV 2014 (RJH)
4 16 CFR at 436.1(a)(2)–(5). (S.D.N.Y. 2005) ($200–295 fee); FTC v. Kamaco
14 16 CFR at 436.2(a)(1)(ii)(B)(1)–(3).
5 16 CFR at 436.1(a)(7)–(15) and (17)–(18).
Int’l, No. CV 02–04566 LGB (RNBx) (C.D. Cal. 2002)
15 E.g., FTC v. Academic Guidance Serv., Inc., No.
($42 fee); FTC v. Healthcare Claims Network, No.
6 16 CFR at 436.1(a)(16).
2:02–CV–4569 MMM (AMWx) (C.D. Cal. 2002) 92–3001 (AET) (D. N.J. 1992).
7 16 CFR at 436.1(a)(16).
($485 fee); FTC v. Stuffingforcash.com, Corp., No. 16 E.g., FTC v. Misty Stafford, No. 3: CV 05–0215
8 16 CFR at 436.1(a)(20). 92 C 5022 (N.D. Ill. 2002) ($45 fee); FTC v. Medicor (M.D. Pa. 2005); FTC v. USS Elder Enter. Inc., No.
9 16 CFR at 436.1(b)–(c) and (e). LLC, No. CV01–1896 (CBM) (C.D. Cal. 2001) ($375 SACV–04–1039 AHS (ANx) (C.D. Cal. 2004); FTC v.
10 16 CFR at 436.2(a)(2) and (a)(3)(iii). In the SBP, fee); FTC v. SkyBiz.com, No. 01–CV–0396–EA (X) Holiday Magic, No. C 93–4038 VRW (N.D. Cal.
the Commission noted that ‘‘[w]here a franchisee (N.D. Okla. 2001) ($125 fee). 1994).
12 Interpretive Guides, 44 FR at 49967. 17 16 CFR at 436.2(a)(1)(ii)(A)(1)–(3).
makes no significant investment in the franchise
business, he assumes only a limited risk, and the 13 E.g., FTC v. Trek Alliance, Inc., No. 02–9270 18 E.g., FTC v. Misty Stafford, No. 3: CV 05–0215
protection of the rule is inappropriate.’’ 43 FR at SJL (AJWx) (C.D. Cal. 2002); FTC v. Equinox, Int’l, (M.D. Pa. 2005); FTC v. Sun Ray Trading, Inc., No.
59704. See also Final Interpretive Guides No. CV–S–99–0969–JBR–RLJ (D. Nev. 1999). 05–20402 CIV-Seitz/Bandstra (S.D. Fla. 2005).
that of the Franchise Rule, while the address the sale of business same time, the Commission announced
compliance burden is much lighter. opportunities through a separate, its intention to conduct a separate
narrowly tailored new trade regulation rulemaking to address business
2. Franchise Rule Review
rule. To that end, it published an opportunity sales.28 Agreeing with the
In 1995, the Commission conducted a Advance Notice of Proposed overwhelming view of the commenters
regulatory review of the Franchise Rule Rulemaking, as described in the next who discussed this issue during the
to ensure that it continues to serve a section. Rule Review and in response to the
useful purpose.19 One issue that the ANPR, the Commission found that
Commission explored in that 3. Advance Notice of Proposed
franchises and business opportunities
proceeding was the application of the Rulemaking
are distinct business arrangements that
Franchise Rule to the sale of business In 1997, the Commission published require separate disclosure approaches.
opportunities. Specifically, the an Advance Notice of Proposed Without proposing any specific
Commission noted that although the Rulemaking (‘‘ANPR’’) in the Federal Business Opportunity Rule provisions at
Franchise Rule applied to certain Register,23 seeking further comment on that time, the Commission noted that:
business opportunities, it lacked a clear several proposed Franchise Rule
[M]any of the [Franchise] Rule’s pre-sale
definition of the term ‘‘business modifications, including the separation disclosures, in particular those pertaining to
opportunity.’’ Accordingly, the of disclosure requirements for sales of the parties’ detailed relationship, do not
Commission solicited comment on an business opportunities from those for apply to the sale of most business
appropriate definition.20 In addition, sales of franchises. The Commission opportunities, which typically involve fairly
the Commission asked whether such a also sought comment on the proper simple contracts or purchase agreements. The
definition should include business scope of the term ‘‘business Rule’s detailed disclosure obligations may
opportunities not covered by the opportunity,’’ 24 the types of business also create barriers to entry for legitimate
business opportunity sellers.
Franchise Rule, such as ‘‘multilevel opportunities that are known to engage
marketing, seller assisted market plans, in deceptive or fraudulent conduct,25 Franchise Rule NPR, 64 FR at 57296.
work-at-home plans, and certain and the types of disclosures that are Section B. Need for a Separate Business
distributorships and licenses.’’ 21 material to business opportunity Opportunity Rule
The Commission also inquired purchasers.26 In addition to soliciting
whether the Franchise Rule’s extensive written comments, the Commission staff Based upon its enforcement
disclosure requirements are well-suited held three public workshops experience and the record developed to
to business opportunity sales and specifically addressing business date, the Commission has determined to
whether the Franchise Rule imposes opportunity sales issues. These were promulgate a separate trade regulation
unnecessary compliance costs on both held in Chicago, Dallas, and rule to address widespread fraud in the
business opportunity sellers and buyers. Washington, DC. The workshop sale of business opportunities. This
For example, certain Franchise Rule participants included: Business approach is consistent with the view of
disclosures—such as site selection and opportunity promoters; the Direct the vast majority of commenters and the
approval and public figure Sellers Association (‘‘DSA’’); several of regulatory approaches adopted in most
involvement—arguably are more likely DSA’s multilevel marketer members states.
to be important to franchise investors (e.g., Amway, Longaberger Company, Rule Review and ANPR commenters
than business opportunity purchasers. Pampered Chef); several attorneys who and participants overwhelmingly urged
To ensure that the required disclosures represent business opportunity the Commission to promulgate a
protect prospective business promoters; state regulators; and several separate business opportunity rule.29 As
opportunity purchasers, while franchise and distribution law attorneys. an initial matter, several commenters
minimizing overall compliance costs, observed that business opportunities
4. Franchise Rule Notice of Proposed and franchises are distinct business
the Commission solicited comment on Rulemaking
whether any of the Rule’s disclosures arrangements that pose very different
should be eliminated because they are After assessing the comments regulatory challenges. For example,
unnecessary in the business opportunity received in response to the ANPR, the
context and if any additional material Commission decided to amend the the abbreviations used to identify each is attached
Franchise Rule and, to that end, as Attachment C.
disclosures should be required.22 28 Franchise Rule NPR, 64 FR at 57296.
At the conclusion of the Rule Review, published a Franchise Rule Notice of 29 E.g., Muncie, ANPR 15, at 2; Baer, ANPR 25;
the Commission determined to retain Proposed Rulemaking (‘‘Franchise Rule H&H, ANPR 28, at 6; Kaufmann, ANPR 33, at 6;
the Franchise Rule with modifications NPR’’), soliciting comment on proposed DSA, ANPR 34, at 1; IL AG, ANPR 77, at 3; IFA,
designed to harmonize it better with revisions to the Franchise Rule.27 At the ANPR 82, at 2; Caffey, ANPR 94, at 1–2; Jeffers,
ANPR 116, at 2; NASAA, ANPR 120, at 4; Selden,
state franchise regulations. At the same ANPR 133, at 2; Cendant, ANPR 140; Wieczorek, RR
23 ANPR, 62 FR 9115 (Feb. 28, 1997). References
time, the Commission determined to to the ANPR comments are cited as: The name of
23, at 2–3; CA BLS, RR 45, at 5–6; Forte Hotels, RR
seek additional comment on whether to 52, at 2. See also Harrington, Sept95 Tr at 285
the commenter, ANPR, comment number (e.g.,
(noting complete consensus among public
NASAA, ANPR 120). References to the ANPR
workshop participants for a separate business
19 Rule Review, 60 FR 17656 (April 7, 1995). workshop conferences are cited as: Name of
opportunity rule). But see NCL, ANPR 35 (‘‘While
References to the Rule Review comments are cited commenter, ANPR, date Tr (e.g., Bundy, ANPR,
there may be clear distinctions with those involved
as: The name of the commenter, RR comment 6Nov97 Tr). A list of the ANPR commenters and the
in the trade for franchises and business
number (e.g., NASAA, RR 43). References to the abbreviations used to identify each is attached as
opportunities, the consumers who contact the NFIC
Rule Review workshop conferences are cited as: Attachment B.
are unaware of the differences. Moreover, a review
Name of commenter, Sept95 Tr or March96 Tr, 24 ANPR, 62 FR at 9116–117 and 9121 (Question
of the NFIC complaints received in 1996 reveals
respectively (e.g., D’Imperio, Sept95 Tr, and 12).
that more involve business opportunities than

Ainsely, March96 Tr). A list of the Rule Review 25 ANPR, 62 FR at 9121 (Questions 8–10).
franchises. This indicates that the same pre-sale
commenters and the abbreviations used to identify 26 ANPR, 62 FR at 9121 (Questions 15–16).
disclosures are needed for business opportunities as
each is attached as Attachment A. 27 Franchise Rule NPR, 64 FR 57294 (October 22, for franchises.’’); Cory, ANPR 12; McBirney, RR 7,
20 Rule Review, 60 FR at 17656–658 (Question
1999). References to the comments responding to at 2; Perry RR 44, at 3 (arguing that the Commission
13). the Franchise Rule NPR are cited as: Name of should create a level playing field between all
21 Rule Review, 60 FR at 17658 (Question 13b).
commenter, FR–NPR, commenter number (e.g., IFA, income generating opportunities, subjecting each to
22 Rule Review, 60 FR at 17658 (Question 14). FR–NPR 22). A list of the FR–NPR commenters and the same disclosure approach).
franchises typically are expensive and costs are too high.35 For example, Section C. Overview of the Proposed
involve complex contractual licensing attorney Kat Tidd explained: Rule
relationships, while business From my experience as a franchise attorney In drafting a Business Opportunity
opportunity sales are often less costly, of more than 15 years, many entrepreneurs Rule, the Commission relies heavily on
involving simple purchase agreements will choose to risk not complying with the its law enforcement experience in
that pose less of a financial risk for Rule because the cost of compliance is too
high relative to the size of the company, the addressing a wide array of business
purchasers.30 Also, in contrast to opportunity fraud under both the
size of the investment to be made and/or the
franchises, many business opportunity number of, or profits to be derived from, the Franchise Rule and section 5 of the FTC
programs have no continuing sale of opportunities. Act. The Commission also relies on the
relationship between the buyer and staff’s analysis of consumer complaints
Tidd, ANPR 112, at 1.36
seller, but are a one time purchase of submitted to the FTC.39 By far, the most
The Commission is concerned that the
packaged information.31 current application of the Franchise frequent allegations in Commission
Further, unlike most franchises, many Rule to the sale of business business opportunity cases pertain to
business opportunities are permeated opportunities does not work well. false or unsubstantiated earnings
with fraud.32 Perhaps one business Accordingly, the Commission is claims.40 This is followed by false
opportunity and franchise consultant proposing a separate business testimonials or fictitious references and
said it best when she described many opportunity rule, narrowly tailored to misrepresentations concerning the
business opportunity sellers as: minimize compliance costs.37 For the profitability of locations, availability of
present, those business opportunity support and assistance, nature of the
Individuals who go from one business products or services sold, prior success
opportunity to the next, violating laws,
sellers covered by the original Franchise
Rule will remain covered by that rule.38 of the seller or locator, full extent of
committing frauds, taking funds without investment costs, and refund policies.41
delivering what was promised only to shut 35 CA BLS suggested that business opportunity These alleged material
down the operation within a year and move sellers will go so far as to change their program to misrepresentations or omissions also
on to another one with new officers, new avoid falling within the Franchise Rule’s definition were most frequently mentioned in
company names, and new products. of a business opportunity, resulting in reduced
protection for prospective purchasers: complaints to the Commission
Chistopher, ANPR 115, at 1.33 [I]f the only reason that a seller’s program is submitted by business opportunity
falling within the definition of the Rule is that it purchasers.42
Other commenters observed that provides personnel who assist the purchaser in The proposed Rule would address
business opportunity sellers take securing sites, it may withdraw this service. In
these practices by requiring five
advantage of the Franchise Rule’s some instances, companies have eliminated
independent owner programs altogether rather than affirmative disclosures.43 The first
narrow focus to avoid disclosure attempting to comply with the Rule and the
obligations.34 Other commenters ‘‘patchwork quilt’’ of multiple and diverse state Franchise Rule would be changed to ‘‘business
asserted that business opportunity regulations. opportunity seller’’ and ‘‘business opportunity
sellers do not comply with the CA BLS, RR 45, at 6–7. See also Muncie, ANPR purchaser,’’ respectively. Second, the term
15, at 2 (suggesting that Franchise Rule coverage of ‘‘franchise’’ would be deleted from the original
Franchise Rule because compliance business opportunities ‘‘only serve[s] to drive Franchise Rule’s definitions and would be replaced
legitimate companies out of the marketplace, with ‘‘business opportunity.’’ Further, the first part
30 E.g., IFA, FR–NPR 22, at 4; NASAA, ANPR 120, thereby harming consumers.’’). of the original definition—the ‘‘franchise’’
at 2–3; DSA, RR 21, at 3–4; Wieczorek, RR 23, at 36 See also, e.g., Caffey, ANPR 94, at 2; elements—would be deleted; the revised definition
2–3; D’Imperio, Sept95 Tr at 130; Kezios, Sept95 Tr Christopher, ANPR 115, at 1; CA BLS, RR 45, at 5– would focus on the second part of the original
at 365, 631. 6; Huke, Sept95 Tr at 239–40. definition—the business opportunity elements.
31 Caffey, ANPR 94, at 2. 37 In this regard, one fairly typical comment urged Except for these changes, all disclosures and
32 E.g., Baer, ANPR 25, at 5; Wieczorek, 21Aug97 that the Commission: prohibitions in part 437 would be identical to those
Tr at 35; DSA, id.; Finnigan, id. at 90; Kestenbaum, Tailor the scope of disclosure content, creating a of the original Franchise Rule.
39 See Bureau of Consumer Protection Staff,
RR 14, at 3–4; Wieczorek, RR 23, at 2–3; Lewis, RR disclosure statement designed for compliance by a
40, Attachment at 3; CA BLS, RR 45, at 5–6; business opportunity seller. A number of sections Franchise and Business Opportunity Program
D’Imperio, Sept95 Tr at 130; Kezios, id. at 365, 631. of the FTC Rule disclosure have little relevance to Review 1993–2000: A Review of Complaint Data,
33 At the Washington, DC public workshop a typical business opportunity sale. These include Law Enforcement, and Consumer Education (June
conference, a business opportunity seller described the business experience of executives of the seller, 2001) (‘‘Staff Program Review’’) (available at
an informal survey of business opportunity personal participation of the buyer in the operation http://www.ftc.gov/reports/franchise93-01.pdf). See
advertisements in the Boston Globe. He stated that of the business, termination/renewal information, also Tifford, ANPR 78, at 4–5 (‘‘[T]he FTC should
in February 1997, he observed advertisements for statistical information, site selection, public figure draw upon its own experience with business
23 business opportunity ventures. When he involvement, financial information of the seller, the opportunity enforcement in fashioning a definition
attempted to call the advertised numbers the contract. that would encompass the business opportunity
following August, he found ‘‘20 of them were Caffey, ANPR 94, at 1–2. See also Muncie, ANPR arrangements which have been the source of most
disconnected, meaning they shut down, left one to 15, at 3; Baer, ANPR 25, at 5; Tifford, ANPR 78, at of the consumer injury, as well as focusing on the
a thousand people with no customer support, no 4–5; D’Amico, Sept95 Tr at 151, 154; Huke, id. at types of disclosures that are best suited for business
parts for machines, no parts whatsoever.’’ M. 240; Simon, id. at 281; Lewis, id. at 284. A few opportunity purchasers.’’).
40 Staff Program Review, supra note 39, Table I.1;
Garceau, 20Nov97 Tr at 28–29. commenters, however, suggested that disclosures
34 Kestenbaum, RR 14, at 3–4 (‘‘Too many for business opportunity sales should be ‘‘stronger’’ I.2. (127 Franchise Rule allegations; 94 Section 5
companies are trying to avoid the disclosure than those for franchise sales. E.g., Cory, ANPR 12; allegations pertaining to earnings claims issues in
requirements of the Rule by sidestepping the D’Imperio, Sept95 Tr at 132; Perry, id. at 258–59. FTC enforcement actions). See also NCL, ANPR 35,
franchise definition and taking a position that what 38 In the event that a revised Franchise Rule is at 2.
41 Staff Program Review, supra note 39, Table I.2.
they do is not defined under the FTC Rule.’’). See promulgated before a new Business Opportunity
42 Id., Appendix 5 (listing earnings claims; lack of
also Caffey, 20Nov97 Tr at 24 (‘‘I think one of the Rule, business opportunities presently covered by
drawbacks of the existing Rule is it is very narrowly the original Franchise Rule could remain covered promised support, locations, or training; exclusive
defined. Under the existing Rule * * * if the seller by that rule pending completion of this rulemaking. territory and cost misrepresentations; and refund
is not locating vending machines or providing For example, the Commission could finalize a issues among most prevalent business opportunity
assistance for locations, the seller is virtually not revised Franchise Rule (16 CFR part 436), and complaints).
covered by the Rule.’’); Lewis, Sept95 Tr at 283 simultaneously publish a modified version of the 43 Consistent with the Franchise Rule, the
(observing that the narrow definition of business original Franchise Rule that would be named the Commission does not express any opinion about the
opportunity enables business opportunity sellers to ‘‘Business Opportunity Rule’’ (16 CFR part 437). legality of any practices that might be disclosed
conclude that they ‘‘are not part of it; it’s very easy This rule might differ from the original Franchise under the proposed Rule. See 16 CFR part 436, note
to say I’m not a franchise and I’m not a bis op Rule in two respects. First, references to 1. In the Franchise Rule SBP, the Commission
[sic].’’). ‘‘franchisor’’ and ‘‘franchisee’’ in the original Continued
affirmative disclosure would require a territory that, in fact, encompasses the telephones,47 Internet kiosks,48 and 900-
business opportunity seller to state same or overlapping areas already number ventures,49 among others.
whether the seller chooses to make assigned to another purchaser.’’ Further, business opportunity
earnings claims. If the seller does, then ventures covered by the Franchise Rule
the proposed Rule would require Section D. Scope of the Proposed Rule continue to stand out as a major source
substantiation and additional 1. Business Opportunities Covered by of consumer complaints.50 In fact,
disclosures. The other four affirmative the Franchise Rule business opportunities covered by the
disclosures pertain to certain prior Franchise Rule consistently rank among
litigation; the seller’s cancellation or The proposed Rule would continue to the top 10 categories of consumer fraud
refund policies; statistics on cover those business opportunities that complaints reported to the
cancellation and refund requests; and are presently covered by the original Commission.51
contact information for prior purchasers Franchise Rule. The Commission’s law Moreover, such scams typically cost
as references. enforcement experience demonstrates consumers thousands of dollars.52
In addition to these disclosure that sales of these opportunities are
requirements, the proposed Rule would 47 See, e.g., FTC v. Advanced Pub. Commc’ns
fraught with unfair and deceptive
prohibit common deceptive business Corp., No. 00–00515–CIV–Ungaro-Benages (S.D.
practices, in particular the making of Fla. 2000); FTC v. Ameritel Payphone Distribs., Inc.,
opportunity sales practices. Among
other things, business opportunity false or unsubstantiated earnings claims. No. 00–0514–CIV–Gold (S.D. Fla. 2000); FTC v.
ComTel Commc’ns Global Network, Inc., No. 96–
sellers would be prohibited from Indeed, such practices are 3134–CIV–Highsmith (S.D. Fla. 1996); FTC v.
misrepresenting: (1) Earnings; (2) costs widespread. Since 1990 alone, the Intellipay, Inc., No. H92 2325 (S.D. Tex. 1992).
or the efficacy, nature, or central Commission has brought more than 140 48 See, e.g., FTC v. Bikini Vending Corp., No. CV–
S–05–0439–LDG–RJJ (D. Nev. 2005); FTC v.

characteristics of the business Franchise Rule cases against vending Network Service Depot, Inc., No. CV–S0–05–0440–
opportunity or the goods or services machine, rack display, and similar LDG–LRL (D. Nev. 2005); U.S. v. Am. Merch. Tech.,
sold to the purchaser as part of the opportunities. Since 1995, the No. 05–20443–CIV–Huck (S.D. Fla. 2005); FTC v.
business opportunity; (3) cancellation or Commission has conducted more than Hart Mktg. Enter. Ltd., Inc., No. 98–222–CIV–T–23
E (M.D. Fla. 1998). See also FTC v. FutureNet, Inc.,
refund policies; (4) promised assistance; 11 business opportunity sweeps,44 No. CV–98–1113 GHK (BQRx) (C.D. Cal. 1998); FTC
(5) the calculation and distribution of many with other federal and state law v. TouchNet, Inc., No. C98–0176 (W.D. Wash.
commissions, bonuses, incentives, enforcement partners, to combat 1998).
premiums, or other payments from the persistent business opportunity scams
49 See, e.g., FTC v. Bureau 2000 Int’l, Inc., No. 96–
seller; (6) the likelihood of finding 1473–DT–(JR) (C. D. Cal. 1996); FTC v. Genesis One
violating the Franchise Rule, such as Corp., No. CV–96–1516–MRP (MCX) (C. D. Cal.
locations for equipment or accounts for those involving the sale of vending 1996); FTC v. Innovative Telemedia, Inc., No. 96–
services; (7) a business opportunity as machines,45 rack displays,46 public 8140–CIV–Ferguson (S. D. Fla. 1996); FTC v. Ad-
an offer of employment; (8) territorial Com Int’l, No. 96–1472 LGB (VAP) (C.D. Cal. 1996).
50 See FTC, The FTC in 2005: Standing Up For
exclusivity or more limited territorial 44 E.g., Project Telesweep (1995); Operation
Consumers and Competition (2005) (available at
protections; (9) endorsements; and (10) Missed Fortune (1996); Project Trade Name Games http://www.ftc.gov/os/2005/04/
shills as references. Finally, the (1997); Project Vend Up Broke (1998); Project 0504abareportfinal.pdf), at 18 (announcing 14
proposed Rule would prohibit business Bizillion$ (1999); Project Busted Opportunity criminal indictments in connection with business
opportunity sellers from failing to make (2002); and Project Biz Opp Flop (2005). In addition opportunity fraud); FTC Staff Report, Consumer
to joint law enforcement sweeps, Commission staff Fraud in the United States: An FTC Survey (Aug.
promised refunds, as well as assigning 2004) (‘‘Fraud Survey’’) (available at http://
has also targeted specific business opportunity
‘‘to any purchaser a purported exclusive www.ftc.gov/reports/consumerfraud/
ventures such as 900 numbers (Project Buylines
1996); vending (Project Yankee Trader 1997); 040805confraudrpt.pdf) at 48 (showing 450,000
recognized that the Franchise Rule may require seminars (Operation Showtime 1998); medical victims of business opportunity fraud).
franchisors to disclose practices that may raise billing (Project House Call 1998); and Internet-
51 See, e.g., FTC News Release: Criminal and Civil
antitrust issues. SBP, 43 FR at 59719. While related services (Net Opportunities 1998). Enforcement Agencies Launch Major Assault
antitrust issues are probably less of a concern in the 45 See, e.g., FTC v. Am. Entm’t Distribs., Inc., No.
Against Promoters of Business Opportunity and
narrowly tailored Business Opportunity Rule Work-at-Home Schemes (Feb. 22, 2005) (available at
context, the Commission nevertheless reserves the 04–22431–CIV–Huck (2004); FTC v. Pathway http://www.ftc.gov/opa/2005/02/bizoppflop.htm)
right to pursue violations of antitrust laws even if Merch., Inc., No. 01–CIV–8987 (S.D.N.Y. 2001); U.S. (defendants in FTC cases alone caused tens of
a business opportunity seller discloses a violation v. Photo Vend Int’l, Inc., No. 98–6935–CIV– thousands of consumers to lose a total of more than
in complying with the proposed Rule’s disclosure Ferguson (S.D. Fla. 1998); FTC v. Hi Tech Mint Sys., $100 million); FTC News Release: Law Enforcers
requirements. In short, disclosure does not create a Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); FTC v. Target ‘‘Top 10’’ Online Scams; Consumer
safe harbor for engaging in otherwise unlawful Claude A. Blanc, Jr., No. 2:92–CV–129–WCO (N.D. Protection Cops From 9 Countries, 5 U.S. Agencies,
conduct. Ga. 1992). See also FTC News Release: FTC and 23 States Tackle Internet Fraud (Oct. 31, 2000)
Further, a business opportunity seller may have Announces ‘‘Operation Vend Up Broke’’ (Sept. 3, (available at http://www.ftc.gov/opa/2000/10/
an obligation under section 5 of the FTC Act to 1998) (available at http://www.ftc.gov/opa/1998/09/ topten.htm) (listing business opportunities and
impart material information to prospective vendup2.htm) (FTC and 10 states announce 40 work-at-home schemes among the top 10 Internet
purchasers beyond the disclosures required by this enforcement actions against fraudulent vending frauds). See also Prepared Statement of Federal
proposed Rule. This clarification is critical, business opportunities). Trade Commission on ‘‘Internet Fraud’’ before the
especially in an age of quickly developing changes 46 See, e.g., U.S. v. Elite Designs, Inc., No. CA 05 House Subcomm. on Commerce, Trade, and
in the marketplace. The Commission cannot now 058 (D.R.I. 2005); U.S. v. QX Int’l, No. 398–CV– Consumer Protection of the Comm. on Energy and
predict what types of business opportunities will be Commerce (May 23, 2001) (available at http://
0453–D (N.D. Tex. 1998); FTC v. Carousel of Toys,
offered in the future, nor the information a business www.ftc.gov/opa/2001/05/iftestimony.htm) (listing
No. 97–8587–CIV–Ungaro-Benages (S.D. Fla. 1997);
opportunity purchaser will find material. This does pyramids, business opportunities, and work-at-
FTC v. Raymond Urso, No. 97–2680–CIV–Ungaro- home schemes among the top Internet frauds);
not mean that a seller must include additional
Benages (S.D. Fla. 1997); FTC v. Infinity Prepared Statement of the Federal Trade
information in its disclosure document. As noted
Multimedia, Inc., No. 96–6671–CIV–Gonzalez (S.D. Commission on ‘‘Internet Fraud’’ before the Senate
below, proposed section 437.5(c) prohibits the
inclusion of additional information in a disclosure Fla. 1996); FTC v. O’Rourke, No. 93–6511–CIV– Comm. on Finance (April 5, 2001) (available at
document. Rather, when a seller must impart Ferguson (S.D. Fla. 1993). See also FTC News http://www.ftc.gov/os/2001/04/
material information beyond that required by the Release: Display Racks for Trade-Named Toys and internetfraudstate.htm) (listing pyramid, business
Rule, it must provide the information separately Trinkets are the Latest in Business Opportunity opportunities, and work-at-home schemes among
from its disclosure document. The Commission Fraud Schemes (Aug. 5, 1997) (available at http:// the top 10 Internet frauds based on Consumer
does not purport to specify how such information www.ftc.gov/opa/1997/08/tradenam.htm) (FTC and Sentinel Database).
must be disseminated, permitting sellers the 8 states file 18 enforcement actions against sellers 52 E.g., FTC v. World Traders Ass’n, Inc., No.
flexibility to decide which method is best for their of bogus display opportunities that use trademarks CV05 0591 AHM (CTx) (C.D. Cal. 2005) (estimated
particular business. of well-known companies). $30 million in consumer injury); FTC v. Am. Entm’t
While precise figures of consumer outside of the home.55 For the most part, Each of these promises by work-at-
injury from fraudulent business they are not distinguishable in any home opportunity sellers is often just as
opportunity ventures is unknown, the material respect from business illusory as the analogous promises made
Commission’s law enforcement opportunities covered by the existing by business opportunity sellers covered
experience reveals that it is not Franchise Rule.56 by the Franchise Rule. In addition,
uncommon for purchasers of fraudulent Sellers of fraudulent work-at-home fraudulent work-at-home opportunity
business opportunities to lose opportunities deceive their victims with sellers frequently invent undisclosed
thousands of dollars each.53 For these promises of an ongoing relationship in conditions and limitations for rejecting
reasons, the Commission has which the seller will buy the output that the work performed by purchasers and
determined that sales of vending opportunity purchasers produce. These refusing to buy back the goods the
machines, rack displays, and similar sellers often misrepresent that there is a
purchasers produce.60 Similarly, these
opportunities should be covered by the market for a purchaser’s goods and
sellers’ promises of continuing support
Business Opportunity Rule, now that services,57 just as sellers of fraudulent
vending machine and rack display and assistance frequently prove empty,
the Franchise Rule is being amended to leaving work-at-home opportunity
focus exclusively on the sale of opportunities falsely claim that
profitable vending locations are purchasers with no help in figuring out
franchises. how to assemble misshapen
available.58 Work-at-home opportunity
2. Business Opportunities Not Presently sellers also often claim to provide components into finished products.
Covered by the Franchise Rule ongoing training and other assistance, as Moreover, as the Commission’s cases
The proposed Business Opportunity business opportunity sellers covered by and complaint data demonstrate, the
Rule would also address the sale of the Franchise Rule often do.59 con artists who promote fraudulent
other business arrangements that are work-at-home schemes frequently dupe
currently outside the scope of the 55 See, e.g., FTC v. USS A Enter., Inc., No. SA CV–
consumers with false earnings claims,61
04–1039 AHS (ANx) (C.D. Cal. 2004) (craft assembly
Franchise Rule, but have been shown by opportunity aimed at Spanish speakers); FTC v. a very prevalent practice among
the Commission’s law enforcement Esteban Barrios Vega, No. H–04–1478 (S.D. Tex. fraudulent business opportunity sellers.
experience and complaint data to be 2004) (product assembly opportunity aimed at For example, in one envelope-stuffing
sources of prevalent and persistent Spanish speakers); FTC v. Castle Publ’g, Inc., No.
AO3CA 905 SS (W.D. Tex. 2003) (envelope-stuffing
case brought under section 5 of the FTC
problems. Two important types of opportunity targeting unemployed, disabled, and Act, the defendant allegedly offered to
fraudulent or deceptive opportunities elderly hoping to work from home); FTC v. Medicor pay purchasers $550 to $3,000 weekly.62
that would fall within the proposed LLC, No. CV01–1896 (CBM) (C.D. Cal. 2001) (work- Similarly, in a medical billing work-at-
Rule’s coverage are work-at-home at-home scams victimizing stay-at-home parents,
the physically disabled, and non-English speakers). home case, the defendant allegedly
schemes and pyramid marketing See also James, 21Nov97 Tr at 344 (describing promised purchasers annual incomes of
schemes.54 work-at-home program aimed at the elderly and $25,000–$50,000.63 Because the initial
poorly-educated).
a. Work-at-Home Schemes 56 See discussion above in Section A.1 explaining
investment is relatively low, hundreds
that the Franchise Rule’s limitation requiring of thousands of bilked consumers do not
Deceptive work-at-home schemes are
a persistent type of fraud, preying upon purchasers to sell directly to end-users effectively formally complain or take action against
exempts many work-at-home opportunities from these illegal operators.
stay-at-home parents, the physically Franchise Rule coverage.
disabled, non-English speakers, and 57 E.g., FTC v. Misty Stafford, No. 3: CV 05–0215 The Commission’s law enforcement
others who cannot obtain employment (M.D. Pa. 2005); FTC v. Elec. Med. Billing, Inc., No. experience demonstrates that work-at-
SA02–368 AHS (ANX) (C.D. Cal. 2003); FTC v. home scams are widespread, causing
Holiday Magic, No. C 93–4038 VRW (N.D. Cal.
Distribs., No. 04–22431–CIV–Huck (S.D. Fla. 2004) 1994); In re New Mexico Custom Designs, Inc., FTC significant consumer injury. Indeed,
(estimated $20 million in consumer injury). See C–3485 (1993); In re Sandcastle Creations, FTC C– since 1990 the Commission has brought
also United States Postal Inspection Service, News 3484 (1993); In re Homespun Prods., Inc., FTC C–
Release: U.S. Postal Inspectors, Federal Trade over 60 work-at-home cases.64 These
3483 (1993); In re Hairbow Co., FTC C–3482 (1993).
Commission, Department of Justice dismantle See James, 21Nov97 Tr at 343 (bead assembly seller actions have targeted a variety of
business-opportunity scams (‘‘Postal Inspectors falsely represented a relationship with J.C. Penney). schemes, ranging from envelope
have arrested 28 individuals * * * who victimized 58 E.g., FTC v. Nat’l Vending Consultants, Inc.,
more than 140,000 consumers with estimated losses No. CV–S–05–0160–RCJ–PAL (D. Nev. 2005); FTC 60 See FTC v. Misty Stafford, No. 3: CV 05–0215
exceeding $73 million.’’). v. Pathway Merchandising, Inc., No. 01–CIV–8987
53 E.g., FTC v. Am. Entm’t Distribs., No. 04– (M.D. Pa. 2005). See also James, 21Nov97 Tr at 244–
(S.D.N.Y. 2001); FTC v. Int’l Computer Concepts,
22431–CIV–Huck (S.D. Fla. 2004) ($28,000–$37,500 45 (describing clown assembly work-at-home
Inc., No. 1:94CV1678 (N.D. Ohio 1994).
for one machine); FTC v. Accent Mktg., Inc., No. 59 E.g., FTC v. USS Elder Enter., Inc., No. SA CV–
program that repeatedly rejected goods produced by
02–0405–CB–M (S.D. Ala. 2002) ($8,000 initial investor).
04–1039 AHS (ANx) (C.D. Cal. 2004) (company 61 E.g., FTC v. Sun Ray Trading, No. 05–20402
payment). One measure of injury attributed to would provide work or substantial assistance in
business opportunity fraud can be gleaned from the CIV-Sitz/Bandstra (S.D. Fla. 2005) (potential weekly
obtaining work); FTC v. Leading Edge Processing,
2001 Staff Program Review. In its review of 2,665 income of $550 to $3,000); FTC v. Castle Publ’g,
Inc., No. 6:02–CV–681–ORL–19 DAB (M.D. Fla.
business opportunity complaints from 1997 through Inc., No. AO3CA 905 SS (W.D. Tex. 2003) (earn
2003) (company would provide specialized
the first half of 1999, over 70% of complainants $2,900 to $5,000 and more weekly); FTC v. Darrell
software, manuals, and training); FTC v. Fin. Res.
reported losses of at least $1,000, with over 48% Richmond, No. 3:02–3972–22 (D.S.C. 2002) (earn
Unlimited, No. 03–C–8864 (N.D. Ill. 2003) (no prior
reporting losses of over $5,000. Approximately 24% experience necessary; company would provide all between $100 and $1,000 or more per week). See
reported losses over $10,000. Staff Program Review, supplies needed); FTC v. Darrell Richmond, No. also James, 21Nov97 Tr at 341 (describing a bead
supra note 39, at 36. 3:02–3972–22 (D.S.C. 2003) (seller claimed to assembly work-at-home program that claimed
54 In response to the ANPR, state regulators provide all necessary materials to perform the work- earnings of $1,400 per $1,000 investment).
62 FTC v. Fin. Res. Unlimited, No. 03–C–8864
argued for a broad rule covering a wide array of at-home envelope stuffing business); FTC v. Elec.
opportunities. For example, in its ANPR Comment, Med. Billing, Inc., No. SACV02–368 AHS (ANX) (N.D. Ill. 2003) (earn ‘‘$550.00 to $3,000 and more
NASAA recommended that the disclosure (C.D. Cal. 2003) (company promised to provide weekly’’ stuffing envelopes).
63 FTC v. Elec. Med. Billing, Inc., No. SA02–368

requirements for business opportunity ventures everything necessary to perform medical billing,
include business opportunity formats such as including a list of doctors, training, and software). AHS (AN) (C.D. Cal. 2002).
multilevel marketing plans, seller-assisted See also Finnigan, 21Aug97 Tr at 95 (a business or 64 Many of these cases were brought in
marketing plans, work-at-home plans and certain income-earnings opportunity inherently must offer connection with sweeps of fraudulent work-at-
distributorships and licensing plans not currently some sort of assistance or training); Catalano, home and related employment opportunities,
covered under the Franchise Rule. NASAA, ANPR 20Nov97 Tr at 37 (purchasers buy business including Project Biz Opp Flop (2005); Project
120, at 5. See also James, ANPR 76; WA Securities, opportunities to obtain the seller’s expertise and Homework (2001); Operation Top Ten Dot Con
ANPR 117, at 2; Maxey, Sept95 Tr at 38. know-how). (2000); and Operation Missed Fortune (1996).
stuffing 65 and craft assembly complaints and alleged injury from earnings potential, pyramid schemes are
programs,66 to technology-driven work-at-home scams, the Commission highly successful in attracting
opportunities,67 including medical staff analyzed fraud complaint prospective investors. For example, one
billing plans.68 In some of these cases, information from the Commission’s pyramid program attracted more than
what appeared to be simple work-at- complaint database for the period 150,000 consumers who collectively
home scams turned out to be illegal January 1997 through December 2005. paid over $80 million during the course
pyramid schemes.69 The staff’s analysis shows 37,333 work- of three years.73 Indeed, cases brought
Consumer complaints to the at-home complaints, resulting in alleged under section 5 against pyramid
Commission also demonstrate the injury of over $15 million marketing promotions have resulted in
prevalence of fraudulent work-at-home ($15,408,934).71 Indeed, work-at-home huge consumer redress, such as $40
schemes.70 To determine the level of complaints ranked among the top fraud million in Equinox and $20 million in
complaint categories submitted to the SkyBiz.com.74
65 E.g., FTC v. Sun Ray Trading, No. 05–20402
Commission. For example, during the The prevalence of false earnings
CIV-Seitz/Bandstra (S.D. Fla, 2005); FTC v. Fin. Res. claims is not the only similarity
Unlimited, No. 03–C–8864 (N.D. Ill. 2003); FTC v.
period studied, work-at-home schemes
Castle Publ’g, Inc., No. AO3CA 905 SS (W.D. Tex. ranked among the top 20 fraud between pyramid schemes and business
2003); FTC v. Patrick Cella, No. CV03–3202 GAF complaint categories each year: opportunity frauds covered by the
(SHSx) (W.D. Cal. 2003); FTC v. Terrance Maurice current Franchise Rule. Many induce
Howard, No. SA02CA0344 (W.D. Tex. 2002); FTC new recruits with the promise of an
Year Rank Complaints
v. Stuffingforcash.com, Corp., No. 92 C 5022 (N.D.
Ill. 2002); FTC v. America’s Shopping Network, Inc., ongoing commercial relationship that
No. 02–80540–CIV-Hurley (S.D. Fla. 2002). 1997 ............ 5th ............... 1,399 will enable recruits to operate their own
66 E.g., FTC v. Misty Stafford, No. 3: CV 05–0215 1998 ............ 20th ............. 1,653 business selling various products or
(M.D. Pa. 2005); FTC v. Esteban Barrios Vega, No. 1999 ............ 19th ............. 2,611 services.75 Typically, they promise to
H–04–1478 (S.D. Tex. 2004); FTC v. Nat’l Crafters, 2000 ............ 18th ............. 3,448 provide recruits with promotional
Corp., No. 01–4825–CIV-Graham-Turnoff (S.D. Fla. 2001 ............ 13th ............. 4,852
2001); FTC v. Ed Boehlke, No. 96–0482–E–BLW (D. 2002 ............ 11th ............. 17,307
assistance.76 Some also offer training.77
Idaho 1996); In re Sandcastle Creations, FTC C– 2003 ............ 9th ............... 16,694 Few, however, reveal their high drop-
3484 (1993); In re Hairbow Co., FTC C–3482 (1993); out rates, much less the fact that the vast
FTC v. Holiday Magic, No. C 93–4038 VRW (N.D.
2004 ............ 12th ............. 6,485
Cal. 1993); In re Homespun Prods., Inc., FTC C– 2005 ............ 15th ............. 4,366 majority of those who have joined the
3483 (1993); In re New Mexico Custom Designs, program—often 90 percent or more—
Inc., FTC C–3485 (1993). See also Prepared Were it not for the minimum will not recoup their investment.78
Statement of the FTC on ‘‘Internet Fraud’’ before the investment requirement and direct sales Further, since 1990, the Commission
House Subcomm. on Commerce, Trade, and has brought 20 cases against pyramid
Consumer Protection, Comm. on Energy and to end-user limitation in the Franchise
Commerce (May 23, 2001) (listing business Rule, many work-at-home schemes
opportunities and work-at-home schemes among would be covered by that rule because thousand a month * * * And, you know, we have
top 10 Internet or online scams); Prepared people doing thirty thousand a month.’’); FTC v.
the same potential for abuse exists as Nia Cano, No. 97–7947–CAS (AJWx) (C.D. Cal.
Statement of the FTC on ‘‘Internet Fraud’’ before the
Senate Comm. on Finance (April 5, 2001) (listing with vending machines and rack display 1997) (as much as $18,000 per month); FTC v.
business opportunities and work-at-home schemes opportunities, which are covered. In Global Assistance Network for Charities, No. 96–
among top 10 online scams). view of the misrepresentations and 2494 PHX RCB (D. Ariz. 1996) (promising over
67 E.g., FTC v. Wealth Sys., Inc., No. CV 05 0394 $89,000 a month); FTC v. NexGen3000.com, No.
omissions that fraudulent work-at-home CIV–03–120 TUC WDB (D. Ariz. 2003) (‘‘each
PHX JAT (D. Ariz. 2005) (web design); FTC. v.
Leading Edge Processing, Inc., No. 6:02–CV–681–
opportunity sellers have used, as shown activated business center has the potential to earn
by consumer complaints and past up to $60,000 per week’’); FTC v. SkyBiz.com, No.
ORL–19 DAB, (M.D. Fla. 2002) (data entry); FTC v.
01–CV–0396–EA (X) (N.D. Okla. 2001) (‘‘he’s
LS Enter., FTC C–3884 (1999) (bulk email); In re Commission cases, the Commission has making 76,000 a week and growing’’).
Computer Bus. Servs., FTC C–3705 (1996) (in-home determined that the proposed business 73 FTC v. 2Xtreme Performance Int’l, LLC, No.
computer work); FTC v. AMP Publ’n, Inc., No.
SACV–00–112–AHS–ANx (C.D. Cal. 2000) (in-home
opportunity disclosure requirements JFM 99CV 3679 (D. Md. 1999). See also FTC v.
and prohibitions would provide Fortuna Alliance, LLC, No. C96–799M (W.D. Wash.
computer work).
1996) (tens of thousands of consumers in over 60
68 E.g., FTC v. Med. Billers Network, Inc., No. 05 potential work-at-home purchasers with countries); FTC v. Jewelway, Int’l, No. CV–97 TUC
CV 2014 (RJH) (S.D.N.Y. 2005); FTC v. Elec. Med. the tools they need to protect JMR (D. Ariz. 1997) (200,000 investors).
Billing, No. SA02–368 AHS (AN) (C.D. Cal. 2002); themselves from false claims. 74 See also FTC v. Bigsmart.com, No. CIV 01–0466
FTC v. Elec. Processing Servs., Inc., No. CV–S–02– PHX ROS (D. Ariz. 2001) ($5 million for redress);
0500–L.H.–R.S. (D. Nev. 2002); FTC v. Medicor, b. Pyramid Marketing Schemes FTC v. Nia Cano, No. 97–7947–CAS (AJWx) (C.D.
LLC, No. CV01–1896 (CBM) (C.D. Cal. 2001); FTC Cal. 1997) (nearly $2 million for redress); FTC v.
v. Encore Networking Servs., No. 00–1083 WJR Like business opportunities covered Fortuna Alliance, LLC, No. C96–799M (W.D. Wash.
(AIJx) (C.D. Cal. 2000); FTC v. Physicians by the existing Franchise Rule, pyramid 1996) (approximately $5.5 million for redress); FTC
Healthcare Dev. Serv. Corp., No. CV–02–2936 RMT
(C.D. Cal. 2000); FTC v. Data Med. Capital, Inc., No.
schemes often deceive consumers with v. FutureNet, Inc., No. CV–98–1113 GHK (BQRx)
(C.D. Cal. 1998) ($1 million for redress); FTC v.
SACV–99–1266 AHS (C.D. Cal. 1999); FTC v. Elec. the promise of large potential incomes. Jewelway, Int’l, No. CV–97 TUC JMR (D. Ariz. 1997)
Filing Acad., No. 98–0054–PHX–EHC (D. Ariz. It is not uncommon for promoters of ($5 million for redress); FTC v. ICR Servs., No. 03
1998). these schemes to claim potential C 5532 (N.D. Ill. 2003) ($1.5 million for redress).
69 E.g., FTC v. David Martinelli, Jr., No. 3:99 CV
incomes of thousands of dollars a week 75 E.g., FTC v. Trek Alliance, Inc., No. 02–9270
1272 (CFD) (D. Conn. 1999) (income from work-at- SJL (AJWx) (C.D. Cal. 2002); FTC v. Equinox, Int’l,
home opportunity processing applications or month.72 Because of the claimed high No. CV–S–99–0960–JBR–RLH (D. Nev. 1999); FTC
dependent upon signing new recruits to join the v. FutureNet, Inc., No. CV–98–1113 GHK (BQRx)
opportunity). 71 See also James, 21Nov97 Tr at 340–45 (C.D. Cal. 1998).
70 In adopting amendments to the Telemarketing (describing three work-at-home opportunities in 76 E.g., FTC v. 2Xtreme Performance Int’l, LLC,
Sales Rule (‘‘TSR’’), the Commission observed ‘‘that Florida, one of which took in $18 million, No. JFM 99CV 3679 (D. Md. 1999); FTC v.
telemarketing fraud perpetuated by the advertising victimizing 6,000 consumers). Bigsmart.com, No. CIV 01–0455 PHX ROS (D. Ariz.
of work-at-home and other business opportunity 72 E.g., FTC v. 2Xtreme Performance Int’l, LLC, 2001); FTC v. NexGen3000.com, No. CIV–03–120
schemes in general media sources is a prevalent and No. JFM 99CV 3679 (D. Md. 1999) (‘‘about $2,000 TUC WDB (D. Ariz. 2003).
growing phenomenon.’’ Indeed, the Commission in the first month * * * and then it went to 77 FTC v. World Class Network, Inc., No. SACV–
stated that ‘‘the single greatest per capita monetary $60,000’’); FTC v. Bigsmart.com, No. CIV 01–0466 97–162–AHS (EEx) (C.D. Cal. 1997).
loss category in complaints reported to the FTC is PHX ROS (D. Ariz. 2001) (‘‘50 people made over 78 Peter J. VanderNat and William W. Keep,
for business opportunities, including work-at-home $50,000 their first month! We also had a $100,000 Marketing Fraud: An Approach to Differentiating
schemes.’’ 67 FR 4492, at 4530 (Jan. 30, 2002). See first month money earner!’’); FTC v. FutureNet, Inc., Multilevel Marketing from Pyramid Schemes, 21 J.
also TSR Statement of Basis and Purpose, 68 FR No. CV–98–1113 GHK (BQRx) (C.D. Cal. 1998) (‘‘If of Pub. Pol’y & Marketing (Spring 2002), at 139–
4480, at 4661 (Jan. 29, 2003). you’re serious, we can show you how to make ten 151.
schemes under section 5.79 These consistently ranked among the top 20 437.9—would address other laws, rules,
matters have involved a wide range of injury categories reported in consumer and orders, and severability.
purported product sales or investments, fraud complaints to the Commission.91
1. Proposed Section 437.1: Definitions
ranging from the mundane 80 For example, during the period 1997
(nutritional supplements, beauty aids, through 2005, pyramid marketing The proposed Rule would begin with
weight-loss products, and water filters) schemes ranked among the top 20 injury a definitions section setting forth
to the unusual (auto leasing,81 charitable levels each year, except in 2003, as defined terms in alphabetical order. In
giving,82 unsecured credit cards,83 follows: several instances, the proposed
credit repair,84 travel agency definitions closely track those contained
credentials,85 Internet malls,86 and Year Rank Injury in the current Franchise Rule,
Internet access 87). Indeed, pyramid Commission interpretations of the
fraud has gone high-tech, flooding the 1997 ............ 9th ............... $352,769 Franchise Rule, and the states’
Internet 88 and consumers’ email 1998 ............ 5th ............... 1,858,787 comparable franchise disclosure
1999 ............ 10th ............. 2,011,012 document, the Uniform Franchise
boxes.89 2000 ............ 4th ............... 12,632,132
The Commission staff’s analysis of Offering Circular (‘‘UFOC’’) Guidelines.
2001 ............ 10th ............. 10,685,083
consumer fraud complaint data also 2002 ............ 18th ............. 9,685,722 These include the definitions for the
demonstrates the prevalence of 2003 ............ (not in top ........................ terms ‘‘action,’’ ‘‘affiliate,’’ ‘‘disclose or
deceptive pyramid marketing 20). state,’’ ‘‘earnings claims,’’ ‘‘person,’’ and
schemes.90 For the period January 1997 2004 ............ 18th ............. 2,264,112 ‘‘written.’’ The Commission also
through December 2005, Commission 2005 ............ 17th ............. 3,347,443 proposes to define the terms ‘‘business
staff found that consumers lodged assistance,’’ ‘‘business opportunity,’’
17,858 complaints against pyramid Were it not for the minimum ‘‘cancellation or refund request,’’
schemes, reporting alleged aggregate investment and inventory exemptions in ‘‘designated person,’’ ‘‘exclusive
injury level of over $46 million the Franchise Rule, many pyramid territory,’’ ‘‘general media,’’ ‘‘new
($46,824,347). Indeed, complaints schemes would be covered because the business,’’ ‘‘prior business,’’ ‘‘providing
against pyramid marketing companies same potential for abuse exists as with locations, outlets, accounts, or
vending machines and rack display customers,’’ ‘‘purchaser,’’ ‘‘quarterly,’’
79 E.g., FTC v. Trek Alliance, Inc., No. 02–9270 opportunities covered by the Franchise and ‘‘seller.’’ Each proposed definition
SJL (AJWx) (C.D. Cal. 2002); FTC v. Streamline Int’l, Rule.92 In view of the is set forth below.
No. 01–6885–CIV–Ferguson (S.D. Fla. 2001); FTC v. misrepresentations and omissions that
Bigsmart.com, No. CIV 01–0466 PHX ROS (D. Ariz. a. Proposed Section 437.1(a): ‘‘Action’’
2001); FTC v. Five Star Auto Club, Inc., No. CIV– fraudulent pyramid scheme promoters
99–1693 McMahon (S.D.N.Y. 1999); FTC v. 2Xtreme have used, as shown by consumer The term ‘‘action’’ arises in proposed
Performance Int’l, LLC, No. JFM 99CV 3679 (D. Md. complaints and past Commission cases, section 437.3(a)(3), which would require
1999); FTC v. Equinox, Int’l, No. CV–S–99–0969– business opportunity sellers to disclose
JBR–RLH (D. Nev. 1999); FTC v. FutureNet, Inc.,
pre-sale disclosures and prohibitions are
No. CV–98–1113 GHK (BQRx) (C.D. Cal. 1998). necessary to protect potential recruits material information about the seller’s
80 E.g., FTC v. Trek Alliance, Inc., No. 02–9270 from deceptive practices. prior litigation. Proposed section
SJL (AJWx) (C.D. Cal. 2002); FTC v. Streamline Int’l, 437.1(a) would define the term ‘‘action’’
Inc., No. 01–6885–CIV–Ferguson (S.D. Fla. 2001); Section E. The Proposed Rule
closely tracking the Commission’s
FTC v. 2Xtreme Performance Int’l, No. JFM 99CV The proposed Rule is divided into
3679 (D. Md. 1999); FTC v. Equinox, Int’l, No. CV– current interpretation of the term
S–99–0969–JBR–RLH (D. Nev. 1999). nine sections. Section 437.1 would set ‘‘action’’ in connection with the
81 FTC v. Five Star Auto Club, Inc., No. CIV–99– forth the Rule’s definitions. Section Franchise Rule. Specifically, it would
1693 McMahon (S.D.N.Y. 1999). 437.2 would establish the business make clear that disclosures involving
82 FTC v. Universal Direct, No. C 3–02–145 (S.D.
opportunity seller’s obligation to furnish litigation include not only civil actions
Ohio 2002); FTC v. Global Assistance Network for
Charities, No. 96–2494 PHX RCB (D. Ariz. 1996).
prospective purchasers with material brought before a court, but matters
83 FTC v. Nia Cano, No. 97–7947–CAS (AJWx) information in the form of a written before arbitrators.93 It would also make
(C.D. Cal. 1997). basic disclosure document. Section clear that an ‘‘action’’ includes all
84 FTC v. ICR Servs., No. 03 C 5532 (N.D. Ill.
437.3 would specify the content of the governmental actions, including
2003). basic disclosure document. Section
85 FTC v. World Class Network, Inc., No. SACV–
criminal matters, and administrative
97–162–AHS (Eex) (C.D. Cal. 1997).
437.4 would set forth the requirements law enforcement actions, including
86 E.g., FTC v. NexGen3000.com, No. CIV–03–120 business opportunity sellers must cease and desist orders, or assurances of
TUC WDB (D. Ariz. 2003); FTC v. Bigsmart.com, follow if they elect to make earnings voluntary compliance.
No. CIV 01–0466 PHX ROS (D. Ariz. 2001). representations. Section 437.5 would
87 FTC v. FutureNet, Inc., No. CV–98–1113 GHK
prohibit a number of deceptive claims b. Proposed Section 437.1(b): ‘‘Affiliate’’
(BQRx) (C.D. Cal. 1998).
88 E.g., FTC v. Sun Ray Trading, Inc., No. 05–
and practices in connection with To combat business opportunity sales
20402–CIV–Seitz/Bandstra (S.D. Fla. 2005); FTC v. business opportunity sales. Section fraud, proposed section 437.3(a)(3)
2Xtreme Performance Int’l, LLC, No. JFM 99CV 437.6 would set forth the Rule’s would require a business opportunity
3679 (D. Md. 1999); FTC v. Nia Cano, No. 97–7947– recordkeeping provisions. Section 437.7 seller to disclose not only litigation in
CAS (AJWx) (C.D. Cal. 1997); FTC v. FutureNet, which it was named as a party, but any
Inc., No. CV–98–1113 GHK (BQRx) (C.D. Cal. 1998).
would expressly exempt from the
89 E.g., FTC v. David Martinelli, Jr., No. 3:99 CV Business Opportunity Rule those litigation naming any of its affiliates.
1272 (CFD) (D. Conn. 1999); FTC v. Universal business arrangements that are covered Closely tracking the UFOC Guidelines,
Direct, No. C 3–02–145 (S.D. Ohio 2002); In re by the Franchise Rule. Finally, two proposed section 437.1(b) would define
Kalvin P. Schmidt, FTC C–3834 (1998). administrative sections—437.8 and the term ‘‘affiliate’’ to mean: ‘‘an entity
90 State regulators report similar data. For
controlled by, controlling, or under
example, a Florida business opportunity regulator

91 See also Fraud Survey, supra note 50, at 48
noted that in his office, 60% of the written
complaints received pertain to pyramid marketing (1.55 million victims of pyramid fraud). 93 See Interpretive Guides, 44 FR at 49973;
companies. ‘‘They last about six months and they’re 92 See discussion above in Section A.1 explaining Rabenberg, Sept. 95 Tr. at 105, 279 (arguing for the
gone.’’ James, 20Nov97 Tr at 115–26. The State of that the current Rule’s minimum required payment disclosure of matters in arbitration, which normally
Washington also reported a large number of and inventory exemptions effectively exempt many are not public documents). See also Franchise Rule
pyramid marketing scheme complaints. See WA pyramid marketing opportunities from Franchise NPR, 64 FR at 57297 and 57332; UFOC Guidelines,
Securities, ANPR 117 at 2. Rule coverage. Item 3.
common control with a business Each of the five illustrative examples is sold would also qualify as an offer of
opportunity seller.’’ 94 This definition discussed immediately below. account assistance.101
would also cover litigation involving a
i. Location Assistance iii. Buy-Back Assistance
parent and subsidiaries of the business
opportunity seller. The proposed ‘‘business assistance’’ A business opportunity seller’s offer
definition would include as an
c. Proposed Section 437.1(c): ‘‘Business to pay purchasers for their work by
illustrative example the promise to
assistance’’ buying back their work product typifies
provide locations ‘‘for the use or
operation of equipment, displays, most fraudulent work-at-home plans,
One of the definitional elements of such as craft assembly opportunities.102
vending machines, or similar devices on
the term ‘‘business opportunity’’ in To capture such opportunities, the term
premises neither owned nor leased by
section 437.1(d) is the offer of ‘‘business ‘‘business assistance’’ would include as
the purchaser.’’ This is substantially
assistance.’’ Proposed section 437.1(c) an illustrative example ‘‘buying back, or
similar to the analogous provision in the
would define ‘‘business assistance’’ to purporting to buy back, any or all of the
current Franchise Rule.97 Including this
mean ‘‘ the offer of material advice, goods or services that the purchaser
example would help ensure that
information, or support to a prospective makes, produces, fabricates, grows,
business opportunities currently
purchaser in connection with the breeds, modifies, or provides.’’ 103 The
covered by the Franchise Rule will
establishment or operation of a new proposed definition, however, would
remain covered by the Business
business.’’ 95 By using the concept of not include the offer to buy back
Opportunities Rule. Indeed, the
business assistance as one of the Commission’s enforcement experience inventory or equipment needed to start
definitional elements of the term shows that the offer of location a business.104 In response to the ANPR,
‘‘business opportunity’’—the term that assistance is the hallmark of fraudulent DSA opined that such a proposal very
establishes the parameters of the Rule’s vending machine and rack display route likely would result in discouraging
coverage—the Commission intends to opportunities.98
ensure coverage of those business legitimate sellers from adopting
relationships that involve more than the ii. Account Assistance inventory or equipment buy-back
ordinary sale of goods or services to policies.105 The Commission finds this
Another illustrative example of argument persuasive.
existing businesses. ‘‘business assistance’’ would be
In addition, the proposed definition of ‘‘providing, or purporting to provide, 101 See, e.g., FTC v. NexGen3000.com, No. CIV–
‘‘business assistance’’ lists five outlets, accounts, or customers, 03–120 TUC WDB (D. Ariz. 2003); FTC v. Netforce
illustrative, but not exhaustive, including, but not limited to, Internet Seminars, No. 00 2260 PHX FJM (D. Ariz. 2000);
examples of qualifying assistance, outlets, accounts, or customers, for the FTC v. iMall, Inc., No. 99–03650 (C.D. Cal. 1999).
102 E.g., FTC v. Fin. Res. Unlimited, No. 03–C–
corresponding to practices shown by the purchaser’s goods or services.’’ As
8864 (N.D. Ill. 2003); FTC v. Castle Publ’g, Inc., No.
Commission’s law enforcement Commission cases have shown, AO3CA 905 SS (W.D. Tex. 2003); FTC v. Patrick
experience, and that of the states, to be fraudulent promises of assistance in Cella, No. CV03–3202 GAF (SHSx) (W.D. Cal. 2003);
common among sellers of fraudulent securing accounts are often the linchpin FTC v. Terrance Maurice Howard, No. SA02CA0344
business opportunities.96 The common of business opportunity scams such as (W.D. Tex. 2002); FTC v. Stuffingforcash.com,
fraudulent medical billing schemes.99 Corp., No. 92 C 5022 (N.D. Ill. 2002); FTC v.
thread linking each of these five America’s Shopping Network, Inc., No. 02–80540–
examples is that the seller promotes his The proposed definition would be CIV–Hurley (S.D. Fla. 2002); FTC v. Esteban Barrios
or her expertise in operating the similar to the current ‘‘account Vega, No. H–04–1478 (S.D. Tex. 2004); FTC v. Nat’l
business or in providing a market for the assistance’’ provision of the Franchise Crafters, Corp., No. 01–4825–CIV–Graham-Turnoff
Rule,100 but would update that (S.D. Fla. 2001); FTC v. Ed Boehlke, No. 96–0482–
goods or services the purchaser sells to E–BLW (D. Idaho 1996); In re Sandcastle Creations,
the public, or in ensuring compensation provision by specifying that outlets, FTC C–3484 (1993); In re Hairbow Co., FTC C–3482
promised to the purchaser, thereby accounts, or customers include those on (1993); FTC v. Holiday Magic, No. C 93–4038 VRW
reducing the purchaser’s financial risk. the Internet. Accordingly, the offer to (N.D. Cal. 1993); In re Homespun Prods., Inc., FTC
provide Web sites or online shopping C–3483 (1993); In re New Mexico Custom Designs,
Inc., FTC C–3485 (1993).
94 See NASAA Commentary on the Uniform malls where the seller’s products can be 103 See Illinois Act, 815 ILCS at 602/5–1.10(a)(3)
Franchise Offering Circular Guidelines (1999), Bus. (‘‘The seller or a person specified by the seller will
Franchise Guide (CCH), ¶5790, at 8,466. This is a 97 See 16 CFR at 436.2(a)(1)(ii)(B). See also
purchase any or all products made, produced,
greatly streamlined version of the definition of Illinois Act, 815 ILCS 602/5–510(a)(1) (‘‘The seller fabricated, grown, bred, or modified by the
‘‘affiliated person’’ in the current Franchise Rule: or a person recommended by the seller will provide purchaser.’’). See also California Contracts for Seller
The term affiliated person means a person * * * or assist the purchaser in finding locations for the Assisted Marketing Plans, Cal. Civ. Code at
(1) Which directly or indirectly controls, is use or operation of vending machines, rack display § 1812.201(a)(3) (CA SAMP) (The ‘‘seller will buy
controlled by, or is under common control with, a cases or other similar devices, on premises neither back or is likely to buy back any product made,
franchisor; or (2) Which directly or indirectly owns, owned nor leased by the purchaser or seller.’’). produced, fabricated, grown or bred by the
controls, or holds with power to vote, 10 percent 98 E.g., FTC v. Am. Entm’t Distribs., No. 04– purchaser using in whole or in part, the product,
or more of the outstanding voting securities of a 22431–CIV–Huck (S.D. Fla. 2004); FTC v. Advanced supplies, equipment, or services which were
franchisor; or (3) Which has, in common with a Pub. Commc’ns Corp., No. 00–00515–CIV–Ungaro- initially sold or leased or offered for sale or lease
franchisor, one or more partners, officers, directors, Benages (S.D. Fla. 2000); FTC v. Ameritel Payphone to the purchaser by the seller assisted marketing
trustees, branch managers, or other persons Distribs., Inc., No. 00–0514–CIV–Gold (S.D. Fla. plan seller’’).
occupying similar status or performing similar 2000); FTC v. Mktg. and Vending Concepts, No. 00– 104 Cf. Illinois Act, 815 ILCS at § 5–5.10(a)(5)
functions. 1131 (S.D.N.Y. 2000). (attaching coverage where ‘‘[t]he seller will refund
16 CFR at 436.2(i). 99 E.g., FTC v. Mediworks, Inc., No. 00–01079 all or part of the price paid to the seller, or
95 As discussed below, the term ‘‘new business’’ (C.D. Cal. 2000); FTC v. Home Professions, Inc., No. repurchase any of the products, equipment or
also includes a new line of business. 00–111 (C.D. Cal. 2000); FTC v. Data Med. Capital, supplies provided by the seller or a person
96 The examples are drawn from the Illinois Inc., No. SACV–99–1266 (C.D. Cal. 1999). See also, recommended by the seller, if the purchaser is
business opportunity statute. Business Opportunity FTC v. AMP Publ’n, Inc., No. SACV–00–112–AHS– dissatisfied with the business’’).
Sales Law of 1995, 815 ILCS 602/5–1 through 602/ ANx (C.D. Cal. 2000). 105 Elman, 21-Aug-97 Tr. at 106–08. See also,
5–135 (1995) (‘‘Illinois Act’’). Several commenters 100 See 16 CFR at 436.2(a)(1)(ii)(B). See also, Wieczorek, id. at 108–09 (a broad buy-back policy
pointed to that statute as a good model. E.g., Illinois Act, 815 ILCS at 602/5–1.10(a)(2) (‘‘The would result in business opportunity coverage
Pampered Chef, ANPR 86, at 1; Amway, ANPR 89, seller or a person recommended by the seller will where a franchisor permits a prospective franchisee
at 1; Elman, Sept. 95 Tr. at 132–33; Wieczorek, id. provide or assist the purchaser in finding outlets or to ‘‘test drive’’ an opportunity for a limited period
at 284. accounts for the purchaser’s products or services.’’). of time).
iv. Payment Assistance guidance in the use, maintenance, and/ seller typically advertises the sale of a
The proposed list of illustrative or repair of any product to be sold by business, not just goods or services. In
business assistance examples also the purchaser or of any equipment contrast, a typical retailer may sell
includes ‘‘tracking or paying, or acquired by the purchaser.’’ This various goods that could be used in a
purporting to track or pay, commissions proviso is necessary to distinguish business, and may even recommend that
or other compensation based upon the ordinary support and warranty its goods be used in a particular
purchaser’s sale of goods or services or commitments that many manufacturers business, but the retailer does not
recruitment of other persons to sell or retailers offer in connection with the ordinarily promote the business itself.
goods or services.’’ Many pyramid sale of their products from the more
ii. Consideration
marketing plans offer this type of extensive assistance that characterizes a
business opportunity offer. For example, The proposed definition of ‘‘business
assistance, purporting to compensate
a copier manufacturer may advise opportunity’’ in section 437.1(d) would
participants not only for their own
customers on how to operate and apply where the purchaser pays
product sales but also for sales made by
perform service on a copier machine. consideration to the seller.109
their participants’ downline recruits.106
Or, a camera retailer may demonstrate ‘‘Consideration’’ is to be read broadly to
The inclusion of this illustrative
routine maintenance on a high-end include a monetary payment, share of
example would help to make it clear
camera sold to a professional profits, or a current obligation to make
that the Rule encompasses business
photographer. In both of these instances, a payment at a future date.110 The
opportunities in the form of pyramid
the printing business and photographer proposed definition also would make
schemes. As noted above, the
may well find the promised assistance clear that consideration can be paid
Commission’s law enforcement
valuable even if they are already directly to the seller, or indirectly
experience shows that these schemes
operating established businesses. In through a third party, such as a broker,
cause significant injury to consumers.
addition, this type of assistance is not lead generator, or locator. This
v. Other Advice or Training Assistance likely to cause someone contemplating provision is designed to close a
The final illustrative example of a new business to conclude that he or potential loophole that would subvert
‘‘business assistance’’ is ‘‘advising or she is assured of success even if they the proposed Rule’s anti-fraud
training, or purporting to advise or train, have no prior business experience. For protections. Without such a provision,
the purchaser in the promotion, these reasons, offers of such product- fraudulent business opportunity sellers
operation, or management of a new related assistance, without more, do not could circumvent the Rule by requiring
business, or providing, or purporting to rise to the level of ‘‘business assistance’’ payment to a third party with whom the
provide, the purchaser with operational, necessary for coverage under the seller has a formal or informal business
managerial, technical, or financial proposed Rule. relationship.111
guidance in the operation of a new iii. An Earnings Claim or an Offer to
d. Proposed Section 437.1(d): ‘‘Business
business.’’ Our law enforcement Provide Business Assistance
experience shows that the promise of opportunity’’
This definition establishes the The definition of ‘‘business
such assistance is a key feature of many
proposed Rule’s scope. The proposed opportunity’’ in section 437.1(d) would
fraudulent business opportunity
definition of ‘‘business opportunity’’ is specify that either the making of an
ventures, such as vending, rack display
intended to capture the sale of true earnings claim or the promise of
scams, and medical billing work-at-
business opportunities without business assistance by a seller in
home schemes.107
The proposed ‘‘business assistance’’ regulating the ordinary sale of goods connection with an offer to sell a new
definition concludes with an important and services to businesses. The three business will trigger Rule coverage.
proviso—that the term ‘‘business These elements are discussed in greater
definitional elements of the term
assistance’’ does not include ‘‘a written detail in the sections immediately
‘‘business opportunity’’ are: (1) A
product warranty or repair contract, or below.
solicitation to enter into a new business;
(2) payment of consideration, directly or 1. Earnings Claims
106 E.g., FTC v. NexGen3000.com, No. CIV–03– indirectly through a third party; and (3) The Commission’s law enforcement
120 TUC WDB (D. Ariz. 2003); FTC v. either an earnings claim or an offer to
Bigsmart.com, No. CIV 01–0466 PHX ROS (D. Ariz. history demonstrates that the making of
2001); FTC v. SkyBiz.com, No. 01–CV–0396–EA (X) provide business assistance. Each of earnings claims underlies virtually all
(N.D. Okla. 2001); FTC v. 2Xtreme Performance these elements is discussed immediately fraudulent business opportunity
Int’l, LLC, No. JFM 99CV 3679 (D. Md. 1999); FTC below.
v. FutureNet, Inc., No. CV–98–1113 GHK (BQRx)
schemes. As detailed above, the
(C.D. Cal. 1998); FTC v. Nia Cano, No. 97–7947– i. Solicitation to Enter Into a New Commission to date has brought over
CAS (AJWx) (C.D. Cal. 1997); FTC v. Global Business 140 cases against a multitude of
Assistance Network for Charities, No. 96–2494 PHX business opportunities and related
RCB (D. Ariz. 1996). See also, FTC v. Am. Safe The proposed definition of ‘‘business schemes, each of which lured
Mktg., No. 1:89–CV–462–RLV (N.D. Ga. 1989). opportunity’’ set forth at section
107 E.g., FTC v. Inspired Ventures, Inc., No. 02–
437.1(d)(1) contemplates that business or a person recommended by the seller shall
21760–CIV–Jordan (S.D. Fla. 2002); FTC v. Inv. Dev.
Inc., No. 89–0642 (E.D. La. 1989). FTC v. Home opportunity sellers will solicit provide to the purchaser any product, equipment,
Professions, Inc., No. 00–111 (C.D. Cal. 2000); FTC prospective purchasers to enter into supplies, or services enabling the purchaser to start
v. Star Publ’g Group, Inc., No. 00–023 (D. Wyo. new businesses, as opposed to merely a business’’).
109 As discussed below in connection with
2000) FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV soliciting purchasers for goods or
5881 (JES) (S.D.N.Y. 1998); FTC v. Fresh-O-Matic section 437.7 (exemptions), the proposed Business
Corp., No. 96–CV–315–CAS (E.D. Mo. 1996) FTC v. services.108 A business opportunity Opportunity Rule, unlike the Franchise Rule, would
Joseph Hayes, No. 4:96CV06126SNL (E.D. Mo. not include a minimum required payment
1996). See Illinois Act, 815 ILCS at § 602/5–5.15 108 ‘‘New business’’ is a term defined at section exemption.
110 This is consistent with the broad definition of
(The seller offers a marketing plan, defined as 437.(1)(k) of the proposed Rule: ‘‘ ‘new business’
‘‘advice or training * * * includ[ing], but not means a new business in which the prospective ‘‘payment’’ in the current Franchise Rule. See
limited to * * * training, regarding the promotion, purchaser is not engaged, or a new line or type of Interpretive Guides, 44 FR at 49967.
operation or management of the business business.’’ See Illinois Act, 815 ILCS at § 5–510(a) 111 See Illinois Act, 815 ILCS at § 602/5–5.10 (a)
opportunity; or operational, managerial, technical, (‘‘ ‘Business opportunity’ means a contract or (‘‘payment to the seller or a person recommended
or financial guidelines or assistance.’’). agreement * * * wherein it is agreed that the seller by the seller’’).
unsuspecting consumers through false 2. An Offer of Business Assistance whether or not the purchaser has a
or deceptive earnings Proposed section 437.1(d) brings contractual right to cancel, rescind, or
representations.112 These claims have within the scope of the Rule’s coverage seek a refund.’’
taken the form of purported historical those business opportunity sellers that f. Proposed Section 437.1(f):
earnings statistics (e.g., ‘‘Our operators do not make earnings claims, but offer ‘‘Designated Person’’
have earned $100,000 a year’’), as well business assistance. As one business
as wild and unsupported earnings The term ‘‘designated person’’
opportunity representative put it:
projections (e.g., ‘‘You will earn appears in section 437.1(d)(3)(ii), the
‘‘[Purchasers are] buying the seller’s
$100,000 in your first year’’). In the business assistance element of the
expertise to an extent. * * * The
Commission’s experience, such claims proposed ‘‘business opportunity’’
[sellers] know how to do it and that’s
are highly relevant to consumers in definition. That section specifies that
why [purchasers are] paying a
making their investment decisions and offered business assistance underlying a
premium.’’ Catalano, 20Nov97 Tr at
typically are the single most decisive business opportunity solicitation need
37.115 At the same time, the ‘‘business
factor in such decisions. not be provided to a purchaser directly
assistance’’ prong of the definition helps
Some commenters questioned by the seller. Rather, a seller who
to distinguish the sale of a business
whether the making of an earnings represents that business assistance may
opportunity from the ordinary sale of
claim alone should be sufficient to bring or will be provided by a third party,
goods or services: The proposed
the sale of a business opportunity such as a locator or supplier, will still
definition of ‘‘business assistance’’ is
within the ambit of the Rule, thereby be covered by the Rule and subject to its
limited to only those situations
triggering disclosure and other disclosure requirements and
involving ‘‘the establishment or
obligations. Pointing to various state prohibitions.118 Proposed section
operation of a new business.’’
business opportunity laws, these 437.1(d)(3)(ii) uses the term ‘‘designated
Assistance provided by a seller in
commenters contended that the person’’ as a convenient way to refer to
connection with the sale of off-the-shelf
disclosure and other requirements of the any third parties who would provide
goods, for example, would be excluded.
business assistance to a business
proposed Rule should be triggered only The proposed definition of ‘‘business
opportunity purchaser. Section 437.1(f)
if either: (1) The seller guarantees a level assistance,’’ therefore, expressly states
would define the term ‘‘designated
of earnings; or (2) the seller represents that ‘‘ ‘business assistance’ does not
person’’ to mean ‘‘any person, other
that the purchaser will earn at least as include a written product warranty or
than the seller, whose goods or services
much as his or her investment.113 repair contract, or guidance in the use,
the seller suggests, recommends, or
Given the prevalence of earnings maintenance, and/or repair of any
requires that the purchaser use in
claims in business opportunity sales, product to be sold by the purchaser or
establishing or operating a new
the Commission believes that a broad of any equipment acquired by the
business, including, but not limited to,
earnings disclosure requirement is purchaser.’’
any person who finds or purports to
necessary to prevent fraud. Limiting the e. Proposed Section 437.1(e): find locations for equipment.’’
Rule’s coverage to scenarios in which a ‘‘Cancellation or Refund Request’’ The definition of ‘‘designated person’’
seller either makes an express earnings and the use of this defined term in
guarantee or represents that the Section 437.3(a)(5) uses the term
‘‘cancellation or refund request.’’ It setting the scope of what constitutes a
purchaser will recoup his or her ‘‘business opportunity’’ are designed to
investment would effectively clear the would require a business opportunity
seller to disclose the number of close a potential loophole. For example,
way for fraudulent sellers to make other a fraudulent vending machine route
types of earnings claims to deceive cancellation or refund requests received
in the last two years.116 As explained seller would not be able to circumvent
prospects. We see little difference, for the Rule by representing to a
example, between a seller representing more fully below, this provision would
enable the prospective purchaser to prospective purchaser that a specific
that ‘‘our purchasers earn $10,000 a locator will place machines for the
month’’ and ‘‘we guarantee you $10,000 assess previous buyers’ satisfaction with
the business opportunity purchase. In purchaser, because that would qualify
a month.’’ In both instances, prospective as ‘‘business assistance,’’ bringing the
purchasers are likely to give the claim that regard, it is analogous to the
Franchise Rule’s disclosure of transaction within the ambit of the Rule.
significant weight in making their Similarly, a fraudulent rack display
investment decision.114 terminations, cancellations, and non-
renewals.117 Proposed section 437.1(e) seller could not evade Rule coverage by
would define ‘‘cancellation or refund simply recommending that a
112 See Section D above, discussing the scope of
request’’ broadly to mean ‘‘any request prospective purchaser use a particular
the proposed Rule. See also Franchise Rule SBP, 43 rack supplier. The recommendation
FR at 59630–632; 59684–689. to cancel or rescind a business
113 E.g., Wieczorek, 20Nov97 Tr at 32–33; opportunity purchase, or any request to itself would be sufficient to constitute
Cantone, id. at 33; Catalano; id. at 34. See Illinois seek a refund, in whole or in part, for ‘‘business assistance’’ under the Rule.
Act, 815 ILCS at § 602/5–5.10(a)(4) (‘‘The seller
guarantees that the purchaser will derive income
a business opportunity purchase, g. Proposed Section 437.1(g): ‘‘Disclose
from the business which exceeds the price paid to or State’’
115 See also Christopher, 20Nov97 Tr at 68; Grant,
the seller.’’); CA SAMP, Cal. Civ. Code, at
§ 1812.201(a)(1) (‘‘represented that the purchaser id. at 69. Proposed section 437.1(g) would
will earn, is likely to earn, or can earn an amount 116 Like other provisions of the proposed Rule, define the terms ‘‘disclose’’ and ‘‘state’’
in excess of the initial payment paid by the this provision would be subject to the Rule’s
purchaser for participation in the seller assisted quarterly updating requirement set forth at 118 This approach is consistent with the current
marketing plan’’). proposed section 437.3(b). For example, a seller Franchise Rule’s analogous definitional elements,
114 See Grant, 20Nov97 Tr at 40–41 (‘‘I’m offering business opportunities on November 5, extending the scope of that rule’s coverage to reach
concerned that using the word guarantee would be 2006, would disclose the data for the period transactions in which the franchisor provides to the
too limiting, that it would actually prevent the FTC October 1, 2004 through October 1, 2006, the last franchisee the services of a person able to secure
going after companies that we are all concerned eight quarters before the date of disclosure. See also the retail outlets, accounts, sites, or locations. 16
about for maybe not using the word guaranteeing proposed section 437.1(p) (defining the term CFR at 436.2(a)(1)(ii)(B)(3). See also, e.g., Illinois
but in their representations virtually guaranteeing ‘‘quarterly’’ to mean January 1, April 1, July 1, and Act, 815 ILCS at § 602/5–5.10(a)(1) (‘‘The seller or
through a variety of implications a level or range October 1). a person recommended by the seller will provide
that the person can expect.’’). 117 See 16 CFR at 436.1(a)(16). or assist the purchaser in finding locations.’’).
to mean ‘‘to give information in writing specific examples illustrative of this new purchaser through alternative
that is clear and conspicuous, accurate, type of earnings claim, as follows: ‘‘earn means of distribution, such as through
concise, and legible.’’ 119 This ensures enough to buy a Porsche,’’ ‘‘earn a six- Internet sales. It also includes implied
that a prospective purchaser will receive figure income,’’ and ‘‘earn your marketing areas, such as representations
complete information in a form that can investment back within one year.’’ 123 that the seller or other operators will not
easily be read. For example, the Each of these three illustrative examples compete with the purchaser, without
furnishing of a disclosure document imply a minimum value—the cost of the delineating a specific territory, or stating
without punctuation or appropriate lowest priced Porsche in the first a vague or undefined territory, such as
spacing between words would not be example, at least $100,000 in the ‘‘in the metropolitan area,’’ or ‘‘in this
‘‘clear.’’ Similarly, required information second, and an amount equal to the
region.’’ If false, any of these kinds of
such as the number and percentage of purchaser’s initial investment in the
representations can mislead a prospect
prior purchasers obtaining a represented third.124 Accordingly, the proposed
level of earnings would not be language makes it clear that these types about the likelihood of his or her
‘‘conspicuous’’ if set in small type, of representations are indistinguishable success.
printed in a low-contrast ink, or buried from direct, express earnings claims. j. Proposed Section 437.1(j): ‘‘General
amid extraneous information. Media’’
i. Proposed Section 437.1(i): ‘‘Exclusive
h. Proposed Section 437.1(h): ‘‘Earnings Territory’’
The term ‘‘general media’’ appears in
Claim’’ As discussed below, proposed section proposed section 437.4(b), which
Proposed section 437.1(h) would 437.5(n) would prohibit prohibits business opportunity sellers
define the term ‘‘earnings claim’’ as misrepresentations concerning from making unsubstantiated earnings
‘‘any oral, written, or visual exclusive territories. Representations claims in the ‘‘general media.’’127
representation to a prospective about exclusive territories are material Proposed section 437.1(j) would define
purchaser that conveys, expressly or by because they purport to assure a
the term ‘‘general media’’ as follows:
implication, a specific level or range of purchaser that he or she will not face
‘‘any instrumentality through which a
actual or potential sales, or gross or net competition from other business
person may communicate with the
income or profits.’’120 It is intended to opportunity purchasers of the same type
cover all variations of earnings in his or her chosen location, or from public, including, but not limited to,
representations that the Commission’s the seller offering the same goods or television, radio, print, Internet,
law enforcement experience shows are services through alternative channels of billboard, Web site, and commercial
associated with business opportunity distribution. Exclusive territory bulk e-mail.’’128 Thus, the definition
fraud. promises go to the viability of the includes traditional advertising media,
The definition also provides examples business opportunity and to the level of such as television, radio, and
of communications that constitute risk entailed in the purchase. Indeed, newspapers, as well as new
earnings claims. The first of these misrepresented territories are commonly technologies such as the Internet (both
examples is taken from the UFOC made by business opportunity sellers to standard advertisements and pop-up
Guidelines’ description of common lure consumers into believing that the window ads), and Web sites.129 It also
types of potentially fraudulent earnings offer poses little financial risk.125 includes commercial bulk e-mail
claims: ‘‘a chart, table, or mathematical Proposed section 437.1(i) would messages that are unsolicited, and often
calculation that demonstrates possible define an exclusive territory as follows: sent to individuals who have not
results based upon a combination of a specified geographic or other actual or previously expressed an interest in
variables.’’ UFOC Guidelines, Item 19, implied marketing area in which the seller
promises not to locate additional purchasers
receiving an e-mail from the particular
at i.121 This is intended to clarify that business opportunity seller.130
or offer the same or similar goods or services
sales matrixes that purport to show as the purchaser through alternative channels
income from an array of ‘‘vends’’ per of distribution. 127 This proposed provision is based on an
day from a vending machine, for analogous provision in the current Franchise Rule.
example, would constitute an ‘‘earnings Thus, the definition of ‘‘exclusive 16 CFR at 436.1(e). The Commission has alleged
claim’’ under the proposed Rule.122 territory’’ would reflect the common violations of this provision in numerous cases, for
The second example incorporates the industry practice of establishing example: FTC v. Wealth Sys., Inc., No. CV 05 0394
geographically delimited territories— PHX JAT (D. Ariz. 2005); U.S. v. Am. Coin-Op
principle, as expressed in the Servs., Inc., No. 00–0125 (N.D.N.Y. 2000); U.S. v.
Interpretive Guides to the Franchise such as a city, county, or state borders— Cigar Factory Outlet, Inc., No. 00–6209–CIV–
Rule, that ‘‘any statements from which as well as other marketing areas, such as Graham-Turnoff (S.D. Fla. 2000); U.S. v. Emily
a prospective purchaser can reasonably those delineated by population.126 It Water & Beverage Co., Inc., No. 4–00–00131 (W.D.
includes both representations that other Mo. 2000); and U.S. v. Greeting Card Depot, Inc.,
infer that he or she will earn a minimum No. 00–6212–CIV–Gold (S.D. Fla. 2000).
level of income’’ constitutes an earnings business opportunity purchasers will 128 See Interpretative Guides, 44 FR at 49984–85
claims. Such implied claims are at least not be allowed to compete with a new (earnings claims made ‘‘for general dissemination’’
as likely to mislead prospective purchaser within the territory, as well as includes ‘‘claims made in advertising (radio,
purchasers as express claims. The representations that the business television, magazines, newspapers, billboards, etc.),
opportunity seller itself or other as well as those contained in speeches or press
proposed definition includes three releases.’’ We also note that the Interpretive Guides
purchasers will not compete with the recognize several exemptions to the general media
119 The Franchise Rule contains a comparable claim, such as claims made to the press in
123 See Interpretive Guides, 44 FR at 49967. connection with bona fide news stories, as well as
provision, 16 CFR at 436.1(a), as do the UFOC
Guidelines. UFOC Guidelines, General Instruction 124 See Interpretive Guides, 44 FR at 59685 n. 486. claims made directly to lending institutions. Id. We
150. 125 See Staff Program Review, supra note 39, at propose that future Compliance Guides to the new
120 See UFOC Guidelines, Item 19.
39, 57. E.g., FTC v. Vendors Fin. Serv., Inc., No. 98– Business Opportunity Rule retain these standard
121 See also Staff Advisory Opinion, Handy 1832 (D. Colo. 1998); FTC v. Int’l Computer general media claims exemptions.
Hardware Centers, Bus. Franchise Guide (CCH) Concepts, Inc., No. 1:94CV1678 (N.D. Ohio 1994); 129 E.g., FTC v. Am. Entm’t Distribs., Inc., No. 04–
;¶ 6426 (1980). FTC v. O’Rourke, No. 93–6511–CIV–Ferguson (S.D. 22431–CIV–Martinez (S.D. Fla. 2004) (challenging
122 E.g., FTC v. Inspired Ventures, Inc., No. 02– Fla. 1993); FTC v. Am. Safe Mktg., No. 1:89–CV– earnings claims posted on seller’s Web site).
21760–CIV–Jordan (S.D. Fla. 2002); FTC v. Inv. Dev. 462–RLV (N.D. Ga. 1989). 130 See Informal Staff Advisory 04–2, Bus.
Inc., No. 89–0642 (E.D. La. 1989). 126 See UFOC Guidelines, Item 12 Instructions, ii. Franchise Guides (CCH) ¶ 6522 (2004).
k. Proposed Section 437.1(k): ‘‘New provisions.132 As in the current n. Proposed Section 437.1(n):
Business’’ Franchise Rule, the term would include: ‘‘Providing Locations, Outlets,
‘‘an individual, group, association, Accounts, or Customers’’
The term ‘‘new business’’ appears in
limited or general partnership, As noted above, one of the hallmarks
section 437.1(d), setting forth the
corporation, or any other entity.’’133 of fraudulent business opportunities is
definitional elements of the term
Accordingly, the term ‘‘person’’ is to be the offer to find locations, outlets, or
‘‘business opportunity.’’ As noted
read broadly to refer to both natural accounts for prospective purchasers.
above, the proposed ‘‘business
persons, businesses, associations, and The seller itself may purport to secure
opportunity’’ definition includes a
‘‘solicitation to enter into a new other entities. Where the proposed Rule locations, or may represent that third
business’’ prong in order to distinguish refers to a natural person only, it uses parties will do so for the business
the sale of a business opportunity from the term ‘‘individual.’’ opportunity purchaser.136 Proposed
the ordinary sale of products and section 437.1(n) would make clear that
m. Proposed Section 437.1(m): ‘‘Prior ‘‘providing locations, outlets, accounts,
services. Section 437.1(k) would define Business’’
the term ‘‘new business’’ to mean ‘‘a or customers’’ means:
business in which the prospective As discussed below, section furnishing the prospective purchaser with
purchaser is not currently engaged, or a 437.3(a)(3) of the proposed Rule would existing or potential locations, outlets,
new line or type of business.’’ Thus, the require business opportunity sellers to accounts, or customers; requiring,
recommending, or suggesting one or more
definition covers not only the disclose litigation in which they have locators or lead generating companies;
establishment of a new business, but been involved, in whole or in part, as collecting a fee on behalf of one or more
also entry into a new ‘‘line or type of well as that in which any of their locators or lead generating companies; or
business.’’ The intention in including affiliates or any prior businesses have training or otherwise assisting the
the latter language is to cover sales of been involved. Proposed section prospective purchaser in obtaining his or her
business opportunities to persons who 437.1(m) defines ‘‘prior business’’ as own locations, outlets, accounts, or
may already be in a business. It is customers.
(1) A business from which the seller
reasonable to assume that an existing acquired, directly or indirectly, the Accordingly, ‘‘providing locations,’’ for
businessperson could be defrauded like major portion of the business’ assets, or example, includes both an offer to
any other consumer when expanding provide locations that have already been
his or her business to include new (2) any business previously owned or found, as well as an offer to furnish a
products or services not currently operated by the seller, in whole or in list of potential locations. It includes not
offered for sale. For example, an existing part, by any of the seller’s officers, only directly furnishing locations, but
tire business could purchase a vending directors, sales managers, or by any also recommending to a prospective
machines route, or a beverage vending other individual who occupies a purchaser specific locators, providing a
machine route owner could purchase an position or performs a function similar list of locators who will furnish the
envelope stuffing opportunity.131 In to that of an officer, director, or sales locations, and training or otherwise
such instances, the veteran manager of the seller. assisting prospects in finding their own
businessperson may need the proposed Thus, the definition is broader than locations.137 The Commission’s law
Rule’s protections as much as a novice. the definition of ‘‘predecessor’’ found in enforcement history shows that in either
the UFOC Guidelines, for example, case, misrepresentations of this nature
l. Proposed Section 437.1(l): ‘‘Person’’ are particularly potent fraudulent
which covers only an entity from whom
Proposed section 437.1(l) would a seller acquired, directly or indirectly, devices to which prospective purchasers
define the term ‘‘person,’’ a term used the major portion of the seller’s are susceptible because of their reliance
in many of the proposed Rule’s assets.134 It includes instances where on the seller’s expertise in making their
definitional or substantive the seller owned or operated companies investment decision.138
that ceased operations. This broader 136 See, e.g., FTC v. Showcase Distribs., Inc., No.
131 One commenter questioned whether the Rule
definition is necessary to eliminate a 95–1368–PHX–SMM (D. Ariz. 1995) (location
should cover existing businesses that seek to potential loophole that would exist assistance found where investor introduced to a
expand into new lines of business. Caffey, 20Nov97 third party to secure locations or sites or provided
Tr at 25–27. In his view, experienced businesses under a more restrictive definition. The
with a list of such persons); FTC v. Jordan Ashley,
may not need full disclosure, noting that the Commission’s law enforcement Inc., No. 93–2257–CIV–Nesbitt (S.D. Fla. 1994)
Commission recognized this point in including a experience shows that sellers of (locations assistance found where purchasers
fractional franchise exemption in the Franchise fraudulent business opportunities referred to a professional locator); U.S. v. Hill, No.
Rule. Id. We disagree. As a preliminary matter, we IP–154–CR (S.D. Inc. 1991) (location assistance
note that the current Franchise Rule’s fractional frequently ply their trade through
found, in contempt action, where the promoter
franchise exemption is very narrow, covering multiple companies simultaneously or permitted investors to find their own locations or
instances where the purchaser has been in the same sequentially, disappearing in order to engaged the services of independent locating
type of business for more than two years and the avoid detection, and then reemerging in companies, but introduced investors to one or two
parties anticipate sales arising from the relationship ‘‘favored’’ locators). See also FTC v. World Traders
will represent no more than 20% of total sales. 16 some new form or different part of the Ass’n, Inc., No. CV05 0591 AHM (CTx) (C.D. Cal.
CFR at 436.2(a)(3)(i) and (h). The fractional country under new names. Accordingly, 2005) (assistance in finding businesses to purchase
franchise exemption’s prior experience prerequisite the broader ‘‘prior business’’ is needed surplus goods).
recognizes the fact that, because a businessperson 137 The scope of this definition is consistent with
may be experienced in one sector—such as snack
to capture all of a seller’s operations that
the parallel scope of ‘‘location assistance’’ required
vending—does not necessarily mean that he or she might fall outside a narrower term like for business opportunity coverage by the Franchise
is experienced enough to understand the potential ‘‘predecessor.’’135 Rule. See Staff Advisory Opinion 95–10, Bus.
for success and the risk of loss in another line of Franchise Guide (CC) ¶ 6475 (1995).
business, such as a greeting card rack display or 132 E.g.,

138 See, e.g., FTC v. Greeting Cards of Am., Inc.,
envelope stuffing. Moreover, we are inclined to sections 437.1(o); 437.5(p).
133 See
No. 03–60745–CIV–Gold (S.D. Fla. 2003); FTC v.
believe that a ‘‘fractional’’ exemption is 16 CFR at 436.2(b). Home Professions, Inc., No. 00–111 (C.D. Cal. 2000);
134 See UFOC Guidelines, Item 1 Instructions, iii.
unnecessary in the business opportunity context, FTC v. Hart Mktg. Enter. Ltd., Inc., No. 98–222–
given the greatly streamlined disclosure document 135 E.g., FTC v. Joseph Hayes, No. 4:96CV06126
CIV–T–23 E (M.D. Fla. 1998); FTC v. Hi Tech Mint
contemplated by the proposed Rule, since the SNL (E.D. Mo. 1996); FTC v. O’Rourke, No. 93– Sys., Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998);
benefits of disclosure would outweigh the minimal 6511–CIV–Ferguson (S.D. Fla. 1993); FTC v. Inv. FTC v. Fresh-O-Matic Corp., No. 96–CV–315–CAS
compliance costs. Dev. Inc., No. 89–0642 (E.D. La. 1989). (E.D. Mo. 1996).
o. Proposed Section 437.1(o): them, share them with an advisor, and payment of any consideration.144 This
‘‘Purchaser’’ retain them for future use. provision ensures a uniform standard
for determining when sellers must
Proposed section 437.1(o) would 2. Proposed Section 437.2: The
furnish disclosures, while ensuring
define the term ‘‘purchaser’’ to mean ‘‘a Obligation To Furnish Written
sufficient time for prospective
person who buys a business Documents
purchasers to review the sellers’
opportunity.’’ By operation of the Proposed section 437.2 would set disclosures before putting money at risk.
definition of ‘‘person’’ in section forth the Rule’s basic disclosure To prevent circumvention of this
437.1(l), a natural person, as well as any obligation. It would specify that it is a requirement, section 437.2 clarifies that
of various entities, would qualify as a violation of the Rule and section 5 of the payment to the seller can be made either
business opportunity purchaser.139 FTC Act for a seller to fail to furnish a directly to the seller or indirectly
p. Proposed Section 437.1(p): prospective business opportunity through a third party, such as a broker
‘‘Quarterly’’ purchaser with a complete and accurate or locator.145
basic disclosure document containing
To ensure accuracy and reliability of particular items of material information 3. Proposed Section 437.3: The Basic
disclosures, proposed section 437.3(b) (section 437.3(a)) and, where applicable, Disclosure Document
would require sellers to revise their an earnings claim statement (section Proposed section 437.3 specifies the
disclosures at least ‘‘quarterly.’’ 140 437.4(a)). The provision requires that items of material information that must
Proposed section 437.1(p) would set these disclosures must be provided to be included in the basic disclosure
forth a bright line rule that is easy to prospective purchasers ‘‘at least seven document. As an initial matter, we note
follow and that would ensure calendar days before the earlier of the that the proposed Rule specifies that
uniformity of disclosures: ‘‘quarterly’’ time that the prospective purchaser: (1) only sellers of business opportunities
means ‘‘as of January 1, April 1, July 1, Signs any contract in connection with have an obligation to prepare and
and October 1.’’ Thus, the proposed the business opportunity sale; or (2) furnish a basic disclosure document.
Rule would require sellers to update makes a payment or provides other Other persons involved in the sale of a
their disclosure by those specific dates consideration to the seller, directly or business opportunity—such as brokers,
each year. indirectly through a third party.’’ These locators, or suppliers—would have no
q. Proposed Section 437.1(q): ‘‘Seller’’ two requirements are discussed obligation to prepare basic disclosure
immediately below. documents or to furnish such
Proposed section 437.1(q) defines the documents. The ultimate responsibility
term ‘‘seller’’ to mean: ‘‘a person who a. ‘‘Seven Calendar Days’’
to ensure that disclosures are accurately
offers for sale or sells a business The proposed seven calendar-day prepared and disseminated would rest
opportunity.’’ Like the ‘‘purchaser’’ timing period is modeled on the current with the seller.146
definition, it contemplates that both Franchise Rule requirement that Proposed § 437.3(a) would provide
natural persons and entities may be franchisors furnish prospective instructions for preparing the basic
business opportunity sellers. purchasers with a completed copy of the disclosure document. Specifically,
franchise agreement at least five sellers must present the information in
r. Proposed Section 437.1(r): ‘‘Written’’ business days (which typically works
or ‘‘In Writing’’ ‘‘a single written document in the form
out to be seven calendar days), before and using the language set forth in
Proposed section 437.1(r) would the agreement is executed.143 The Appendix A to part 437’’. The single
define the terms ‘‘written’’ or ‘‘in Commission believes that seven written document requirement is
writing,’’ which are used throughout the calendar days is sufficient to enable a necessary to ensure that disclosures are
proposed Rule.141 The terms are defined prospective purchaser to review the not furnished in piecemeal fashion that
to include type-set, word processed, basic disclosure document and any can easily be overlooked or lost. It
printed, handwritten, and faxed earnings claims statement, as well as
documents. The definition also would conduct a due diligence review of the 144 This is similar to the comparable Franchise
include new technologies, such as offering, including contacting Rule provision. 16 CFR at 436.1(a) and 436.2(g).
information stored in computer disks or references. Nevertheless, the 145 This proposal is narrower than the original
CD–ROMs, as well as information sent Commission recognizes that for business Franchise Rule approach. Under the original
Franchise Rule, a franchisor must furnish a
via email or posted on the Internet.142 opportunity sales—as opposed to more disclosure document before the signing of a contract
Nevertheless, the definition seeks a complex franchise sales—a shorter or ‘‘the payment by a prospective franchisee, about
balance, minimizing compliance costs period may be warranted. Accordingly, which the franchisor, franchise broker, or any agent,
while preventing fraud. To that end, the the Commission solicits comment on representative, or employee thereof, knows or
should know, of any consideration in connection
definition would make clear that all whether it should adopt a shorter time with the sale or proposed sale of a franchise.’’ 16
electronic media must be in a form period. CFR at 436.2(g). Accordingly, a franchisor must
‘‘capable of being downloaded, printed, b. Signing a Contract or Making a furnish the disclosures if it knows or should know
or otherwise preserved in tangible form that a prospective franchisee is going to pay for
Payment as the Trigger for the required equipment from a third party. See
and read,’’ thus ensuring that a Disclosure Obligation Interpretive Guides, 44 FR 49970. To reduce
prospective purchaser who receives compliance burdens, the proposed Business
disclosures electronically can read Proposed section 437.2 would set Opportunity Rule, in contrast, would provide that
forth two events before which the seller a seller must provide required disclosure seven
must furnish disclosures: The execution calendar days before it actually receives
139 See 16 CFR at 436.2(b). consideration, directly or indirectly from a third
of any contract in connection with the
140 See 16 CFR at 436.1(a)(22). party.

141 E.g, sections 437.2, 437.3(a), 437.4(a). business opportunity sale, or the 146 See Wieczorek, 20Nov97 Tr at 13. This is the
142 Cf. Franchise Rule NPR, 64 FR at 57333. This same approach staff has recommended with respect
proposal would effectively permit business 143 16 CFR 436.1(g). See NASAA, ANPR 120, at to the Franchise Rule. See Staff Report on the
opportunity sellers to comply with the proposed 4 (advocating 10 business days); Wieczorek, Proposed Revised FTC Franchise Rule, at 85 (Aug.
Rule electronically, consistent with the Electronic 21Aug97 Tr at 113–14 (suggesting a seven-day or 10 25, 2004) (‘‘Franchise Rule Staff Report’’) (available
Signatures in Global and National Commerce Act, calendar-day waiting period). But see Caffey, ANPR at http://www.ftc.gov/os/2004/08/
15 U.S.C. 7001. 94, at 2 (opposing any waiting period). 0408franchiserulerpt.pdf.
would also prevent a seller from the salesperson offering the furnish the prospective purchaser with
circumventing the Rule by presenting opportunity,149 and the date. This an earnings claim statement attached to
damaging information in a format that is background information is material the basic disclosure document.153
not sufficiently prominent to be noticed because it would enable a prospective
ii. Proposed Section 437.3(a)(3): Legal
and understood, or not readily purchaser to contact the seller and any
Actions
accessible.147 By specifying that the salesperson for additional information,
basic disclosure document be ‘‘in the while providing a written record of who Proposed section 437.3(a)(3) would
form and using the language set forth in provided the required disclosures and address fraud in the sale of business
Appendix A,’’ the Commission intends when for law enforcement purposes. opportunities by requiring the
to make clear that all of the standard disclosure of material information about
b. Preamble certain prior legal actions.154
disclosures and other wording shown in
Appendix A are to be followed without After the identifying information, the Specifically, if the seller or certain
deviation. Failure to follow Appendix basic disclosure document would persons associated with the seller have
A’s form and language would violate the prescribe a preamble that briefly been the subject of specific types of
Rule. explains the purpose and limitations of actions within the last 10 years, the
Appendix A to part 437 would set the disclosures to prospective seller would be required to check the
forth the required format and language purchasers. Specifically, the preamble ‘‘yes’’ box. The types of actions covered
of the disclosure document. It consists would state that the information by this provision include ‘‘any civil or
of a single page and certain attachments contained in the disclosure document criminal actions for misrepresentation,
that in some instances may be ‘‘can help you in deciding whether to fraud, securities law violations, or
necessary. Specifically, Appendix A purchase a business opportunity.’’ At unfair or deceptive practices.’’
prescribes required introductory the same time, it cautions that ‘‘no Knowledge of actions of this nature
identifying information, a standard governmental agency has verified the against the seller or other persons
preamble, and five substantive information.’’ 150 It also advises associated with the seller would
disclosures: (1) Earnings claims; (2) prospects to seek more information from obviously affect a prospective
legal actions; (3) cancellation or refund the FTC by calling the FTC or visiting purchaser’s decision to go forward with
policy; (4) cancellation or refund the FTC’s Web site.151 It also advises the transaction. Moreover, the obligation
request history; and (5) references. prospects to check for information about to disclose these actions is not narrowly
Three of these disclosure items— additional state law requirements with confined to the seller in its specific
earnings claims, legal actions, and their state’s attorney general office. current corporate identity. It extends to
cancellation or refund policy—take the any ‘‘affiliate or prior business of the
c. ‘‘Yes’’ or ‘‘No’’ Disclosure Items
form of a ‘‘yes’’ or ‘‘no’’ check box on seller,’’ any of the seller’s ‘‘officers,
the disclosure document. Finally, the As noted above, the basic disclosure directors, sales managers, or any
seller must include a copy of the basic document would instruct the seller to individual who occupies a position or
disclosure document to be signed by the check a box providing ‘‘yes’’ or ‘‘no’’ as performs a function similar to an officer,
prospect as a receipt. Each of these to whether it: (1) Makes earnings claims; director, or sales manager of the seller,’’
elements of the required disclosure (2) has been the subject of legal actions; as well as any of the seller’s ‘‘employees
document is explained in greater detail and (3) offers cancellation or refund who are involved in business
below. rights. opportunity sales activities.’’ If there are
i. Proposed Section 437.3(a)(2): Earnings no actions to disclose, the seller would
a. Identifying Information
Claims simply check the ‘‘no’’ box.
The basic disclosure document would Disclosure of actions against ‘‘any
begin with identifying information Proposed section 437.3(a)(2) would affiliate or prior business of the seller’’
about the seller.148 Proposed section address earnings claims. As discussed is necessary to prevent circumvention of
437.3(a)(1) would specify that the seller further below in connection with the Rule. The Commission’s law
must include the seller’s name, business section 437.4, the Rule would permit enforcement experience amply
address, telephone number, the name of sellers to make an earnings claim, demonstrates that fraudulent business
provided there is a reasonable basis for opportunity sellers often operate
147 See 16 CFR at 436.1(a)(21). the claim and the seller can substantiate through multiple related affiliates, or
148 See 16 CFR at 436.1(a)(1) (requiring the the claim at the time it is made.152 If the use, sequentially or simultaneously, a
disclosure of the official name and address of the seller makes no earnings claim, then
principal place of business of the franchisor); UFOC variety of corporate identities in order to
Guidelines, Cover Page, at 2; Item 1. The
section 437.3(a)(2) would direct the
Commission has long recognized the materiality of seller simply to check the ‘‘no’’ box. If 153 Business opportunity sellers must also make
a business opportunity seller’s background the seller does make an earnings claim, the following prescribed cautionary statement in
information. For example, in the Franchise Rule however, then the Rule would require close proximity to the ‘‘yes’’ or ‘‘no’’ check boxes:
SBP, the Commission concluded that: ‘‘Read this statement carefully. You may wish to
the seller to check the ‘‘yes’’ box and to
The failure to disclose such material information show this information to an advisor or accountant.’’
* * * may mislead the [prospect] as to the business Obviously, this statement would not apply when a
149 See D’Imperio, Sept95 Tr at 278 (asserting that
experience of the parties with whom he or she is seller checks the ‘‘no’’ box.
dealing and * * * could easily result in economic disclosure of salesperson is an imperative 154 This provision is based upon analogous
injury to the [prospect] because of the * * * disclosure). provisions of the original Franchise Rule, 16 CFR
150 This is very similar to the current Franchise
dependence upon the business experience and 436.1(a)(4), and UFOC Guidelines, UFOC Item 3. In
expertise of the [business opportunity seller]. Rule approach. See 16 CFR at 436.1(a)(21). connection with the Franchise Rule, the
151 The reference to the FTC Web site will further
43 FR at 59642. Other Commission trade Commission stated in the Franchise Rule SBP that
regulation rules similarly require identity reduce fraud by giving prospects access to a wealth litigation history is material because it bears on the
disclosures. E.g., Wool Products Labeling Rule, 16 of information about business opportunities, ‘‘integrity and financial standing of the [seller].’’ 43
CFR at 300.14 (recognizing that names on a label including news releases on individual cases and FR at 59649. E.g., FTC v. Joseph Hayes, No.
may mislead consumers about the actual joint enforcement sweeps, consumer education 4:96CV02162SNL (E.D. Mo. 1996) (full disclosure
manufacturer); Fur Products Labeling Rule, 16 CFR materials, and Commission reports. would have revealed prior state fines and
at 301.43 (recognizing that corporate name may 152 This is consistent with analogous provisions injunctions); FTC v. Inv. Dev. Inc., No. 89–0642
mislead consumers about the character of the in the Franchise Rule, 16 CFR 436.1(b), (c), and (e), (E.D. La. 1989) (full disclosure would have revealed
product). as well as the UFOC Guidelines, Item 19. arson and insurance fraud convictions).
avoid detection.155 The requirement to opportunity.160 To enable a prospective Commission believes that these types of
disclose legal actions against affiliates or purchaser to evaluate better such actions are the most relevant in
prior businesses is designed to thwart salesperson’s statements, the Rule addressing business opportunity
such attempts to skirt the Rule. would require a business opportunity fraud.163
seller to disclose certain information To minimize compliance costs
The obligation to disclose prior legal
about sales personnel’s prior adverse further, the proposed Rule would not
actions reaches ‘‘any of the seller’s
legal history. require sellers to detail the nature of
officers, directors, sales managers, or
The seller, however, would have no each legal action, as in the Franchise
any individual who occupies a position
obligation to disclose litigation against Rule.164 If the seller has litigation to
or performs a function similar to an
other employees—secretarial, clerical, disclose, it need only state in an
officer, director, or sales manager of the
and accounting staff, for example. attachment to the disclosure document
seller’’ 156 to ensure that key officers and Indeed, because a prospective purchaser the full caption of each legal matter
sales personnel with prior litigation typically does not rely on these (names of the principal parties, case
against them cannot evade the Rule by individuals’ expertise, and does not number, full name of court, and filing
merely foregoing a formal title. It is the expect these individuals to perform date). We note that the disclosure
function such individuals perform, not under the business opportunity document itself instructs prospects that
a title, that triggers the proposed Rule’s agreement, any litigation in which they the legal matters disclosed pertain to
disclosure obligation. In the may have been involved is largely ‘‘misrepresentation, fraud, securities
Commission’s experience, there is often immaterial to the business opportunity law violation, or unfair or deceptive
little correlation between titles and sale. practices.’’ This will provide the
functions performed in business To minimize compliance costs, only prospect with a basic understanding of
opportunity scams. Business criminal proceedings or civil actions the subject matter of the action. Armed
opportunity sellers often operate as a involving ‘‘misrepresentation, fraud, with the full caption, a prospective
‘‘d/b/a.’’ 157 Even when a seller operates securities law violations, or unfair or purchaser can seek additional
through a corporation, there often is no deceptive practices’’ would be information if he or she so chooses.165
compliance with corporate formalities, disclosed.161 As previously noted in the
or other separations of the entity from discussion of the term ‘‘action,’’ iii. Proposed Section 437.3(a)(4):
its owners, and any of the individuals disclosure of such actions is required Cancellation or Refund Policy
involved in such operations may go on regardless of whether the claim is Proposed section 437.3(a)(4) would
to operate multiple frauds in a variety brought in a court or administrative require sellers to disclose all terms and
of corporate formats.158 Accordingly, action or arbitration proceeding, and conditions of any cancellation or refund
any person who acts as a corporate whether it is brought by a private party policy.166 This pertains to a common
director, officer, or sales manager would or a governmental agency.162 The practice among business opportunity
be deemed to fall within the ambit of sellers, namely, offering prospective
the lawsuit disclosure requirement, 160 E.g., FTC v. Universal Greeting Card Corp., No. purchasers the right to cancel or to seek
whether or not he or she has a formal 02–21753–CIV–Jordan (S.D. Fla. 2002); FTC v. a whole or partial refund.167 Such
corporate title. Raymond Urso, No. 97–2680–CIV–Ungaro–Benages
(S.D. Fla. 1997). See also FTC v. America’s
The section 437.3(a)(3) litigation Shopping Network, Inc., No. 02–80540–CIV–Hurley 436.1(a)(4)(ii) (requiring disclosure of ‘‘any group of
(S.D. Fla. 2002). civil actions which, irrespective of the materiality
disclosure would also extend to the 161 This is narrower than the range of actions that of any single such action, in the aggregate is
‘‘seller’s employees who are involved in must be disclosed under the Franchise Rule. See 16
material’’).
business opportunity sales CFR at 436.1(a)(4) (legal actions that must be
163 See Finnigan, 21Aug97 Tr at 123 (observing
activities.’’ 159 The Commission’s law disclosed include embezzlement, fraudulent that litigation disclosures are ‘‘crucial information,’’
conversion, misappropriation of property, and but should be limited); Sokol, id. (suggesting fraud
enforcement experience shows that litigation by an enforcement body should be
actions filed by franchisees involving the franchise
sales employees, like officers, often relationship). See also UFOC Guidelines, Item 3 disclosed).
make material misrepresentations to (franchise, antitrust, or securities law, fraud, unfair
164 Cf. 16 CFR at 436.1(a)(4) (‘‘Such statement
induce prospects to purchase a business or deceptive practices, or comparable allegations). shall set forth the identity and location of the court
One commenter suggested that the enumerated list or agency; the date of conviction, judgment, or
of legal actions that must be disclosed in the decision; the penalty imposed; the damages
155 See discussion of section 437.1(m) (‘‘prior
Franchise Rule context may be unwarranted for assessed; the terms of the settlement or the terms
business’’) above. business opportunities. We agree. See Wieczorek, of the order; and the date, nature, and issuer of each
156 The original Franchise Rule and UFOC such order or ruling.’’).
21Aug97 Tr at 124 (suggesting that disclosure of
Guidelines have comparable disclosure embezzlement, fraudulent conversion, and restraint 165 We note that the public’s ability to review
requirements. See 16 CFR at 436.1(a)(2) and (3) of trade litigation for business opportunities may go complaints in legal proceedings has become
(directors, executives, including the chief executive too far). significantly easier since the advent of the Internet.
and chief operating officer, financial, franchise 162 The proposed disclosure of legal actions is Many legal documents are now routinely posted on
marketing, training and service officers); UFOC broader than the comparable disclosure under the court or related websites.
Guidelines, Items 2 and 3 (affiliates offering Franchise Rule in one respect. The proposed Rule 166 The Commission adopted the same approach
franchises under the franchisor’s principal contemplates that a business opportunity seller in the TSR. See 16 CFR at 310.3(a)(1)(iii) (If a seller
trademark, directors, trustees and/or general must disclose prior suits even if the seller makes a representation about a refund policy, it
partners, the principal officers, and other executives prevailed. In contrast, franchisors need not disclose must disclose ‘‘a statement of all material terms and
or subfranchisors who will have management isolated instances of suits in which they prevailed conditions of such policy.’’). See also Cecal,
responsibility relating to the offered franchises). Cf. if such suits are not material. See 16 CFR at 21Aug97 Tr at 126 (suggesting there should be a
Franchise Rule Staff Report, supra note 146, at 101 436.1(a)(4)(ii) (only material individual civil actions refund policy statement).
(recommending that a franchisor identify all need be listed). With respect to business 167 See, e.g., FTC v. AMP Publ’n., Inc., No. SACV–
individuals who control the franchisor, regardless opportunities, the filing of a suit for fraud or 00–112–AHS–ANx (C.D. Cal. 2001); FTC v. Home
of any formal title). misrepresentation, for example, is likely to indicate Professions, Inc., No. SACV 00–111 AHS (Eex) (C.D.
157 E.g., FTC v. Am. Universal Vending Corp., No.

discontent with the business opportunity seller, Cal. 2001); FTC Innovative Prods., No. 3:00–CV–
00–0155 (W.D.N.Y. 2000); FTC v. Data Med. which is a material fact needed for a prospective 0312–D (N.D. Tex. 2000); FTC v. Encore Networking
Capital, Inc., No. SACV–99–1266 (C.D. Cal. 1999). purchaser to assess the quality of the relationship Servs., No. 00–1083 WJR (AIJx) (C.D. Cal. 2000);
158 E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir.
between the seller and prior purchasers. In that FTC v. Mediworks, Inc. No. 00–01079 (C.D. Cal.
2003); FTC v. Inv. Dev. Inc., No. 89–0642 (E.D. La. regard, it is comparable to the disclosure of requests 2000). Indeed, allegations that business opportunity
1989). for cancellation or refund, even if the sales sellers misrepresented their refund policies ranks
159 See D’Imperio, Sept95 Tr at 278 (asserting that agreement contemplates no cancellations or among the top 10 complaint allegations in
salesperson litigation is a critical disclosure). refunds, addressed below. See also 16 CFR at Continued
cancellation or refund offers are similar to false earnings representations during the past two years.173
material to prospective purchasers in that they imply that the purchaser Specifically, proposed section
because they involve the potential risk will also be successful, or, at the very 437.3(a)(5) would require sellers to state
of the proposed transaction, creating the least, that the seller’s offer is a safe first the number of purchasers of the
impression that the business investment.170 The most effective business opportunity during the two
opportunity offer is either risk free or a measure to combat such practices might years prior to the date of disclosure.174
low financial risk. Indeed, the Staff be to require a business opportunity This number would serve as a base line.
Program Review found that 24% of seller to disclose the drop-out rate of Second, the seller would disclose the
business opportunity complaints prior purchasers of the same number of those purchasers who, during
involved consumers seeking to cancel opportunity within a given time period. the same two-year period, asked to
their purchase (818 of 4512 complaints), Such an approach would be similar to cancel their purchase or sought a
and 22% involved a refund policy issue the Franchise Rule requirement of refund, whether or not the purchaser
(752 of 4512 complaints).168 detailed disclosures about the number has the contractual right to receive a
The proposed Rule does not require of existing franchisees, as well as those
any seller to offer cancellation or a cancellation or refund. This two-fold
who have left the system in the previous disclosure is reflected in Appendix A to
refund. Rather, if a seller does make a year.171
cancellation or refund offer, it must the proposed Rule, setting forth the
The Commission recognizes, however, required format and language of the
disclose the terms and conditions prior
to the sale. Specifically, a seller that that a business opportunity seller may disclosure requirement.
offers a cancellation or refund policy not have access to detailed information
The Commission believes that this
must check the ‘‘yes’’ box on the about prior purchasers who have ceased
proposed disclosure is narrowly tailored
disclosure document and also must operations. For example, a vending
business opportunity seller may have no and would impose minimal compliance
attach to the disclosure document a costs. It does not require a seller to
written description of its policy. To further contacts with purchasers after
locating the machines and, therefore, gather statistics about the status of prior
minimize compliance costs, the seller purchasers. Rather, the seller need only
may comply with this disclosure by would not necessarily know if the
purchaser subsequently abandons the report the number of sales, as well as
attaching to the disclosure document a the total number of requests for
copy of a pre-existing document that business. This is in contrast with the
typical business format franchise, where cancellations or refunds that it has
details the seller’s cancellation or received,175 both of which should be
refund policy. For example, a seller may the franchisor maintains direct and
extensive contacts with its franchisees easy to tally. In addition, it would
detail its refund policy in a company
during the entire course of the franchise require sellers to disclose only the
brochure. If so, the seller need only
relationship. With respect to a typical number of cancellation requests or
attach to the disclosure document the
business opportunity transaction, refunds, not the identity of individual
particular page setting forth the refund
policy. As in the other examples above, therefore, the Commission believes it cancellation or refund requesters.
if no cancellation or refund is offered, would be impracticable to mandate a While the Commission believes that
then the seller need only check the ‘‘no’’ drop-out rate disclosure. information on refund requests can
box. In lieu of a drop-out rate, the provide material information on the
Commission proposes that sellers satisfaction of previous purchasers, it is
d. Proposed Section 437.3(a)(5):
disclose cancellation or refund also aware that it is possible that such
Cancellation and Refund History
requests 172 made by prior purchasers a disclosure requirement might cause
In addition to the ‘‘yes’’ or ‘‘no’’ items some sellers to discourage refund
discussed above, the proposed Rule (C.D. Cal. 1996); FTC v. Infinity Multimedia, Inc., requests by not offering refunds or by
would require sellers to disclose No. 96–6671–CIV–Gonzalez (S.D. Fla. 1996). limiting the situations in which refunds
information about prior cancellation or 170 Cf. Franchise Rule SBP, 43 FR at 59670–71
are offered. On the other hand, the
refund requests. This information is (‘‘statistical information gives [prospects] material
information about the size of the * * * system they absence of a refund provision or the
material to prospective purchasers are contemplating joining and sheds light on the presence of a very restrictive provision
because it goes to the viability of the prospect’s likelihood of success.’’). might reduce the attractiveness of the
business, the success of past purchasers, 171 See 16 CFR at 436.1(a)(16); UFOC Guidelines,
offer. Therefore, the Commission invites
and their satisfaction with the business Item 20. See also Finnigan, 21Aug97 Tr at 167
(identifying success rate of a business opportunity comment on the likely effect of this
opportunity. Knowing that a seller has
as a ‘‘crucial piece of information’’). On the other provision on the willingness of business
received a large number of cancellation hand, DSA and its members contended that a drop- opportunity sellers to offer refunds.
or refund requests would likely out rate may be misleading in the multilevel
influence a prospective purchaser’s marketing field, where, because of the low entry
173 Cf. Illinois Act, 815 ILCS § 602/5–35(b)(16)(B)
decision as to whether to go forward costs, people may test the waters for a period before
deciding whether to continue with the program. (‘‘The names and addresses of purchasers who have
with a transaction. E.g., Elman, 21Aug97 Tr at 155–56; 168–69; Brown, requested a refund or rescission from the seller
In many instances, business id. at 157–58, 168. In such circumstances, a drop- within the last 12 months and the number of those
opportunity sellers make false or out rate disclosure may overstate the difficulty of who have received the refund or rescission). See
deceptive claims about the success of succeeding in the business. But see In re Amway, also CA BLS, RR 45, at 9 (‘‘If there is a promise to
93 FTC 618 (1979) (ordering Amway to make such refund if the purchaser is not satisfied with the
prior purchasers.169 Such claims are a disclosure). The approach taken in the proposed business opportunity, the number of times this has
Rule does not require a drop-out rate. Rather than occurred during a certain period of time is
Commission business opportunity cases brought requiring disclosure of a broad drop-out rate, it relevant.’’).
under Section 5. See Staff Program Review, supra focuses narrowly on a subset of purchasers who 174 See Wieczorek, 21Aug97 Tr at 157; Cecal, id.
note 39, at 39. have ceased operations, namely those who have at 159.
168 Staff Program Review, supra note 39, at 57. requested to cancel or to obtain a refund. 175 For purposes of this disclosure, the term ‘‘past
169 E.g., FTC v. Trek Alliance, Inc., No. 02–9270 172 As discussed above, the definition of two years’’ means the eight quarters immediately
SJL (AJWx) (C.D. Cal. 2002); FTC v. 2Xtreme ‘‘cancellation or refund request’’ is broad, including preceding the date of the disclosure document. This
Performance Int’l, LLC, No. JFM 99CV 3679 (D. Md. any request for cancellation or a full or partial would require quarterly updating, consistent with
1999); In re Computer Bus. Servs., FTC C–3705 refund, whether or not the requester has the the Rule’s general updating provision, discussed
(1996); FTC v. Roche, No. SACV 96–481 LHM (Eex) contractual right to receive such a remedy. below at proposed section 437.3(b).
e. Proposed Section 437.3(a)(6): great as to outweigh any potential In addition, proposed section
References detriment to sellers jealous of their 437.3(a)(6) would limit the disclosure of
Proposed section 437.3(a)(6) would customer base. First, the only way references to those who have purchased
require the disclosure of a limited prospects can reasonably protect the business opportunity within the last
number of prior purchasers as themselves from a seller’s fraudulent three years. The Commission believes
references. As in the current Franchise claims is to conduct their own due that purchasers within the last three
Rule,176 the Commission believes that diligence review of the business years—as opposed to those who
the disclosure of prior purchasers is opportunity offer by contacting prior purchased the business opportunity
very important to prevent fraud because purchasers.179 Unlike franchisees earlier than that—are likely to have the
it enables prospects to verify the seller’s identified by a common trademark or most current information about the
claims independently.177 Such a trade name, who can be identified by seller and its business operation.
disclosure has been required for over 25 looking in the yellow pages or other Limiting the disclosure of references to
years for business opportunities covered business directories, business a three-year period will also minimize
by the Franchise Rule. opportunity purchasers are not readily compliance costs.
Nevertheless, this proposed identifiable. Indeed, many business Finally, proposed section 437.3(a)(6)
disclosure was one of the most opportunities are conducted out of the would address the privacy concerns
controversial proposals in the ANPR. purchaser’s home, making them raised by the use of purchaser
Several business opportunity seller difficult, if not impossible, to find. information. As noted above, the
representatives asserted that names of Under the circumstances, the proposed Rule would require a seller to
prior purchasers are proprietary Commission concludes that a disclosure disclose the name, city and state, and
information, essentially comprising a of references is essential. telephone number of certain purchasers
customer list. They maintained that to serve as references. The Commission
The Commission has taken care to has concerns about privacy protection
there are certain fundamental limit the scope of proposed section
differences between franchises and with respect to requiring the disclosure
437.3(a)(6). The seller need only of prior purchasers’ contact
business opportunities with respect to disclose the name, city and state,180 and
the sensitivity of such information. information—notwithstanding the fact
telephone number of each prior that this type of information is often
They argued that in franchise purchaser (if fewer than 10), or at least
relationships, franchisees are often readily available and in the public
the 10 prior purchasers nearest to the domain from such sources as telephone
subject to supplier agreements that prospective purchaser’s location.181 In
compel them to purchase goods or directories. To address this concern, the
order to minimize compliance costs Commission proposes that sellers be
services from specific sources further, the proposed Rule provides an
contractually mandated by the required to state the following language
alternative: In lieu of a list of the 10 clearly and conspicuously in their
franchisor. Accordingly, competing
prior purchasers nearest the prospect, a disclosure document and in immediate
suppliers would not approach a
seller may provide a prospect with a conjunction with the list of references:
franchisee listed in a disclosure
national list of all purchasers.182 For ‘‘If you buy a business opportunity from
document as a potential customer. In
example, the seller making disclosures the seller, your contact information can
contrast, the seller of a business
online could maintain a master list of be disclosed in the future to other
opportunity, such as a vending machine
purchasers on its website that can be buyers.’’
route, may supply the purchaser not
updated periodically. This would The Commission seeks comments and
only with machines, but products to fill
enable the seller to avoid having to suggestions on balancing the need to
the machines. Often, however, there is
tailor the disclosure to each prospective enable prospective purchasers to verify
no ongoing contractual provision
purchaser. Proposed section 437.3(a)(6) sellers’ claims with privacy concerns.
limiting the purchaser’s source of
specifies that sellers selecting the Specifically, the Commission seeks
supplies. A list of prior business
national option must insert the words comment on ways that the Commission
opportunity purchasers, therefore, is
‘‘See Attached List’’ and attach a list of might achieve availability of
essentially a list of potential
the references to the disclosure independent information about
customers.178
document. purchasers’ experience consistent with
While the commenters’ concern is not
protecting those purchasers’ privacy.
without merit, the Commission believes
179 See Rabenberg, Sept95 Tr at 105–06 (business The Commission seeks comment on
that the value to prospects of opportunity purchaser asserting that the disclosure alternatives, including approaches that
information about prior purchasers is so of names and addresses of existing purchasers is may be used by states with business
material information needed to conduct a due
176 16 CFR at 436.1(a)(16)(iii). diligence investigation of the offer); D’Imperio, RR opportunity laws containing reference
177 See Franchise Rule SBP, 43 FR at 59673 (The 16, at 3 (priority should be given to mandatory disclosures. In addition, the
disclosure of current franchisees’ names and disclosure of reliable contact information). Commission seeks comment on whether
180 The proposed Rule would not require the
addresses ‘‘will provide prospective franchisees the Rule should permit purchasers the
with a means to (a) ascertain the problems disclosure of prior purchasers’ street addresses. The
Commission believes that prospects can readily
opportunity to opt-out of the disclosure
confronting franchisees operating under conditions
similar to those under which the prospective contact a prior purchaser if provided with the prior of their contact information.
franchisees would be operating, and (b) verify the purchaser’s name, city and state, and telephone
representations by the franchisor concerning the number. This approach enables prospects to contact f. Proposed Section 437.3(a)(7): Receipt
franchise’’). references while minimizing the intrusion into Proposed section 436.3(a)(7) would
178 See, e.g., Catalano, ANPR 27, at 2–4 prior purchasers’ privacy.
181 See 16 CFR at 436.1(a)(16)(iii).
set forth a receipt requirement.
(‘‘[U]nscrupulous competitors [with] access to the
Specifically, the seller must attach a
customer base of legitimate business opportunity 182 See Catalano, ANPR 27, at 5. Mr. Catalano
sellers * * * would have a ‘field day’ contacting opposed the required disclosure of prior duplicate copy of the basic disclosure
customers of other sellers, attempting to sell them purchasers. He stated, however, that if the page to be signed and dated by the
competing products and services.’’); Brown, Commission were to mandate such a requirement, purchaser. A designation for the
21Aug97 Tr at 167 (contending that Amway would then sellers may prefer disclosing a single national
fight ‘‘tooth and nail’’ to not disclose purchaser reference list to the regulatory burden imposed by
signature and date is included at the
information, which it views as its customer list); compiling individualized reference lists for each bottom of the page. This requirement is
Silverman 20Nov97 Tr at 222–23. prospective purchaser. Id. designed to document proper
disclosure. The receipt is especially the most part, this section is similar to must be a single written document.191
important to prove proper disclosure the parallel section of the Franchise The document must be titled
with respect to electronic documents. A Rule. Like the Franchise Rule, the ‘‘EARNINGS CLAIM STATEMENT
seller furnishing disclosures online, proposed Rule would not require REQUIRED BY LAW’’ in capital, bold
either through email or access to a Web business opportunity sellers to make an type letters. This ensures that the
site, has the burden of establishing that earnings claim. Rather, the disclosure of prospective purchaser can readily
the prospect was actually able to access earnings information is strictly determine from the face of the
the electronic document. Completion voluntary. Also, like the analogous document the importance of its text.
and submission of the receipt serves provision in the Franchise Rule, The title is followed by the name of the
that purpose. proposed section 437.4(a) would require person making the claim, and the date
The proposed Rule does not impose a seller making an earnings claim to: (1) of the claim.
any particular method of transmitting Have a reasonable basis for the claim at After the title and identifying
the receipt. In order to minimize the time the claim is made; 185 (2) have information, the proposed Rule requires
compliance costs, the Commission in its possession written materials that the seller to state the specific earnings
believes that the parties should have substantiate the claim at the time the claim. The proposed Rule does not
maximum flexibility to determine the claim is made; 186 (3) make the written specify any particular format or formula
best method for their business material available to the prospect and for an earnings claim. Consistent with
opportunity. Accordingly, proposed the Commission upon request; 187 and the Franchise Rule, the proposed Rule
section 437.3(a)(7) would permit the (4) furnish the prospect with an allows flexibility in presenting earnings
seller to inform the prospective earnings claim statement.188 Also, like information in the manner that is
purchaser how to return the signed the Franchise Rule, proposed section appropriate for each opportunity,
receipts, for example, by sending the 437.4(b) would set forth the provided that any such claim have a
receipt to a street address, or through requirements for making earnings reasonable basis and that there be
email address, or facsimile. claims in the general media.189 Finally, written substantiation for the claim at
proposed section 437.4(d), like the the time it is made, as noted above.
g. Proposed Section 437.3(b): Updating analogous section of the Franchise Rule, The proposed Rule would also require
To ensure that a seller’s disclosures would require sellers to notify prospects the seller making an earnings claim to
are current, proposed section 437.3(b) in writing of any changes in earnings disclose the beginning and ending dates
would require sellers to update their information before the prospect enters when the represented earnings were
disclosures periodically. Specifically, into a contract or provides any achieved.192 This information is
the provision states that it would be a consideration to the seller, directly or material because a prospective
violation of the Rule for a seller to fail indirectly through a third party.190 At purchaser cannot begin to evaluate an
to update the disclosures to reflect any the same time, the proposed Rule would earnings representation without
material changes in the information differ from the original Franchise Rule knowing how recently the supporting
presented in the basic disclosure by addressing in proposed section data was collected. For example, a seller
document on at least a quarterly 437.4(c) the use of industry financial or may have conducted a survey of
basis.183 The Commission believes that earnings information. Each of these opportunity purchasers in 2002. The
quarterly updating strikes the right issues is discussed in the following Rule would not necessarily prohibit the
balance between the need for accurate section. use of that survey information in 2005
disclosure and the costs and burdens or beyond.193 Nonetheless, the prospect
more frequent updating would entail. a. Proposed Section 437.4(a)(4): The
should be made aware of the applicable
Nevertheless, proposed section 437.3(b) Earnings Claim Statement
time period in order to assess the
would include a proviso that would Proposed section 437.4(a)(4) would relevance of the claim to current market
require more frequent updating in one prescribe the content of the earnings conditions. Similarly, a prospect may
respect: the list of references. claim statement. To ensure ease of reasonably give greater weight to a
Specifically, a seller would be required review, each earnings claim statement survey of purchasers over an extended
to update the list of references monthly period of time (for example, over a
until such time that it is able to include ANPR 115, at 2; Caffey, ANPR 94, at 2; NASAA, three-year period), than a more limited
ANPR 120, at 3–4; NCL, ANPR 142; Samson,
the full list of 10 purchaser/references. 21Aug97 Tr at 173; Finnigan, id.; Wieczorek, RR 23,
survey (for example, over a three-month
This is particularly necessary for start- at 2–3; NASAA, RR 43, at 2; Simon, Sept95 Tr at period).
up systems that may have few or no 281–82. Cf. TSR, 16 CFR at 310.3(a)(2)(vi) Further, this section of the proposed
prior purchaser references when they (prohibiting misrepresentations about any ‘‘material Rule would require the disclosure of the
aspect of an investment opportunity including, but
commence business opportunity sales. not limited to, risk, liquidity, earnings potential, or
number and percentage of all purchasers
The Commission believes that profitability’’). during the relevant time period who
prospective purchasers’ ability to 185 E.g., 16 CFR at 436.1(b)(2); 436.1(c)(2). have achieved at least the claimed
contact at least 10 purchasers in their Consistent with the Franchise Rule NPR, the earnings.194 This information is highly
due diligence investigation of business Commission also proposes not to include in the material because it enables the prospect
proposed Business Opportunity Rule a ‘‘geographic
opportunity offers outweighs any costs relevance’’ requirement on the grounds that that to determine whether the claimed
of more frequent updating until the list prerequisite is subsumed in the ‘‘reasonable basis’’ earnings of prior purchasers are typical.
of 10 is compiled. requirement. See Franchise Rule NPR, 64 FR at
57310. 191 See 16 CFR at 436.1(e)(5).
4. Proposed Section 437.4: Earnings 186 16 CFR at 436.1(b)(2); 436.1(c)(2). 192 See, e.g., 16 CFR at 436.1(b)(5)(ii).
Claims 187 16 CFR at 436.1(b)(2); 436.1(c)(2).
193 Of course, supporting data may become so

188 16 CFR at 436.1(d).
Section 437.4 of the proposed Rule stale that a seller would no longer have a reasonable
189 16 CFR at 436.1(e). basis for making an earnings representation because
would address earnings claims.184 For 190 16 CFR at 436.1(d)(2) and 436.1(e)(6) (each the data, even if true when collected, no longer
prospective franchisee to whom the representation reflects current market conditions. Any such
183 See16 CFR at 436.1(a)(22). determination is necessarily fact-specific and can
is made shall be notified of any material change in
184 Commenters widely supported earnings the information contained in the earnings claims only be made on a case-by-case basis.
disclosure and substantiation. E.g., Christopher, document). 194 See, e.g., 16 CFR at 436.1(e)(5)(ii).
For example, a seller may claim that written material that substantiates the experience of the start-up’s prior
purchasers have average earnings of claim at the time the claim is made; 199 purchasers.
$50,000 a year. Even if true, this and (3) states in immediate conjunction
statement may not reflect the experience with the claim the beginning and ending d. Prospective Section 437.4(d): Material
of the typical purchaser because a few date when the represented earnings Changes
purchasers with unusually high were achieved and the number and Proposed section 437.4(d) would
earnings could skew the average. Thus, percentage of those who have achieved address post-disclosure changes in
the number and percentage of the presented earnings in the given time earnings information. Consistent with
purchasers earning $50,000 a year might period.200 These requirements are the Franchise Rule, it would prohibit
actually be very low. necessary to prevent deceptive and any seller making an earnings claim
In addition to the earnings claim and misleading earnings representations in from failing to notify the prospective
substantiation requirements, this section advertisements, as well as to enable a purchaser, before the prospect enters
of the proposed Rule would require a prospect to assess the typicality of any
seller making an earnings claim to into a contract or pays any
advertised earnings claim.201 consideration, of any material change
disclose any characteristics that
distinguish purchasers who achieved at c. Proposed Section 437.4(c): Industry that has occurred and that calls into
least the represented level of earnings Statistics question the relevance or reliability of
from those characteristics of the As noted above, proposed section the information contained in its
prospective purchasers.195 For example, 437.4(c) would address a problem that earnings claim statement.203 Such
a survey of ice cream vending route is prevalent among business material changes include the issuance of
purchasers operating only in the South opportunity sellers: The use of real or a new survey or other facts that would
may not be readily applicable to other purported industry statistics in the lead the seller to conclude that a prior
regions, such as the North. Similarly, a marketing of business opportunity survey is no longer valid. As with the
survey limited to large urban areas may ventures. It is common for vending analogous provisions of the Franchise
not be applicable to smaller, rural areas. machine promoters, for example, to tout Rule, proposed section 437.4(d)
Distinguishing characteristics of what are purported to be industry-wide recognizes the high degree of materiality
opportunity purchasers who achieved a vending sales statistics. A matrix of of earnings information for prospective
represented level of earnings is very potential earnings based upon an purchasers. At the same time, the
material information because it enables industry-average sliding scale of ‘‘vends Commission seeks to minimize
a prospect to assess the relevance of an per day’’ is typical.202 The use of such compliance costs. The proposal would
earnings claim to his or her particular industry statistics in the promotion of a not require a seller, for example, to
market. business opportunity creates the prepare a revised earnings claim
Finally, the proposed Rule would impression that the level of sales or statement immediately, but would
require a seller making an earnings earnings is typical in the industry, and simply require written notification of
claim to disclose to the prospective by extrapolation, that the prospective the change. The Commission believes
purchaser that written substantiation for purchaser will achieve similar results. this approach strikes the right balance
the claim will be made available upon To prevent this type of deceptive between accurate disclosure to prevent
request. Requiring that a prospective earnings claim, proposed section deception and compliance costs that
purchaser can obtain and review, or 437.4(c) would prohibit the use of would result from a more frequent
have his or her own advisor review, industry financial, earnings, or updating requirement.
substantiation for earnings claims performance information ‘‘unless the 5. Proposed Section 437.5: Other
increases the likelihood that such seller has written substantiation Prohibited Practices
claims actually have a reasonable basis, demonstrating that the information
thus reducing fraud.196 This proposal reflects the typical or ordinary financial, In addition to the disclosure
balances the prospective purchaser’s earnings, or performance experience of requirements and earnings claims
need for material information with the purchasers of the business opportunity provisions discussed above, section
necessity of minimizing the seller’s being offered for sale.’’ Accordingly, 437.5 of the proposed Rule would
compliance costs. Thus, a seller need before a seller could use industry prohibit sellers from engaging in a
only provide such substantiation upon statistics, it must be able to measure the number of deceptive practices, directly
request. performance of existing purchasers and or through a third party, that are
document that the industry statistics common in the sale of fraudulent
b. Proposed Section 437.4(b): General
reflect the existing purchasers’ typical business opportunity ventures. Each of
Media Claims
performance. For example, a start-up these proposed prohibitions is
Proposed section 437.4(b) would business opportunity with no or very discussed in detail below.
address the making of earnings claims limited prior sales would probably not
in the general media.197 Specifically, a be able to use industry statistics because a. Proposed Section 437.5(a):
seller can make an earnings claim in the it would lack a sufficient basis to Disclaimers
general media provided the seller: (1) demonstrate that the industry statistics Proposed section 437.5(a) would
Has a reasonable basis for the claim at reflect the typical or ordinary prohibit a seller, directly or through a
the time the claim is made; 198 (2) has
199 See
third party, from disclaiming, or
16 CFR at 436.1(e)(1).
195 This is a more streamlined approach than the 200 See
requiring a prospective purchaser to
16 CFR at 436.1(e)(3).
current Franchise Rule, which requires earnings waive reliance on, any statement made
201 E.g., FTC v. Inspired Ventures, Inc., No. 02–

claims be presented with a statement of the material 21760–CIV–Jordan (S.D. Fla. 2002); FTC v. in any of the disclosures required or
bases and assumptions upon which the claim is MegaKing, Inc., No. 00–00513–CIV–Lenard (S.D. permitted by the Rule. This provision is
made. See 16 CFR at 436.1(b)(3); 436.1(c)(3). Fla. 2000).
196 See, e.g., 16 CFR at 436.1(b)(2); 436.1(c)(2).
parallel to the anti-disclaimer
202 E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir.
197 The Franchise Rule has an analogous section. prohibition proposed in the revised
2003); FTC v. Inspired Ventures, Inc., No. 02–
See 16 CFR at 436.1(e). 21760–CIV–Jordan (S.D. Fla. 2002); FTC v. Inv. Dev.
198 See 16 CFR at 436.1(e)(1). Inc., No. 89–0642 (E.D. La. 1989). 203 See 16 CFR at 436.1(e)(6).
Franchise Rule.204 It is intended to utility of the disclosures by ensuring circumstances, we believe that the
preserve the reliability and integrity of that a seller does not include extraneous Commission’s disclosures should be
pre-sale disclosures. Otherwise, the materials that may overwhelm kept separate from any disclosures
Rule’s very purpose would be purchasers, distracting them from the mandated by state law. Moreover, any
undermined by signaling to prospects required disclosures.207 The proposed additional costs associated with
that they cannot trust or rely on the provision also reflects the Commission’s complying with separate federal and
Rule’s mandated disclosures. It would acknowledgment that some sellers may state business opportunity disclosure
prevent sellers from using disclaimers wish to furnish disclosures laws are likely to be small, given the
or waivers as a means of insulating electronically and, to that end, expressly proposed Rule’s greatly streamlined
themselves from the consequences of permits the use of common navigational disclosures. The Commission
materially false or deceptive statements tools, such as scroll bars and internal specifically requests comment on the
in their own disclosure documents. links that facilitate review of an appropriateness of this approach and
electronic document. The proposed seeks alternatives that could reconcile
b. Proposed Section 437.5(b):
provision would expressly prohibit federal and state business opportunity
Inconsistent or Contradictory
other electronic features—such as audio, disclosure laws while reducing
Information
video, animation, or pop-up screens— compliance burdens.
Proposed section 437.5(b) would that may distract attention from the core
prohibit sellers from making any d. Proposed Section 437.5(d): False
disclosures.208
representation, directly or through a Earnings Claims
The prohibition on including
third party, that is inconsistent with or extraneous materials extends to As noted throughout this NPR, the
that contradicts any statement made in information required or permitted by making of false earnings claims is the
the basic disclosure document or in any state law. This approach toward the most prevalent problem in the offer and
earnings claim disclosures required by treatment of state law disclosures sale of business opportunities.210
the Rule.205 Inconsistent or contrasts with the analogous provision Proposed section 437.5(d) would
contradictory statements can be made of the Franchise Rule. The Franchise prohibit sellers from misrepresenting,
orally, visually, or in writing. Without Rule permits franchisors great latitude directly or through a third party, the
this proposed prohibition, a seller, for to include information required or amount of sales, or gross or net income
example, would be free to show a permitted by state law. This approach is or profits a prospective purchaser may
prospect a graph with earnings appropriate in the franchise context earn or that prior purchasers have
information, even though the seller’s because all the states with franchise earned. This prohibition would
disclosure document states that it does disclosure laws have adopted the UFOC complement the Rule’s proposed
not make an earnings claim. Our law disclosure format. As a result, state earnings substantiation requirements
enforcement experience shows that this additions to an FTC disclosure detailed in proposed section 437.4.
is a prevalent problem.206 Accordingly, document generally are fitted smoothly Thus, both unsubstantiated and false
this provision, like the anti-disclaimer into that uniform format. Because of this earnings claims would be prohibited by
provision noted above, is necessary to relative uniformity, such additions do the Rule.
preserve the reliability and integrity of not impede a prospect’s ability to e. Proposed Section 437.5(e):
the required disclosures. compare easily among various franchise Misrepresentations Regarding the Law
c. Proposed Section 437.5(c): Extraneous offerings. This approach also reduces as to Earnings Claims
Materials compliance burdens. If adding state
Proposed section 437.5(e) would
materials were prohibited, franchisors
Proposed section 437.5(c) would prohibit sellers from misrepresenting,
would have to incur significant costs to
prohibit the inclusion of any additional
prepare and disseminate separate
information in a disclosure document many instances, certain disclosures are required in
that is not explicitly required or federal and state disclosure documents some of the five states only. For example, Alaska
permitted by the Rule. This preserves simultaneously, without any and California require disclosures about the owners
corresponding benefit to consumers. of the business opportunity, while Florida,
the clarity, coherence, readability, and Kentucky, and Ohio do not. Alaska alone requires
In contrast, business opportunity laws a disclosure about other registration attempts by the
204 Franchise Rule NPR, 64 FR at 57323. Like the
vary widely from state to state. Were the seller. California, Florida, and Ohio require
analogous proposed Franchise Rule revisions, this proposed Rule to permit the inclusion of disclosures about bond and guarantees of credit
provision would not ban the use of disclaimers the varied additional information and requirements, while Alaska and Kentucky do not.
Ohio requires disclosures about refunds, while
such as integration clauses. Integration clauses disclosures required by various states, California, Florida, Kentucky, and Alaska do not.
often serve valid purposes, putting a prospect on
notice that he or she should rely solely on
the resulting disclosure document Florida, however, requires a disclosure stating that
would likely confuse prospective the purchaser is permitted to cancel the business
information authorized by the franchisor.
opportunity agreement if ‘‘the seller fails to deliver
205 This provision is similar to the current purchasers with an overload of the product * * * within 45 days.’’ Ohio requires
Franchise Rule prohibition against the making of divergent and possibly inconsistent disclosure about affiliated persons with whom the
statements that contradict required disclosures. See information.209 Under the purchaser is required to do business, while Alaska,
16 CFR at 436.1(f). See also UFOC Guidelines, Florida, and Kentucky do not. In addition to these
General Instruction 190. inconsistent disclosure requirements, the timing
207 As with the Franchise Rule, a seller may
206 E.g., FTC v. Am. Entm’t Distribs., Inc., No. 04–
requirements for making disclosures differ
22431–CIV–Martinez (S.D. Fla. 2004); FTC v. provide a prospective purchaser with truthful, significantly. For example, Alaska requires
Inspired Ventures, Inc., No. 02–21760–CIV–Jordan consistent and non-contradictory information in disclosure within ‘‘ten days;’’ Florida requires
(S.D. Fla. 2002); FTC v. Mortgage Serv. Assocs., Inc., materials that are separate and apart from the ‘‘three working days;’’ California requires at least
No. 395–CV–13362 (AVC) (D. Conn. 1995); FTC v. required disclosures. See 16 CFR at 436.1(a)(21). ‘‘48 hours;’’ and Ohio requires ‘‘ten business days.’’
208 This is the same approach proposed in the
Tower Cleaning Sys., Inc., No. 96 58 44 (E.D. Pa. 210 In the Franchise Rule SBP, the Commission
1996). See also FTC v. Minuteman Press, 53 F. Franchise Rule NPR. 64 FR at 57318. found that one of the most frequent abuses
Supp. 2d 248, at 262 (E.D.N.Y. 1998) (‘‘[A] conflict 209 To illustrate the lack of consistency among
occurring in the marketing of franchises and
between a specific disclaimer and a contrary oral state business opportunity statutes, the staff business opportunities is the use of deceptive past
representation—typically fatal to a reasonable compared disclosure requirements in five states: and potential sales, income, and profit claims.
reliance argument in a purely private suit—is * * * Alaska (Alaska Stat. § 45.66.010–090); California Indeed, the Commission stated that the ‘‘use of
ipso facto, actionable by the FTC as violative of (Cal. Civ. Code § 1812.200–1812.221); Florida (Fla. deceptive and inaccurate profit and loss statements
Franchise Rule 436.1(f) if the disclaimer is in a Stat. ch. 559.80–815); Kentucky (KRS 367.801–819), * * * has resulted in a legion of ‘horror stories.’ ’’
[disclosure document.]’’). and Ohio (Ohio Rev. Code Ann. § 1334.01–99). In 43 FR at 59684.
directly or through a third party, that prospective purchasers rely on the seller i. Proposed section 437.5(i): Assistance
any law prohibits the furnishing of as the source of income, or where the Another area for potential fraud is the
earnings information. This addresses a seller manages the system’s cash misrepresentation of post-sale assistance
recurring problem identified in the flow.213 Absent this prohibition, the offered to a prospective purchaser.216
rulemaking record—sellers Rule would not address false promises The Commission’s enforcement
misrepresenting that federal law or the about the compensation sellers will experience shows that this practice is an
FTC prohibits the making of earnings provide post-sale. element common to many business
claims.211 In effect, this prohibition opportunity frauds targeted in our
ensures that prospective purchasers are h. Proposed Section 437.5(h): Costs and
Material Characteristics cases.217 Also, consumer complaints
not misled into believing that earnings about misrepresentations concerning the
information is unavailable to them as a A common complaint of victims of type and amount of assistance promised
matter of law. Prospective purchasers business opportunity fraud arises from but not received are among the top
can then understand that if the seller misrepresentations about the costs or categories of reported deceptive
provides no earnings information, it is the performance, efficacy, nature, or business opportunity practices.218 The
because none exists, or because the central characteristics of a business Commission believes that the best way
seller chooses not to make such opportunity offered to a prospective to address this deceptive practice is
information available. purchaser, or the goods or services through a direct prohibition. Section
f. Proposed Section 437.5(f): Written needed to operate the business 437.5(i), therefore, would prohibit
Substantiation for Earnings Claims opportunity. For example, a seller may business opportunity sellers from
Proposed section 437.5(f) would misrepresent the total costs involved in misrepresenting, directly or through a
prohibit a seller who makes an earnings purchasing or operating a business third party, any material aspect of
claim from failing to provide written opportunity.214 In other instances, a assistance provided to purchasers.
substantiation to prospective purchasers seller may misrepresent the quality of
j. Proposed Section 437.5(j): Locations,
and to the Commission upon request.212 goods offered by the business
Outlets, Accounts, Customers
opportunity seller, either for use in
Rather than mandating that business In many instances, business
operating the business (e.g., vending
opportunity sellers include opportunity sellers promise to find
machines) or for ultimate resale to
documentation for earnings claims— locations or outlets for purchasers’
consumers (e.g., novelty items).215
which could be voluminous—in the equipment, or accounts or customers for
earnings claim statement itself, section Proposed section 437.5(h) would make
such deception, directly or through a the purchasers’ services. Indeed, the
437.5(f) would reduce compliance costs Commission’s law enforcement
by requiring only that such materials be third party, actionable as a violation of
the proposed Rule. experience shows that business
provided to potential purchasers and to opportunity sellers not only offer such
the Commission upon request. assistance, but also represent that the
213 E.g., FTC v. Sun Ray Traders, Inc., No. 05–
Purchasers could then review the 20402–CIV–Seitz/Bandstra (S.D. Fla. 2005); FTC v. seller or some other third party will find
documentation if they so choose. Castle Publ’g, Inc., No. AO3CA 905 SS (W.D. Tex. locations, outlets, accounts, or
2003); FTC v. Trek Alliance, Inc., No. 02–9270 SJL
g. Proposed Section 437.5(g): Payments (AJWx) (C.D. Cal. 2002); FTC v. Terrance Maurice
customers for the purchaser.219 Such
From the Seller Howard, No. SA02CA0344 (W.D. Tex. 2002); FTC
216 In the Franchise Rule SBP, the Commission
v. America’s Shopping Network, Inc., No. 02–
Proposed section 437.5(g) would 80540–CIV–Hurley (S.D. Fla. 2002); FTC v. recognized that promises of assistance made to
prohibit sellers from misrepresenting, Equinox, Int’l, No. CV–S–99–0969–JAR–RLH (D. induce prospects to purchase a franchise are
directly or through a third party, how or Nev. 1999). material, especially to those prospects with ‘‘little
when commissions, bonuses, incentives, 214 E.g., FTC v. World Traders Ass’n, Inc., No. or no experience at running a business.’’ 43 FR at
CV05 0591 AHM (CTx) (C.D. Cal. 2005); FTC v. 59676–77.
premiums, or other payments from the 217 E.g., FTC v. Am. Entm’t Distribs., Inc., No. 04–
Castle Publ’g, Inc., No. AO3CA 905 SS (W.D. Tex.
seller to the purchaser will be calculated 2003); FTC v. End70 Corp., No. 3 03CV–0940N 22431–CIV–Martinez (S.D. Fla. 2004); FTC v. USS
or distributed. Our law enforcement (N.D. Tex. 2003); FTC v. Darrell Richmond, No. Elder Enter., Inc., No. SA CV–04–1039 AHS (ANx)
experience shows that these kinds of 3:02–3972–22 (D.S.C. 2003); FTC v. Carousel of (C.D. Cal. 2004); FTC v. Kitco of Nevada, 612 F.
Toys USA, Inc., No. 97–8587 CIV–Ungaro–Benages Supp. 1282 (D. Minn. 1985), FTC v. Leading Edge
misrepresentations underlie work-at- Processing, Inc., No. 6:02–CV–681–ORL–19 DAB
(S. D. Fla. 1997); FTC v. Parade of Toys, Inc., No.
home and pyramid opportunities, where 97–2367–GTV (D. Kan. 1997); FTC v. Telecomm. of (M.D. Fla. 2003); FTC v. Darrell Richmond, No.
Am., Inc., No. 95–693–CIV–ORL–22 (M.D. Fla. 3:02–3972–22 (D.S.C. 2003); FTC v. Elec. Med.
211 In the Franchise Rule context, the Commission 1995). In the Franchise Rule SBP, the Commission Billing, Inc., No. SA02–368 AHS (ANX) (C.D. Cal.
proposed to address this problem through a new recognized that the failure to disclose complete and 2003); FTC v. Transworld Enter., Inc., No. 00 8126–
requirement that franchise sellers include a specific accurate information about fees is deceptive CIV–Graham (S.D. Fla. 2000); FTC v. Advanced
preamble in the financial performance section of because ‘‘it (1) misleads, or at least confuses Pub. Commc’ns Corp., No. 00–00515–CIV–Ungaro–
their disclosures. Among other things, the [prospects] as to the amount of the required initial Benages (S.D. Fla. 2000); FTC v. Hi Tech Mint Sys.,
prescribed preamble would make clear that * * * investment and (2) could readily result in Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); U.S. v.
franchisors can make financial performance economic injury to a [prospect] unable to fully QX Int’l, Inc., No. 398–CV–0453–D (N.D. Tex.
information available, assuming they have a obtain all such funds or unable to recoup the full 1998). See Cory, ANPR 12 (misrepresented
reasonable basis for their claims. Franchise Rule amount of such funds in the course of the * * * training); SBA Advocacy, ANPR 36, at 6–7
NPR, 64 FR at 57309–310; ANPR, 62 FR at 9118. business.’’ 43 FR at 59653. Indeed, pre-sale (observing improper training and credentials in a
In an effort to streamline the business opportunity disclosure of cost information is a remedial travel opportunity). Cf. 16 CFR at 436.1(a)(18)
disclosure document and reduce compliance costs, approach taken in many Commission trade (requiring a description of any training program);
the proposed Rule takes a different approach. It regulation rules. E.g., 900 Number Rule, 16 CFR at UFOC Guidelines, Item 11 (disclosure of
would bar sellers from representing that any law 308.3(b); Telemarketing Sales Rule, 16 CFR at 310.3; franchisor’s obligations including pre-opening
prohibits the furnishing of earnings information. Funeral Rule, 16 CFR at 453.2. advertising and training assistance).
We believe this approach is sufficient to address 215 E.g., FTC v. Kitco of Nevada, 612 F. Supp. 218 See Staff Program Review, supra note 39,
deceptive business opportunity sales: whereas the 1282 (D. Minn. 1985); FTC v. Associated Record Table I.2; Appendix 5.
Franchise Rule seeks to encourage franchisors to Distribs., Inc., No. 02–21754–CIV–Graham/Garber 219 E.g., FTC v. Am. Entm’t Distribs., Inc., No. 04–
make earnings claims, no such encouragement is (S.D. Fla. 2002); FTC v. Home Professions, Inc., No. 22431–CIV–Martinez (S.D. Fla. 2004); FTC v. Int’l
needed in the business opportunity field, where 00–111 (C.D. Cal. 2000); FTC v. Worldwide Mktg. Trader, No. CV–02–02701 AHM (JTLx) (C.D. Cal.
such claims are all too common. and Distrib. Co., Inc., No. 95–8422–CIV–Roettger 2002); FTC v. Elec. Processing Servs, Inc., No. CV–
212 See 16 CFR at 436.1(b)(2); 436.1(c)(2). See also (S.D. Fla. 1995). See also FTC v. Med. Billers S–02–0500–L.H.–R.S. (D. Nev. 2002); FTC v. Home
16 CFR at 436.1(e)(1). Network, No. 05 CV 2014 (RJH) (S.D.N.Y. 2005). Continued
representations include claims that a above, however, a high level of business from misrepresenting, directly or
particular locator is successful in opportunity purchaser complaints through a third party, a business
finding locations, as well as received by the Commission revolve opportunity as an employment
representations that the seller or other around cancellation and refund opportunity.227 The Commission’s law
third party has already found and issues.223 Accordingly, proposed section enforcement experience demonstrates
entered into contracts with location 437.5(k) would prohibit a seller from that some business opportunity sellers
owners or customers.220 These types of misrepresenting, directly or through a lure unsuspecting consumers by falsely
representations are material to a third party, the terms and conditions of representing that they are offering
prospective purchaser because they any cancellation or refund policy. The employment when, in fact, they are
foster the expectation that a profitable Commission emphasizes, however, that offering vending, work-at-home, or
market exists for the goods or services this prohibition does not compel any pyramid sales opportunities. For
the purchaser will sell. To prevent seller to offer cancellation or a refund, example, in many instances consumers
fraudulent location assistance nor does it dictate the terms and have responded to advertisements
representations, proposed Section conditions under which a seller may seeking sales executives, only to
437.5(j) would prohibit sellers, directly offer such relief. Rather, it simply discover that the ‘‘position’’ requires
or through a third party, from ensures that any cancellation or refund them to purchase equipment or
misrepresenting ‘‘the likelihood that a offer a seller makes before the sale is products from the seller and, in turn, to
seller, locator, or lead generator will truthful and accurate. sell the products or to recruit a
find locations, outlets, accounts, or downline to sell the products for
l. Proposed Section 437.5(l): Failure To
customers for the purchaser.’’ them.228
Cancel or Make a Refund
k. Proposed Section 437.5(k): Proposed section 437.5(l) would n. Proposed Section 437.5(n): Territories
Cancellation or Refund Policy prohibit a seller from failing to cancel a Proposed section 437.5(n) would
The Commission’s law enforcement purchase or make a refund when the prohibit misrepresentations made
experience demonstrates that, in many purchaser has qualified for such relief directly by the seller or through a third
instances, business opportunity sellers under the seller’s cancellation or refund party about the terms of any territorial
claim that they permit a purchaser to policy.224 As noted above, proposed exclusivity or limited territorial
cancel the purchase, guarantee a 100% section 437.5(k) would prohibit a seller protection offered to a prospective
refund, or promise to buy back some or from misrepresenting, pre-sale, the purchaser.229 In the Commission’s
all of the products sold to a seller’s cancellation or refund policy. experience, representations about
purchaser.221 These representations Proposed section 437.5(l) complements territorial exclusivity or more limited
have lured prospective purchasers into that section and is intended to address territorial protections are material
believing that the investment is either sellers’ post-sale conduct, prohibiting because they often induce a prospective
low-risk or even risk-free.222 As noted the seller from failing to honor purchaser into believing that he or she
cancellation or refund requests when will not be competing for customers
Professions, Inc., No. SACV 00–111 AHS (Eex) (C.D. purchasers have satisfied all the terms with the seller or other purchasers,
Cal. 2001); FTC v. Encore Networking Servs., No. and conditions disclosed in the seller’s thereby increasing the purchaser’s
00–1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. AMP
Publ’n, Inc., No. SACV–00–112–AHS–ANx (C.D. basic disclosure document for obtaining likelihood of success.230 As noted
Cal. 2001); FTC v. Infinity Multimedia, Inc., No. 96– such relief.225 In our experience, the
6671–CIV–Gonzalez (S.D. Fla. 1996). See Staff failure of business opportunities sellers 227 See Wis. Admin. Code § ACP 116.06
Program Review, supra note 39, Table I.2, (prohibiting misrepresented employment offers).
Appendix 5; Samson, 21Aug97 Tr at 100;
to make promised refunds or to honor 228 See, e.g., FTC v. Trek Alliance, Inc., No. 02–
Wieczorek, id. at 76–77; Cecal, id. at 78–79; James, cancellation policies ranks high among 9270 SJL (AJWx) (C.D. Cal. 2002) (defendants
20Nov97 Tr at 19; Rabenberg, Sept95 Tr at 105. issues raised by business opportunity placed ads in ‘‘Help Wanted’’ sections of newspaper
220 E.g., FTC v. Hart Mktg. Enter. Ltd., Inc., No.
purchasers.226 offering salaried position); FTC v. Leading Edge
98–222–CIV–T–23 E (M.D. Fla. 1998); FTC v. Processing, Inc., No. 6:02–CV–681–ORL–19 DAB
Vendors Fin. Servs., Inc., No. 98–1832 (D. Colo. m. Proposed Section 437.5(m): (M.D. Fla. 2003) (defendants sent emails to job
1998); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV Employment Opportunity seekers who posted their resumes on job websites,
5881 (S.D.N.Y. 1998); FTC v. Infinity Multimedia, falsely representing the availability of jobs and
Inc., No. 96–6671–CIV–Gonzalez (S.D. Fla. 1996). Proposed section 437.5(m) would guaranteeing a steady stream of work); FTC v. David
Similarly, a Florida business opportunity regulator prohibit business opportunity sellers Martinelli, Jr., No. 3:99 CV 1272 (D. Conn. 2000)
noted that during sales presentations, sellers of (defendants sent unsolicited emails falsely offering
vending machines typically claim that they have 223 See, e.g., Staff Program Review, supra note 39,
a $13.50 per hour position processing applications
‘‘15 locations in X community. And in fact there for credit, loans, or employment); FTC v. Equinox,
[are] no locations there. They have to hire a locator, Table I.2 and Appendix 5. Int’l, No. CV–S–99–0969–JAR–RLH (D. Nev. 1999)
224 This is consistent with the current Franchise
a second locator, or a second person. A second (defendants allegedly ran classified ads in the
check is written to the locator. And the consumer Rule approach. See 16 CFR at 436.1(h). See also ‘‘Help Wanted’’ sections of newspapers, impliedly
invariably ends up with a second-rate location Franchise Rule SBP, 43 FR at 59697. offering a salaried position).
because there [were none] to start with.’’ James, 225 E.g., FTC v. AMP Publ’ns, Inc., No. SACV–00– 229 See 16 CFR at 436.1(a)(13) (requiring a
20Nov97 Tr at 19. 112–AHS–ANx (C.D. Cal. 2001) (failure to honor 90- description of any limited geographic area or
221 E.g., FTC v. Med. Billers Network, No. 05 CV day money back guarantee); FTC v. Star Publ’g territorial protections); UFOC Guidelines, Item 12
2014 (RJH) (S.D.N.Y. 2005); FTC v. Castle Publ’g, Group, Inc., No. 00–023 (D. Wyo. 2000) (failure to (disclosure of the nature and scope of any exclusive
Inc., No. AO3CA 905 SS (W.D. Tex. 2003); FTC v. honor 90-day refund policy). See 16 CFR at territory). In some instances, a business opportunity
America’s Shopping Network, Inc., No. 02–80540– 436.1(h). See also Cory, ANPR 12 (describing seller may offer a prospect an exclusive territory, in
CIV–Hurley (S.D. Fla. 2002); FTC v. Home difficulty in securing a refund). which no other person has the right to compete
Professions, Inc., No. SACV 00–111 AHS (Eex) (C.D. 226 See Staff Program Review, supra note 39, at within the territory. In other instances, a seller may
Cal. 2001); FTC v. Encore Networking Servs., No. 28–29 (nearly 25% of business opportunity offer a more limited protection. For example, the
00–1083 WJR (AIJx) (C.D. Cal. 2000). complaints indicated the consumer’s desire to seller may prohibit other purchasers from operating
222 In the Franchise Rule SBP, the Commission cancel, and more than 20% indicated that in the territory, but reserve to itself the ability to
noted the difficulty consumers have in obtaining consumers failed to receive a refund or were conduct telemarking or Internet sales in the
promised refunds from franchisors. ‘‘It is clear from dissatisfied with the company’s refund policies.). territory. Regardless of the scope of the territorial
the record that all franchisors do not adequately See, e.g., FTC v. AMP Publ’ns, Inc., No. 00–112 protection, section 437.5(n) prohibits business
adhere to the refund policies they themselves agree (C.D. Cal. 2000); FTC v. Home Professions, Inc., No. opportunity sellers from misrepresenting the nature
to in their contracts. By requiring strict adherence 00–111 (C.D. Cal. 2000); FTC v. Innovative Prods., of the territory.
to their own refund policies, [the Rule] serves an No. 3–00–0312 (N.D. Tex. 2000); FTC v. Mediworks, 230 E.g., FTC v. Advanced Pub. Commc’ns Corp.,
essential remedial purpose.’’ 43 FR at 59696–697. Inc., No. 00–01079 (C.D. Cal. 2000). No. 00–00515–CIV–Ungaro–Benages (S.D. Fla.
above, the Staff Program Review opportunities have been approved or prohibit any seller from
revealed that false promises about endorsed by a government agency or misrepresenting, directly or through a
territories are a common deceptive well-known third party.234 In other third party, that any person ‘‘has
practice reported by business instances, business opportunity sellers purchased a business opportunity from
opportunity purchasers.231 falsely claim that their opportunities are the seller.’’ This would prevent a seller,
sponsored by or associated with a for example, from claiming that a
o. Proposed Section 437.5(o):
charity, or that a charity will benefit company employee, locator, or other
Assignment of Territories
from a percentage of sales.235 Such third party is a prior purchaser of the
Proposed section 437.5(o) would claims are material to a purchaser opportunity, when that is not the case.
prohibit a seller from assigning a single because an alleged endorsement or Second, the provision would prohibit a
‘‘exclusive’’ territory to more than one shared-profit arrangement may create seller from misrepresenting that any
purchaser. This prohibition the impression that the opportunity is person—such as a locator, broker, or
complements section 437.5(n), which legitimate or that the affiliation will organization that purports to be an
prohibits sellers from misrepresenting enhance sales and profits. independent trade association—‘‘can
territories. It is intended to address provide an independent or reliable
sellers’ post-sale conduct, prohibiting q. Proposed Section 437.5(q): Shills
report about the business opportunity or
the seller from failing to honor its Proposed section 437.5(q) would the experiences of any current or former
promises regarding exclusive or address one of the most pernicious purchaser.’’ Providing a prospect with a
protected territories. Consumer practices common in fraudulent list of brokers who are paid to give
complaints indicate, and the business opportunity sales—the use of favorable reports, for example, would
Commission’s law enforcement shill references to lure unsuspecting violate this provision because any
experience confirms, that fraudulent consumers to invest.236 The statement a person on such a list makes
business opportunity sellers often sell Commission has brought many actions would fail the ‘‘independence and
the same purportedly exclusive territory against business opportunity sellers reliability’’ test.238
to several unsuspecting purchasers.232 who provided prospects with the names
In these circumstances, purchasers who of individuals they falsely claimed were r. Proposed Section 437.5(r): Paid
have been lured to invest in an independent prior purchasers or Consideration or Prior Relationship
opportunity on the basis of promises of independent third parties, but who in Proposed section 437.5(r) would
an exclusive territorial lock on their fact were paid by the seller to give complement the prohibition in section
market find that their chances of success favorable false reports confirming the 437.5(q) against fictitious references by
are materially reduced by competition seller’s claims, especially their earnings requiring sellers to disclose any
from the other purchasers. claims.237 The use of paid shills to give compensation paid to an endorser 239
false reports induces prospective and the existence of any personal or
p. Proposed Section 437.5(p): Third- purchasers into believing that the
Party Endorsements business relationship between the seller
opportunity is a safe and lucrative and an endorser. The Commission has
To prevent endorsement fraud, investment. long held that the failure to disclose
Proposed section 437.5(p) would To address this deceptive practice,
compensation paid to an endorser is a
prohibit business opportunity sellers Proposed section 437.5(q) contains two
deceptive practice in violation of
from misrepresenting, directly or related prohibitions. First, it would
section 5.240 Obviously, an individual
through a third party, that ‘‘any person,
234 E.g., FTC v. Streamline Int’l, No. 01–6885–
trademark or service mark holder, or 238 E.g., FTC v. Affiliated Vendors Ass’n, Inc., No.
CIV–Ferguson (S.D. Fla. 2001) (misrepresented FDA
governmental entity, directly or approval); FTC v. Bus. Opportunity Ctr., Inc., No. 02–CV–0679–D (N.D. Tex. 2002); FTC v. Raymond
indirectly benefits from, sponsors, 95 8429–CIV–Zloch (S.D. Fla. 1995) Urso, No. 97–2680–CIV–Ungaro–Benages (S.D. Fla.
1997). See Cantone, 20Nov97 Tr at 251–52 (voicing
participates in, endorses, approves, (misrepresented FDA approval); FTC v. Star Publ’g
concern about reports from groups that purport to
authorizes, or is otherwise associated Group, Inc., No. 00–023 (D. Wyo. 2000)
(misrepresented HUD approval). See also FTC v. be independent consumer associations. ‘‘I know
with the sale of the business Hawthorne Commc’ns, No. 93–7002 AAH (JGX) from our standpoint in Maryland, we have a lot of
opportunity or the goods or services (C.D. Cal. 1993) (order restricting use of complaints from buyers who * * * got a report
testimonials and endorsements in the sale of from who they thought was an independent
sold through the business company like a Better Business Bureau for business
business opportunities); James, 21Nov97 Tr at 343
opportunity.’’ 233 Our law enforcement (work-at-home promoter falsely represented that opportunities.’’); McKee, id. at 252 (observing that
experience reveals that business JCPenney was a buyer of its products). the Internet permits anyone to set up a website that
opportunity frauds often lure consumers 235 E.g., FTC v. Global Assistance Network for purports to belong to an independent organization
providing reports similar to those of the Better
by misrepresenting that their Charities, No. 96–2494 PHX RCB (D. Ariz. 1996).
Business Bureau).
See also NCL, ANPR 35, at 2.
236 Staff Program Review, supra note 39, Table I.2 239 E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir.
2000); FTC v. Summit Photographix, No. 398–CV– 2003); FTC v. Wolf, No. 94–8119 CIV–Ferguson (S.
(after earnings claims, false testimonials and shill
0449–T (N.D. Tex. 1998); FTC v. Telecard D. Fla. 1994); FTC v. Jordan Ashley, No. 93–2257–
references are the most common Section 5
Dispensing Corp., No. 98–7058 (S.D. Fla. 1998); FTC CIV–Nesbitt (S.D. Fla. 1993); FTC v. Nat’l Bus.
allegations in Commission business opportunities
v. Vendors Fin. Servs., Inc., No. 98–1832 (D. Colo. cases). See also NCL, ANPR 35, at 2; Cecal, Consultants, 781 F. Supp. 1136 (E.D. La. 1991).
1998); U.S. v. QX Int’l, Inc., No. 398–CV–0453–D 21Aug97 Tr, at 67–68 (observing the common use 240 See Guides Concerning Use of Endorsements
(N.D. Tex. 1998); FTC v. Am. Legal Distribs., No. of shills to sell business opportunities in Illinois). and Testimonials in Advertising, 16 CFR at 255.5
1:88–CV–519–MHS (N.D. Ga. 1988). See also 237 E.g., FTC v. Am. Entm’t Distribs., Inc., No. 04– (‘‘When there exists a connection between the
Franchise Rule SBP, 43 FR at 59662 (recognizing endorser and the seller of the advertised product
22431–CIV–Martinez (S.D. Fla. 2004); U.S. v.
that sales restrictions and limited territories impact which might materially affect the weight or
Vaughn, No. 01–20077–01–KHV (D. Kan. 2001);
upon a purchaser’s ability to conduct business and credibility of the endorsement (i.e, the connection
FTC v. Hart Mktg. Enter. Ltd., Inc., No. 98–222–
are, therefore, material). is not reasonably expected by the audience) such
CIV–T–23 E (M.D. Fla. 1998); FTC v. Inetintl.com,
231 See Staff Program Review, supra note 39,

No. 98–2140 (C.D. Cal. 1998); FTC v. Infinity connection must be fully disclosed. * * * [W]hen
Table I.2; Appendix 5. Multimedia, Inc., No. 96–6671–CIV–Gonzalez (S.D. the endorser is neither represented in the
232 E.g., FTC v. Am. Safe Mktg., No. 1:89–CV–
Fla. 1996); FTC v. Allstate Bus. Consultants Group, advertisement as an expert nor is known to a
462–RLV (N.D. Ga. 1989). Inc., No. 95–6634–CIV–Ryskamp (S.D. Fla. 1995). significant portion of the viewing public, the
233 Cf. TSR, 16 CFR at 310.3(a)(vii) (prohibiting See also Cantone, 20Nov97 Tr at 245 (‘‘Shills may advertiser should clearly and conspicuously
misrepresentations concerning ‘‘affiliation with, or be one of the most common problems in the disclose either the payment or promise of
endorsement or sponsorship by, any person or business opportunity industry.’’); James, id. at 246 compensation prior to and in exchange for the
government entity’’). (‘‘It is a huge, huge problem.’’). Continued
paid for his or her assessment of an from failing to disclose any personal or 6. Proposed Section 437.6: Record
opportunity is likely to be biased, and business relationship with any endorser. Retention
any story of success or high earnings For example, an endorser may have a Proposed section 437.6 would
from a person paid to tell it is suspect. personal relationship with the seller establish minimal record retention
The proposed Rule would clarify that (e.g., family member), or an ongoing requirements necessary to document
the term ‘‘consideration’’ is to be business relationship with the seller compliance and permit effective Rule
interpreted broadly. Specifically, (e.g., as a broker, supplier, or locator) enforcement. This section applies to
proposed section 437.5(r)(1) would state other than a relationship created by the both the business opportunity seller and
that consideration includes not only prior purchase of the business its principals to ensure that records
direct cash payments, but indirect opportunity being offered for sale.241 In required by the Rule are not destroyed
financial benefits, such as forgiveness of each instance, the prior business or if the seller goes out of business or
debt, as well as other tangible benefits personal relationship is material to a otherwise ceases operations. As detailed
such as equipment, services, and prospective purchaser because it calls below, sellers and their principals must
discounts. into question the endorser’s keep, and make available to the
Similarly, proposed section independence from the seller. Commission, the following five types of
437.5(r)(2) would also prohibit a seller records for a period of three years:
Proposed section 437.6(a) ....................................................................... Each materially different version of all documents required by the Rule;
Proposed section 437.6(b) ....................................................................... Each purchaser’s disclosure receipt;
Propsed section 437.6(c) ......................................................................... Each executed written contract with a purchaser;
Proposed section 437.6(d) ....................................................................... Each oral or written cancellation or refund request received from a pur-
chaser; and
Proposed section 437.6(e) ....................................................................... All substantiation upon which the seller relies from the time an earn-
ings claim is made.
The Commission believes that these coverage by the proposed Business Rule or the proposed Business
limited recordkeeping requirements Opportunity Rule; and, simultaneously, Opportunity Rule would not be
strike the right balance, requiring no to obviate any loophole that could be justified.
more than necessary for effective law exploited by certain other types of On the other hand, certain businesses
enforcement, while reducing business opportunities that are exempt carved out of Franchise Rule coverage
compliance costs. from the Franchise Rule but that should should not escape regulation by the
be regulated by the proposed Business proposed Business Opportunity Rule—
7. Proposed Section 437.7: Franchise specifically, those exempt from the
Exemption Opportunity Rule.
Franchise Rule’s coverage due to the
Proposed section 437.7 is designed to Thus, for example, businesses exempt minimum payment exemption 245 or the
eliminate potential overlap between the from Franchise Rule coverage pursuant oral agreement exemption.246 While
Business Opportunity Rule’s coverage to the exemption for fractional these two exemptions are warranted in
and that of the Franchise Rule, so that franchises 243 and the exemption for the franchise context to ensure that the
no business would face duplicative ‘‘leased department’’ arrangements 244 significant disclosure costs imposed by
compliance burdens.242 Specifically, would not be subjected to coverage by the Franchise Rule are cost-justified,
section 437.7 would exempt from the the proposed Business Opportunity they do not apply to the proposed
proposed Rule’s coverage those business Rule because such businesses would Business Opportunity Rule, with its
opportunities that: (1) Satisfy the meet the criteria of proposed section comparatively much lighter disclosure
definitional elements of the term 437.7. This is an appropriate result burden.
‘‘franchise’’ under the Franchise Rule; because the same rationale underlying In response to the ANPR, DSA and its
(2) entail a written contract between the exemption of these types of businesses members argued for additional
seller and the business opportunity from the Franchise Rule would also exemptions that would keep multilevel
buyer; and (3) require the buyer to make dictate that they not be covered by the programs, in particular, from falling
a payment that meets the Franchise proposed Business Opportunity Rule— within the proposed Rule’s purview.247
Rule’s minimum payment requirement. i.e., in the case of a fractional franchise, DSA asserted that pre-sale disclosures
These criteria are designed to the franchisor is not likely to deceive are unnecessary in the context of direct
accomplish two ends: to ensure that the prospective franchisee or to subject selling where the risk of financial loss
certain categories of businesses ‘‘carved the prospective franchisee to significant is low.248 To that end, DSA and its
out’’ from the Franchise Rule’s coverage investment risk. Therefore, imposing the members recommended that the
are not inappropriately subjected to requirements of either the Franchise Commission preserve the inventory
endorsement or the fact that the endorser knew or 242 See, e.g., Illinois Act, 815 ILCS § 601/5–10.(f) Franchise Rule. For example, during the Rule
had reasons to know or to believe that if the (exempting opportunities falling under the Review and ANPR proceedings, comments
endorsement favors the advertised product some Franchise Disclosure Act of 1987); CA SAMP, Cal. suggested a wide array of disclosures for business
benefit, such as an appearance on TV, would be Civ. Code at § 1812.201(b)(2) (exempting opportunities. E.g., Christopher, ANPR 115, at 2
extended to the endorser.’’). See also UFOC opportunities falling under the Franchise (adding officer histories, financial statements);
Guidelines, Item 18 (disclosure of any Investment Law). NASAA, ANPR 120, at 3–4 (adding business
243 16 CFR at 436.2(a)(3)(i).

compensation or other benefit given or promised to experience of promoters and bankruptcy
244 16 CFR at 436.2(a)(3)(ii). information); Simon, Sept95 Tr at 281–82 (adding
a public figure).
241 See, e.g., FTC v. Inspired Ventures, Inc., No. 245 16 CFR at 436.2(a)(3)(iii). audited financials, guarantee of sites); Wieczorek,
02–21760–CIV–Jordan (S.D. Fla. 2002); FTC v. 246 16 CFR at 436.2(a)(3)(iv). Sept95 Tr at 284 (adding background on the seller,
Universal Greeting Cards Corp., No. 02–21753–CIV– 247 The comments submitted by DSA and its bankruptcy, fees and initial investment, financials).
Jordan (S.D. Fla. 2002); FTC v. Inetintl.com, Inc., members urging various exemptions from the In light of the streamlined proposed Rule, such
No. 98–2140 (C.D. Cal. 1998). proposed Rule apparently contemplated extensive exemptions are unnecessary.
disclosures, something akin to the current 248 DSA, ANPR 34, at 6.
exemptions from the minimum payment The Commission agrees with the b. Proposed Section 437.8(b):
requirement.249 In addition, they commenters that the scope of the Rule Preemption
contended that a Business Opportunity should be broadened to reach all Proposed section 437.8(b) would
Rule should not cover opportunities business opportunities that our anti- adopt the preemption policy currently
with a repurchase or buy-back plan.250 fraud law enforcement history and found at note 2 of the Franchise Rule.254
They also suggested that the minimum consumer complaints show are a It would provide that the Commission
payment threshold should be raised widespread and persistent problem. does not intend to preempt state or local
from the current $500 to at least This expansion of Rule coverage, business opportunity laws, except to the
$1,000,251 in order not to impose however, would be balanced by extent of any conflict with the Rule.
significant costs on small direct sellers. drastically reduced compliance costs, as Further, a law does not conflict if it
In short, DSA and its members asserted discussed above. affords prospective purchasers equal or
that any regulation of the multilevel greater protection, such as a
marketing industry is likely to impose 8. Proposed Section 437.8: Other Orders
and Preemption requirement for registration of
significant costs on small proprietors. disclosure documents or more extensive
Rather, in DSA’s view, the problem in Proposed section 437.8 would address disclosures.
the industry is not from multilevel the effect the proposed Rule may have
marketers, but from fraudulent pyramid on outstanding Commission orders. It 9. Proposed Section 437.9: Severability
schemes, which the Commission can also discusses preemption of state Finally, proposed section 437.9 would
address through current law.252 business opportunity laws. adopt the severability provision
We note, however, that DSA’s currently found in the Franchise Rule at
position on raising the minimum a. Proposed Section 437.8(a): Effect on
Prior Commission Orders 16 CFR at 436.3. This provision would
payment threshold was opposed by make clear that, if any part of the Rule
many other commenters. Several The Commission recognizes that the is held invalid by a court, the remainder
commenters noted that the purpose of proposed Rule significantly changes the will still be in effect.255
the Rule is to prevent fraud, regardless disclosure obligations for those sellers
of the amount at issue. Others asserted who are now under order in prior Section F—Rulemaking Procedures
that a monetary threshold simply Commission Franchise Rule and section Pursuant to 16 CFR 1.20, the
provides scam operators a means to 5 actions. For example, the proposed Commission will use the following
circumvent the Rule, noting that Business Opportunity Rule rulemaking procedures. These
business opportunities frequently contemplates greatly streamlined procedures are a modified version of the
charge $495 to skirt the current disclosures, as compared to the rulemaking procedures specified in
Franchise Rule’s disclosure Franchise Rule’s extensive disclosures. section 1.13 of the Commission’s Rules
requirements. For example, NCL stated At the same time, the proposed Rule of Practice.
that the: would require new disclosures not First, the Commission is publishing
$500 minimum investment * * * leaves present in the Franchise Rule, such as this Notice of Proposed Rulemaking.
many consumers without the disclosures and the disclosure of the seller’s The comment period will be open until
other protections that they need. Nearly one- cancellation or refund history. To June 16, 2006, followed by a rebuttal
third of the consumers who reported to the enable business opportunity sellers to period until July 7, 2006. Interested
NFIC last year that they had lost money to take advantage of the Business parties are invited to submit written
fraudulent or deceptive business Opportunity Rule’s reduced disclosure comments. Written comments must be
opportunities paid less than $500. . . .
Whatever minimum amount might be set,
obligations, as well as to reduce any received on or before June 16, 2006.
fraudulent operators will price their services potential conflicts between existing Rebuttal comments must be received on
below it, and consumers will be victimized. orders and the proposed Business or before July 7, 2006. All comments
Opportunity Rule, proposed section should be filed as prescribed in the
NCL, ANPR 35, at 11.253
437.8(a) would permit persons under ADDRESSES section above.
249 E.g., Longaberger, ANPR 31, at 1; DSA, ANPR order to petition the Commission for Second, pursuant to Section 18(c) of
34, at 4; Amway, ANPR 89, at 2; Mary Kay, ANPR relief consistent with the provisions of the Federal Trade Commission Act, 15
110, at 2. the new Rule. Specifically, ‘‘business U.S.C. 57a(c), the Commission will hold
250 DSA, ANPR 34, at 5. DSA explained that its
opportunities covered by FTC or court hearings with cross-examination and
code requires all members to repurchase 90% of all order to follow the Franchise Rule, 16 rebuttal submissions only if an
inventory on hand from a terminating direct seller
if that inventory was purchased within one year CFR part 436, may petition the interested party requests a hearing by
prior to termination. Id. See also Amway, ANPR 89 Commission to amend the order so that the close of the comment period. Parties
at 2 (buyback of unused, marketable inventory the business opportunity may follow the interested in a hearing must submit
within 12 months). DSA and its supporters also provisions of the Business Opportunity within the comment period the
contended that the Commission should retain the
current ’sales kit exemption.’’ In the Interpretive Rule.’’ Such determinations, however, following: (1) A comment in response to
Guides, the Commission said that the sale of sales will be made on a case-by-case basis. this notice; (2) a statement how they
kits or the distribution of promotional materials would participate in a hearing; and (3)
alone would not constitute ’significant assistance’’ curtail the number of unsavory companies that are a summary of their expected testimony.
for coverage as a franchise. Interpretive Guides, 44 beyond the reach of the FTC because they sell their
FR at 49967. Parties wishing to cross-examine
scandalous ‘business opportunities’ for $495.’’);
251 E.g., DSA, ANPR 34, at 3–4; Pampered Chef,
James, ANPR 76 (lower the threshold to $300); M.
witnesses must also file a request by the
ANPR 86, at 2; Amway, ANPR 89, at 2; Mary Kay, Garceau, 20Nov97 Tr at 53 (‘‘it should be one
ANPR 110. dollar’’); Finnigan, 21Aug97 Tr at 188–99 (‘‘They’ll 254 This approach is consistent with other
252 DSA, RR 21, at 5; Elman, Sept95 Tr at 42. Commission trade regulation rules. See, e.g.,
go right to $999 and that’s the experience of every
Similarly, DSA asserted that false earnings claims state.’’); D’Imperio, Sept95 Tr at 130 (‘‘I don’t care Appliance Labeling Rule, 16 CFR at 305.17;
can be addressed through section 5 of the FTC Act. if it’s $10, fraud is fraud.’’); Purvin, id. at 280 Cooling-Off Rule, 16 CFR at 429.2; Mail Order Rule,
Elman, Sept95 Tr at 265. See also Catalano, (‘‘companies use that threshold to avoid regulation 16 CFR at 435.3(b)(2).
20Nov97 Tr at 20 (noting that 25–26 states already and consequently have their entry fee be under 255 This provision is comparable to the
have business opportunity laws on the books). $500, which seems to me forces the amount of severability provisions in other Commission trade
253 See also SBA Advocacy, ANPR 36, at 6 money that a prospective purchaser can lose within regulation rules. E.g., 900–Number Rule, 16 CFR at
(‘‘threshold should be lowered to $100 in order to a very acceptable norm’’). 308.8; TSR, 16 CFR at 310.9.
close of the 20-day rebuttal period, including work-at-home and multilevel must disclose whether or not they make
designating specific facts in dispute and marketing programs. The proposed Rule earnings claims. However, the decision
a summary of their expected testimony. would require business opportunity to make an earnings claim is optional.
If requested to do so, the Commission sellers to disclose information and to While the disclosures of references and
will hold one or more informal public maintain certain records relating to earnings claims retain, for the most part,
workshop conferences in lieu of business opportunity sales transactions the current Franchise Rule
hearings. After the close of the comment and refund requests. requirements, the required disclosures
period, the Commission will publish a The current public disclosure and for lawsuits and refund requests are
notice in the Federal Register stating recordkeeping burden associated with reduced from the Franchise Rule.
whether hearings (or a public workshop the Franchise Rule is 37,000 hours,
conference in lieu of hearings) will be approved under OMB Control No. 3084– a. Lawsuits
held and, if so, the time and place of the 0107. In the FTC’s most recent As noted above, the current Franchise
hearings and instructions for those submission for extension of the Rule requires an extensive list of suits
wishing to present testimony or engage clearance for the Franchise Rule, the that must be disclosed including those
in cross-examination of witnesses. Commission staff estimated that there involving allegations of fraud, unfair or
Finally, after the conclusion of the were 5,000 franchisors (2,500 business deceptive business practices,
rebuttal period, and any hearings or and product format franchises and 2,500 embezzlement, fraudulent conversion,
additional public workshop business opportunity sellers).257 As misappropriation of property, and
conferences, Commission staff will issue discussed below, the proposed Rule restraint of trade. Franchisors also must
a Report on the Business Opportunity would reduce the burden on business disclose suits filed against them
Rule (‘‘Staff Report’’). The Commission opportunity sellers by streamlining involving the franchise relationship. 16
will announce in the Federal Register disclosure requirements to minimize CFR at 436.1(a)(4). In contrast, the
the availability of the Staff Report and compliance costs.258 proposed Rule’s lawsuit disclosure
will accept comment on the Staff Report The proposed Rule is designed to requirements are limited to suits for
for a period of 75 days. streamline and reduce substantially the misrepresentation, fraud, or unfair or
quantity of information required to be deceptive business practices only.
Section G—Communications to disclosed by business opportunity
Commissioners and Commissioner sellers. The proposals would impact b. Cancellation and Refund Requests
Advisors by Outside Parties sellers differently, depending upon The current Franchise Rule requires
Pursuant to Commission Rule whether they are currently covered by detailed statistical information
1.18(c)(1), the Commission has the Franchise Rule. The Commission reflecting changes in the number of
determined that communications with staff estimates that there are franchises during the previous year,
respect to the merits of this proceeding approximately 3,200 business specifically the number of:
from any outside party to any opportunity sellers, comprised of some (1) Franchises sold; (2) franchises
Commissioner or Commissioner advisor 2,500 vending machine, rack display, voluntarily terminated or not renewed;
shall be subject to the following and related opportunity sellers, 550 (3) franchises otherwise reacquired by
treatment. Written communications and work-at-home opportunity sellers, and the franchisor; (4) franchises for which
summaries or transcripts of oral 150 multilevel marketing companies. the franchisor refused renewal; (5)
communications shall be placed on the For the 2,500 vending machine, rack franchises cancelled or terminated; as
rulemaking record if the communication display, and related opportunity sellers well as the reasons for any
is received before the end of the presently covered by the Franchise reacquisitions, refusals to renew, or
comment period. They shall be placed Rule, the proposed Rule would reduce terminations. 16 CFR at 436.1(a)(16). In
on the public record if the the number of disclosures from 20 contrast, the proposed Rule requires
communication is received later. Unless categories of information to five only the disclosure of the number of
the outside party making an oral mandatory disclosures pertaining to sales in the last two years and the
communication is a member of earnings claims, lawsuits, refund policy, number of cancellation and refund
Congress, such communications are cancellation and refund requests, and requests received by the seller during
permitted only if advance notice is references. For the 700 business the same period.
published in the Weekly Calendar and opportunity sellers presently exempted
2. Incorporation of Existing Materials
Notice of ‘‘Sunshine’’ Meetings.256 from the Franchise Rule, the
disclosures, as noted below, are The proposed Rule also reduces
Section H—Paperwork Reduction Act streamlined to minimize compliance collection and dissemination costs by
The Commission has submitted this costs. permitting sellers to reference in their
proposed Rule and a Supporting disclosure documents materials already
Statement for Information Collection 1. Reduced Mandatory Disclosures in their possession. For example, a
Provisions to the Office of Management The proposed Business Opportunity seller need not repeat its refund policy
and Budget (‘‘OMB’’) for review under Rule contains five mandatory in the text of the disclosure document,
the Paperwork Reduction Act (‘‘PRA’’), disclosures pertaining to earnings but may incorporate its contract or
44 U.S.C. 3501–3517. In this notice, the claims, lawsuits, refund policy, brochures, or other materials that
Commission proposes to promulgate a cancellation and refund requests, and already provide the necessary details.
trade regulation rule governing business references. With respect to earnings
3. Use of Electronic Dissemination of
opportunity sales. The proposed Rule claims, business opportunity sellers
Information
would cover those business

opportunities currently covered by the 257 70 FR 51819 (Aug. 31, 2005). The proposed Rule redefines the term
Franchise Rule, as well as those not 258 Ifthe Commission ultimately issues a final ‘‘written’’ to include electronic media.
rule for business opportunity sellers, the Accordingly, all business opportunities
covered by the Franchise Rule, Commission staff will request that OMB adjust the
clearance for the Franchise Rule because the
covered by the proposed Rule are
256 See 15 U.S.C. 57a(i)(2)(A); 45 FR 50814 (1980); Franchise Rule will no longer apply to business permitted to use the Internet and other
45 FR 78626 (1980). opportunity sellers. electronic media to furnish disclosure
documents. Allowing this distribution the validity of the methodology and reasonable alternatives that would
method could greatly reduce sellers’ assumptions used; accomplish the Rule’s stated objectives
compliance costs over the long run, 3. Enhance the quality, usefulness, consistent with applicable law (see
especially costs associated with printing and clarity of the information to be IRFA ¶ 6); and a preliminary analysis of
and distributing disclosure documents. collected; and the benefits and adverse effects of those
As a result of this proposal, the 4. Minimize the burden of collection alternatives (see id.). Alternatively, to
Commission expects sellers’ compliance of information on those who are to the extent that this proceeding proposes
costs will decrease substantially over respond, including through the use of to amend the existing Franchise Rule,
time. appropriate automated electronic, the Commission has preliminarily
mechanical, or other technological determined that the proposed
4. Use of Computerized Data Collection collection techniques, or other forms of amendments to the Franchise Rule will
Technology information technology, for example, not have such an effect on the national
Finally, because of advances in permitting electronic submission of economy, on the cost or prices of goods
computerized data collection responses. or services sold through business
technology, the Commission staff Comments on any proposed filing, opportunities, or on covered businesses
anticipates that the costs of collecting recordkeeping, or disclosure or consumers. As noted in the
information and recordkeeping requirements that are subject to Paperwork Reduction Act discussion
requirements imposed by the Rule will paperwork burden review under the above, the Commission staff estimates
be minimal. For example, a seller can Paperwork Reduction Act should each business affected by the Rule will
easily maintain a spreadsheet of its additionally be submitted to: Office of likely incur only minimal compliance
purchasers, which can be sorted by Information and Regulatory Affairs, costs. Specifically, approximately 3,200
location. This would enable a seller to Office of Management and Budget, businesses will spend not more than
comply easily with the proposed Attention: Desk Officer for the Federal $750 (3 hours × $250 each) to create an
reference list requirement (at least 10 Trade Commission. Comments should initial disclosure document and not
prior purchasers in the last three years be submitted via facsimile to (202) 395– more than $500 (2 hours × $250 each)
who are located nearest the prospective 6974 because U.S. Postal Mail is subject
to update the four required disclosures
purchaser, or, if there are not 10, then to lengthy delays due to heightened
on an annual basis. To ensure that the
all prior purchasers). In the alternative, security precautions.
OMB will act on this request for Commission has considered all relevant
the proposed Rule permits a seller to facts, however, it requests additional
review of the collection of information
maintain a national list of purchasers. comment on these issues.
contained in these proposed regulations
Such a list could be posted on the between 30 and 60 days after Section J—Regulatory Flexibility Act
seller’s Web site, for example. publication of this document in the
As a result of these proposals, the Federal Register. Therefore, a comment The Regulatory Flexibility Act
Commission staff estimates that to OMB is best assured of having its full (‘‘RFA’’), 5 U.S.C. 601–612, requires an
compliance with the proposed Rule by effect if OMB receives the comment agency to provide an IRFA with a
business opportunity sellers, on average, within 30 days of publication. This does proposed rule and a Final Regulatory
will require one to three hours to not affect the deadline for the public to Flexibility Analysis (‘‘FRFA’’) with the
prepare an initial disclosure document, comment to the FTC on the proposed final rule, if any, unless the agency
and one to two hours per year to regulation. certifies that the rule will not have a
maintain the necessary records. Staff significant economic impact on a
assumes that in many instances an Section I—Regulatory Analysis substantial number of small entities. See
attorney likely would prepare or update Section 22 of the FTC Act, 15 U.S.C. 5 U.S.C. 603–605. The FTC does not
the disclosure document. Accordingly, 57b, requires the Commission to issue a expect that the proposed Business
staff estimates the total number of hours preliminary regulatory analysis when Opportunity Rule will have a significant
initially to comply with the proposed publishing a Notice of Proposed economic impact on a substantial
Rule to be approximately 16,000 (3,200 Rulemaking, but requires the number of small entities. The
sellers × 5 hours), at a total initial labor Commission to prepare such an analysis abbreviated disclosure and
cost of $4,000,000 (16,000 hours × for a rule amendment proceeding only recordkeeping requirements of the
$250). The Commission staff expects if it: (1) Estimates that the amendment proposed Business Opportunity Rule are
that the annual disclosure burden will will have an annual effect on the the minimum necessary to give
diminish after the first year to one to national economy of $100,000,000 or consumers the information they need to
two hours to prepare disclosures and more; (2) estimates that the amendment protect themselves and permit effective
one to two hours to retain records, will cause a substantial change in the enforcement of the rule. As such, the
resulting in approximately 12,800 hours cost or price of certain categories of economic impact of the proposed Rule
(3,200 sellers × 4 hours) or fewer, for a goods or services; or (3) otherwise will be minimal. In any event, the
total average cost of $3,200,000 (12,800 determines that the amendment will burdens imposed on small businesses
hours × $250), or less. have a significant effect upon covered are likely to be relatively small, and in
The Commission invites comments entities or upon consumers. To the the Commission’s enforcement
that will enable it to: extent that this Document constitutes a experience, insignificant in comparison
1. Evaluate whether the proposed Notice of Proposed Rulemaking, the to their gross sales and profits.
collection of information is necessary Commission has set forth in Section J This document serves as notice to the
for the proper performance of the below, in connection with its Initial Small Business Administration of the
functions of the Commission, including Regulatory Flexibility Analysis agency’s certification of no effect.
whether the information will have a (‘‘IRFA’’) under the Regulatory Nonetheless, the Commission has
practical utility; Flexibility Act, and has discussed determined that it is appropriate to
2. Evaluate the accuracy of the elsewhere in this Document: (1) The publish an IRFA in order to inquire into
Commission’s estimate of the burden of need for and objectives of the proposed the impact of the proposed Rule on
the collection of information, including Rule (see IRFA ¶ 2); (2) a description of small entities. Therefore, the
Commission has prepared the following to the applicable SBA size standards.259 refund request received from a
analysis. The FTC staff estimates that as many as purchaser; and (6) all substantiation
70% of business opportunities, as upon which the seller relies for each
1. Description of the Reasons That
defined by the Rule, are small earnings claim made. The proposed
Action by the Agency Is Being
businesses. The Commission invites Rule requires that these records be made
Considered
comments and information on this available for inspection by the
The Commission’s law enforcement issue. Commission, but does not otherwise
experience provides ample evidence
4. Projected Reporting, Recordkeeping require production of the records. The
that fraud is pervasive in the sale of
many business opportunities marketed and Other Compliance Requirements, Commission is seeking clearance from
to consumers. The pre-sale disclosures Including an Estimate of the Classes of the Office of Management and Budget
provided by the proposed Business Small Entities That Will Be Subject to (‘‘OMB’’) for these requirements and the
Opportunity Rule will give consumers the Requirement and the Type of Commission’s Supporting Statement
the minimal information they need to Professional Skills Necessary for submitted as part of that process will be
protect themselves from fraudulent sales Preparation of the Report or Record made available on the public record of
claims, while minimizing the The proposed Rule imposes this rulemaking.
compliance costs and burdens on disclosure and recordkeeping As discussed in section H above, FTC
sellers. requirements, within the meaning of the staff estimates that the total number of
Paperwork Reduction Act, on the hours initially to comply with the
2. Succinct Statement of the Objectives
‘‘sellers’’ of business opportunities and proposed Rule to be approximately
of, and Legal Basis for, the Proposed
their principals. Section 437.2 of the 16,000 (3,200 sellers × 5 hours), with a
Rule
proposed Rule would require ‘‘sellers’’
The objective of the proposed Rule is total initial legal and clerical cost of
of covered business opportunities to
to provide consumers considering the $4,000,000 (16,000 hours × $250). FTC
provide potential purchasers with a one-
purchase of a business opportunity with page disclosure document, as specified staff expects that the annual burden will
material information they need to by section 437.3 and Appendix A, at diminish after the first year, however, to
investigate the offering thoroughly so least seven calendar days before they approximately 12,800 hours (3,200
they can protect themselves from sign a contract or pay any money toward sellers × 4 hours) or fewer, for a total
fraudulent claims. The legal basis for a purchase. If a seller elects to make an average of annual legal and clerical
the proposed Rule is Section 18 of the earnings claim, section 437.4 would labor costs of $3,200,000 (12,800 hours
FTC Act, 15 U.S.C. 57a, which require that written substantiation for × $250), or less.
authorizes the Commission to the claim be provided to the purchaser
promulgate, modify, and repeal trade 5. Other Duplicative, Overlapping, or
in a separate ‘‘earnings claim statement’’
regulation rules that define with Conflicting Federal Rules
document. However, the proposed Rule
specificity acts or practices in or would not require sellers to make an There are no other federal statutes,
affecting commerce that are unfair or earnings claim, and thus any rules, or policies that would conflict
deceptive within the meaning of section compliance costs incurred in with the proposed Business
(5)(a)(1) of the FTC Act, 15 U.S.C. connection with such claims are strictly Opportunity Rule. The Commission’s
45(a)(1). optional. Franchise Rule, 16 CFR Part 436.1, is
3. Description of and, Where Feasible, Section 437.6 of the proposed Rule
the only federal regulation currently
Estimate of the Number of Small prescribes recordkeeping requirements
applicable to some of the business
Entities to Which the Proposed Rule necessary for effective enforcement of
the Rule. Specifically, sellers of a opportunities covered by the proposed
Will Apply Rule. When the proposed Business
covered business opportunity, and their
The proposed Rule primarily applies principals, must retain for at least three Opportunity Rule takes effect, its
to ‘‘sellers’’ of business opportunities, years the following six types of requirements for business opportunity
including vending, rack display, documents: (1) Records of any oral sellers will supercede the requirements
medical billing and work-at-home (e.g., cancellation or refund requests received of the Franchise Rule, so that any
craft assembly, envelope stuffing) from a purchaser; (2) each materially possible conflict between the two rules
opportunities, as well as pyramid different version of all documents will be avoided.
schemes masquerading as multilevel required by the Rule; (3) each The Commission notes, however, that
sales programs. The FTC staff believes purchaser’s disclosure receipt; (4) each it is aware that 22 states have statutes
that many of these sellers will fall into executed written contract with a specifically governing the sale of
the category of small entities. purchaser; (5) each cancellation or business opportunities. The
Determining the precise number of
small entities affected by the proposed 259 Since October 2000, SBA size standards have
Commission therefore seeks comment
Rule, however, is difficult due to the been based on the North American Industry
and information about any state statutes
wide range of types of businesses Classification System (‘‘NAICS’’), in place of the or rules that may conflict with the
engaged in business opportunity sales. Standard Industrial Classification (‘‘SIC’’) system. proposed requirements, as well as any
In general, a company in a non-manufacturing
The staff estimates that there are industry is a small business if its average annual
other state, local, or industry rules or
approximately 3,200 business receipts are $6 million or less. See http:// policies that require covered entities to
opportunity sellers, including some www.sba.gov/size/indexguide.html. Thus, the size implement practices that conflict or
standard for vending machine operators is $6 comport with the requirements of the
2,500 vending machine, rack display,
million in annual receipts (NAICS 454210), and the

and related opportunity sellers; 550 same size standard applies to other direct selling proposed Rule.
work-at-home opportunity sellers; and establishments (NAICS 454390), marketing
150 multilevel marketing companies. consulting services (NAICS 541613), other
management consulting services (NAICS 541618)
Most established and some start-up and other business support services (NAICS 561499
business opportunities would likely be and 561990). See http://www.sba.gov/size/
considered small businesses according sizetable2002.html.
6. Description of Any Significant purchaser references. Because the Rule. Include in your comment the
Alternatives to the Proposed Rule That proposed Rule does not require sellers number of small entities that will be
Would Accomplish the Stated to make information about potential required to comply with the Rule’s
Objectives of Applicable Statutes and earnings available to potential disclosure and recordkeeping
That Minimize Any Significant purchasers, such earnings claims are requirements.
Economic Impact of the Proposed Rule entirely optional. Thus, if sellers make b. Please provide comment on any or
on Small Entities, Including Alternatives no earnings claims whatsoever, they can all of the provisions in the proposed
Considered, Such as: (1) Establishment avoid the proposed Rule’s requirement Rule with regard to: (a) The impact of
of Differing Compliance or Reporting that any person making an earnings the provision(s) (including benefits and
Requirements or Timetables That Take claim provide a potential purchaser costs to implement and comply with the
Into Account the Resources Available to with an earnings claim representation in Rule or Rule provision), if any; and (b)
Small Entities; (2) Clarification, writing that provides substantiation for what alternatives, if any, the
Consolidation, or Simplification of the claim. Commission should consider, as well as
Compliance and Reporting Thus, the Commission does not the costs and benefits of those
Requirements Under the Rule for Such believe that the proposed Rule will alternatives, paying specific attention to
Small Entities; and (3) Any Exemption impose a significant economic impact the effect of the proposed Rule on small
From Coverage of the Rule, or Any Part on a substantial number of small entities in light of the above analysis. In
Thereof, for Such Small Entities businesses. Nonetheless, the particular, please provide the above
Commission specifically requests information with regard to the
The proposed Rule’s disclosure and
comment on the question whether the disclosure and recordkeeping provisions
recordkeeping requirements are proposed Rule imposes a significant of the proposed Rule set forth in
designed to impose the minimum impact upon a substantial number of sections 437.2, 437.3, 437.4 and 437.6,
burden on all affected business small entities, and what modifications and describe any ways in which the
opportunity sellers, regardless of size. In to the Rule the Commission could make proposed Rule could be modified to
formulating the proposed Rule, the to minimize the burden on small reduce any costs or burdens for small
Commission has taken a number of entities. Moreover, the Commission entities consistent with the proposed
significant steps to minimize the requests comment on the general Rule’s purpose. Costs to implement and
burdens the proposed Rule would question whether new technology or comply with a Rule provision include
impose on large and small businesses. changes in technology can be used to expenditures of time and money for:
These include: (1) Limiting the required reduce the burdens mandated by the Any employee training; attorney,
pre-sale disclosure to a one-page Act. computer programmer or other
document, with check boxes provided In some situations, the Commission professional time; preparing relevant
to simplify disclosure responses; (2) has considered adopting a delayed materials (e.g., disclosure documents),
allowing the disclosure to refer to effective date for small entities subject and recordkeeping.
information in other existing documents to a new regulation in order to provide c. Please describe ways in which the
to avoid needless duplication; (3) them with additional time to come into Rule could be modified to reduce any
permitting the disclosure document compliance. In this case, however, in costs or burdens on small entities,
itself to be furnished in electronic form light of the proposed Rule’s flexible including whether and how
to minimize printing and distribution standard and modest compliance costs, technological developments could
costs; and (4) employing specific the Commission believes that small further reduce the costs of
prohibitions in place of affirmative entities should feasibly be able to come implementing and complying with the
disclosures whenever possible. into compliance with the proposed Rule proposed Rule for small entities.
Moreover, because many of the sellers by the proposed effective date, six d. Please provide any information
covered by the proposed Rule are months following publication of the quantifying the economic costs and
already required to comply with the final Rule. Nonetheless, the Commission benefits of the proposed Rule on the
Commission’s Franchise Rule and the invites comment on whether small entities covered, including small
business opportunity laws in 22 states, businesses might need additional time entities.
FTC staff anticipates that the proposed to come into compliance and, if so, why. e. Please identify any relevant federal,
Rule will drastically reduce their In addition, the Commission has the state, or local rules that may duplicate,
current compliance costs, while authority to exempt any persons or overlap or conflict with the proposed
imposing exceedingly modest ongoing classes of persons from the Rule’s Rule.
compliance costs on all covered sellers. application pursuant to section 18(g) of
Consequently, the Commission believes Section K—Request for Comments
the FTC Act. The Commission therefore
that the proposed Rule will not have a requests comment on whether there are The Commission invites members of
significant economic impact upon small any persons or classes of persons the public to comment on any issues or
businesses. covered by the proposed Rule that it concerns they believe are relevant or
The proposed Rule would require should consider exempting from the appropriate to the Commission’s
business opportunity sellers to provide Rule’s application pursuant to section consideration of the proposed Business
only five affirmative disclosures in a 18(g). However, the Commission notes Opportunity Rule. The Commission
one-page disclosure document. This is a that the proposed Rule’s purpose of requests that factual data upon which
significant reduction from the 20 protecting consumers against fraud the comments are based be submitted
disclosures now required by the could be undermined by the granting of with the comments. In addition to the
Commission’s Franchise Rule, with a broad exemption to small entities. issues raised above, the Commission
which many business opportunity solicits public comment on the specific

sellers are now obligated to comply. The 7. Questions for Comment To Assist questions identified below. These
proposed Rule limits required Regulatory Flexibility Analysis questions are designed to assist the
disclosures to information about the a. Please provide information or public and should not be construed as
sellers’ litigation history, refund policy, comment on the number and type of a limitation on the issues on which
refund request history, and prior small entities affected by the proposed public comment may be submitted.
1. General Questions ‘‘business opportunity’’ focus on the persons already in business who are
Please provide comment, including offer of assistance alone or on the seeking to enter into a new line of
relevant data, statistics, consumer making of earnings claims alone? What business. Do persons already in
complaint information, or any other alternatives should the Commission business need the protection of the
evidence, on each different provision of consider? What would be the costs and proposed Rule? Does this provision
benefits of each alternative? impose unwarranted costs? Should the
the proposed Rule. Regarding each
3. Proposed section 437.1(d) Commission consider alternatives
provision, please include answers to the
contemplates that a business regarding persons already in business
following questions: arrangement will constitute a ‘‘business who are either looking to purchase a
a. How prevalent is the practice the opportunity’’ if the purchaser pays new business opportunity or to expand
provision seeks to address? consideration to the seller, directly or their line of business? If so, what would
b. What is the impact (including any indirectly through a third party. The be the costs and benefits of each
benefits and costs), if any, on: proposed definition, however, does not alternative?
1. Prospective business opportunity contain a minimum payment threshold.
purchasers; The Commission believes that, in light Timing Provision
2. Existing business opportunity of the limited compliance costs—far less 7. Proposed section 437.2
purchasers; and than under the Franchise Rule—all contemplates that a seller must furnish
3. Business opportunity sellers business opportunity sellers (with the a prospective purchaser with a
(including small business opportunity exception of franchisors under the disclosure document at least seven
sellers and start-up sellers)? Franchise Rule), should comply with calendar days before the earlier of the
c. What alternative proposals should the Rule. Further, the record shows that time that the prospective purchaser: (1)
the Commission consider? How would whatever threshold might be set forth in Signs any contract in connection with
these proposed alternatives affect the a Business Opportunity Rule, fraudulent the business opportunity sale; or (2)
costs and benefits of the proposed Rule? business opportunity sellers will price makes a payment or provides other
2. Questions on Specific Proposals their opportunities at an amount just consideration to the seller, directly or
under the threshold in order to avoid indirectly through a third party, for the
In response to each of the following compliance. Nevertheless, should the purchase or lease of goods or services.
questions, please provide: (1) Detailed Commission consider a monetary Is a seven calendar-day period
comment, including data, statistics, threshold and if so, why? At what level warranted to enable prospective
consumer complaint information, and should the threshold be set? If so, how purchasers to investigate and make an
other evidence, regarding the issues can the Commission ensure that informed investment decision? Is a
addressed in the question; (2) comment fraudulent business opportunity sellers seven calendar-day period necessary to
as to whether the proposal does or does will not price their opportunities just enable prospective purchasers to review
not provide an adequate solution to the under the threshold in order to avoid any earnings claims? Would a seven
problems it is intended to address; and Rule coverage? What alternatives should calendar-day review period impose
(3) suggestions for additional changes the Commission consider? What would unnecessary delay or excessive costs
that might better maximize consumer be the costs and benefits of each when the prospective purchaser is
protections or minimize the burden on alternative? already in business? Should the review
business opportunity sellers. 4. Proposed section 437.1(c) would period be shortened to five or three
Definitions define the term ‘‘business assistance,’’ days? What would be the costs and
setting forth five examples. Are each of benefits of each alternative time period?
1. Proposed section 437.1(d) would these examples warranted? What other
limit the definition of ‘‘business examples, if any, might better capture Liability
opportunity’’ to instances where a seller the nature of business assistance offered 8. Proposed section 437.3 would
solicits a purchaser to enter into a new by business opportunity sellers? What provide that only a seller has the
business (or new line or type of would be the costs and benefits of each obligation to furnish a basic disclosure
business). This limitation seeks to alternative? document. While a seller may hire
distinguish the sale of business 5. Proposed section 437.1(c) would brokers or others to arrange for sales, the
opportunity ventures from the ordinary include as an example of ‘‘business seller ultimately has the obligation to
sale of goods and services. Is limiting assistance’’ the tracking or paying, or ensure that disclosures are properly
the definition of ‘‘business opportunity’’ purporting to track or pay, commissions prepared and disseminated to
to solicitations to enter into a new or other compensation based upon the prospective purchasers. Is it proper to
business adequate to make this sale of goods or services or recruitment limit liability for preparing and
distinction? If not, what alternative of other persons to sell goods or disseminating disclosure documents to
limitation should the Commission services. This example is intended to the seller? Should other individuals or
consider? What would be the costs and capture pyramid marketing programs entities involved in a business
benefits of each alternative? that assist program participants in opportunity sale also be liable for either
2. Proposed section 437.1(d) tracking commissions to be paid or by failing to furnish disclosure documents
contemplates that a business paying commissions to participants’ or for the contents of an incomplete or
arrangement will constitute a ‘‘business downstream. Does this example inaccurate disclosure documents? What
opportunity’’ if the seller either adequately capture pyramid schemes? Is alternatives, if any, should the
promises business assistance or makes it too broad, sweeping in business Commission consider? What would be
an earnings claim. Are both alternatives arrangements other than pyramids? If the costs and benefits of each
necessary? Are there business so, what alternative, if any, should the alternative?
opportunities that offer assistance Commission consider to capture
without making an earnings claim? Are pyramid programs? What would be the The Disclosure Document
there business opportunities that make costs and benefits of each alternative? 9. Proposed section 437.3(a) requires
earnings claims that do not offer 6. Proposed section 437.1(k) would that disclosure documents be ‘‘in the
assistance? Should the definition of make clear that the Rule applies to form and using the language set forth in
Appendix A.’’ Is this instruction seller is a d/b/a? What are the costs and each action, including the names of the
sufficient to inform business benefits of including both the company principal parties, case number, full
opportunity sellers on how to prepare a and the principal officers’ names next to name of the court, and the filing date.
basic disclosure document? Should the ‘‘Seller’’? Should previous business Should more detail be provided about
Commission revise the proposed Rule opportunities offered by the seller’s legal actions? Should the business
specifically to reference each of the principal officers be disclosed? What are opportunity seller also have to provide
required boilerplate disclosures? What the costs and benefits of including such information about any of the following
alternatives, if any, should the information? topics: the final disposition of the
Commission consider? What would be 13. Proposed section 437.3(a)(3) action; the penalties imposed; the
the costs and benefits of each would require sellers to furnish certain damages assessed; the terms of the
alternative? litigation information. Specifically, the settlement; or the terms of the order?
10. The one-page disclosure seller would disclose information about What would be the costs and benefits of
document set forth in Appendix A is itself, as well as any affiliates and prior including such additional information?
intended to provide prospective businesses, any of the seller’s officers, 16. Proposed section 437.3(a)(4)
purchasers with material information directors, sales managers (or other would require a seller to disclose
with which to make an informed individuals who occupy a similar whether or not the seller has a
investment decision. Can the overall position or perform similar functions), cancellation or refund policy. In
presentation of the information in the and employees who are involved in addition, proposed section 437.3(a)(5)
one-page disclosure document be business opportunity sales activities. would require the seller to state the
improved? Are there specific sections The intent of this provision is to capture number of purchasers of the business
that can be improved by simplifying the all individuals who function as officers, opportunity during the two years prior
presentation to make it easier for directors, or sales managers, even to the date of the disclosure and the
prospective purchasers to understand? though they may not have a formal title. number of cancellation and refund
How could the presentation be In addition, it also captures those requests submitted by prior purchasers
improved? What would be the costs and employees who are involved in sales during the same period. The purpose of
benefits of each alternative? activities. Does this provision this provision is to assist the
11. The one-page disclosure adequately capture the types of prospective purchaser in assessing the
document set forth in Appendix A is individuals whose litigation should be viability of the offer and the likelihood
intended to assist prospective disclosed? Is the phrase ‘‘any individual of the seller’s post-sale performance.
purchasers by describing the nature of who occupies a similar position or
The focus on cancellations and refunds
the information disclosed. For example, performs a function similar to an officer,
assumes that a seller would be better
where a seller checks the ‘‘yes’’ box in director, or sales manager of the seller’’
connection with earnings claims, it able to disclose information about such
adequate to identify those who act as or
clarifies for prospective purchasers that requests that it receives than
perform the functions of officers,
the seller or its representative is information about the current status of
directors, or sales managers? Similarly,
furnishing sales, income, or profit data. prior purchasers. Is this assumption
is the language ‘‘employees who are
At the same time, the one-page correct? To what extent do business
involved in business opportunity sales
disclosure document sets forth legal opportunity sellers track the current
activities’’ too broad? What alternative
standards, summarizing for sellers and status of prior purchasers? Is
language, if any, should the Commission
prospective purchasers the more lengthy consider? What would be the costs and cancellation or refund request
disclosure obligations found in the text benefits of each alternative? information relevant in a business
of the Rule. Accordingly, the 14. Proposed section 437.3(a)(3) opportunity sale? Does such information
Commission has tried to balance, as would limit the types of suits that must correctly imply dissatisfaction or
much as possible, the use of clear be disclosed to civil and criminal problems within a business opportunity
language readily understandable by actions involving misrepresentation, system? Would such a disclosure
prospective purchasers with the need fraud, securities law violations, or requirement actually discourage sellers
for clear legal standards applicable to unfair or deceptive practices within 10 from offering cancellations or refunds?
sellers. Has the Commission succeeded years immediately preceding the date What alternatives, if any, should the
in striking the appropriate balance? Are that the business opportunity is offered. Commission consider? What would be
there areas where the understandability Are these types of actions sufficient to the costs and benefits of each
of the one-page disclosure document enable a prospective purchaser to assess alternative?
may be improved, without sacrificing the risk of purchasing an opportunity 17. Proposed section 437.3(a)(6)
clear legal standards? Are there specific from the seller? Should the list be would require each seller to disclose the
sections where the proposed language expanded to include bankruptcy? name, city and state, and telephone
does not accurately convey the Should it be expanded to include suits number for at least 10 prior purchasers
substance of the corresponding Rule against the seller for breach of contract? nearest to the prospective purchaser’s
provision? What improvements should How often do business opportunity location. The Commission believes the
the Commission consider to the purchasers sue sellers for breach of disclosure of this information is critical
language found in the one-page contract, as opposed to to enable a prospective business
disclosure document? What would be misrepresentation or fraud? Is 10 years opportunity purchaser to verify the
the costs and benefits of each a sufficient period to track prior seller’s claims and to conduct a due
alternative? litigation? Is a 10-year period too long? diligence investigation of the offering. Is
12. The disclosure document provides If so, what alternative time period, if this information proprietary for the
a space for the name of the ‘‘Seller.’’ In any, should the Commission consider? seller? If so, do the benefits of such
addition to any company or d/b/a name What would be the costs and benefits of disclosure to prospective purchasers
listed next to ‘‘Seller,’’ should ‘‘Seller’’ each alternative? outweigh the costs to sellers? Are there
also include the principal officers’ 15. Proposed section 437.3(a)(3) other ways to identify prior purchasers?
names? Should the addition of such would require a seller disclosing What alternatives, if any, should the
names depend on whether or not the litigation to include the full caption of Commission consider? What would be
the costs and benefits of each the seller update its reference list on a ordinary financial performance
alternative? monthly basis drawing only from those experience of purchasers of the business
18. As an alternative, proposed purchasers who have received a privacy opportunity being offered for sale.
section 437.3(a)(6) would enable a seller notice? Is a monthly updating Should a seller be required to disclose
to furnish prospective purchasers with a requirement feasible? What alternative the number and percentage of its
national list of prior purchasers. Is this updating requirement should the purchasers that have achieved at least
a viable option? Would sellers be Commission consider? Would a the same level of performance as the
inclined to publish a single national list monthly updating requirement industry figures? Would number and
rather than individualized lists of disadvantage those purchasers who buy percentage information be sufficient to
purchasers ‘‘nearest to the prospective a business opportunity immediately enable a prospective purchaser to assess
purchaser’s location?’’ Under what after the Rule goes into effect, when no the applicability of industry information
circumstances should the Rule permit a or few prior purchasers will have to the opportunity being offered? Do
seller to post a national list of received the required privacy notice? business opportunity sellers collect
purchasers on its Web site? What What alternatives should the performance data from purchasers? Is
protections should be put in place to Commission consider? What would be such information readily available?
limit access to the list? What protections the costs and benefits of each What other alternatives, if any, should
might be sufficient to prevent those who alternative? the Commission consider? What would
merely want to sell fraudulent business 21. Are there other disclosures that be the costs and benefits of each
opportunities from accessing such a list? should be included in the disclosure alternative?
What other options, if any, should the document? Specifically, should any
Commission consider? Would these proposed initial purchaser price of the Prohibited Acts and Practices
options enable the seller to select only business opportunity and/or payments 24. Proposed section 437.5 would set
those prior purchasers who are to be sent to third parties be listed on forth a number of prohibited acts or
successful or who otherwise would give the disclosure document? Why or why practices. Is the proposed list complete?
a favorable report on the seller? What not? What would be the costs and Are there any other practices common
would be the costs and benefits of each benefits of including such information? among business opportunity sellers that
alternative? should be prohibited? Are any of the
19. Proposed section 437.3(b) would Earnings Claims proposed prohibitions unnecessary?
require the disclosure of contact 22. Proposed section 437.4(a)(4) What would be the costs and benefits of
information, raising privacy concerns. would set forth the required content of each proposed prohibition? What
Accordingly, the Commission proposes an earnings claims statement. It alternatives, if any, should the
that sellers include in the references includes the name of the person making Commission consider? What would be
section of the disclosure document the the claim, the date of the claim, the the costs and benefits of each
following: ‘‘If you buy a business claim, the beginning and ending dates alternative?
opportunity from the seller, your when the represented earnings were 25. Proposed section 437.5 would
contact information can be disclosed in achieved, the number and percentage of prohibit sellers from misrepresenting
the future to other buyers.’’ Are there all purchasers during the stated time the business opportunity, directly or
alternative methods that would protect frame who achieved at least the stated through third parties. Accordingly, a
prior purchasers’ privacy? Should the level of earnings, and a description of business opportunity could be held
Commission consider an opt-out any characteristics of the purchasers liable for misrepresentations made
provision, enabling purchasers to who achieved the represented earnings about the business opportunity through
decline having their contact information that may be materially different from the third parties, such as a locator or broker.
listed in a disclosure document? Would characteristics of the prospective Should third parties involved in the
sellers likely exploit an opt-out purchasers being offered the business business opportunity sales process be
provision by inducing purchasers to opt opportunity. Is this information held liable for misrepresenting the
out, thereby avoiding the obligation to sufficient to enable a prospective seller’s disclosures? Proposed section
disclose prior purchasers as references? purchaser to assess the validity of an 437.5 also does not address when a
Would sellers use an opt-out provision earnings claim? What other third party—such as a shill—makes his
to create, in effect, a self-serving list of substantiation, if any, should be or her own misrepresentations outside
successful purchasers or shills? Are required? Should a seller be able to of the disclosure document. The
there alternative methods employed by make an earnings claim if it does not Commission believes that third parties
the states that the Commission should have complete and accurate information can be held liable for their own
consider? on the number and percentage of prior misrepresentations under section 5 of
20. Once the Rule becomes effective, purchasers who have achieved the the FTC Act. Is section 5 of the FTC Act
sellers must disclose contact represented level of earnings? If so, sufficient to address independent
information for prior purchasers. under what conditions should such misrepresentations made outside of a
However, individuals who have earnings claims be permitted? What disclosure document by such third
purchased a business opportunity before alternatives, if any, should the parties? What alternatives, if any,
the Rule becomes effective probably will Commission consider? What would be should the Commission consider? What
have received no notice that their the costs and benefits of each would be the costs and benefits of each
contact information can be disclosed to alternative? alternative?
other purchasers in the future. How 23. Proposed section 437.4(c) would
should the Commission balance the address the dissemination of industry Federal and State Relations
goals of disclosing prior purchasers as financial, earnings, or performance 26. The proposed Rule would prohibit
references with the fact that, at least information. Specifically, a seller would business opportunity sellers from
initially, some prior purchasers will not be barred from using such information adding any other information to the
have received any privacy notice? unless the seller has written required disclosures, including
Should the Commission phase in the substantiation demonstrating that the information required by state law. This
use of references? For example, should information reflects the typical or approach is different from the Franchise
Rule approach, which enables in a judicial action or proceeding; a business opportunity purchase, or any
franchisors to include additional arbitration; or any governmental request to seek a refund, in whole or in
materials in a disclosure document that administrative proceeding, including, part, for a business opportunity
are required or permitted by state law. but not limited to, an action to obtain purchase, whether or not the purchaser
Because the proposed disclosure or issue a cease and desist order, and an has a contractual right to cancel,
document comprises a single page (and assurance of voluntary compliance. rescind, or seek a refund.
any attachments), sellers can easily (b) Affiliate means an entity (f) Designated person means any
attach the federal disclosure document controlled by, controlling, or under person, other than the seller, whose
to any disclosure document required common control with a business goods or services the seller suggests,
under state law, without imposing opportunity seller. recommends, or requires that the
significant costs or burdens. In light of (c) Business assistance means the purchaser use in establishing or
the vastly different laws governing offer of material advice, information, or operating a new business, including, but
business opportunities on the state support to a prospective purchaser in not limited to, any person who finds or
level, this approach will also preserve connection with the establishment or purports to find locations for
the uniformity of federal disclosure operation of a new business. equipment.
documents. Is this approach proper? (1) Business assistance includes, but (g) Disclose or state means to give
How can the Commission best is not limited to: information in writing that is clear and
accommodate divergent state business (i) Providing, or purporting to conspicuous, accurate, concise, and
opportunity approaches? What provide, locations for the use or legible.
alternatives, if any, should the operation of equipment, displays, (h) Earnings claim means any oral,
Commission consider? What would be vending machines, or similar devices, written, or visual representation to a
the costs and benefits of each on premises neither owned nor leased prospective purchaser that conveys,
alternative? by the purchaser; expressly or by implication, a specific
(ii) Providing, or purporting to level or range of actual or potential
Record Retention provide, outlets, accounts, or customers, sales, or gross or net income or profits.
27. Proposed section 437.6 would including, but not limited to, Internet Earnings claims include, but are not
require that records be kept for ‘‘each outlets, accounts, or customers, for the limited to:
oral or written cancellation or refund purchaser’s goods or services; (1) Any chart, table, or mathematical
request received from a purchaser.’’ (iii) Buying back, or purporting to buy calculation that demonstrates possible
How should oral cancellation or refund back, any or all of the goods or services results based upon a combination of
requests be kept? Is there certain that the purchaser makes, produces, variables; and
information that should be preserved in fabricates, grows, breeds, modifies, or (2) any statements from which a
a written form, such as name, address, provides; prospective purchaser can reasonably
amount of request, date, and resolution (iv) Tracking or paying, or purporting
infer that he or she will earn a minimum
of the request? What would be the costs to track or pay, commissions or other
level of income (e.g., ‘‘earn enough to
and benefits of requiring such record compensation based on the purchaser’s
buy a Porsche,’’ ‘‘earn a six-figure
retention obligations? sale of goods or services or recruitment
income,’’ or ‘‘earn your investment back
of other persons to sell goods or
Section L—Proposed Rule within one year’’).
services; and (i) Exclusive territory means a
For the reasons set forth in the (v) Advising or training, or purporting
specified geographic or other actual or
preamble, the Federal Trade to advise or train, the purchaser in the
implied marketing area in which the
Commission proposes to amend 16 CFR promotion, operation, or management of
a new business, or providing, or seller promises not to locate additional
Chapter I by adding part 437 to read as purchasers or offer the same or similar
follows: purporting to provide, the purchaser
with operational, managerial, technical, goods or services as the purchaser
or financial guidance in the operation of through alternative channels of
PART 437—BUSINESS OPPORTUNITY distribution.
RULE a new business.
(2) Provided, however, that ‘‘business (j) General media means any
Sec. assistance’’ does not include a written instrumentality through which a person
437.1 Definitions. product warranty or repair contract, or may communicate with the public,
437.2 The obligation to furnish written guidance in the use, maintenance, and/ including, but not limited to, television,
documents. radio, print, Internet, billboard, Web
437.3 The disclosure document. or repair of any product to be sold by
the purchaser or of any equipment site, and commercial bulk e-mail.
437.4 Earnings claims. (k) New business means a business in
437.5 Other prohibited practices. acquired by the purchaser.
437.6 Record retention. (d) Business opportunity means a which the prospective purchaser is not
437.7 Franchise exemption. commercial arrangement in which: currently engaged, or a new line or type
437.8 Other laws, rules, orders. (1) The seller solicits a prospective of business.
437.9 Severability. purchaser to enter into a new business; (l) Person means an individual, group,
(2) The prospective purchaser makes association, limited or general
Appendix A to Part 437—Model partnership, corporation, or any other
Document a payment or provides other
consideration to the seller, directly or entity.
Authority: 15 U.S.C. 41–58. indirectly through a third party; and (m) Prior business means:
(3) The seller, expressly or by (1) A business from which the seller
§ 437.1 Definitions. acquired, directly or indirectly, the
implication, orally or in writing, either:

The following definitions shall apply (i) Makes an earnings claim; or major portion of the business’ assets, or
throughout this part: (ii) Represents that the seller or one or (2) Any business previously owned or
(a) Action means a criminal more designated persons will provide operated by the seller, in whole or in
information, indictment, or proceeding; the purchaser with business assistance. part, by any of the seller’s officers,
a civil complaint, cross claim, (e) Cancellation or refund request directors, sales managers, or by any
counterclaim, or third-party complaint means any request to cancel or rescind other individual who occupies a
position or performs a function similar number of the seller, the name of the telephone number of at least the 10
to that of an officer, director, or sales salesperson offering the opportunity, purchasers within the past three years
manager of the seller. and the date when the disclosure who are located nearest to the
(n) Providing locations, outlets, document is furnished to the prospective purchaser’s location.
accounts, or customers means prospective purchaser. Alternatively, a seller may furnish a
furnishing the prospective purchaser (2) Earnings claims. If the seller makes prospective buyer with a list disclosing
with existing or potential locations, an earnings claim, check the ‘‘yes’’ box all purchasers nationwide within the
outlets, accounts, or customers; and attach the earnings statement last three years. If choosing this option,
requiring, recommending, or suggesting required by section 437.4. If not, check insert the words ‘‘See Attached List’’
one or more locators or lead generating the ‘‘no’’ box. without removing the list headings or
companies; collecting a fee on behalf of (3) Legal actions. the numbers 1 through 10, and attach a
one or more locators or lead generating (i) If any of the following persons has list of the references to the disclosure
companies; or training or otherwise been the subject of any civil or criminal document.
assisting the prospective purchaser in action for misrepresentation, fraud, (ii) Clearly and conspicuously, and in
obtaining his or her own locations, securities law violations, or unfair or immediate conjunction with the list of
outlets, accounts, or customers. deceptive practices within the 10 years references, state the following: ‘‘If you
(o) Purchaser means a person who immediately preceding the date that the buy a business opportunity from the
buys a business opportunity. business opportunity is offered, check seller, your contact information can be
(p) Quarterly means as of January 1, the ‘‘yes’’ box: disclosed in the future to other buyers.’’
April 1, July 1, and October 1. (A) The seller; (7) Receipt. Attach a duplicate copy of
(q) Seller means a person who offers (B) Any affiliate or prior business of the disclosure page to be signed and
for sale or sells a business opportunity. the seller; dated by the purchaser. The seller may
(r) Written or in writing means any (C) Any of the seller’s officers, inform the prospective purchaser how
document or information in printed directors, sales managers, or any to return the signed receipt (for
form or in any form capable of being individual who occupies a position or example, by sending to a street address,
downloaded, printed, or otherwise performs a function similar to an officer, email address, or facsimile telephone
preserved in tangible form and read. It director, or sales manager of the seller; number).
includes: type-set, word processed, or or (b) Fail to update the disclosures
handwritten documents; information on (D) Any of the seller’s employees who required by paragraph (a) of this section
computer disk or CD–ROM; information are involved in business opportunity at least quarterly to reflect any changes
sent via e-mail; or information posted sales activities. in the required information, including,
on the Internet. It does not include mere (ii) If the ‘‘yes’’ box is checked, but not limited to, any changes in the
oral statements. disclose all such actions in an seller’s refund or cancellation policy,
attachment to the disclosure document. the total number of purchasers, the
§ 437.2 The obligation to furnish written State the full caption of each action number of cancellation requests, or the
documents. (names of the principal parties, case list of references; provided, however,
In connection with the offer for sale, number, full name of court, and filing that until a seller has 10 purchasers, the
sale, or promotion of a business date). list of references must be updated
opportunity, it is a violation of this Rule (iii) If there are no actions to disclose, monthly.
and an unfair or deceptive act or check the ‘‘no’’ box.
practice in violation of section 5 of the (4) Cancellation or refund policy. If § 437.4 Earnings claims.
Federal Trade Commission Act (‘‘FTC the seller offers a refund or the right to In connection with the offer for sale,
Act’’) for any seller to fail to furnish a cancel the purchase, check the ‘‘yes’’ sale, or promotion of a business
prospective purchaser with the material box. If so, state the terms of the refund opportunity, it is a violation of this Rule
information required by §§ 437.3(a) and or cancellation policy in an attachment and an unfair or deceptive act or
437.4(a) of this Rule in writing at least to the disclosure document. If no refund practice in violation of section 5 of the
seven calendar days before the earlier of or cancellation is offered, check the FTC Act, for the seller to:
the time that the prospective purchaser: ‘‘no’’ box. (a) Make any earnings claim to a
(a) Signs any contract in connection (5) Cancellation or refund requests. prospective purchaser, unless the seller:
with the business opportunity sale; or State the total number of purchasers of (1) Has a reasonable basis for its claim
(b) makes a payment or provides other the same type of business opportunity at the time the claim is made;
consideration to the seller, directly or offered by the seller during the two (2) Has in its possession written
indirectly through a third party. years prior to the date of disclosure. materials that substantiate its claim at
State the total number of oral and the time the claim is made;
§ 437.3 The disclosure document. written cancellation requests during that (3) Makes the written substantiation
In connection with the offer for sale, period for the sale of the same type of available upon request to the
sale, or promotion of a business business opportunity. For purposes of prospective purchaser and to the
opportunity, it is a violation of this Rule this disclosure, ‘‘two years’’ means the Commission; and
and an unfair or deceptive act or eight quarters immediately preceding (4) Furnishes to the prospective
practice in violation of section 5 of the the date of the disclosure document. purchaser an earnings claim statement.
FTC Act, for any seller to: (6) References. The earnings claim statement shall be a
(a) Fail to disclose to a prospective (i) State the name, city and state, and single written document and shall state
purchaser the following material telephone number of all purchasers who the following information:
information in a single written purchased the business opportunity (i) The title ‘‘EARNINGS CLAIM
document in the form and using the within the last three years. If more than STATEMENT REQUIRED BY LAW’’ in
language set forth in Appendix A to part 10 purchasers purchased the business capital, bold type letters;
437: opportunity within the last three years, (ii) The name of the person making
(1) Identifying information. State the the seller may limit the disclosure by the earnings claim and the date of the
name, business address, and telephone stating the name, city and state, and earnings claim;
(iii) The earnings claim; inconsistent with or contradicts the (p) Misrepresent that any person,
(iv) The beginning and ending dates information required to be disclosed by trademark or service mark holder, or
when the represented earnings were §§ 437.3 (basic disclosure document) governmental entity, directly or
achieved; and 437.4 (earnings claims document) of indirectly benefits from, sponsors,
(v) The number and percentage of all this Rule; participates in, endorses, approves,
purchasers during the stated time period (c) Include in any disclosure authorizes, or is otherwise associated
who achieved at least the stated level of document or earnings claim statement with the sale of the business
earnings; any materials or information other than opportunity or the goods or services
(vi) Any characteristics of the what is explicitly required or permitted sold through the business opportunity;
purchasers who achieved at least the by this Rule. For the sole purpose of (q) Misrepresent that any person:
represented level of earnings, such as enhancing the prospective purchaser’s (1) Has purchased a business
their location, that may differ materially ability to maneuver through an opportunity from the seller or has
from the characteristics of the electronic version of a disclosure operated a business opportunity of the
prospective purchasers being offered the document or earnings statement, the type offered by the seller; or
business opportunity; and seller may include scroll bars and (2) Can provide an independent or
(vii) A statement that written internal links. All other features (e.g., reliable report about the business
substantiation for the earnings claim multimedia tools such as audio, video, opportunity or the experiences of any
will be made available to the animation, or pop-up screens) are current or former purchaser.
prospective purchaser upon request. prohibited; (r) Fail to disclose:
(b) Make any earnings claim in the (d) Misrepresent the amount of sales, (1) Any consideration promised or
general media, unless the seller: or gross or net income or profits a paid to any person identified as a
(1) Has a reasonable basis for its claim prospective purchaser may earn or that purchaser or operator of a business
at the time the claim is made; prior purchasers have earned; opportunity of the type offered by the
(2) Has in its possession written (e) Misrepresent that any seller. Consideration includes, but is not
material that substantiates its claim at governmental entity, law, or regulation limited to, any payment, forgiveness of
the time the claim is made; prohibits a seller from furnishing debt, or provision of equipment,
(3) States in immediate conjunction earnings information to a prospective services, or discounts to the person or
with the claim: purchaser;
(i) The beginning and ending dates to a third party on the person’s behalf;
(f) Fail to make available to
when the represented earnings were (2) Any personal relationship or any
prospective purchasers, and to the
achieved; and past or present business relationship
Commission upon request, written
(ii) The number and percentage of other than as the purchaser or operator
substantiation for the seller’s earnings
purchasers during that time period who of the business opportunity being
claims;
achieved the represented earnings. (g) Misrepresent how or when offered by the seller.
(c) Disseminate industry financial, commissions, bonuses, incentives, § 437.6 Record retention.
earnings, or performance information premiums, or other payments from the To prevent the unfair and deceptive
unless the seller has written seller to the purchaser will be calculated acts or practices specified in this part,
substantiation demonstrating that the or distributed; business opportunity sellers and their
information reflects the typical or (h) Misrepresent the cost, or the
principals must prepare, retain, and
ordinary financial, earnings, or performance, efficacy, nature or central
make available for inspection by
performance experience of purchasers of characteristics of the business
Commission officials copies of the
the business opportunity being offered opportunity or the goods or services
following documents for a period of
for sale. offered to a prospective purchaser;
(d) Fail to notify any prospective three years:
(i) Misrepresent any material aspect of
purchaser in writing of any material any assistance offered to a prospective (a) Each materially different version of
changes affecting the relevance or purchaser; all documents required by this Rule;
reliability of the information contained (j) Misrepresent the likelihood that a (b) Each purchaser’s disclosure
in an earnings claim statement before seller, locator, or lead generator will receipt;
the prospective purchaser signs any find locations, outlets, accounts, or (c) Each executed written contract
contract or makes a payment or provides customers for the purchaser; with a purchaser;
other consideration to the seller, (k) Misrepresent any term or (d) Each oral or written cancellation
directly or indirectly, through a third condition of the seller’s refund or or refund request received from a
party. cancellation policies; purchaser; and
(l) Fail to provide a refund or (e) All substantiation upon which the
§ 437.5 Other prohibited practices. cancellation when the purchaser has seller relies for each earnings claim from
In connection with the offer for sale, satisfied the terms and conditions the time each such claim is made.
sale, or promotion of a business disclosed pursuant to § 437.3(a)(4);
opportunity, it is a violation of this Rule § 437.7 Franchise exemption.
(m) Misrepresent a business
and an unfair or deceptive act or opportunity as an employment The provisions of this part shall not
practice in violation of section 5 of the opportunity; apply to any business opportunity that:
FTC Act for any seller, directly or (n) Misrepresent the terms of any (a) Constitutes a ‘‘franchise,’’ as
indirectly through a third party, to: territorial exclusivity or territorial defined in the Franchise Rule, 16 CFR
(a) Disclaim, or require a prospective protection offered to a prospective part 436;
purchaser to waive reliance on, any purchaser; (b) Has a written contract; and
statement made in any document or (o) Assign to any purchaser a (c) Requires purchasers to make a
attachment that is required or permitted purported exclusive territory that, in payment that meets the minimum
to be disclosed under this Rule; fact, encompasses the same or payment requirement set forth in the
(b) Make any claim or representation, overlapping areas already assigned to Franchise Rule (part 436 of this
orally, visually, or in writing, that is another purchaser; chapter).
§ 437.8 Other orders and preemption. provisions of the Business Opportunity however, must be made in a separate
(a) If an outstanding FTC or court Rule. state disclosure document.
order applies to a person, but imposes (b) The FTC does not intend to
§ 437.9 Severability.
requirements that are inconsistent with preempt the business opportunity sales
any provision of this regulation, the practices laws of any state or local The provisions of this Rule are
person may petition the Commission to government, except to the extent of any separate and severable from one
amend the order. In particular, business conflict with the Rule. A law is not in another. If any provision is stayed or
opportunities required by FTC or court conflict with this Rule if it affords determined to be invalid, it is the
order to follow the Franchise Rule, 16 prospective purchasers equal or greater Commission’s intention that the
CFR part 436, may petition the protection, such as registration of remaining provisions shall continue in
Commission to amend the order so that disclosure documents or more extensive effect.
the business opportunity may follow the disclosures. All such disclosures, BILLING CODE 6750–01–P
BILLING CODE 6750–01–C

EP12AP06.001</GPH>
By direction of the Commission. RR 32. International Franchise RR 69. Eversheds (‘‘Eversheds’’)

Donald S. Clark, Association (‘‘IFA’’) RR 70. Brownstein Zeidman (see supra
Secretary. RR 33. Brownstein, Zeidman & Lore RR 33)
(‘‘Brownstein Zeidman’’) RR 71. Penny Ward, Baker & McKenzie
Note: The following attachments will not RR 34. Jere W. Glover (‘‘Glover’’), (‘‘Ward’’)
appear in the Code of Federal Regulations.
Counsel for Advocacy, U.S. Small RR 72. Matthias Stein (‘‘Stein’’)
Business Administration (‘‘SBA RR 73. Byron Fox, Hunton & Williams
Attachment A: Rule Review
Advocacy’’) (‘‘Fox’’)
Commenters
RR 35. Jan Meyers, Chair, House RR 74. Papa John’s Pizza (‘‘Papa Johns’’)
RR 1. Robert E. Mulloy, Jr. (‘‘Mulloy’’) Committee on Small Business RR 75. Harold L. Kestenbaum (see supra
RR 2. Stanley M. Dub, Dworken & (‘‘Representative Myers’’) RR 14)
Bernstein (‘‘Dub’’) RR 36. Neil A. Simon, Hogan and
RR 3. Marvin J. Migdol, Nationwide Hartson (‘‘Simon’’) Rule Review September 1995 Public
Franchise Marketing Services RR 37. Deborah Bortner (‘‘Bortner’’), Workshop Conference
(‘‘Migdol’’) Washington State Department of Panelists
RR 4. SCPromotions, Inc. Financial Institutions, Securities
(‘‘SCPromotions’’) Harold Brown, Brown & Stadfeld
Division
RR 5. R. Dana Pennell (‘‘Pennell’’) (‘‘Brown’’)
RR 38. American Franchisee
RR 6. Robin Day Glenn (‘‘Glenn’’) Sam Damico, Q.M. Marketing, Inc.
Association (‘‘AFA’’)
RR 7. Jack McBirney, McGrow (‘‘Damico’’)
RR 39. American Association of
Consulting (‘‘McBirney’’) Connie B. D’Imperio, Color Your Carpet,
Franchisees & Dealers (‘‘AAFD’’)
RR 8. SRA International (‘‘SRA RR 40. Warren Lewis, Lewis & Trattner Inc. (‘‘D’Imperio’’)
International’’) Eric Ellman (‘‘Ellman’’), Direct Selling
(‘‘Lewis’’)
RR 9. Harold Brown, Brown & Stadfeld RR 41. Century 21 Real Estate Corp. Assocation (‘‘DSA’’)
(‘‘Brown’’) (‘‘Century 21’’) Mark B. Forseth, Locke Purnell Rain
RR 10. Ronald N. Rosenwasser RR 42. John Hayden (‘‘Hayden’’) Harrell (‘‘Forseth’’)
(‘‘Rosenwasser’’) RR 43. North American Securities Mike Gason, Barkely & Evergreen
RR 11. Louis F. Sokol (‘‘Sokol’’) Administrators Association (‘‘Gaston’’)
RR 12. J. Howard Beales III, Professor, (‘‘NASAA’’) Susan Kezios, American Franchisee
George Washington University RR 44. Robert L. PeRRy (‘‘Perry’’) Association (‘‘AFA’’) (‘‘Kezios’’)
(‘‘Beales’’) RR 45. The State Bar of California, William Kimball, Iowa Coalition for
RR 13. Peter Lagarias (‘‘Lagarias’’) Business Law Section (‘‘CA BLS’’) Responsible Franchising
RR 14. Harold L. Kestenbaum RR 46. Mike Gaston, Barkely & (‘‘Kimball’’)
(‘‘Kestenbaum’’) Evergreen (‘‘Gaston’’) Warren Lewis, Lewis & Trattner
RR 15. Walter D. Wilson, Better RR 47. The Southland Corp. (‘‘Lewis’’)
Business Bureau of Central Georgia, (‘‘Southland’’) Steven Maxey (‘‘Maxey’’), North
Inc. (‘‘Wilson’’) RR 48. Medicap Pharmacies, Inc. American Securities Administrators
RR 16. Connie B. D’Imperio, Color Your (‘‘Medicap’’) Association (‘‘NASAA’’)
Carpet, Inc. (‘‘D’Imperio’’) RR 49. Rochelle B. Spandorf Joyce G. Mazero, Locke Purnell Rain
RR 17. Q.M. Marketing, Inc (‘‘Q.M. (‘‘Spandorf’’), ABA Forum on Harrell (‘‘Mazero’’)
Marketing’’) Franchising, Andrew C. Selden Barry Pineles (‘‘Pineles’’), U.S. Small
RR 18. David Gurnick, Kindel & (‘‘Selden’’), David J. Kaufman Business Administration (‘‘SBA
Anderson (‘‘Gurnick’’) (‘‘Kaufmann’’) Advocacy’’)
RR 19. U-Save Auto Rental (‘‘U-Save RR 50. Joyce G. Mazero, Locke Pernell Robert Purvin, American Association of
Auto Rental’’) Rain Harrell (‘‘Mazero’’) Franchisees & Dealers (‘‘AAFD’’)
RR 20. The Longaberger Co. RR 51. Mark B. Forseth, Locke Pernell (‘‘Purvin’’)
(‘‘Longaberger’’) Rain Harrell (‘‘Forseth’’) Steven Rabenberg, Explore St. Louis
RR 21. Direct Selling Association RR 52. Forte Hotels (‘‘Forte Hotels’’) (‘‘Rabenberg’’)
(‘‘DSA’’) RR 53. R.A. Politte (‘‘Politte’’) Matthew R. Shay (‘‘Shay’’), International
RR 22. American Bar Association, RR 54. Politte (see supra RR 53). Franchise Association (‘‘IFA’’)
Section on Antitrust Law (‘‘ABA RR 55. Brown (see supra RR 9). Neil A. Simon, Hogan & Hartson
AT’’) RR 56. Wieczorek (see supra RR 23). (‘‘Simon’’)
RR 23. Dennis E. Wieczorek, Rudnick & RR 57. Scott Shane, Georgia Institute of Robin Spencer (‘‘Spencer’’),
Wolfe (‘‘Wieczorek’’) Technology (‘‘Shane’’) representing American Franchisee
RR 24. Real Estate National Network RR 58. Friday’s (‘‘Friday’s’’) Association
(‘‘RENN’’) RR 59. Carl E. Zwisler, Keck, Mahin & Leonard Swartz, Arthur Anderson & Co.
RR 25. Attorney General Jim Ryan Cate (‘‘Zwisler’’) (‘‘Swartz’’)
(‘‘General Ryan’’), State of Illinois RR 60. Wieczorek (see supra RR 23) John Tifford, Brownstein Zeidman &
RR 26. Alan S. Nopar (‘‘Nopar’’) RR 61. Enrique A. Gonzalez, Gonzalez Lore
RR 27. Snap-On, Inc. (‘‘Snap-On’’) Cavillo Y Forastierei (‘‘Gonzalez’’) Ronnie Volkening (‘‘Volkening’’), The
RR 28. Steven Rabenberg, Explore St. RR 62. Pepsico Restaurants (‘‘Pepsico’’) Southland Corp. (‘‘Southland’’)
Louis (‘‘Rabenberg’’) RR 63. IFA (see supra RR 32) Dennis E. Wieczorek, Rudnick & Wolfe
RR 29. Douglas M. Brooks, Martland & RR 64. Atlantic Richfield Co (‘‘ARCO’’) (‘‘Wieczorek’’)
Brooks (‘‘Brooks’’) RR 65. David Clanton (‘‘Clanton’’) William J. Wimmer (‘‘Wimmer’’), Iowa
RR 30. Robert N. McDonald RR 66. Leonard Swartz, Arthur Coalition for Responsible
(‘‘Commissioner McDonald’’), Andersen & Co. (‘‘Swartz’’) Franchising
Securities Commissioner, State of RR 67. John R.F. Baer, Keck, Mahin &
Maryland Cate (‘‘Baer’’) Public Participants
RR 31. Little Caesars (‘‘Little Caesars’’) RR 68. Lynn Scott (‘‘Scott’’) Peter Denzen (‘‘Denzen’’)
Bob Hessler, Wendy’s (‘‘Hessler’’) Attachment B: Advance Notice of ANPR 36. Jere W. Glover & Jennifer A.
Chris Huke, SC Promotions (‘‘Huke’’) Proposed Rulemaking Commenters Smith, U.S. Small Business
Michael Jorgensen (‘‘Jorgensen’’) ANPR 1. Kevin Brendan Murphy, Mr. Administration Office of Chief
Robert L. Perry (‘‘Perry’’) Franchise (‘‘Murphy’’) Counsel for Advocacy (‘‘SBA
Brian Schnell, Gray, Plant Mooty ANPR 2. Murphy (see supra ANPR 1). Advocacy’’)
(‘‘Schnell’’) ANPR 3. Mike Bruce, The Michael ANPR 37. Robert Chabot, Domino’s
Bruce Fund (‘‘Bruce’’) Pizza Franchisee (‘‘Chabot’’)
March 1996 Public Workshop ANPR 38. Teresa Maloney, National
ANPR 4. Harold Brown, Brown &
Conference Coalition of 7-Eleven Franchisees
Stadfeld (‘‘Brown’’)
Panelists ANPR 5. Frances L. Diaz (‘‘Diaz’’) (‘‘Maloney’’)
ANPR 6. Brown (see supra ANPR 4). ANPR 39. BLANK
Kay M. Ainsley, Ziebart Intl, Corp. ANPR 7. Diaz (see supra ANPR 5). ANPR 40. Harold L. Kestenbaum
(‘‘Ainsley’’) ANPR 8. Marian Kunihisa (‘‘Kunihisa’’) (‘‘Kestenbaum’’)
John R.F. Baer, Keck, Mahin & Cate ANPR 9. Kevin Bores, Domino’s Pizza ANPR 41. Samuel L. Sibent, KFC
(‘‘Baer’’) Franchisee (‘‘Bores’’) Franchisee (‘‘Sibent’’)
Michael Brennan, Rudnick & Wolfe ANPR 10. Terrence L. Packer, Supercuts ANPR 42. Oren C. Crothers, KFC
(‘‘Brennan’’) Franchisee (‘‘Packer’’) Franchisee (‘‘Crothers’’)
Joel R. Buckberg, HFA, Inc. ANPR 11. John Delasandro ANPR 43. Matthew Jankowski, KFC
(‘‘Buckberg’’) (‘‘Delasandro’’) Franchisee (‘‘Jankowski’’)
David A. Clanton, Baker & McKenzie ANPR 12. William Cory (‘‘Cory’’) ANPR 44. Rodney A. DeBoer, KFC
(‘‘Clanton’’) ANPR 13. Joseph Manuszak, Domino’s Franchisee (‘‘DeBoer’’)
Kenneth R. Costello, Loeb & Loeb Franchisee (‘‘Manuszak’’) ANPR 45. Liesje Bertoldi, KFC
(‘‘Costello’’) ANPR 14. Daryl Donafin, Taco Bell Franchisee (‘‘L. Bertoldi)’
Edward J. Fay, Kwik Kopy Corp. (‘‘Fay’’) Franchisee (‘‘Donafin’’) ANPR 46. Steve Bertoldi, KFC
Mark B. Forseth, Locke Purnell Rain ANPR 15. David Muncie, National Franchisee (‘‘S. Bertoldi’’)
Harrell (‘‘Forseth’’) Claims Service, Inc. (‘‘Muncie’’) ANPR 47. Charles Buckner, KFC
ANPR 16. Patrick E. Meyers, The Franchisee (‘‘Buckner’’)
Byron E. Fox, Hunton & Williams
Quizno’s Corp. (‘‘Quizno’s’’) ANPR 48. Walter J. Knezevich, KFC
(‘‘Fox’’)
ANPR 17. David Weaver, Domino’s Franchisee (‘‘Knezevich’’)
Bruce Harsh, International Trade
Pizza Franchisee (‘‘Weaver’’) ANPR 49. Jeffrey W. Gray, KFC
Specialist, U.S. Department of ANPR 18. Karen M. Paquet, Domino’s
Commerce (‘‘Harsh’’) Franchisee (‘‘J. Gray’’)
Pizza Franchisee (‘‘Paquet’’) ANPR 50. Fred Jackson, KFC Franchisee
Arnold Janofsky, Precision Tune ANPR 19. Gary R. Duvall Graham &
(‘‘Janofsky’’) (‘‘Jackson’’)
Dunn (‘‘Duvall’’) ANPR 51. Ronald L. Rufener, KFC
Susan P. Kezios (‘‘Kezios’’), American ANPR 20. Andrew J. Sherman,
Franchisee Association (‘‘AFA’’) Franchisee (‘‘Rufener’’)
Greenberg & Tauris (‘‘Sherman’’) ANPR 52. Tim Morris, KFC Franchisee
Alex S. Konigsberg, QC (‘‘Konigsberg’’), ANPR 21. S. Beavis Stubbings
Lapoint Rosenstein (‘‘Morris’’)
(‘‘Stubbings’’)
Andrew P. Loewinger, Abraham ANPR 53. Scarlett Norris Adams, KFC
ANPR 22. Jim & Evalena Gray, Pearle
Pressman & Bauer (‘‘Loewinger’’) Franchisee (‘‘Adams’’)
Vision Franchisee (‘‘J&E Gray’’)
ANPR 23. Ernest Higginbotham ANPR 54. Calvin G. White, KFC
H. Bret Lowell, Brownstein Zeidman
(‘‘Higginbotham’’) Franchisee (‘‘White’’)
(‘‘Lowell’’)
ANPR 24. Henry C. Su & Bryon Fox ANPR 55. Nick Iuliano, KFC Franchisee
John Melle, Office of U.S. Trade
(‘‘Su’’) (‘‘N. Iuliano’’)
Representative (‘‘Melle’’)
ANPR 25. John R.F. Baer, Keck, Mahin ANPR 56. Dolores Iuliano, KFC
Raymond L. Miolla, Burger King Corp. Franchisee (‘‘D. Iuliano’’)
(‘‘Miolla’’) & Cate (‘‘Baer’’)
ANPR 26. Clay Small & Lowell Dixon, ANPR 57. Ralph A Harman, KFC
Alex Papadakis, Hurt Sinisi Papadakis Franchisee (‘‘R. Harman’’)
(‘‘Papadakis’’) Nat’l Franchise Mediation Program
Steering Committee (‘‘NFMP’’) ANPR 58. Saundra S. Harman, KFC
Matthew R. Shay (‘‘Shay’’), International Franchisee (‘‘S. Harman’’)
Franchise Association (‘‘IFA’’) ANPR 27. Richard T. Catalano
(‘‘Catalano’’) ANPR 59. Richard Braden, KFC
Neil A. Simon, Hogan & Hartson Franchisee (‘‘Barden’’)
ANPR 28. Neil Simon & Erik Wulff,
(‘‘Simon’’) ANPR 60. K.F.C. of Pollys, KFC
Hogan & Hartson (‘‘H&H’’)
Leonard Swartz, Arthur Anderson & Co. ANPR 29. Glenn A. Mueller, Domino’s Franchisee (‘‘Pollys’’)
(‘‘Swartz’’) Pizza Franchisee (‘‘Mueller’’) ANPR 61. Joan Fiore, McDonalds
Greg L. Walther, Outback Steakhouse ANPR 30. Doug Bell et al. Supercuts Franchisee (‘‘Fiore’’)
Intl (‘‘Walther’’) Franchisees (‘‘Supercut ANPR 62. Susan P. Kezios, American
Dennis E. Wieczorek, Rudnick & Wolfe Franchisees’’) Franchisee Association (‘‘AFA’’)
(‘‘Wieczorek’’) ANPR 31. Michael L. Bennett, ANPR 63. Kenneth R. Costello, Loeb &
Erik B. Wulff, Hogan & Hartson Longaberger Co. (‘‘Longaberger’’) Loeb (‘‘Costello’’)
(‘‘Wulff’’) ANPR 32. John Rachide, Domino’s Pizza ANPR 64. AFA (see supra ANPR 62)
Philip F. Zeidman (‘‘Zeidman’’) Franchisee (‘‘Rachide’’) ANPR 65. Susan Rich, KFC Franchisee
Carl Zwisler, Keck, Mahin & Cate ANPR 33. David J. Kaufmann, (‘‘Rich’’)
(‘‘Zwisler’’) Kaufmann, Feiner, Yamin, Gildin & ANPR 66. Fiore (see supra ANPR 61)
Robbins (‘‘Kaufmann’’) ANPR 67. Mike Johnson, Subway

Public Participants
ANPR 34. Joseph N. Mariano, Direct Franchisee (‘‘Johnson’’)
Jeff Brams, Sign-A-Rama and Shipping Selling Association (‘‘DSA’’) ANPR 68. Laurie Gaither, GNC
Connections (‘‘Brams’’) ANPR 35. Linda F. Golodner & Susan Franchisee (‘‘L. Gaither’’)
Pamela Mills, Baker & McKenzie Grant, National Consumers League ANPR 69. Greg Gaither, GNC Franchisee
(‘‘Mills’’) (‘‘NCL’’) (‘‘G. Gaither’’)
ANPR 70. Greg Suslovic, Subway ANPR 106. Dennis E. Wieczorek, ANPR 138. Robert S. Keating, Baskin &
Franchisee (‘‘Suslovic’’) Rudnick & Wolfe (‘‘Wieczorek’’) Robbins Franchisee (‘‘Keating’’)
ANPR 71. Richard Colenda, GNC ANPR 107. Gerald A. Marks, Marks & ANPR 139. A. Patel, Baskin & Robbins
Franchisee (‘‘Colenda’’) Krantz (‘‘Marks’’) Franchisee (‘‘A. Patel’’)
ANPR 72. Bob Gagliati, GNC Franchisee ANPR 108. Brown (see supra ANPR 4) ANPR 140. Joel R. Buckberg, Cendant
(‘‘Gagliati’’) ANPR 109. Everett W. Knell (‘‘Knell’’) Corporation (‘‘Cendant’’)
ANPR 73. Pat Orzano, 7-Eleven ANPR 110. Anne Crews, Mary Kay, Inc. ANPR 141. Duvall (see supra ANPR 19)
Franchisee (‘‘Orzano’’) (‘‘Mary Kay’’) ANPR 142. NCL (see supra ANPR 35)
ANPR 74. Linda Gaither, GNC ANPR 111. Carl Letts, Domino’s Pizza ANPR 143. AFA (see supra ANPR 62)
Franchisee (‘‘Li Gaither’’) Franchisee (‘‘Letts’’) ANPR 144. Catalano (see supra ANPR
ANPR 75. Kevin 100 (‘‘Kevin 100’’) ANPR 112. Kat Tidd (‘‘Tidd’’) 27)
ANPR 76. Robert James, Florida ANPR 113. Ted Poggi, National ANPR 145. DSA (see supra ANPR 34)
Department of Agriculture & Coalition of Associations of 7- ANPR 146. Keating (see supra ANPR
Consumer Services (‘‘James’’) Eleven Franchisees (‘‘NCA 7-Eleven 139)
ANPR 77. Robert A. Tingler, Office of Franchisees) ANPR 147. Kathie & David Leap, Baskin
ANPR 114. Gary R. Duvall & Nadine C.
the Attorney General, State of & Robbins Franchisee (‘‘Leap’’)
Mandel (‘‘Duvall & Mandel’’)
Illinois (‘‘IL AG’’) ANPR 115. Sherry Christopher, ANPR 148. Ted D. Kuhn, Baskin &
ANPR 78. John M. Tifford, Rudnick, Christopher Consulting, Inc. Robbins Franchisee (‘‘Kuhn’’)
Wolfe, Epstien & Zeidman (‘‘Christopher’’) ANPR 149. Mike S. Lee, Baskin &
(‘‘Tifford’’) ANPR 116. Carl C. Jeffers, Intel Robbins Franchisee (‘‘Lee’’)
ANPR 79. Robert L. Purvin, Jr. Marketing Systems, Inc. (‘‘Jeffers’’) ANPR 150. R. Deilal, Baskin & Robbins
(‘‘Purvin’’) ANPR 117. Deborah Bortner, State of Franchisee (‘‘Deilal’’)
ANPR 80. Teresa Heron, My Favorite Washington, Department of ANPR 151. Frank J. Demotto, Baskin &
Muffin Franchisee (‘‘Heron’’) Financial Institutions, Securities Robbins Franchisee (‘‘Demotto’’)
ANPR 81. Purvin (see supra ANPR 79) Divisions (‘‘WA Securities’’) ANPR 152. Thomas Hung, Baskin &
ANPR 82. Matthew R. Shay, ANPR 118. Carmen D. Caruso, Noonan Robbins Franchisee (‘‘Hung’’)
International Franchise Association & Caruso (‘‘Caruso’’) ANPR 153. Jean Jones, Baskin & Robbins
(‘‘IFA’’) ANPR 119. Howard Bundy, Bundy & Franchisee (‘‘Jones’’)
ANPR 83. Duvall (see supra ANPR 19) Morrill, Inc.(‘‘Bundy’’) ANPR 154. Hang, Baskin & Robbins
ANPR 84. Lance Winslow, Car Wash ANPR 120. Franchise & Business Franchisee (‘‘Hang’’)
Guys (‘‘Winslow’’) Opportunity Committee, North ANPR 155. Dilip Patel, Baskin &
ANPR 85. Winslow (see supra ANPR 84) American Securities Robbins Franchisee (‘‘D. Patel’’)
ANPR 86. Rick Gue, The Pampered Administrations Association ANPR 156. Terry L. Glase, Baskin &
Chef, (‘‘Pampered Chef’’) (‘‘NASAA’’) Robbins Franchisee (‘‘Glase’’)
ANPR 87. John M. Tifford, Coverall ANPR 121. Tifford (see supra ANPR 78) ANPR 157. R.E. Williamson, Baskin &
North America (‘‘Coverall’’) ANPR 122. Wieczorek (see supra ANPR Robbins Franchisee (‘‘Williamson’’)
ANPR 88. John M. Tifford, Merchandise 106) ANPR 158. R.M. Valum, Baskin &
Mart Properties (‘‘Merchandise ANPR 123. John & Debbie Lopez, Baskin Robbins Franchisee (‘‘Valum’’)
Mart’’) & Robbins Franchisee (‘‘Lopez’’) ANPR 159. Rajendra Patel, Baskin &
ANPR 89. Dirk C. Bloemendaal, Amway ANPR 124. Susan R. Essex & Ted Storey, Robbins Franchisee (‘‘R. Patel’’)
Corporation (‘‘Amway’’) California Bar, Business Law ANPR 160. Jerry & Debbie Robinett,
ANPR 90. Winslow (see supra ANPR 84) Section (‘‘CA BLS’’) Baskin & Robbins Franchisee
ANPR 91. Winslow (see supra ANPR 84) ANPR 125. Peter C. Lagarias, The Legal (‘‘Robinett’’)
ANPR 92. Winslow (see supra ANPR 84) Solutions Group (‘‘Lagarias’’) ANPR 161. Ronald J. Rudolf, Baskin &
ANPR 93. Winslow (see supra ANPR 84) ANPR 126. James G. Merret, Jr. Robbins Franchisee (‘‘Rudolf’’)
ANPR 94. Andrew A. Caffey (‘‘Caffey’’) (‘‘Merret’’) ANPR 162. Kamlesh Patel, Baskin &
ANPR 95. Entrepreneur Media, Inc. ANPR 127. W. Michael Garner, Dady & Robbins Franchisee (‘‘K. Patel’’)
(‘‘Entrepreneur’’) Garner (‘‘Garner’’) ANPR 163. Nicholas & Marilyn Apostal,
ANPR 96. Brown (see supra ANPR 4) ANPR 128. Jeff Brickner (‘‘Brickner’’)
ANPR 129. Bernard A. Brynda, Baskin Baskin & Robbins Franchisee
ANPR 97. Raymond & Robert Buckley, (‘‘Apostal’’)
& Robbins Franchisee (‘‘Brynda’’)
Scorecard Plus Franchisees ANPR 130. Caron B. Slimak, Jacadi USA ANPR 164. Patrick Sitin, Baskin &
(‘‘Buckley’’) Franchisee (‘‘Slimak’’) Robbins Franchisee (‘‘Sitin’’)
ANPR 98. Mark A. Kirsch, Rudnick, ANPR 131. Dr. Ralph Geiderman, Pearl ANPR 165. Paul & Lisa SeLander,
Wolfe, Epstien & Zeidman Vision Franchisee (‘‘Geiderman’’) Baskin & Robbins Franchisee
(‘‘Kirsch’’) ANPR 132. Felipe Frydmann, Minister (‘‘SeLander’’)
ANPR 99. Dale E. Cantone, Maryland of Economic & Trade Affairs, ANPR 166. S. Bhilnym, Baskin &
Division of Securities, Office of the Embassy of the Argentine Republic Robbins Franchisee (‘‘Bhilnym’’)
Attorney General (‘‘Md Securities’’) (‘‘Argentine Embassy’’) ANPR 167. Mike & Kathy Denino,
ANPR 100. Roger C. Haines, Scorecard ANPR 133. Andrew C. Selden, Briggs & Baskin & Robbins Franchisee
Plus Franchisee (‘‘Haines’’) Morgan (‘‘Selden’’) (‘‘Denino’’)
ANPR 101. David E. Myklebust, ANPR 134. Robert Zarco, Zarco & Pardo
Scorecard Plus Franchisee ANPR Workshop Participants
(‘‘Zarco & Pardo’’)
(‘‘Myklebust’’) ANPR 135. Jason H. Griffing, Baskin & Michael Bennett, Longaberger Company
ANPR 102. Robert Larson (‘‘Larson’’) Robbins Franchisee (‘‘Griffing’’) (‘‘Bennett’’)

ANPR 103. Brown (see supra ANPR 4) ANPR 136. Erik H. Karp, Witmer, Karp, Kennedy Brooks (‘‘Brooks’’)
ANPR 104. Mark B. Forseth, CII Warner & Thuotte (‘‘Karp’’) John Brown, Amway Corporation
Enterprises (‘‘CII’’) ANPR 137. William D. Brandt, Ferder, (‘‘J. Brown’’)
ANPR 105. Bertrand T. Unger, PR One Brandt, Casebeer, Copper, Hoyt & Howard Bundy, Bundy & Morrill
(‘‘Pr One’’) French (‘‘Brandt’’) (‘‘Bundy’’)
Delia Burke, Jenkins & Gilchrist Charles Lay, Brite Site Franchisee FR–NPR 11. John R.F. Baer, Robert T.
(‘‘Burke’’) (‘‘Lay’’) Joseph, Alan H. Silberman,
Andrew Caffey, Esq. (‘‘Caffey’’) Mike Ludlum, Entrepreneur Media Sonnenschein Nath & Rosenthal
Dale Catone, Office of the Maryland (‘‘Ludlum’’) (‘‘Baer’’)
Attorney General (‘‘Cantone’’) Marge Lundquist, Franchisee FR–NPR 12. Morton A. Aronson, Neil A.
Emilio Casillas, Washington State (‘‘Lundquist’’) Simon, David J. Kaufmann,
Securities Division (‘‘Casillas’’) Gerald Marks, Marks & Krantz National Franchise Council
Richard Catalano, Esq. (‘‘Catalano’’) (‘‘Marks’’) (‘‘NFC’’)
Sherry Christopher, Esq. Philip McKee, National Consumers FR–NPR 13. Alaska Turner (‘‘Turner’’)
(‘‘Christopher’’) League (‘‘McKee’’) FR–NPR 14. Susan P. Kezios, American
Michael W. Chiodo, Domino’s Dianne Mousley, Mike Schmidt’s Phil.
Franchisee Association (‘‘AFA’’)
Franchisee (‘‘Chiodo’’) Hoagies Franchisee (‘‘Mousley’’)
Joseph Punturo, Office of the New York FR–NPR 15. Warren L. Lewis, Lewis &
Martin Cordell, Washington State
Attorney General (‘‘Punturo’’) Kolton (‘‘Lewis’’)
Securities Division (‘‘Cordell’’)
Joseph Cristiano, Carvel Franchisee Mehran Rafizadeh, GNC Franchisee FR–NPR 16. John W. Regnery, Snap-On
(‘‘Cristiano’’) (‘‘Rafizadeh’’) Inc. (‘‘Snap-On’’)
John D’Alessandro, Quaker State Lube David R. Raymond, Esq. (‘‘Raymond’’) FR–NPR 17. Dale E. Cantone, Stephen
Distributor (‘‘D’Alessandro’’) Iris Sandow, Blimpie Franchisee W. Maxey, Joseph J. Punturo,
Mark Deutsch, former franchisee (‘‘Sandow’’) NASAA Franchise and Business
(‘‘Deutsch’’) Philip Sanson, Illinois Securities Opportunity Project Group
Steve Doe, Franchisee (‘‘Doe’’) Department (‘‘Sanson’’) (‘‘NASAA’’)
Gary Duvall, Graham & Dunn (‘‘Duvall’’) Matthew Shay, International Franchise FR–NPR 18. Howard E. Bundy, Bundy
Eric Ellman, Direct Selling Association Association (‘‘IFA’’) & Morrill, Inc. (‘‘Bundy’’)
(‘‘Ellman’’) David Silverman, Sportworld Int’l FR–NPR 19. Laurie Taylor (‘‘Taylor’’)
Debbie Fetzer, Snap-On Franchisee (‘‘Silverman’’) FR–NPR 20. Jonathan Hubbell,
(‘‘Fetzer’’) Neil Simon, Hogan & Hartson (‘‘Simon’’) Prudential Real Estate Affiliates
David Finigan, Illinois Securities Caron Slimak (‘‘Slimak’’), Jacadi USA (‘‘PREA’’)
Department (‘‘Finigan’’) Franchisee
J.H. Snow, Jenkens & Gilcrist (‘‘Snow’’) FR–NPR 21. David Gurnick, Arter &
Mark B. Forseth, Jenkens & Gilchrist Hadden (‘‘Gurnick’’)
(‘‘Forseth’’) Adam Sokol, Illinois Attorney General’s
Office (‘‘Sokol’’) FR–NPR 22. Don J. DeBolt, Matthew R.
Richard W. Galloway, Domino’s Pizza Shay, International Franchise
Franchisee (‘‘Galloway’’) Kat Tidd, Esq. (‘‘Tidd’’)
John Tifford, Rudnick Wolfe, Epstien & Association (‘‘IFA’’)
Elizabeth Garceau, Pro Design (‘‘E. FR–NPR 23. L. Seth Stadfeld, Weston,
Garceau’’) Zeidman, (‘‘Tifford’’)
Robert Tingler, Franchise Bureau Chief, Patrick, Willard & Redding
Michael Garceau, Pro Design (‘‘M.
Illinois Attorney General’s Office (‘‘Stadfeld’’)
Garceau’’)
Roger Gerdes, Microsoft Corp. (‘‘Tingler’’) FR–NPR 24. Eric H. Karp, Witmer, Karp,
Bertrand Unger, PR One (‘‘Unger’’) Warner & Thuotte (‘‘Karp’’)
(‘‘Gerdes’’)
Dr. Spencer Vidulich, Pearle Vision FR–NPR 25. Janet L. McDavid,
Rick Geu, The Pampered Chef (‘‘Geu’’)
Franchisee (‘‘Vidulich’’) American Bar Association, Section
Judy Gitterman, Jenkens & Gilchrist
Dick Way, PR One (‘‘Way’’) of Antitrust Law (‘‘ABA AT’’)
(‘‘Gitterman’’) Dennis Wieczorek, Rudnick & Wolfe
Susan Grant, National Consumers FR–NPR 26. Randall Loeb, NaturaLawn
(‘‘Wieczorek’’) of America (‘‘NaturaLawn’’)
League (‘‘Grant’’) Erik Wulff, Hogan & Hartson (‘‘Wulff’’)
Bruce Hoar, Hanes Franchisee FR–NPR 27. Tony Rolland, National
Barry Zaslav, Coverall North America
(‘‘B. Hoar’’) Franchisee Association (‘‘NFA’’)
(‘‘Zaslav’’)
Thomas Hoar, Hanes Franchisee FR–NPR 28. Andrew P. Loewinger,
(‘‘T. Hoar’’) Attachment C: Franchise Rule Notice of Buchanan Ingersoll (‘‘BI’’)
Nelson Hockert-Lotz, Domino’s Pizza Proposed Rulemaking Commenters FR–NPR 29. Jeffrey E. Kolton, Frandata
Franchisee (‘‘Hockert-Lotz’’) FR–NPR 1. Patrick E. Meyers, The (‘‘Frandata’’)
Tee Houston-Aldridge, World Quizno’s Corporation (‘‘Quizno’s’’) FR–NPR 30. AFC Enterprises (‘‘AFC’’)
Inspection Network (‘‘Houston- FR–NPR 2. Steven A. Rosen, Frannet FR–NPR 31. Howard Morrill, Bundy &
Aldridge’’) (‘‘Frannet’’) Morrill, Inc. (‘‘Morrill’’)
Robert James, Florida Dept. of FR–NPR 3. Robert Tingler, Franchise FR–NPR 32. Carl E. Zwisler, Jenkens &
Agriculture & Consumer Services Bureau Chief, Illinois Attorney Gilchrist (‘‘J&G’’)
(‘‘James’’) General (‘‘IL AG’’) FR–NPR 33. Diane T. Nauer, TruServ
Carl Jeffers, Intel Marketing Systems FR–NPR 4. Dennis E. Wieczorek, Piper Corporation (‘‘TruServ’’)
(‘‘Jeffers’’) Marbury Rudnick & Wolfe
Erik Karp, Witmer, Karp, Warner & FR–NPR 34. Brian H. Cole, Tricon
(‘‘PMR&W’’) (‘‘Tricon’’)
Thuotte (‘‘Karp’’) FR–NPR 5. Jack Schuessler, Wendy’s
David Kaufmann, Kaufmann, Feiner, FR–NPR 35. Steven Goldman, Mark
Intl, Inc. (‘‘Wendy’s’’)
Yamin, Gildin & Robbins FR–NPR 6. Curtis S. Gimson, Triarc Forseth, Marriott Corp. (‘‘Marriott’’)
(‘‘Kaufmann’’) Restaurant Group (‘‘Triarc’’) FR–NPR Rebuttal 36. Gurnick (see supra
Harold Kestenbaum, Hollenbrug, FR–NPR 7. Eugene Stachowiak, FR–NPR 21)
Bleven, Solomon, Ross McDonald’s (‘‘McDonalds’’) FR–NPR Rebuttal 37. Kezios (see supra
(‘‘Kestenbaum’’) FR–NPR 8. David E. Holmes (‘‘Holmes’’) FR–NPR 14)
Susan Kezios, American Franchisee FR–NPR 9. Erik B. Wulff, John F. FR–NPR Rebuttal 38. IL AG (see supra
Association (‘‘Kezios’’) Dienelt, Hogan & Hartson (‘‘H&H’’) FR–NPR 3)
Mark Kirsch, Rudnick Wolfe, Epstien & FR–NPR 10. Ronnie R. Volkening, FR–NPR Rebuttal 39. Bundy (see supra
Zeidman (‘‘Kirsch’’) 7-Eleven, Inc. (‘‘7-Eleven’’) FR–NPR 18)
FR–NPR Rebuttal 40. John W.

Fitzgerald, Gray, Plant, Mooty,
Mooty & Bennett (‘‘GPM’’)
[FR Doc. 06–3395 Filed 4–11–06; 8:45 am]
BILLING CODE 6750–01–P

Proposed Rule: Trade Regulation Rules: Business Opportunity Rule Fraud and Unfair or Deceptive Practices Prevention

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Wednesday,

April 12, 2006

Avenue, NW., Washington, DC 20580. entitled ‘‘Disclosure Requirements and

that more involve business opportunities than

S–05–0439–LDG–RJJ (D. Nev. 2005); FTC v.

63 FTC v. Elec. Med. Billing, Inc., No. SA02–368

example, a Florida business opportunity regulator

business, such as a greeting card rack display or 132 E.g.,

140 See 16 CFR at 436.1(a)(22). party.

157 E.g., FTC v. Am. Universal Vending Corp., No.

193 Of course, supporting data may become so

201 E.g., FTC v. Inspired Ventures, Inc., No. 02–

231 See Staff Program Review, supra note 39,

243 16 CFR at 436.2(a)(3)(i).

would cover those business

million in annual receipts (NAICS 454210), and the

which many business opportunity solicits public comment on the specific

implication, orally or in writing, either:

BILLING CODE 6750–01–C

By direction of the Commission. RR 32. International Franchise RR 69. Eversheds (‘‘Eversheds’’)

Robbins (‘‘Kaufmann’’) ANPR 67. Mike Johnson, Subway

ANPR 102. Robert Larson (‘‘Larson’’) Robbins Franchisee (‘‘Griffing’’) (‘‘Bennett’’)

FR–NPR Rebuttal 40. John W.

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