Comments Needed on the FTC's
Proposed Business Opportunity Rule

Stephen Barrett, M.D.

The Federal Trade Commission is proposing a rule to protect consumers from bogus business opportunities and enhance law enforcement efforts in this area. The rule is intended to cover business opportunities commonly touted by fraudsters, while minimizing compliance costs for legitimate businesses [1]. The proposed rule defines business opportunity as a situation that includes (a) a solicitation to enter a new business, (b) payment or a promise of payment to a third party, and (c) an earnings claim or an offer to provide business assistance. The FTC uses the Franchise Rule and the FTC Act to attack fraudulent business opportunities. However, neither is specifically designed for the typical scams that occur with these schemes. The FTC's Notice of Proposed Rulemaking states that "unlike most franchises, business opportunities are permeated with fraud." [1] A strong and vigorously enforced Business Opportunity Rule could protect millions of Americans from being swindled.

This article focuses on the rule as it applies to the opportunity to earn money in multilevel marketing (MLM), in which independent distributors sell products, recruit more distributors, and theoretically profit from both their own sales and those of the people they recruit. The Direct Sales Association, whose members include many MLMs, estimates that 13 million Americans are involved in MLMs today and that the sales of products and services through MLMs totaled more than $29 billion in 2003. Since 1980, I have examined the offerings of more than 150 MLMs that sell health-related products and found that all of them have misrepresented their products, their income opportunity, or both.

The proposed rule would include MLMs by eliminating the $500 minimum investment requirement from the Franchise Rule. The proposed rule would also eliminate many of the disclosures (such as trademarks) that are required for franchises but do not currently apply to business opportunities. Instead, it would require a one-page disclosure that includes:

The proposed rule would also prohibit unfair or deceptive practices that are common among business opportunity sellers, including misrepresentations about the material terms of the business relationship, misrepresentations of endorsements or testimonials, and failure to honor refunds.

Earnings Claims

The FTC's current proposal in intended to require all sellers of business opportunities to provide sufficient information to enable prospective buyers to make an informed decision about their probability of earning money. As far as I know, no health-related MLM has ever voluntarily disclosed such information. The proposed rule would not require any seller to make an earnings claim. However, those that do would be required to have a reasonable basis and written substantiation and provide a printed “Earnings Claims Statement” that includes:

I believe this proposal should be strengthened in several ways:

How to Comment

Commission is seeking public comments on the proposed rule. The FTC has published a list of questions it would like addressed, but comments are welcome any aspect of the rule. The comment period will close on July 17, 2006, and rebuttal comments are due by August 7th. Comments can be submitted online or on paper. Online comments are limited to 4000 characters in the body of the message, but additional documents can be attached. Those filed in paper form should refer to "Business Opportunity Rule, Matter No. R511993" both in the text and on the envelope, and should be mailed or delivered to: Federal Trade Commission; Office of the Secretary; Room H-135 (Annex W); 600 Pennsylvania Avenue, NW; Washington, DC 20580. If a comment contains any material for which confidential treatment is requested, it must be filed in paper form and the first page of the document must be clearly labeled "Confidential." Comments filed in paper form should be sent by courier or overnight service, if possible, because postal mail in the Washington area and at the Commission is subject to delay because of heightened security precautions.

Additional Information

This page was revised on July 17, 2006.

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