Tragic (Legal) Mistake 3: FTC Biz Op Rules Takes On Earning Claims

By Chip Cooper, Esq.

The New Biz Op Rule by the FTC applies to all fifty states, including the 25 states that did not already have a business opportunity law. This means it applies to everyone with a business that meets its classification criteria, no matter where they operate within the U.S.

What Does the New Biz Op Rule Do?

First, the New Biz Op Rule alters the business opportunity seller’s disclosure form. On one hand, it streamlines the business opportunity disclosure form to a single page form with only five mandatory pieces of information. The disclosure agreement must be provided to the purchaser at least seven calendar days before the purchaser can sign it. The old rules said it was ten business days. The new FTC business opportunity disclosure document must include the seller’s identifying information, earnings claims if any, legal information about legal claims against the seller, the business’ refund and cancellation policies, and a list of the ten closest purchasers or all purchasers within the last three years. You are required by law to indicate whether the prior purchasers have a personal relationship with you, such as identifying prior purchasers who are family members. A business can check “no” if there is no refund or cancellation policy or no earnings claims. And you cannot use the old FTC Disclosure Statement, even if you’ve been using it for years.

Secondly, the New Business Opportunity Rule expands the number of businesses that fall under the new business opportunity regulations. It has always applied to vending machines, payphones, internet kiosks and rack displays. The 2012 regulation expands the rule to include work at home schedules such as envelope stuffing, jewelry assembly and any system based on buying back goods or services the business opportunity buyer makes at home. The New Biz Op Rule does not cover franchisors that fall under the FTC Franchise Rule. It also excludes multi-level marketing companies.

Any business is subject to this rule if it:

The seller has to solicit the purchaser to join the business opportunity. The rule doesn’t apply to business to business selling of products and services.
The rule only applies if the purchaser has to make a required payment to join the business opportunity. This may be a one time lump sum or an affiliate agreement where a portion of all sales go to the seller. The old rule said the regulations applied only if a payment of at least $50 was made in the first six months. The price limit and time frame have been eliminated in the new regulation. The rule does have an exception when the payments are for a reasonable amount of inventory for resale.
The rule applies when the summer provides any of three types of assistance.

a. Location
The new rule applies if the business opportunity includes giving locations for the purchaser to use, such as vending machine locations or rack locations. It also applies if the purchaser gets to use the seller’s equipment like candy vending machines or DVD rental kiosks. Internet businesses fall under this rule when they have turn-key ecommerce sites, essentially providing an internet outlet or online business location for the purchaser.

b. Buying Back Products or Services
The New Biz Op Rule applies whenever the seller agrees to buy back products or services the buyer makes.

c. Outlets or Accounts

The New Biz Op Rule applies if the seller gives the purchaser outlets, accounts or customers. This includes customer lists, stores through which they can sell the product and even online stores. For example, the New Biz Op Rule applies if someone teaches a medical transcriptionist course and sells with the business opportunity a list of doctors who use these services.

Furthermore, the list of prohibitions on sellers has grown. You cannot make earnings claims without identifying who is making the claim, the date of the claim, the actual earnings claim, the date range in which the earnings were achieved, what characteristics or traits allowed the top sellers to achieve these earnings and the percentage or number of people who actually earn that income level. You cannot make earnings claims that aren’t included in the Biz Op Disclosure Document or make earnings claims after checking “no” on the earnings claims section. You must provide written substantiation of earnings claims if either the purchaser or the Federal Trade Commission request it.

Why The Rule Changes Matter?

The seller has to prove they are compliant with the New Biz Op Rule. You have to be in compliance with it even if you don’t file the New Biz Op Disclosure Document with either the Federal Trade Commission or your state, if it has its own state level business opportunity regulations.

The complexity of the rules means that it is easy to accidentally become non-compliant. You should work with an attorney who specializes in business opportunities to become compliant or assist you if you may have fallen afoul of the law.

If your business falls under the New Biz Op Rule and you don’t meet its requirements, your liability risk skyrockets. This is true even if you complied with the prior version of the rule or the interim version of the rule that was in effect through February, 2012. Failure to comply with the regulation allows the FTC to bring an action against you. Fortunately, the law doesn’t allow private individuals to sue you, though they may be able to sue under their state’s unfair and deceptive practices act.

The end result of the New Biz Op Rule changes is that you have to comply with the regulation or risk massive liability in either lawsuits or FTC fines – or redesign your business to avoid falling under the Biz Op regulation.

How to Avoid the New Biz Op Regulation

One way to avoid the Biz Op Regulation is to not meet any of the New Biz Op Rule criteria. For example, instead of offering a new business, only offer educational services to help them identify products for sale and how to market them. Now your business is a sales and training service provider, not a new business opportunity.

The surest way to avoid falling under the New Business Opportunity regulation is to not provide locations, outlets, accounts, customers or buyback promises.

This means that you cannot provide business leads to purchasers. However, the Federal Trade Commission does say it is OK if you provide general advice on business development. If you teach purchasers how to find leads and they find their own leads, then you don’t fall under the rule. If you aid purchasers in creating an ecommerce website with the functionality to generate leads that regularly convert into paying customers and then offer training in how to increase the conversion rate, you do not fall under the Biz Op rule.

The best way to avoid non-compliance with the regulation is to make the purchaser responsible for finding their own customers or devising their own ways to monetize the purchase.

Conclusion

You must be careful not to fall under the Business Opportunity Rule. Accidentally offering business opportunities for sale ensures non-compliance, because you weren’t trying to offer a biz op. You can avoid this problem by designing your business to not fall under these regulations. You should avoid offering a business opportunity unless you have proper legal advice from an attorney familiar with the new regulations.

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Disclaimer: This article is provided for informational purposes only. It’s not legal advice, and no attorney-client relationship is created. Neither the author nor FTC Guardian, Inc. is endorsed by the Federal Trade Commission.