FTC Proposed Business Opportunity Rule:
Request for Comments
Federal Register, April 12, 2006
The Commission invites members of the public to comment on any issues or concerns they believe are relevant or appropriate to the Commission’s consideration of the proposed Business Opportunity Rule. The Commission requests that factual data upon which the comments are based be submitted with the comments. The Commission is soliciting comment on the specific questions identified below. However, the questions are designed to assist the public and are not intended to limit the issues on which comment can be submitted.
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.
Here are the FTC's questions with my answers to some of the questions in brackets. Unless otherwise specified, my comments are intended for application only to multilevel marketing companies (MLMs)].
Rules 1. General Questions
Please provide comment, including relevant data, statistics, consumer complaint information, or any other evidence, on each different provision of the proposed Rule. Regarding each provision, please include answers to the following questions:
a. How prevalent is the practice the provision seeks to address? [Extremely common. Every ad I have seen for work-at-home business opportunities has made impossible income claims. I have also examined the offerings of more than 150 MLMs and found that none of them give a realistic picture of probable income.]
b. What is the impact (including any benefits and costs), if any, on:
Prospective business opportunity purchasers;
Existing business opportunity purchasers; and
Business opportunity sellers (including small business opportunity sellers and start-up sellers)?
c. What alternative proposals should the Commission consider? How would these proposed alternatives affect the costs and benefits of the proposed Rule?
2. Questions on Specific Proposals
In response to each of the following questions, please provide: (1) Detailed comment, including data, statistics, consumer complaint information, and other evidence, regarding the issues addressed in the question; (2) comment as to whether the proposal does or does not provide an adequate solution to the problems it is intended to address; and
(3) suggestions for additional changes that might better maximize consumer protections or minimize the burden on business opportunity sellers.
Proposed section 437.1(d) would limit the definition of “business opportunity” to instances where a seller solicits a purchaser to enter into a new business (or new line or type of business). This limitation seeks to distinguish the sale of business opportunity ventures from the ordinary sale of goods and services. Is limiting the definition of “business opportunity” to solicitations to enter into a new business adequate to make this distinction? If not, what alternative limitation should the Commission consider? What would be the costs and benefits of each alternative? [It appears to me that the proposed definition could include the ordinary sale of businesses. Perhaps the wording should be modified to indicate that the solicitation is to multiple (perhaps unlimited) buyers. In addition, the common types of business opportunity offerings should be defined and listed so that no doubt can arise about what situations the Rule is intended to cover.]
Proposed section 437.1(d) contemplates that a business arrangement will constitute a “business opportunity” if the seller either promises business assistance or makes an earnings claim. Are both alternatives necessary? Are there business opportunities that offer assistance without making an earnings claim? Are there business opportunities that make earnings claims that do not offer assistance? Should the definition of “business opportunity” focus on the offer of assistance alone or on the making of earnings claims alone? What alternatives should the Commission consider? What would be the costs and benefits of each alternative? [All MLMs make earnings claims. They should not be permitted to avoid disclosure by pretending tat they do not.]
Proposed section 437.1(d) contemplates that a business arrangement will constitute a “business opportunity” if the purchaser pays consideration to the seller, directly or indirectly through a third party. [It appears to me that this would omit phony work-at-home where the seller purports to facilitate access to nonexistent third parties.] The proposed definition, however, does not contain a minimum payment threshold. The Commission believes that, in light of the limited compliance costs—far less than under the Franchise Rule—all business opportunity sellers (with the exception of franchisers under the Franchise Rule), should comply with the Rule. Further, the record shows that whatever threshold might be set forth in a Business Opportunity Rule, fraudulent business opportunity sellers will price their opportunities at an amount just under the threshold in order to avoid compliance. Nevertheless, should the Commission consider a monetary threshold and if so, why? At what level should the threshold be set? If so, how can the Commission ensure that fraudulent business opportunity sellers will not price their opportunities just under the threshold in order to avoid Rule coverage? What alternatives should the Commission consider? What would be the costs and benefits of each alternative? [There should be no monetary threshold. A threshold as low as $100 would exempt multilevel companies that solicit millions of people every year.]
Proposed section 437.1(c) would define the term “business assistance,” setting forth five examples. Are each of these examples warranted? What other examples, if any, might better capture the nature of business assistance offered by business opportunity sellers? What would be the costs and benefits of each alternative?
Proposed section 437.1(c) would include as an example of “business assistance” the tracking or paying, or purporting to track or pay, commissions or other compensation based upon the sale of goods or services or recruitment of other persons to sell goods or services. This example is intended to capture pyramid marketing programs that assist program participants in tracking commissions to be paid or by paying commissions to participants’ downstream. Does this example adequately capture pyramid schemes? Is it too broad, sweeping in business arrangements other than pyramids? If so, what alternative, if any, should the Commission consider to capture pyramid programs? What would be the costs and benefits of each alternative?
Proposed section 437.1(k) would make clear that the Rule applies to persons already in business who are seeking to enter into a new line of business. Do persons already in business need the protection of the proposed Rule? Does this provision impose unwarranted costs? Should the Commission consider alternatives regarding persons already in business who are either looking to purchase a new business opportunity or to expand their line of business? If so, what would be the costs and benefits of each alternative?
7. Proposed section 437.2 contemplates that a seller must furnish a prospective purchaser with a disclosure document at least seven calendar days before the earlier of the time that the prospective purchaser: (1) signs any contract in connection with the business opportunity sale; or (2) makes a payment or provides other consideration to the seller, directly or indirectly through a third party, for the purchase or lease of goods or services. Is a seven calendar-day period warranted to enable prospective purchasers to investigate and make an informed investment decision? Is a seven calendar-day period necessary to enable prospective purchasers to review any earnings claims? Would a seven calendar-day review period impose unnecessary delay or excessive costs when the prospective purchaser is already in business? Should the review period be shortened to five or three days? What would be the costs and benefits of each alternative time period? [I believe that the critical thing is to present the buyer with an opportunity to think about any proposal while not directly in the presence of the seller. A waiting period will also permit the buyer to consult with friends, family, or other advisers. The bottom line is to reduce the probability of impulse purchases. I believe that three days is sufficient for this purpose and that a longer period might adversely impact legitimate sellers. ]
8. Proposed section 437.3 would provide that only a seller has the obligation to furnish a basic disclosure document. While a seller may hire brokers or others to arrange for sales, the seller ultimately has the obligation to ensure that disclosures are properly prepared and disseminated to prospective purchasers. Is it proper to limit liability for preparing and disseminating disclosure documents to the seller? Should other individuals or entities involved in a business opportunity sale also be liable for either failing to furnish disclosure documents or for the contents of an incomplete or inaccurate disclosure documents? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative? [MLM companies should be required to post the disclosure document(s) on their Web site. This would enable huge numbers of people to see the document at minimal cost.]
The Disclosure Document
9. Proposed section 437.3(a) requires that disclosure documents be “in the form and using the language set forth in 19085 Appendix A.” Is this instruction sufficient to inform business opportunity sellers on how to prepare a basic disclosure document? Should the Commission revise the proposed Rule specifically to reference each of the required boilerplate disclosures? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative? [For MLMs, the FTC should require that a set list of questions be answered so that the resultant data are meaningful.]
The one-page disclosure document set forth in Appendix A is intended to provide prospective purchasers with material information with which to make an informed investment decision. Can the overall presentation of the information in the one-page disclosure document be improved? Are there specific sections that can be improved by simplifying the presentation to make it easier for prospective purchasers to understand? How could the presentation be improved? What would be the costs and benefits of each alternative?
The one-page disclosure document set forth in Appendix A is intended to assist prospective purchasers by describing the nature of the information disclosed. For example, where a seller checks the “yes” box in connection with earnings claims, it clarifies for prospective purchasers that the seller or its representative is furnishing sales, income, or profit data. At the same time, the one-page disclosure document sets forth legal standards, summarizing for sellers and prospective purchasers the more lengthy disclosure obligations found in the text of the Rule. Accordingly, the Commission has tried to balance, as much as possible, the use of clear language readily understandable by prospective purchasers with the need for clear legal standards applicable to sellers. Has the Commission succeeded in striking the appropriate balance? Are there areas where the understandability of the one-page disclosure document may be improved, without sacrificing clear legal standards? Are there specific sections where the proposed language does not accurately convey the substance of the corresponding Rule provision? What improvements should the Commission consider to the language found in the one-page disclosure document? What would be the costs and benefits of each alternative?
The disclosure document provides a space for the name of the “Seller.” In addition to any company or d/b/a name listed next to “Seller,” should “Seller” also include the principal officers’ names? Should the addition of such names depend on whether or not the seller is a d/b/a? What are the costs and benefits of including both the company and the principal officers’ names next to “Seller”? Should previous business opportunities offered by the seller’s principal officers be disclosed? What are the costs and benefits of including such information?
Proposed section 437.3(a)(3) would require sellers to furnish certain litigation information. Specifically, the seller would disclose information about itself, as well as any affiliates and prior businesses, any of the seller’s officers, directors, sales managers (or other individuals who occupy a similar position or perform similar functions), and employees who are involved in business opportunity sales activities. The intent of this provision is to capture all individuals who function as officers, directors, or sales managers, even though they may not have a formal title. In addition, it also captures those employees who are involved in sales activities. Does this provision adequately capture the types of individuals whose litigation should be disclosed? Is the phrase “any individual who occupies a similar position or performs a function similar to an officer, director, or sales manager of the seller” adequate to identify those who act as or perform the functions of officers, directors, or sales managers? Similarly, is the language “employees who are involved in business opportunity sales activities” too broad? What alternative language, if any, should the Commission consider? What would be the costs and benefits of each alternative?
Proposed section 437.3(a)(3) would limit the types of suits that must be disclosed to civil and criminal actions involving misrepresentation, fraud, securities law violations, or unfair or deceptive practices within 10 years immediately preceding the date that the business opportunity is offered. Are these types of actions sufficient to enable a prospective purchaser to assess the risk of purchasing an opportunity from the seller? Should the list be expanded to include bankruptcy? Should it be expanded to include suits against the seller for breach of contract? How often do business opportunity purchasers sue sellers for breach of contract, as opposed to misrepresentation or fraud? Is 10 years a sufficient period to track prior litigation? Is a 10-year period too long? If so, what alternative time period, if any, should the Commission consider? What would be the costs and benefits of each alternative?
Proposed section 437.3(a)(3) would require a seller disclosing litigation to include the full caption of each action, including the names of the principal parties, case number, full name of the court, and the filing date. Should more detail be provided about legal actions? Should the business opportunity seller also have to provide information about any of the following topics: the final disposition of the action; the penalties imposed; the damages assessed; the terms of the settlement; or the terms of the order? What would be the costs and benefits of including such additional information? [The seller should be required to make a meaningful disclosure. The cost of a summary would be nominal because one summary could be posted to the Internet where it could inform thousands or tens of thousands of prospective buyers.]
Proposed section 437.3(a)(4) would require a seller to disclose whether or not the seller has a cancellation or refund policy. In addition, proposed section 437.3(a)(5) would require the seller to state the number of purchasers of the business opportunity during the two years prior to the date of the disclosure and the number of cancellation and refund requests submitted by prior purchasers during the same period. The purpose of this provision is to assist the prospective purchaser in assessing the viability of the offer and the likelihood of the seller’s post-sale performance. The focus on cancellations and refunds assumes that a seller would be better able to disclose information about such requests that it receives than information about the current status of prior purchasers. Is this assumption correct? To what extent do business opportunity sellers track the current status of prior purchasers? Is cancellation or refund request information relevant in a business opportunity sale? Does such information correctly imply dissatisfaction or problems within a business opportunity system? Would such a disclosure requirement actually discourage sellers from offering cancellations or refunds? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative? [I believe that MLMs track this type of data and that the cost of disclosure would be nominal. Perhaps it would help for you or the Direct Sellers Association to ask MLMs whether they track such data.]
Proposed section 437.3(a)(6) would require each seller to disclose the name, city and state, and telephone number for at least 10 prior purchasers nearest to the prospective purchaser’s location. The Commission believes the disclosure of this information is critical to enable a prospective business opportunity purchaser to verify the seller’s claims and to conduct a due diligence investigation of the offering. Is this information proprietary for the seller? If so, do the benefits of such disclosure to prospective purchasers outweigh the costs to sellers? Are there other ways to identify prior purchasers? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative? [For MLMs, probable income, if properly calculated and expressed, should be sufficient.]
As an alternative, proposed section 437.3(a)(6) would enable a seller to furnish prospective purchasers with a national list of prior purchasers. Is this a viable option? Would sellers be inclined to publish a single national list rather than individualized lists of purchasers “nearest to the prospective purchaser’s location?” Under what circumstances should the Rule permit a seller to post a national list of purchasers on its Web site? What protections should be put in place to limit access to the list? What protections might be sufficient to prevent those who merely want to sell fraudulent business opportunities from accessing such a list? What other options, if any, should the Commission consider? Would these options enable the seller to select only those prior purchasers who are successful or who otherwise would give a favorable report on the seller? What would be the costs and benefits of each alternative? [This gets into all sorts of politically sensitive issues about privacy, competition, and maintenance cost that will make it easy for MLM companies to mobilize opposition to the rule.]
Proposed section 437.3(b) would require the disclosure of contact information, raising privacy concerns. Accordingly, the Commission proposes that sellers include in the references section of the disclosure document the following: “If you buy a business opportunity from the seller, your contact information can be disclosed in the future to other buyers.” Are there alternative methods that would protect prior purchasers’ privacy? Should the Commission consider an opt-out provision, enabling purchasers to decline having their contact information listed in a disclosure document? Would sellers likely exploit an opt-out provision by inducing purchasers to opt out, thereby avoiding the obligation to disclose prior purchasers as references? Would sellers use an opt-out provision to create, in effect, a self-serving list of successful purchasers or shills? Are there alternative methods employed by the states that the Commission should consider? [All of the above problems can occur, rendering the list provision difficult or impossible to enforce.]
Once the Rule becomes effective, sellers must disclose contact information for prior purchasers. However, individuals who have purchased a business opportunity before the Rule becomes effective probably will have received no notice that their contact information can be disclosed to other purchasers in the future. How should the Commission balance the goals of disclosing prior purchasers as references with the fact that, at least initially, some prior purchasers will not have received any privacy notice? Should the Commission phase in the use of references? For example, should the seller update its reference list on a monthly basis drawing only from those purchasers who have received a privacy notice? Is a monthly updating requirement feasible? What alternative updating requirement should the Commission consider? Would a monthly updating requirement disadvantage those purchasers who buy a business opportunity immediately after the Rule goes into effect, when no or few prior purchasers will have received the required privacy notice? What alternatives should the Commission consider? What would be the costs and benefits of each alternative?
21. Are there other disclosures that should be included in the disclosure document? Specifically, should any proposed initial purchaser price of the business opportunity and/or payments to be sent to third parties be listed on the disclosure document? Why or why not? What would be the costs and benefits of including such information?
22. Proposed section 437.4(a)(4) would set forth the required content of an earnings claims statement. It includes the name of the person making the claim, the date of the claim, the claim, the beginning and ending dates when the represented earnings were achieved, the number and percentage of all purchasers during the stated time frame who achieved at least the stated level of earnings, and a description of any characteristics of the purchasers who achieved the represented earnings that may be materially different from the characteristics of the prospective purchasers being offered the business opportunity. Is this information sufficient to enable a prospective purchaser to assess the validity of an earnings claim? What other substantiation, if any, should be required? Should a seller be able to make an earnings claim if it does not have complete and accurate information on the number and percentage of prior purchasers who have achieved the represented level of earnings? If so, under what conditions should such earnings claims be permitted? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative? [I believe that the FTC should determine the parameters of earning claims so that all companies put out comparable data. As part of the process, the FTC could ask the Direct Sellers Association to come up with parameters.]
23. Proposed section 437.4(c) would address the dissemination of industry financial, earnings, or performance information. Specifically, a seller would be barred from using such information unless the seller has written substantiation demonstrating that the information reflects the typical or ordinary financial performance experience of purchasers of the business opportunity being offered for sale. Should a seller be required to disclose the number and percentage of its purchasers that have achieved at least the same level of performance as the industry figures? Would number and percentage information be sufficient to enable a prospective purchaser to assess the applicability of industry information to the opportunity being offered? Do business opportunity sellers collect performance data from purchasers? Is such information readily available? What other alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative? [The Direct Sellers Association should be asked these questions.]
Prohibited Acts and Practices
24. Proposed section 437.5 would set forth a number of prohibited acts or practices. Is the proposed list complete? Are there any other practices common among business opportunity sellers that should be prohibited? Are any of the proposed prohibitions unnecessary? What would be the costs and benefits of each proposed prohibition? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative?
25. Proposed section 437.5 would prohibit sellers from misrepresenting the business opportunity, directly or through third parties. Accordingly, a business opportunity could be held liable for misrepresentations made about the business opportunity through third parties, such as a locator or broker. Should third parties involved in the business opportunity sales process be held liable for misrepresenting the seller’s disclosures? Proposed section 437.5 also does not address when a third party—such as a shill—makes his or her own misrepresentations outside of the disclosure document. The Commission believes that third parties can be held liable for their own misrepresentations under section 5 of the FTC Act. Is section 5 of the FTC Act sufficient to address independent misrepresentations made outside of a disclosure document by such third parties? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative?
Federal and State Relations
26. The proposed Rule would prohibit business opportunity sellers from adding any other information to the required disclosures, including information required by state law. This approach is different from the Franchise Rule approach, which enables franchisers to include additional materials in a disclosure document that are required or permitted by state law. Because the proposed disclosure document comprises a single page (and any attachments), sellers can easily attach the federal disclosure document to any disclosure document required under state law, without imposing significant costs or burdens. In light of the vastly different laws governing business opportunities on the state level, this approach will also preserve the uniformity of federal disclosure documents. Is this approach proper? How can the Commission best accommodate divergent state business opportunity approaches? What alternatives, if any, should the Commission consider? What would be the costs and benefits of each alternative?
27. Proposed section 437.6 would require that records be kept for “each oral or written cancellation or refund request received from a purchaser.” How should oral cancellation or refund requests be kept? Is there certain information that should be preserved in a written form, such as name, address, amount of request, date, and resolution of the request? What would be the costs and benefits of requiring such record retention obligations?
[General comment. Work-at-home plans, party plans, and MLMs have some characteristics that are common and other that are not. Thought should be given to whether each part of the rule is applicable to all types of business opportunities and whether sections should be added that apply to only one or a few types of opportunities.]
This page was revised on July 6, 2006.