Guiding You Through the Legal Mazesm
FTC FRANCHISE RULE APPLIES TO CERTAIN
BUSINESS OPPORTUNITY SELLERS
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:
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
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:
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:
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.
Keith J. Kanouse, Esquire is an attorney specializing in franchising, business opportunity sales, distributorships/dealerships and licensing law. He acts as special counsel to the National Business Opportunity Bureau for franchise and business opportunity law matters. He can be reached at Kanouse & Walker, P.A., One Boca Place, Suite 324 Atrium, PMB #1070, 2255 Glades Road, Boca Raton, Florida 33431, by phoning (561) 451-8090; by fax  451-8089 ; or by e-mail Keith@Kanouse.com