Guiding You Through the Legal Maze^sm

    State Business Opportunity Laws

    Hopefully, all business opportunity sellers are aware that 24 states have laws regulating the sale of business opportunities. There are several different types of business opportunities covered by these state laws including:

1. sellers of vending machines, racks, display cases and currency-operated amusement machines or devices who provide locations or location assistance;
   
2. sellers who "buy back" the items that the buyer produces, grows, fabricates or assembles;
   
3. sellers who guarantee in writing that the buyer will derive income;
   
4. sellers who provide the buyer with a sales or marketing program; and
   
5. sellers who represent to the buyer that there is a market for the goods or services.

    These laws generally require, among other things, the preparation of a disclosure document to be given to a prospective buyer for his or her review (2 to 10 business days) before the buyer can sign contacts or give the seller money. A majority of these states also require the registration and approval of the business opportunity offering by a state regulatory body.

FTC Franchise Rule

    What you may not know is that certain (but not all) business opportunity sellers are also subject to the Federal Trade Commission Rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" (the "FTC Franchise Rule"). The FTC Franchise Rule not only applies to traditional business format franchises (for example, fast food restaurants) and product franchises (for example, Tupperware) but it also applies to "business opportunity ventures."

    A business opportunity venture has three elements:

1. The buyer sells goods or services which are supplied by the business opportunity seller or a person affiliated with the business opportunity seller;
   
2. The business opportunity seller assists the buyer in any way with respect to securing accounts for the buyer, or securing locations or sites for vending machines or rack displays, or providing the services of a person able to do either; and
   
3. The buyer is required to make a payment of $500 or more to the business opportunity seller or person affiliated with the business opportunity seller at any time on or before 6 months before the business opens (including equipment purchases from the seller or affiliate).

If you meet all 3 elements, then you are a business opportunity venture under the FTC Franchise Rule and are subject to its disclosure requirements. You are required to prepare a FTC format disclosure document containing 20 items of information.

    This disclosure document must be given to the prospective buyer at the earlier of either:

1. the prospective buyer’s first personal meeting with the seller; or
   
2. 10 business days before the execution of any contract or the payment of any money. In addition, the buyer must have the completed contract 5 business days before signing or giving money to the seller.

    The FTC format of the disclosure document is generally far more extensive than required under state business opportunity laws. Therefore, if your disclosure document statement was written to comply with a state business opportunity law, in all likelihood, it does not satisfy the FTC Franchise Rule. Furthermore, the FTC Franchise Rule applies in all 50 states, Puerto Rico and the U.S. Virgin Islands and not just in the business opportunity states. You must give a disclosure statement in connection with all sales in all states and also comply with 10-business day and 5-business day rules, even in a business opportunity state requiring less disclosure or a shorter presale "cooling off" period.

What to do:

    If you are a business opportunity seller that does not meet all of the elements of a "business opportunity venture" under FTC Franchise Rule, the FTC Franchise Rule does not apply to you and you need only comply with applicable state business opportunity laws.

    If you do not secure outlets or accounts for your buyers, or you do not sell bending machines, rack displays, or similar items or, even if you sell these items, you do not directly or indirectly assist in any way in providing site location assistance, then the FTC Franchise Rule does not apply to you. If you do any of the above, and your disclosure document complies with state business opportunity laws, but is not in the FTC format, you may be in violation of the FTC Franchise Rule. You should consult with an attorney knowledgeable in franchise and business opportunity laws to determine whether the FTC Franchise Rule applies to your program.

    If as a result of reading this article, you appear to be a business opportunity venture under the FTC Franchise Rule or a business opportunity seller under state business opportunity laws and you do not give any disclosure document…run, don’t walk, to an attorney knowledgeable in franchise and business opportunity laws. You and your attorney will need to determine whether you should eliminate seeming accounts for your buyers and/or providing any sales or marketing assistance in order to become a true distributorship or "bite the bullet" and comply with the applicable federal and state business opportunity laws.

Keith J. Kanouse, Esq.

Home