News Briefs

FTC's New Business Opportunity Rule Goes into Effect on March 1

Revisions to the FTC's Business Opportunity Rule will go into effect on March 1. The new rule completes the FTC's announced intention to distinguish the purchase of a (typically) low-investment business opportunity from an investment in a more complicated and costly franchise relationship. In 2006, the FTC announced its intention to expand the scope of businesses covered under the biz-op rule and to simultaneously streamline the disclosure requirements for those businesses. With the rules in effect, the FTC has more strongly illuminated the “bright line” that distinguishes biz-ops from franchises and dealerships.

To expand coverage, the new rule eliminates two prongs of the rule that had enabled some biz-ops to avoid regulation: a $500 initial investment and a requirement that the purchaser of the opportunity had to sell goods or services directly to third-party end users, not back to the seller of the business opportunity. When the rule was proposed in 2006, the FTC stated specifically that it also intended it to cover multi-level marketing (“MLM”) businesses. However, the Commission backed off that requirement after receiving nearly 17,000 comments in opposition from businesses and individuals engaged in MLM activities.

The other major impact of the new biz-op rule is on disclosure. Namely, the rule creates a one-page disclosure document that sellers must provide to prospective buyers and prohibits a wide range of misrepresentations and fictitious business references. The new disclosure document must contain, in standardized format:

• Seller's name, business location and phone number;
• Name of sales person;
• Supporting information for any earnings claims, including the number and percentage of biz-op buyers who have reached those levels;
• Whether legal actions alleging fraud or misrepresentation have been brought against the seller, its affiliates, or its key personnel;
• Specific and detailed information about cancellation and refund policies;
• Names and contact information of all people who have purchased or joined the system in the prior three years;

If offers are marketed in languages other than English, the disclosures must be provided in those languages, too.

Update: Utah Subway Franchise Dispute

Last month, the U.S. District Court for the District of Utah was asked by both parties for summary judgment in a lawsuit that pits a prospective Subway franchisee against the Town Council of Springdale, UT. Izzy Poco, LLC, a prospective Subway franchisee, filed a lawsuit in June 2010 against the Springdale Town Council over the city's ordinance against formula restaurants and the apparent unwillingness of Council members and other city officials to allow Izzy Poco to modify the Subway store to meet the ordinance, as other franchised businesses have done (see FBLA, December 2011, page 8). Earlier, the court had granted summary judgment to remove individuals in city government who were named in the lawsuit.

On Dec. 8, 2011, both parties asked the court for a summary judgment ruling on the constitutionality of the town's ordinance and said they could submit arguments to the court in March 2012. They also asked for additional time for discovery if summary judgment is not granted.

FTC's New Business Opportunity Rule Goes into Effect on March 1

Revisions to the FTC's Business Opportunity Rule will go into effect on March 1. The new rule completes the FTC's announced intention to distinguish the purchase of a (typically) low-investment business opportunity from an investment in a more complicated and costly franchise relationship. In 2006, the FTC announced its intention to expand the scope of businesses covered under the biz-op rule and to simultaneously streamline the disclosure requirements for those businesses. With the rules in effect, the FTC has more strongly illuminated the “bright line” that distinguishes biz-ops from franchises and dealerships.

To expand coverage, the new rule eliminates two prongs of the rule that had enabled some biz-ops to avoid regulation: a $500 initial investment and a requirement that the purchaser of the opportunity had to sell goods or services directly to third-party end users, not back to the seller of the business opportunity. When the rule was proposed in 2006, the FTC stated specifically that it also intended it to cover multi-level marketing (“MLM”) businesses. However, the Commission backed off that requirement after receiving nearly 17,000 comments in opposition from businesses and individuals engaged in MLM activities.

The other major impact of the new biz-op rule is on disclosure. Namely, the rule creates a one-page disclosure document that sellers must provide to prospective buyers and prohibits a wide range of misrepresentations and fictitious business references. The new disclosure document must contain, in standardized format:

• Seller's name, business location and phone number;
• Name of sales person;
• Supporting information for any earnings claims, including the number and percentage of biz-op buyers who have reached those levels;
• Whether legal actions alleging fraud or misrepresentation have been brought against the seller, its affiliates, or its key personnel;
• Specific and detailed information about cancellation and refund policies;
• Names and contact information of all people who have purchased or joined the system in the prior three years;

If offers are marketed in languages other than English, the disclosures must be provided in those languages, too.