# Business Opportunity Rule

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2011-30597

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 8, 2011
- **Citation:** 76 FR 76816

## Text

FEDERAL TRADE COMMISSION
16 CFR Part 437
RIN 3084-AB04
Business Opportunity Rule

AGENCY:

Federal Trade Commission (FTC or Commission).

ACTION:

Final rule.

SUMMARY:

The Commission is adopting final amendments to its Trade Regulation Rule entitled “Disclosure Requirements and Prohibitions Concerning Business Opportunities” (“Business Opportunity Rule” or “Rule”). Among other things, the Business Opportunity Rule has been amended to broaden its scope to cover business opportunity sellers not covered by the interim Business Opportunity Rule, such as sellers of work-at-home opportunities, and to streamline and simplify the disclosures that sellers must provide to prospective purchasers. The final Rule is based upon the comments received in response to an Advance Notice of Proposed Rulemaking (“ANPR”), an Initial Notice of Proposed Rulemaking (“INPR”), a Revised Notice of Proposed Rulemaking (“RNPR”), a public workshop, a Staff Report, and other information discussed herein. This document also contains the text of the final Rule and the Rule's Statement of Basis and Purpose (“SBP”), including a Regulatory Analysis.

DATES:

The provisions of the final Rule will become effective on March 1, 2012.

ADDRESSES:

Requests for copies of the final Rule and the SBP should be sent to Public Reference Branch, Room 130, Federal Trade Commission, 600 Pennsylvania Avenue NW., Washington, DC 20580. The complete record of this proceeding is also available at that address. Relevant portions of the proceeding, including the final Rule and SBP, are available at
http://www.ftc.gov.

FOR FURTHER INFORMATION CONTACT:

Christine M. Todaro, (202) 326-3711, Division of Marketing Practices, Room H-286, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW., Washington, DC 20580.

SUPPLEMENTARY INFORMATION:

The final Rule modifies the interim Business Opportunity Rule in two significant ways. First, the final Rule contains an expanded definition of “business opportunity” aimed at extending the scope of the Rule to business opportunities previously not covered, such as work-at-home programs. Second, although the final Rule's scope is broader than the interim Business Opportunity Rule, the compliance burden is reduced. Specifically, in contrast to the extensive disclosures previously required, the final Rule now requires that business opportunity sellers provide prospective customers with a substantially simplified and streamlined one-page disclosure document. The final Rule also adds affirmative prohibitions on misrepresentations and omissions, as well as disclosure requirements for sales conducted in Spanish and other languages besides English.

Statement of Basis and Purpose

Key Terms and Abbreviations Used Throughout This Statement of Basis and Purpose

“Amended Franchise Rule” refers to the amended Franchise Rule published at 72 FR 15444 (Mar. 30, 2007) and codified at 16 CFR 436.

“ANPR” refers to the Trade Regulation Rule on Franchising and Business Opportunity Ventures: Advanced Notice of Proposed Rulemaking, 62 FR 9115 (Feb. 28, 1997).

“Initial Proposed Disclosure Document” refers to the original version of the Disclosure Document that was proposed in the INPR in 2006.

“INPR” refers to the Initial Notice of Proposed Rulemaking for the Business Opportunity Rule, 71 FR 9054 (Apr. 12, 2006).

“Interim Business Opportunity Rule” refers to the Business Opportunity Rule, codified at 16 CFR 437 that is currently in effect and is the subject of these amendment proceedings.

“IPBOR” refers to the Initial Proposed Business Opportunity Rule, which was proposed in the INPR in 2006.

“Macro Report” refers to Macro International, Inc.'s report to the FTC on the Disclosure Form, available at
http://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.

“Original Franchise Rule” refers to the original Franchise Rule published at 43 FR 59614 (Dec. 21, 1978).

“RNPR” refers to the Revised Notice of Proposed Rulemaking for the Business Opportunity Rule, 73 FR 16110 (Mar. 26, 2008).

“RPBOR” refers to the Revised Proposed Business Opportunity Rule, which was proposed in the RNPR in 2008.

“Staff Report” refers to FTC staff's
Staff Report to the Federal Trade Commission and Proposed Revised Trade Regulation Rule
(16 CFR Part 437). The Staff Report is available at
http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf.

“Workshop” refers to the June 1, 2009, public workshop held in Washington, DC, to discuss the proposed Disclosure Document and other aspects of the Business Opportunity Rule.

“Workshop Notice” refers to the
Federal Register
Notice announcing the Workshop, 74 FR 18712 (Apr. 24, 2009).

I. Introduction

A. Overview of the Franchise Rule and the Evolution of the Interim Business Opportunity Rule

1. The Franchise Rule

On December 21, 1978, the Commission promulgated a Trade Regulation Rule entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” (the “Original Franchise Rule”), to address deceptive and unfair practices in the sale of franchises and business opportunity ventures.
1

The Original Franchise Rule covered, in a single Code of Federal Regulations part, both franchises and certain business opportunity ventures. With franchises, the franchisee sells goods or services that are associated with the franchisor's trademark, and the franchisee is subject to significant control by, or receives significant assistance from, the franchisor. The franchisee typically distributes goods or services supplied by the seller or an affiliate and receives accounts or locations in which to conduct the business. By contrast, business opportunities often do not involve a trademark. Vending machines or rack display routes are typical examples of business opportunities. Based upon the original rulemaking record, the Commission found that unfair and deceptive practices were widespread in the sale of franchises and business opportunities, causing serious economic harm to consumers.

1
43 FR 59614 (Dec. 21, 1978).

The Commission adopted the Original Franchise Rule to prevent unfair and deceptive practices in the sale of franchises and business opportunities through pre-sale disclosure of specified items of material information. The purpose of the Original Franchise Rule was neither to regulate the substantive terms of a franchise or business opportunity agreement nor to regulate the relationship between the seller and the buyer. Rather, it was to ensure that sellers disclose material information to prospective buyers. The Original Franchise Rule was posited on the notion that a fully informed prospective buyer can determine whether a particular offering is in his or her best interest.

The Original Franchise Rule required extensive disclosures on a score of specified topics, such as, information about the seller; the business background of the seller's principals and their litigation and bankruptcy histories; the terms and conditions of

the offer; statistical analyses of existing franchised and company-owned outlets; information about prior purchasers, including the names and addresses of at least 10 purchasers nearest the prospective buyer; and audited financial statements.

The Commission recognized that requiring these extensive disclosures would likely impose significant compliance costs on businesses covered by the Original Franchise Rule. It therefore sought to strike the proper balance between prospective purchasers' need for pre-sale disclosure and the burden imposed on those selling business ventures covered by the Rule. To achieve this balance, the Commission limited the scope of the Original Franchise Rule's coverage in three significant ways.

First, the Original Franchise Rule covered only those opportunities that required a purchaser to make a payment of at least $500 within the first six months of operation. In transactions where a purchaser may incur high financial losses if the seller withholds material information, the benefit for prospective purchasers of the Original Franchise Rule's pre-sale disclosure requirements outweighs the sellers' cost to make those disclosures. By contrast, when the investment required to purchase a business opportunity is comparatively small, prospective purchasers face a relatively small financial risk. In such circumstances, compliance costs may outweigh the benefits of pre-sale disclosure. Therefore, the Original Franchise Rule did not reach opportunities that charged lower fees.

Second, the “inventory exemption” excluded certain types of payments from the Original Franchise Rule's $500 minimum cost threshold. The “inventory exemption” is the franchise industry's shorthand term for the Commission's determination that, as a matter of policy, voluntary purchases of reasonable amounts of inventory at bona fide wholesale prices for resale do not count toward the required threshold payment. An important consequence of this policy determination was to eliminate from Original Franchise Rule coverage many pyramid marketing plans because purchasers of such plans typically do not make a required payment of or exceeding $500, but instead make voluntary purchases of inventory in reasonable amounts and at bona fide wholesale prices for resale.

Third, in addition to franchise opportunities, the Commission focused the Original Franchise Rule on the types of business opportunities that the record showed were likely to result in significant consumer injury, such as vending machines, rack displays, and similar opportunities, which frequently were sold through deceptive conduct. A feature common to these types of opportunities was the promise of assistance in securing locations or accounts. Thus, the Commission incorporated this characteristic into the Original Franchise Rule's definitional elements to ensure coverage of demonstrably injurious schemes. Other forms of assistance that business opportunity sellers frequently offer—such as training and the buy-back and resale of goods assembled by the purchaser (an element of many craft assembly opportunities) did not bring a business opportunity within the scope of the Original Franchise Rule's coverage.

In addition to these limits on the scope of the Original Franchise Rule's coverage—driven by balancing prospective purchasers' need for pre-sale disclosure against the burden imposed on business opportunity sellers—another aspect of the Original Franchise Rule's language further limited the scope of coverage. Specifically, the Original Franchise Rule provided that a business opportunity was covered only if the purchaser of the opportunity sells goods or services directly to end-users other than the business opportunity seller. The effect of this limitation was to exclude many work-at-home opportunities—such as envelope stuffing and craft assembly ventures—from Original Franchise Rule coverage. In those opportunities, the purchaser typically performs work for the seller or produces various goods for the seller, who then purportedly distributes them to end-users.

In 1995, as part of its systematic review of FTC rules, the Commission published in the
Federal Register
a request for comment on the Original Franchise Rule to determine its continued effectiveness and impact.
2

Based upon the comments received during the rule review, the Commission tentatively determined to retain the Original Franchise Rule, but sought additional comment on possible amendments. To that end, in February 1997, the Commission published an ANPR, seeking comment on various issues, including whether the Commission should separate the disclosure requirements for business opportunities from those for franchises.
3

2
60 FR 17656 (Apr. 7, 1995).

3
62 FR 9115 (Feb. 28, 1997).

Based upon comments responding to the ANPR, the Commission found that the Original Franchise Rule continued to serve a vital purpose and that pre-sale disclosure was necessary to protect purchasers of franchises and business opportunities from fraudulent and deceptive sales practices. At the same time, however, the Commission agreed with the overwhelming view of the commenters who suggested that there are material differences between franchises and business opportunities and that these two types of distinct business arrangements require separate disclosure approaches. For example, many of the Original Franchise Rule's pre-sale disclosures, in particular those pertaining to the structure of the parties' relationship, do not apply to the sale of most business opportunities because those sales typically involve comparatively simple contracts. In addition, the Commission recognized that the Original Franchise Rule's detailed disclosure obligations may create barriers to entry for legitimate business opportunity sellers.
4

Accordingly, in 1999, the Commission announced its intention to conduct a separate rulemaking proceeding for business opportunity sales.
5

4
64 FR 57296 (Oct. 22, 1999).

5

Id.

2. The Interim Business Opportunity Rule

Much of the information revealed by the Commission's regulatory review of the Original Franchise Rule highlighted the differences between franchises and business opportunity ventures, and the distinct regulatory challenges presented by these two types of offerings—that franchises typically are expensive and involve complex contractual licensing relationships, while business opportunity sales are generally less costly and involve comparatively simple purchase agreements that pose less of a financial risk to purchasers. Based on the record amassed during the review proceeding, the Commission concluded that the Original Franchise Rule's extensive disclosure requirements imposed unnecessary compliance costs on both business opportunity sellers and buyers, and determined to bifurcate the Original Franchise Rule into two separate parts—one covering the sale of business format franchises
6

and one to govern the sale of business opportunities. Accordingly, in the ANPR, the Commission solicited

comment on several proposed regulatory modifications, including the creation of a separate trade regulation rule governing the sale of business opportunities.
7

6
The industry term “business format franchise” specifically refers to franchises in which franchisees operate under a common trademark or other commercial symbol and are required to adhere to the specific business format or method of doing business prescribed by the franchisor. Business format franchises are commonly called “franchises” by the general public, and the two terms are used interchangeably here.

7
62 FR at 9115. In response to the ANPR, the Commission received 166 written comments. The staff also held six public workshops on the issues raised in the comments, three of which specifically addressed business opportunities.

Subsequently, the Commission completed all procedural steps prescribed by Section 18 of the FTC Act to finalize the Amended Franchise Rule, along with a Statement of Basis and Purpose, in March 2007.
8

At that time, the Amended Franchise Rule—no longer covering business opportunities—was codified at Part 436 in Title 16 of the CFR. The Original Franchise Rule with all definitional elements and references regarding business format franchising deleted, was retained and redesignated as Part 437. Part 437 was titled the “interim Business Opportunity Rule.”
9

The interim Business Opportunity Rule contained no new substantive disclosure requirements or prohibitions, and in all material respects was substantially identical to the Original Franchise Rule. Until the final Rule becomes effective, Part 437 governs sales of non-franchise business opportunities.
10

8
72 FR 15444 (Mar. 30, 2007).

9
For example, references to “franchisor” and “franchisee” used in the Original Franchise Rule were changed in the interim Business Opportunity Rule to “business opportunity seller” and “business opportunity purchaser,” and the Original Franchise Rule's definition of “franchise” was changed to “business opportunity.”
See id.

10
73 FR 16111, 16112 (Mar. 26, 2008).

B. Rule Amendment Proceedings

1. Initial Notice of Proposed Rulemaking and Initial Proposed Business Opportunity Rule

In 2006, having determined that a separate business opportunity rule was necessary, the Commission published an Initial Notice of Proposed Rulemaking (“INPR”), announcing its intention to proceed with its proposal for a separate Business Opportunity Rule (the “initial proposed Business Opportunity Rule” or “IPBOR”).
11

The INPR proposed to amend the interim Business Opportunity Rule by updating it, streamlining it, and expanding its scope of coverage.
12

The IPBOR contained an expansive definition of “business opportunity” that encompassed business opportunities previously covered by the Original Franchise Rule as well as work-at home, medical billing, and multi-level marketing (MLM)
13

operations. It also eliminated the $500 threshold for Rule coverage.
14

11
71 FR 19054 (Apr. 12, 2006).

12
The INPR also specified the process the Commission would follow in amending the Business Opportunity Rule. Pursuant to the Commission's Rules of Practice, 16 CFR 1.20, the Commission determined to use a modified version of the rulemaking process set forth in section 1.13 of those Rules. Specifically, the Commission announced that it would publish a Notice of Proposed Rulemaking, with a 60-day comment period, followed by a 40-day rebuttal period. In addition, pursuant to Section 18(c) of the FTC Act, the Commission announced that it would hold hearings with cross-examination and rebuttal submissions only if an interested party requested a hearing. The Commission also stated that, if requested to do so, it would contemplate holding one or more informal public workshops in lieu of hearings. Finally, pursuant to 16 CFR 1.13(f), the Commission announced that staff would issue a Report on the Business Opportunity Rule (“Staff Report”), which would be subject to additional public comment. 71 FR at 19079-80.

13
Multi-level marketing is one form of direct selling, and refers to a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors' direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their “down lines.”
See
Peter J. Vander Nat & William W. Keep,
Marketing Fraud: An Approach to Differentiating Multilevel Marketing from Pyramid Schemes,
21 J. Pub. Pol'y & Marketing 140 (Spring 2002).

14
Promoters of business opportunities were able to evade coverage under the Original Franchise Rule and the interim Business Opportunity Rule by pricing their offerings opportunities below $500, the monetary threshold of coverage.

Streamlining the interim Business Opportunity Rule and tailoring it to fit business opportunities (as opposed to business format franchises) has been a primary focus of this proceeding. Both the Original Franchise Rule and the interim Business Opportunity Rule require extensive disclosures covering over twenty specified topics. In the INPR, the Commission recognized that these extensive disclosure requirements entail disproportionate compliance costs for sellers of comparatively low-cost business opportunity ventures.
15

Therefore, the Commission proposed to mitigate the compliance burden by simplifying and streamlining the disclosure requirements.
16

15
71 FR at 19057.

16

Id.

Specifically, the INPR proposed a one-page business opportunity pre-sale disclosure document (the “initial proposed disclosure document”) with only six required material disclosures.
17

The initial proposed disclosure document was intended to provide prospective purchasers with essential material information they could use in making a purchase decision. The INPR proposed to require sellers to use the exact form and language set forth by the Commission and to include information regarding (1) the seller; (2) earnings claims; (3) legal actions involving the offered business and its key personnel; (4) the existence of cancellation or refund policies; (5) the number of cancellation or refund requests; and (6) references.
18

17
71 FR at 19091.

18
71 FR at 19068.

In response to the INPR, the Commission received more than 17,000 comments, the overwhelming majority of which came from individuals active in the MLM industry.
19

MLM companies, their representatives and trade associations, as well as individual participants in various MLM plans, expressed grave concern about the burdens the IPBOR would impose on them and urged the Commission to exclude them from the scope of the IPBOR, to implement various safe harbor provisions, and to reduce the required disclosures.
20

The Commission also received approximately 187 comments, primarily from individual consumers or consumer groups, in favor of the IPBOR.
21

Only a handful of comments came from non-MLM companies and industry groups, expressing various concerns about obligations that the IPBOR would impose upon them.
22

None of the comments addressed the form of the initial proposed disclosure document.

19
Comments responding to the INPR are available at
http://www.ftc.gov/os/comments/businessopprule/index.shtm.
References to INPR comments are cited herein as: Name of the commenter-INPR (
e.g.,
Avon-INPR).

20
Thousands of comments were form letters submitted by participants in various MLM programs. 73 FR at 16113.

21
Numerous letters came from individuals having negative experiences with various MLMs. 73 FR at 16113 n.37.

22
73 FR at 16113.

2. The Revised Notice of Proposed Rulemaking and Revised Proposed Business Opportunity Rule

Based on an extensive review of the comments received in response to the INPR and the Commission's law enforcement history, the Commission issued a revised Notice of Proposed Rulemaking (“RNPR”) on March 28, 2008, that set forth a revised proposed Rule (the “Revised Proposed Business Opportunity Rule” or “RPBOR”) that was more narrowly tailored than the IPBOR.
23

23

Id.
at 16110.

In the RNPR, the Commission recognized that there were two main problems with the IPBOR's breadth of coverage. First, the IPBOR would have unintentionally swept in numerous commercial arrangements, including

retail product distribution, training and/or educational organizations, where there was little or no evidence that fraud was occurring.
24

Recognizing this legitimate concern, the Commission, in the RNPR, proposed to narrow the definition of “business opportunity.” Specifically, the RPBOR provided that the “required payment” prong of the business opportunity definition would not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices;
25

eliminated as an element of the business opportunity definition the making of an earnings claim;
26

and narrowed the types of “business assistance” that would trigger the business opportunity definition to just those types of assistance that are the hallmark of business opportunity fraud: Location, account, and “buy-back” assistance.
27

24

Id.
As one commenter described it, the IPBOR would have swept in traditional arrangements for distribution of “food and beverages, construction equipment, manufactured homes, electronic components, computer systems, medical supplies and equipment, automotive parts, automotive tools and other tools, petroleum products, industrial chemicals, office supplies and equipment, and magazines.” IBA-INPR at 5;
see also
Timberland-INPR (noting that numerous manufacturers structure their retail distribution in this manner).

25
This amendment was based on concerns raised by some commenters that if a “required payment” did not exclude the purchase of inventory, many traditional product distribution arrangements could be brought within the scope of the Rule. 73 FR at 16113.

26
This amendment was based on concerns raised by some commenters that a broad range of commercial arrangements easily would fall under the business opportunity definition if the company made some representation about sales or profits sufficient to constitute an earnings claim.
Id.
at 16114;
see also infra
Section III.A.3.

27

Id.
at 16123. The Commission eliminated two additional types of assistance that would have triggered the Rule's strictures and disclosure obligations—tracking payments and providing training.

Second, the Commission determined that the IPBOR was unworkable with respect to MLMs and would have imposed greater burdens on the MLM industry than other types of business opportunity sellers without sufficient countervailing benefits to consumers. After careful consideration of the record, the Commission decided to narrow the scope of the RPBOR to avoid broadly sweeping in all sellers of MLM opportunities. This decision was based on the overwhelming majority of the approximately 17,000 comments that argued that the IPBOR failed to differentiate between unlawful pyramid schemes—which the Commission intended to cover—and legitimate companies using an MLM model.

Finally, the RPBOR eliminated two disclosures that would have been required by the IPBOR—information about legal actions pertaining to a business opportunity seller's sales personnel, and the number of cancellation or refund requests the seller received.
28

Eliminating the disclosure of legal actions involving sales employees was based on the Commission's recognition that the burden of collecting litigation histories for every sales person was not outweighed by the corresponding benefit to prospective purchasers.
29

With respect to the disclosure of the number of cancellation or refund requests received, the Commission determined that such disclosure was not useful, and further, may have had the perverse effect of discouraging legitimate businesses from offering refunds.
30

28

Id.
at 16125.

29

Id.

30

Id.

The RNPR sought public comment on issues relevant to the Commission's consideration of the RPBOR, including whether the RPBOR would adequately accomplish the Commission's stated purpose of protecting consumers against fraud and, if it did not, what alternatives the Commission could consider.
31

In contrast to the INPR, which generated more than 17,000 comments, the Commission received fewer than 125 comments and rebuttal comments in response to the RNPR.
32

Again, however, the vast majority of commenters were from the MLM industry, but this time they supported the Commission's proposal to narrow the scope of the Business Opportunity Rule, albeit with suggestions for fine-tuning.
33

It is noteworthy that only one comment came from a business opportunity seller.
34

The Commission also received comments from two consumer groups
35

and approximately twelve individuals
36

who expressed their disappointment that the FTC's proposed rule would exclude MLMs from coverage.

31

Id.
at 16133.

32
Comments responding to the RNPR are available at
http://www.ftc.gov/os/comments/bizoprevised/index.shtm.
References to RNPR comments are cited herein as: Name of commenter-RNPR.

33
Some commenters suggested changes to the language of certain definitions proposed in the RNPR to ensure that the multi-level marketing industry was not inadvertently swept into the ambit of the rule.
See, e.g.,
DSA-RNPR; Babener-RNPR; IBA-RNPR.

34
Planet Antares-RNPR.

35
The two consumer groups are the Consumer Awareness Institute (“CAI”) and Pyramid Scheme Alert (“PSA”).

36
Some letters came from individuals having negative experiences with MLMs.

3. Consumer Testing of Disclosure Document and Public Workshop

In the RNPR, the Commission announced that it had retained a consultant to assess the proposed disclosure document, with the objective of achieving the proper format and content for communicating material information to consumers. Following publication of the RNPR, Macro International, Inc. (“Macro”), the FTC's consultant, conducted extensive consumer testing of the initial proposed disclosure document that resulted in substantial improvement to both the layout and the wording of the form.
37

The Commission made Macro's report as well as the revised proposed Business Opportunity Disclosure Document (“revised proposed disclosure document”)
38

public in a
Federal Register
Notice (“Workshop Notice”) that also announced a one-day public workshop in Washington, DC.
39

The Workshop Notice focused on whether the revised proposed disclosure document was an effective means of conveying material information to prospective purchasers of business opportunities. The Workshop Notice also sought comment to further develop the public record on issues that had been raised in the comments received in response to the RNPR. Five individuals who represented a range of interests in the proposed Rule were chosen to participate as panelists, including a federal law enforcer, a state law enforcer, a consumer advocate, the general counsel of a national multi-level marketing company, and a former director of the FTC's Bureau of Consumer Protection.
40

Staff convened the public workshop with these five panelists in Washington, DC, on June 1, 2009. At the conclusion of the workshop discussion of the revised proposed disclosure document, panelists and audience members were invited to express their views about other issues related to the RPBOR.
41

Following

robust discussion on various topics, the Commission received follow-up written comment from six individuals and entities.
42

37
A copy of the expert's report to the FTC, “Design and Testing of Business Opportunity Disclosures,” (“Macro Report”) is available at
http://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.

38
The version of the revised proposed disclosure document that was tested by Macro inadvertently omitted the phrase “or pay any money” from the conclusion of the penultimate sentence of the revised proposed disclosure document. Macro determined that this omission had no effect on the results of its testing.
See
Macro Report at 2.

39

See
74 FR 18712 (Apr. 24, 2009).

40
Commission staff selected individuals as panelists based upon their comments, backgrounds, and interest in the subject matter.

41
A copy of the transcript of the June 1, 2009 workshop is available at
http://www.ftc.gov/bcp/workshops/bizopps/index.shtml.
References to the

transcript from the June 2009 Business Opportunity Rule public workshop are cited herein as: Name of commenter, June 09 Tr at page no. (
e.g.,
Jost, June 09 Tr at 12).

42
Comments received in response to the Workshop Notice are available at
http://www.ftc.gov/os/comments/bizoprulerevwrkshp/index.shtm.
References to workshop comments are cited herein as: Name of commenter-Workshop.

4. Staff Report

Pursuant to the Rule amendment process announced in the INPR, the Commission's Bureau of Consumer Protection issued a Staff Report on the Business Opportunity Rule in November 2010.
43

The Staff Report explained in detail the history of the Rule amendment proceeding and summarized the issues raised during the various notice and comment periods, particularly those raised in response to the RNPR. It also addressed the public workshop discussion and subsequent comments, as well as additional issues that the staff raised on its own initiative, based on the Commission's law enforcement experience.

43

See
Bureau of Consumer Protection,
Staff Report to the Federal Trade Commission and Proposed Revised Trade Regulation Rule (16 CFR Part 437)
(Nov. 2010) (“Staff Report”). The Staff Report is available at
http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf.
In November, the Commission published a notice in the
Federal Register
announcing the availability of, and seeking comment on, the Staff Report.
See
75 FR 68559 (Nov. 8, 2010).

Twenty-seven comments were submitted in response to the Staff Report,
44

including eleven comments submitted by consumer group Consumer Awareness Institute (“CAI”). The Commission also received comments from the Department of Justice (“DOJ”), the Direct Selling Association (“DSA”), MLM companies,
45

one franchise lead generator, a consumer group named Pyramid Scheme Alert (“PSA”), and ten individuals. A few commenters suggested changes to some of the Rule's definitions and the scope of coverage,
46

while others encouraged the Commission to adopt the Rule as recommended in the Staff Report.
47

The majority of comments submitted by individuals, and the comments submitted by CAI and PSA, opposed the Commission's decision to narrow the scope of the Rule to avoid broadly sweeping in MLMs.
48

In crafting the final Rule, the Commission has carefully considered the comments received in response to the Staff Report and throughout the Rule amendment proceeding.
49

44
Comments received in response to the Staff Report are available at
http://www.ftc.gov/os/comments/bizoppstaffreport/index.shtm.
References to Staff Report comments are cited herein as: Name of commenter—Staff Report.

45
Comments on behalf of the MLM industry were submitted by Tupperware and Primerica.

46

E.g.,
Dub-Staff Report; Tupperware-Staff Report.

47
DOJ-Staff Report; Primerica-Staff Report; DSA-Staff Report.

48

E.g.,
CAI-Staff Report; PSA-Staff-Report; O'Handley-Staff Report; Brooks-Staff Report; Johnson-Staff Report.

49
The Staff Report comments addressing specific provisions of the Rule are discussed within the substantive discussions on the relevant provisions. The comments regarding MLMs are discussed in Subsection C.1.c below, addressing the Commission's decision to exclude MLMs from coverage.

C. Overview of the Final Rule

The final Rule significantly modifies the scope, disclosure requirements, and prohibitions of the interim Business Opportunity Rule. This proceeding was, in major part, prompted by the recognition that the interim Business Opportunity Rule's extensive disclosure requirements are ill-suited to many business opportunities and place unnecessary compliance costs on both business opportunity sellers and buyers. Similarly, commenters have observed that business opportunities and business format franchises are distinct business arrangements that pose very different regulatory challenges. To account for these differences, to avoid unnecessary compliance burdens, and to ensure that consumers are best protected against deceptive practices in the sale of business opportunities, the Commission has amended the interim Rule to:

(1) Expand its scope to cover many business opportunities that were not covered under the interim Business Opportunity Rule;

(2) Streamline pre-sale disclosures;

(3) Prohibit various specific misrepresentations and other misleading practices often engaged in by fraudulent business opportunity sellers; and

(4) Require that for offers conducted in Spanish or other languages besides English, that the disclosures be provided in the same language as the offer is made. The sections that follow describe these four aspects of the final Rule.

1. Scope of the Final Rule

The definition of “business opportunity” dictates the scope of coverage under the final Rule. To ensure appropriate coverage, this definition has been crafted to capture the sale of business opportunities that historically have been associated with deceptive practices. As discussed below, the final Rule (1) extends coverage to those types of opportunities that previously were not covered under the Original Franchise Rule and the interim Business Opportunity Rule; (2) continues to cover business opportunities that previously were covered under the Original Franchise Rule and interim Business Opportunity Rule; and (3) avoids broadly sweeping in MLMs and certain other types of arrangements that are not characterized by the deceptive and unfair practices the final Rule aims to prevent.

a. The Final Rule Covers Many Business Opportunities That Previously Escaped Coverage

The final Rule includes an expansive definition of “business opportunity” aimed at extending the scope of the Rule to certain business opportunities—namely work-at-home opportunities such as envelope-stuffing, product assembly, and medical billing—that often were not covered by the interim Business Opportunity Rule. The Commission's law enforcement experience and complaint data show that these types of business opportunities are sources of prevalent and persistent problems. These opportunities, however, often escaped coverage of the Original Franchise Rule and the interim Business Opportunity Rule due to the following two limitations: (1) A minimum payment threshold set at $500; and (2) coverage was limited to business opportunities in which products were sold directly to third party end-users, rather than back to the business opportunity seller.
50

Each limitation is discussed below.

50
73 FR at 16112.

First, the Original Franchise Rule and the interim Business Opportunity Rule covered only business opportunity ventures costing $500 or more. Ventures such as product assembly, medical billing, and envelope stuffing, however, often require payments of less than $500 and thus were not covered by the interim Business Opportunity

Rule.
51

Some commenters asserted that setting the threshold for coverage at a specific dollar amount simply provides scam operators a means to circumvent the Rule, noting that sellers of business opportunities may charge less than $500 to skirt the interim Business Opportunity Rule's disclosure requirements.
52

The Commission has concluded that the scope of the final Rule should be broad enough to reach business opportunities that the Commission's law enforcement history and consumer complaints show are a widespread and persistent problem, regardless of the price at which they are offered. Accordingly, the final Rule eliminates the monetary threshold.

51

See, e.g., FTC
v.
Med. Billers Network, Inc.,
No. 05 CIV 2014 (RJH) (S.D.N.Y. 2005) ($200-$295 fee);
FTC
v.
Sun Ray Trading,
No. Civ. 05-20402-CIV-Seitz/Bandstra (S.D. Fla. 2005) ($160 fee);
FTC
v.
Wholesale Mktg. Group, LLC,
No. 05 CV 6485 (N.D. Ill. 2005) ($65 to $175 registration fees);
FTC
v.
Vinyard Enters., Inc.,
No. 03-23291-CIV-ALTONAGA (S.D. Fla. 2003) ($139 fee);
FTC
v.
Leading Edge Processing, Inc.,
6:02-CV-681-ORL-19 DAB (M.D. Fla. 2002) ($150 fee);
FTC
v.
Healthcare Claims Network, Inc.,
No. 2:02-CV-4569 MMM (AMWx) (C.D. Cal. 2002) ($485 fee);
FTC
v.
Stuffingforcash.com, Corp.,
No. 92 C 5022 (N.D. Ill. 2002) ($45 fee);
FTC
v.
Kamaco Int'l,
No. CV 02-04566 LGB (RNBx) (C.D. Cal. 2002) ($42 fee);
FTC
v.
Medicor LLC,
No. CV01-1896 (CBM) (C.D. Cal. 2001) ($375 fee);
FTC
v.
SkyBiz.com,
No. 01-

CV-0396-EA (X) (N.D. Okla. 2001) ($125 fee);
FTC
v.
Para-Link Int'l,
No. 8:00-CV-2114-T-27E (M.D. Fla. 2000) ($395 to $495 fee);
see also Consumer Fraud in the United States: The Second FTC Survey
(October 2007) at 48,
available at http://www.ftc.gov/opa/2007/10/fraud.pdf
(indicating a median payment for work-at-home schemes of $200).

52

See
71 FR at 19079 (citing comments submitted in earlier proceedings by NCL, SBA Advocacy, Finnigan, and Purvin).

A second limitation to the Original Franchise Rule and the interim Business Opportunity Rule's scope of coverage was the requirement that the purchaser of the opportunity had to sell goods or services directly to third party end-users—someone other than the business opportunity seller. The effect of this limitation was to exclude most work-at-home opportunities—such as envelope stuffing and craft assembly ventures—from coverage. Promoters of these types of opportunities often tell prospective purchasers that they (1) will work directly for the seller or a third party the seller identifies or (2) will produce various goods for the seller, who will then purportedly distribute the goods to end-users or retail markets.
53

In order to reach these types of business opportunities, coverage of the final Rule is not limited to transactions where the purchaser of the opportunity sells goods or services directly to individuals other than the business opportunity seller.

53

E.g., FTC
v.
Darling Angel Pin Creations, Inc.,
No. 8:10-cv-00335-JSM-TGW (M.D. Fla. Feb. 2010);
FTC
v.
Indep. Mktg. Exch. Inc.,
No. 1:10-cv-00568-NLH-KMW (D.N.J. Feb. 2010);
FTC
v.
Preferred Platinum Svcs. Network LLC,
No. 3:10-cv-00538-MLC-LHG (D.N.J. Feb. 2010).

b. The Final Rule Continues To Cover Those Types of Opportunities Covered Under the Original Franchise Rule and the Interim Business Opportunity Rule

In addition to those types of business opportunities that often evaded coverage under the Original Franchise Rule and Interim Business Opportunity Rule, the final Rule continues to cover the types of business opportunities that previously had been covered, such as vending machine opportunities, rack display opportunities, and similar arrangements. The Commission's law enforcement experience demonstrates that sales of these types of opportunities are fraught with unfair and deceptive practices, in particular, false or unsubstantiated earnings claims. Indeed, such practices are widespread in promotion and sale of such business opportunities. Since 1995, the Commission has brought over 80 law enforcement actions
54

in connection with more than ten law enforcement sweeps
55

that targeted business opportunity scams involving the sale of vending machines,
56

rack displays,
57

public telephones,
58

Internet kiosks,
59

and 900-number ventures,
60

among others. These persistent scams will continue to be covered under the final Rule.

54
In bringing these FTC law enforcement actions, the FTC partnered with sister federal agencies—such as the DOJ and the United States Postal Inspection Service—and with the various state attorneys general, including the District of Columbia. Thus, these “sweeps” entailed many more actions besides those brought by the FTC.

55

E.g.,
Project Fal$e Hope$,
see
FTC News Release: Federal, State Law Enforcers Complete Bogus Business Opportunity Sweep (Dec. 12, 2006),
available at http://www.ftc.gov/os/caselist/projectfalsehopes.shtm;
Project Biz Opp Flop,
see
FTC News Release: Criminal and Civil Enforcement Agencies Launch Major Assault Against Promoters of Business Opportunity and Work-at-Home Schemes (Feb. 22, 2005),
available at http://www.ftc.gov/opa/2005/02/bizoppflop.htm;
Project Busted Opportunity,
see
FTC News Release: State, Federal Law Enforcers Launch Sting on Business Opportunity, Work-at-Home Scams (June 20, 2002),
available at http://www.ftc.gov/opa/2002/06/bizopswe.shtm;
Project Biz-illion$,
see
FTC News Release: State-Federal Crackdown on Phony Business Opportunities Intensifies (March 6, 2000),
available at http://www.ftc.gov/opa/2000/03/biz.shtm;
Operation Money Pit,
see
FTC News Release: “Operation Money Pit” Targets Fraudulent Business Opportunity Schemes (Feb. 20, 1998),
available at http://www.ftc.gov/opa/1998/02/moneypit.shtm;
Project Vend Up Broke,
see
FTC News Release: FTC Announces “Operation Vend Up Broke” (Sept. 3, 1998),
available at http://www.ftc.gov/opa/1998/09/vendup2.shtm;
Project Trade Name Games,
see
FTC News Release: Display Racks for Trade-Named Toys and Trinkets rre Lastest in Business Opportunity Fraud Schemes (Aug. 5, 1997),
available at http://www.ftc.gov/opa/1997/08/tradenam.shtm;
Operation Missed Fortune FTC News Release: Operation Missed Fortune (Nov. 13, 1996),
available at http://www.ftc.gov/opa/1996/11/misdfort.shtm;
Project Telesweep,
see
FTC News Release: Major State-Fed Crackdown Targets Business Opportunity Scam “Epidemic” (July 18, 1995),
available at http://www.ftc.gov/opa/1995/07/scam.shtm.
Recent law enforcement sweeps “Operation Bottom Dollar” and “Operation Short Change,” challenged, among other things, “work-at-home” opportunities.
See
FTC News Release: FTC Cracks Down on Scammers Trying to Take Advantage of the Economic Downturn (Feb. 17, 2010),
available at http://www.ftc.gov/opa/2010/02/bottomdollar.shtm;
FTC News Release: FTC Targets Scams Spawned by Economic Downturn (July 1, 2009),
available at http://www.ftc.gov/opa/2009/07/shortchange.shtm.

56

See, e.g., United States
v.
Lifestyle Vending, Inc.,
No. CV-06-6421 (E.D.N.Y. 2006);
FTC
v.
Am. Entm't Distribs., Inc.,
No. 04-22431-CIV-Huck (2004);
FTC
v.
Inspired Ventures, Inc.,
No. 02-21760-CIV-Jordan (S.D. Fla. 2002);
FTC
v.
Essex Mktg. Group, Inc.,
No. 2:02-cv-03415-TCP-AKT (E.D.N.Y 2002);
United States
v.
Univend, LLC,
No. 02-0433-P-L (S.D. Ala. 2002);
FTC
v.
Pathway Merch., Inc.,
No. 01-CIV-8987 (S.D.N.Y. 2001);
United States
v.
Photo Vend Int'l, Inc.,
No. 98-6935-CIV-Ferguson (S.D. Fla. 1998);
FTC
v.
Hi Tech Mint Sys., Inc.,
No. 98 CIV 5881 (JES) (S.D.N.Y. 1998);
FTC
v.
Claude A. Blanc, Jr.,
No. 2:92-CV-129-WCO (N.D. Ga. 1992);
see also
FTC News Release: FTC Announces “Operation Vend Up Broke” (Sept. 3, 1998),
available at http://www.ftc.gov/opa/1998/09/vendup2.shtm
(FTC and 10 states announce 40 enforcement actions against fraudulent vending business opportunities).

57

See, e.g., United States
v.
Elite Designs, Inc.,
No. CA 05 058 (D.R.I. 2005);
United States.
v.
QX Int'l,
No. 398-CV-0453-D (N.D. Tex. 1998);
FTC
v.
Carousel of Toys,
No. 97-8587-CIV-Ungaro-Benages (S.D. Fla. 1997);
FTC
v.
Raymond Urso,
No. 97-2680-CIV-Ungaro-Benages (S.D. Fla. 1997);
FTC
v.
Infinity Multimedia, Inc.,
No. 96-6671-CIV-Gonzalez (S.D. Fla. 1996);
FTC
v.
O'Rourke,
No. 93-6511-CIV-Ferguson (S.D. Fla. 1993);
see also
FTC News Release: Display Racks for Trade-Named Toys and Trinkets are the Latest in Business Opportunity Fraud Schemes (Aug. 5, 1997),
available at http://www.ftc.gov/opa/1997/08/tradenam.htm
(FTC and 8 states filed 18 enforcement actions against sellers of bogus display opportunities that use trademarks of well-known companies).

58

See, e.g., FTC
v.
Advanced Pub. Commc'ns Corp.,
No. 00-00515-CIV-Ungaro-Benages (S.D. Fla. 2000);
FTC
v.
Ameritel Payphone Distribs., Inc.,
No. 00-0514-CIV-Gold (S.D. Fla. 2000);
FTC
v.
ComTel Commc'ns Global Network, Inc.,
No. 96- 3134-CIV-Highsmith (S.D. Fla. 1996);
FTC
v.
Intellipay, Inc.,
No. H92 2325 (S.D. Tex. 1992).

59

See, e.g., FTC
v.
Bikini Vending Corp.,
No. CV- S-05-0439-LDG-RJJ (D. Nev. 2005);
FTC
v.
Network Serv. Depot, Inc.,
No. CV-S0-05-0440- LDG-LRL (D. Nev. 2005);
United States
v.
Am. Merch. Tech.,
No. 05-20443-CIV-Huck (S.D. Fla. 2005);
FTC
v.
Hart Mktg. Enter. Ltd., Inc.,
No. 98-222-CIV-T-23 E (M.D. Fla. 1998);
see also FTC
v.
FutureNet, Inc.,
No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998);
FTC
v.
TouchNet, Inc.,
No. C98-0176 (W.D. Wash. 1998).

60

See, e.g., FTC
v.
Bureau 2000 Int'l, Inc.,
No. 2:96-cv-01473-WMB-RC (C.D. Cal. 1996);
FTC
v.
Genesis One Corp.,
No. CV-96-1516-MRP (MCX) (C.D. Cal. 1996);
FTC
v.
Innovative Telemedia, Inc.,
No. 96- 8140-CIV-Ferguson (S.D. Fla. 1996);
FTC
v.
Ad-Com Int'l,
No. 96-1472 LGB (VAP) (C.D. Cal. 1996).

c. The Final Rule Avoids Broadly Sweeping in MLMs

The final Rule's definition of business opportunity avoids broadly sweeping in all sellers of MLM opportunities.
61

The decision in the RPBOR to exclude MLMs from the scope of the Rule's coverage was based on the overwhelming majority of the approximately 17,000 comments that argued that the IPBOR failed to differentiate between unlawful pyramid

schemes—which the Commission intended to cover—and legitimate companies using an MLM model.

61

See
73 FR at 16120.

As detailed more fully in the RNPR, several common themes emerged from the numerous comments submitted by the MLM industry. Many commenters suggested that the low economic risks of participating in a typical MLM do not justify imposing burdensome regulations that would threaten to strangle the MLM industry.
62

These commenters focused on the low fees—often less than $100—that top MLM companies charge prospective distributors for the right to sell their products, and on the relatively low risk that consumers would lose money on large purchases of inventory.
63

In addition, industry commenters contended that the various disclosure requirements were ill-suited for the MLM business model and that many of the disclosure obligations would show direct selling companies in a distorting negative light.
64

For example, according to one commenter, the requirement to disclose prior legal actions would cast successful and long-established companies in a worse light than fly-by-night frauds simply because larger companies with more sales representatives and more years of operation are likely to get involved in a larger number of lawsuits.
65

Moreover, industry commenters uniformly asserted that the cost of compliance with the IPBOR would be extremely high for them—first, from the burden of developing, providing and keeping records of proposed disclosures, and second, from the impaired ability to recruit prospective distributors.
66

Finally, industry commenters argued that unlike traditional business opportunities, the MLM industry is not permeated with fraud.
67

62

Id.
at 16114.

63

Id.

64

Id.
at 16115.

65

Id.

66

Id.
at 16116.

67

Id.
at 16114.

In contrast to the overwhelming majority of comments that opposed regulating MLMs through the Business Opportunity Rule, only a small minority of commenters were in favor of a rule that would cover MLMs. These commenters included two consumer groups, CAI and PSA, a few consumer advocates, individuals who regretted becoming involved in MLMs, and other MLM participants.
68

Many of the consumer advocates contended that the MLM industry is comprised primarily of pyramid schemes masquerading as legitimate companies.
69

The commenters also asserted that MLMs deceptively market their distributorships as a low-risk opportunity with high earnings potential, when in fact, the costs of participating in an MLM can be high and the earnings comparatively small.
70

68

Id.
at 16116.

69
CAI-INPR at 2 (“I can certify that
MLM (sic) are not direct selling programs, but chain selling programs”
); CAI-INPR Rebuttal of DSA Comments at 3 (“The Direct Selling Association (DSA), recently taken over by chain sellers now promotes chain selling (pyramid marketing)—even more than legitimate direct selling”);
see also
Brooks-INPR at 2 (“In my opinion, most MLM firms operate in a deceptive or fraudulent manner”).

70
PSA-INPR at 3-4; Brooks-INPR at 4; Johnson-INPR at 1.

In the RNPR, the Commission concluded that although there is significant concern that some pyramid schemes may masquerade as legitimate MLMs, assessing the incidence of such practices is difficult and indeed, determining whether an MLM is a pyramid scheme requires a fact-intensive, case-by-case analysis. Further, the record developed was insufficient as a basis for crafting MLM disclosures that would effectively help consumers make an informed decision about the risks of joining a particular MLM.

Based on the record and the Commission's law enforcement experience, the RNPR announced the Commission's determination that it would not be practicable to apply the requirements of the proposed Rule to MLM companies. Drawing on its law enforcement experience, the Commission acknowledged that some MLMs do engage in unfair or deceptive acts or practices, including operating pyramid schemes or making unsubstantiated earnings claims that cause consumer harm. The Commission, however, was not persuaded that workable, meaningful disclosures could be devised that would help consumers identify a fraudulent pyramid scheme. This being the case, the Commission decided that the proposed Rule was too blunt an instrument to alleviate fraud in the sale of MLMs. The Commission therefore determined to continue to challenge unfair or deceptive practices in the MLM industry through law enforcement actions alleging violations of Section 5 of the FTC Act and not through the Business Opportunity Rule. The Staff Report's recommendations were consistent with this decision.
71

71
Staff Report at 20.

In response to the Staff Report, the Commission received 24 comments addressing the Commission's decision to narrow the scope of the Rule to avoid broadly sweeping in MLMs. Specifically, 19 comments opposed the Commission's decision,
72

one commenter agreed with the decision to narrow the scope of the Rule, but suggested modifying the Rule to contain bright line exemptions and to clarify the definition of “required payment,”
73

and two commenters advocated that the Commission adopt the Rule as recommended.
74

72
These included eleven comments submitted by consumer group CAI, as well as comments submitted by PSA and seven individuals. In addition, two individuals submitted comments supporting the statistical analysis provided by CAI President, Jon Taylor.
See
McKee-Staff Report; Ashby-Staff Report.

73
Tupperware-Staff Report.

74
DSA-Staff Report; Primerica-Staff Report.

Commenters opposing the decision to avoid sweeping MLMs within the scope of the Rule's coverage set forth the same basic premise—that MLMs frequently misrepresent the level of earnings achieved by their distributors and therefore, should be subject to regulation.
75

More specifically, many of the commenters advocated that the MLM industry should be required to disclose the average income of their participants.
76

The Commission has carefully considered the comments submitted in response to the Staff Report on the issue of MLMs. While some of the commenters provided an analysis of the MLM industry with concrete examples of the types of problems that exist within that industry,
77

many did not. Instead, many commenters expressed in general terms their low opinion of MLMs and their general opinion that MLMs should be regulated.
78

More to the point, none of the commenters provided persuasive arguments for why the Business Opportunity Rule is the proper vehicle to address the problems they identified within the MLM industry.

75

See, e.g.,
O'Handley-Staff Report (“I personally believe that this industry is a borderline scam at best and needs MORE oversight than everyone else-NOT LESS.”); Welling-Staff Report (“I find it amazing that * * * the MLM industry has little or no regulations.”).

76

See, e.g.,
Barrett-Staff Report (FTC should “demand truthful disclosure of income potentials for MLM”); Brooks-Staff Report (MLMs should produce “actual, verifiable data concerning the earnings and losses of their distributors”); CAI-Staff Report at 7-3 (advocating for the disclosure of “information supporting earnings claims”).

77

See, e.g.,
CAI-Staff Report (reporting research on the MLM industry and quoting representations made by various MLMs).

78

See, e.g.,
Craig-Staff Report (there is “ample evidence of problems with MLM to warrant inclusion in the rule”); Afoa-Staff Report (commenting on personal experience with one MLM).

Before discussing the comments in further detail, however, one point in the rulemaking record requires clarification. Several comments focused on the

following language contained in the Staff Report: “Two key problems emerged with the IPBOR's breadth of coverage. First, the IPBOR would have unintentionally swept in numerous commercial arrangements where there is little or no evidence that fraud is occurring.”
79

The commenters suggest, incorrectly, that the quoted language reveals a finding by the Commission that there is little or no evidence of fraud occurring within the MLM industry.
80

This language, however, referred to a passage from the RNPR that addressed traditional product distribution arrangements, not MLMs.
81

The Commission has not made a finding that there is little or no evidence of fraud within the MLM industry; to the contrary, it has specifically recognized, through its own law enforcement experience, that some MLMs may be pyramid schemes in masquerade and may make false and unsubstantiated earnings claims.
82

79

See, e.g.,
CAI-Staff Report at 1, 10-41; PSA-Staff Report.

80
CAI-Staff Report at 10-41; PSA-Staff Report (“The basis of the exclusion appears to be the extraordinary claim that there is insufficient evidence of widespread fraud in the multi-level marketing field.”).

81
Indeed, the language quoted by CAI and PSA contains a footnote referencing the section of the RNPR that discussed traditional product distribution arrangements.
See
Staff Report at 30 (citing 73 FR at 16113).

82

See
73 FR at 16119;
see also
Staff Report at 20.

In any event, the comments submitted in response to the Staff Report do not persuade the Commission that the Business Opportunity Rule is the proper tool to address these problems.
83

Two of the affirmative disclosure requirements illustrate the difficulty in applying the Rule to MLMs: (1) The disclosure of substantiation for earnings claims; and (2) the disclosure of references.

83
Indeed, one commenter recommended a completely separate set of disclosures for MLM opportunities, further suggesting that the Business Opportunity Rule is a poor fit for the MLM industry.
See
Johnson-Staff Report (recommending that the FTC convert its consumer education on investing with an MLM into a series of disclosures that would be MLM-specific).

First, as the Commission has acknowledged, the varied and complex structure of MLMs makes it exceedingly difficult to make an accurate earnings disclosure and likely would require different disclosures for different levels of participation in the company. For instance, it would be difficult to craft an accurate earnings disclosure that would account for “inactive” participants that use their distributorship as a “buyers club” and are interested only in purchasing goods at a wholesale price for their own use.
84

This problem appears to be unique to MLMs and, so far as the Commission is aware, does not arise in other forms of business opportunities.

84

See
73 FR at 16120.

Furthermore, it may be difficult to determine retail income if the MLM is not in a position to verify the extent to which a distributor has resold the product at retail, is warehousing the product, or bought the product for his or her own personal consumption. Even where the MLM has policies in place purportedly to ensure that a portion of its distributors' income is derived from retail sales, these policies could go unenforced, or even where ostensibly enforced, could be circumvented by distributors who may have an incentive to “inflate” their retail sales by “certifying” that such sales occurred in order to qualify for higher levels of commissions. In light of these difficulties, and because the comments submitted in response to the Staff Report did not refute these findings, the Commission continues to believe that developing a standard, useful, and understandable earnings disclosure that would apply to both the MLM industry and the other business opportunities covered by the Rule remains elusive.
85

85
While CAI presented its proposal for an earnings disclosure, it is clear that the disclosure would be specific to MLMs and would have no application to the other types of business opportunities addressed by the Rule.
See
CAI-Staff Report at 7-33.

Second, the reference disclosure required under the final Rule would make little sense in the MLM context. As the Commission has previously recognized, those prior purchasers appearing on the reference list likely would stand to receive a financial benefit if they could convince a prospect to enroll into their downline.
86

Under these circumstances, information provided by such a reference might not be a reliable indicator of the potential risk and rewards of enrollment in the MLM.

86

See
73 FR at 16121.

In response to the Staff Report, the Commission received one comment attempting to refute this reasoning. The commenter argued that, contrary to the Commission's view, prior purchasers would have little incentive to misrepresent the success of the MLM because that incentive would exist only if the prospective purchaser would become part of the prior purchaser's downline, which the commenter implies would not always be the case.
87

The commenter further argued that the fact that the prospective purchaser had received the disclosure document would indicate that the prospective purchaser had already been recruited, and therefore would be unlikely to face further recruitment by the prior purchaser.
88

87
Brooks-Staff Report at 8.

88

Id.

The Commission finds these arguments unpersuasive. To the extent there is any financial incentive for a reference to puff or exaggerate the benefits of buying into a business, that reference obviously cannot provide a disinterested opinion to the prospect. The MLM model is inherently structured to create financial incentives for distributors to recruit prospects into their downlines.
89

Thus, those financial incentives are present whenever a potential recruit enquires into the business. To illustrate the point, even dissatisfied distributors have an incentive to refrain from disparaging the MLM because any losses they have suffered could potentially be recouped by the recruitment of the prospect into their downline. Whether they are ultimately successful in their attempt to woo a recruit from another distributor is immaterial; they have every incentive to try.
90

89
Multi-level marketing is a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors' direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their “down lines.”
See
Vander Nat & Keep, supra note 13.

90
Comments submitted in response to the Staff Report did not refute these arguments, but actually bolstered them. For instance, one commenter noted that MLM recruiters will often pretend they are wealthy when they are not, simply to entice others to join the MLM.
See
O'Handley-Staff Report at 2;
see also
CAI-Staff Report at 5 (noting that in MLMs, “every major victim is of necessity a perpetrator (recruiter) because to have any hope of recouping their ongoing investments * * * they must recruit others to do what they have done”).

Thus, the Commission continues to believe that the final Rule's reference disclosure would not provide prospective MLM participants with an accurate account of the MLM experience or with information necessary to make an informed purchasing decision. Moreover, these challenges appear to be unique to MLMs, and as far as the Commission is aware, are not inherent in the other types of business opportunities addressed by the final Rule.

Accordingly, while the Commission recognizes that problems may exist within the MLM industry, it continues to find that the Business Opportunity Rule is not the appropriate vehicle through which to address them. Rather, the Commission will continue to challenge unfair or deceptive practices in the MLM industry through Section 5 of the FTC Act. Thus, the final Rule has

been crafted to avoid broadly sweeping in MLMs.
91

91
The final Rule, however, does not explicitly exempt MLMs from coverage, but instead contains a narrow definition of “business opportunity.” As discussed in Section III.A.3
infra,
the final Rule's definition of “business opportunity” eliminates two types of business assistance that previously would have triggered the Rule's coverage of MLMs: (1) Tracking or paying commissions or other compensation for recruitment or sales; and (2) providing generalized training or advice for the business. The final Rule is thus more narrowly tailored to those types of deceptive business assistance representations that are the hallmark of fraudulent business opportunity schemes: location, account, and “buy back” assistance. 73 FR at 16123.

2. Streamlined Disclosure Requirements

Although the scope of coverage is broader, the compliance burden is lighter under the final Rule than under the interim Business Opportunity Rule. In contrast to the voluminous disclosures that business opportunity sellers are required to make under the interim Business Opportunity Rule, the final Rule has significantly streamlined the disclosures to focus on the types of information most material to business opportunity purchasers: (1) The seller's identifying information; (2) whether the seller makes an earnings claim;
92

(3) whether the seller, its affiliates, or key personnel, have been involved in any legal actions;
93

(4) whether the seller has a cancellation or refund policy; and (5) a list of purchasers who have bought the business opportunity within the previous three years. The final Rule also requires the disclosure of supplementary information that substantiates earnings claims, identifies legal actions, and states the material terms of the seller's cancellation or refund policy. These disclosures are consistent with the Commission's experience concerning common practices in the sale of business opportunities, and the types of information most meaningful to prospective purchasers.
94

For example, the Commission's experience demonstrates that earnings claims are highly relevant to consumers in making their investment decisions and are often the single most decisive factor in such decisions. Furthermore, the presence of a legal action against the seller or its key personnel may warn the purchaser of potential risk associated with the business opportunity. Information about the seller's cancellation or refund policy is relevant to consumers when weighing their investment risks. Finally, providing the contact information for prior purchasers will allow prospective purchasers to discuss the business opportunity with other purchasers prior to committing themselves to the business opportunity venture.

92
If the business opportunity seller indicates that it does make earnings claims, then it must complete a separate earnings claim statement setting forth the earnings claim, the number and percentage of purchasers who achieved the represented level of earnings, the date range during which the represented earnings were achieved, and additional information.

93
If the business opportunity seller indicates that it or its affiliates or key personnel have been subject to legal actions, then it must complete a separate attachment setting forth the full caption of each action, and may choose to include a brief 100-word description of the action.

94
To fully develop the rulemaking record on business opportunities, in the ANPR, the Commission solicited comment about what pre-sale disclosures would ensure that business opportunity purchasers receive material information necessary to make an investment decision and prevent fraud in the sale of business opportunities. 62 FR at 9121, Questions 15 & 16.

These streamlined disclosure requirements strike the appropriate balance by providing consumers with material information in a straightforward and focused document that will allow them to make informed purchasing decisions. At the same time, the streamlined form eases the compliance burden currently imposed on business opportunity sellers. Like the Original Franchise Rule and the interim Business Opportunity Rule, the final Rule is posited on the notion that a fully informed consumer is in a better position to determine whether a particular offering is in his or her best interest when sellers are required to disclose to them material information. Consumers should be protected against receiving inaccurate information and self-serving unsubstantiated statements from business opportunity sellers. Accordingly, the final Rule requires that business opportunity sellers disclose just the types of information that the Commission has determined are most material to potential purchasers in making a purchasing decision: The seller's identifying information; whether the seller makes an earnings claim, and if so, the substantiation for that claim; whether the seller offers a refund or cancellation policy, and if so, the material terms of that policy; whether the seller or its affiliates and key personnel have been the subject of prior legal actions; and the names and business telephone numbers of prior purchasers to contact. The Commission has determined that these streamlined disclosure requirements will provide potential purchasers with the tools they need to protect themselves from false claims, while at the same time minimizing compliance costs for legitimate business opportunity sellers.

3. Express Prohibitions

In addition to mandating disclosures to prospective purchasers, the final Rule includes prohibitions on sellers from engaging in a number of deceptive practices, which were absent from the interim Business Opportunity Rule. In drafting the final Rule, the Commission relied heavily on its experience in addressing a wide array of deceptive and unfair business opportunity practices through law enforcement actions under the Original Franchise Rule, the interim Business Opportunity Rule, and Section 5 of the FTC Act. The Commission also relied on the staff's analysis of consumer complaints submitted to the FTC. By far, the most frequent allegations in Commission business opportunity cases pertain to false or unsubstantiated earnings claims.
95

False testimonials or fictitious references and misrepresentations concerning the profitability of locations, availability of support and assistance, nature of the products or services sold, prior success of the seller or locator, full extent of investment costs, and refund policies are also prevalent in Commission business opportunity cases.
96

These alleged material misrepresentations or omissions also were frequently mentioned in complaints to the Commission submitted by business opportunity purchasers.
97

95

See, e.g., FTC
v.
Darling Angel Pin Creations, Inc.,
No. 8:10-cv-00335-JSM-TGW (M.D. Fla. Feb. 2010) (representing likely earnings of $500 per week);
FTC
v.
Route Wizard, Inc.,
No. 1:06-cv-00815-KD-B (S.D. Ala. 2006) (representing that purchasers could earn $3,000 a month);
FTC
v.
Bus. Card Experts, Inc.,
No. 06-CV-4671 (PJS/RLE) (D. Minn. 2006) (claiming likely earnings of $150,000 in first year);
FTC
v.
Richardson d/b/a Mid-South Distribs.,
No. CV-06-S-4754-NW (N.D. Ala. 2006) (representing likely earnings of over $2,000 a month or $65,000 a year);
FTC
v.
Accent Mktg., Inc., et al.,
No. 02-405-CB-M (S.D. Ala. 2002) (representing likely earnings of $3,200 per month to $16,000 per month).

96

See, e.g., FTC
v.
Bus. Card Experts, Inc.,
No. 06-CV-4671 (PJS/RLE) (D. Minn. 2006) (used paid references);
FTC
v.
Route Wizard, Inc.,
No. 1:06-cv-00815-KD-B (S.D. Ala. 2006) (misrepresented location assistance);
FTC
v.
Richardson d/b/a Mid-South Distribs.,
No. CV-06-S-4754-NW (N.D. Ala. 2006) (promised high-traffic, high-profit locations);
FTC
v.
Am. Entm't Distribs., Inc.,
No. 04-22431-Civ-Martinez (S.D. Fla. 2004) (used fictitious references, misrepesented locations);
FTC
v.
Fidelity ATM, Inc.,
No. 06-81101-Civ-Hurley/Hopkins (S.D. Fla. 2004) (misrepresented level of support or assistance);
FTC
v.
Accent Mktg., Inc., et al.,
No. 02-405-CB-M (S.D. Ala. 2002) (misrepresented that references purchased the business venture or would provide reliable descriptions of their experience);
FTC
v.
Associated Record Distribs., Inc.,
No. 02-21754-CIV-Graham/Garber (S.D. Fla. 2002) (misrepresented business assistance and that references either purchased the business venture or would provide reliable descriptions of their experience).

97
In 2010, the Commission logged over 12,000 complaints against franchises, business opportunities, and work-at-home schemes.
See
Consumer Sentinel Network Databook (March 2011) at 76,
available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf.

Therefore, among other things, under the final Rule, business opportunity sellers are prohibited from misrepresenting: (1) Earnings; (2) the cost, efficacy, nature, or central characteristics of the business opportunity or the goods or services sold to the purchaser as part of the business opportunity; (3) their cancellation or refund policies; (4) promised assistance; (5) the calculation and distribution of commissions, bonuses, incentives, premiums, or other payments from the seller; (6) the likelihood of finding locations for equipment or accounts for services; (7) that the business opportunity is an offer of employment; (8) territorial exclusivity or more limited territorial protections; (9) endorsements; and (10) references. The final Rule also prohibits business opportunity sellers from failing to make promised refunds, and from assigning to any purchaser a purported exclusive territory that has been sold to another purchaser.

The final Rule prohibits entities covered by the Rule from engaging in the specific acts or practices identified as deceptive or unfair through the Commission's law enforcement experience, as well as the rulemaking record. Engaging in any of those acts or practices is a violation of both the final Rule and Section 5 of the FTC Act.
98

Of course, the Commission, under Section 5, also may challenge any conduct that is not enumerated in the final Rule if the Commission determines that such conduct constitutes an unfair or deceptive act or practice.

98
15 U.S.C. 57a(d)(3).

4. Disclosures in Spanish or Other Languages Besides English

The Commission's law enforcement history demonstrates that some business opportunities are marketed primarily to Spanish speaking consumers.
99

Based on this experience, the Staff Report discussed the limited utility of English-language disclosures for business opportunities marketed in Spanish. Specifically, the staff questioned whether the disclosure document could be made more effective by translating it into Spanish and requiring that when a business opportunity is marketed in Spanish, the disclosure document and any disclosures required by the Rule be provided in Spanish. The Staff Report further suggested that when a business opportunity seller purposefully reaches out to a particular population by marketing in the foreign language spoken by members of that community, all of the disclosures required by the Rule should be accessible and comprehensible to each of those potential purchasers. The Staff Report recommended, therefore, that because the Commission has specific law enforcement experience with business opportunities marketed in Spanish, a Spanish translation of the disclosure document was necessary to attach as an appendix to the final Rule. It further recommended that where the business opportunity is marketed in a language other than Spanish, the business opportunity seller should be required to translate the disclosure document into the language of the sale and provide all the disclosures required by the Rule in that language.

99

E.g., FTC
v.
Zoilo Cruz,
No. 3:08-cv-01877-JP (D. P.R. 2008) (envelope stuffing scheme marketed in Spanish-language newspapers and on a Web site available in Spanish and English);
FTC
v.
Integrity Mktg. Team, Inc.,
No. 07-cv-61152 (S.D. Fla. 2007) (envelope stuffing scheme marketed in Spanish-language classified advertisements);
FTC
v.
Hispanexo, Inc.,
No. 1:06-cv-00424-JCC-TRJ (E.D. Va. 2006) (assistance in starting a construction, gardening, or cleaning business marketed through Spanish-language television and radio stations);
FTC
v.
Juan Matos,
No. 06-61429-CIV-Altonaga (S.D. Fla. 2006) (craft assembly business marketed through Spanish-language advertisements);
FTC
v.
Nat'l Vending Consultants, Inc.,
CV-S-05-0160-RCJ (PAL) (D. Nev. 2005) (deceptively marketed vending machine business opportunities—with many marketing efforts specifically targeting Spanish-speaking consumers);
FTC
v.
Amada Guerra,
No. 6:04-CV-1395 (M.D. Fla. 2004) (product assembly scheme telemarketed to Spanish-speaking consumers);
FTC
v.
USS Elder Enter., Inc.,
No. SACV-04-1039 AHS (Anx) (C.D. Cal. 2004) (work at home assembly scheme offered through Spanish-language newspapers and magazines);
FTC
v.
Esteban Barrios Vega,
No. H-04-1478 (S.D. Tex. 2004) (deceptive product assembly opportunity marketed through Spanish-language newspaper and magazine advertisements).

It is the long-held policy of the Commission that disclosures required by Commission orders, rules, or guides should be made in the predominant language used in the related advertisement or sales material.
100

Upon consideration of this policy, the staff's recommendation, and the rationale for the staff's recommendation, the Commission agrees with the staff's recommendation. Accordingly, the final Rule contains a new provision, § 437.5, which specifies the disclosure requirements for sales conducted in Spanish or other languages besides English.

100
FTC Enforcement Policy Statement Concerning Clear and Conspicuous Disclosures in Foreign Language Advertising and Sales Materials, 16 CFR 14.9.

II. The Legal Standard for Amending the Rule

The Commission is amending 16 CFR Part 437 pursuant to Section 18 of the FTC Act, 15 U.S.C. 57a
et seq.,
and Part 1, subpart B of the Commission's Rules of Practice.
101

This authority permits the Commission to promulgate, modify, and repeal trade regulation rules that define with specificity acts or practices that are unfair or deceptive in or affecting commerce within the meaning of Section 5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1).

101
16 CFR 1.7, 5 U.S.C. 551
et seq.

The Commission's Rules of Practice further provide that if the Commission determines to promulgate a rule, it shall adopt a Statement of Basis and Purpose (“SBP”), which must address four factors: (1) The prevalence of the acts or practices addressed by the rule; (2) the manner and context in which the acts or practices are unfair or deceptive; (3) the economic effect of the rule, taking into account the effect on small businesses and consumers; and (4) the effect of the rule on state and local laws.
102

In this section, the Commission summarizes its findings regarding each of these factors.
103

102
Rules of Practice, 16 CFR 1.14(a)(1)(i)-(iv). In addition, in accordance with 16 CFR 1.14(a)(1)(v), the regulatory analysis is provided at Section V of this Statement of Basis and Purpose.

103
Support in the record for each factor is set forth in the substantive discussion of each provision of the final Rule.

A. Prevalence of Acts or Practices Addressed by the Rule

The Commission promulgated the Original Franchise Rule in 1978 based upon its finding of prevalent deception in the offer and sale of franchises and business opportunity ventures, leading to significant consumer injury. Since 1995, when the Commission commenced a regulatory review of the Original Franchise Rule to ensure that the Original Franchise Rule continued to serve a useful purpose, the Commission has sought comment several times to ascertain the need for a separate trade regulation rule to address widespread fraud in the sale of business opportunities.
104

104

See
60 FR at 17657; 62 FR at 9117; 71 FR at 19084; 73 FR at 16133; 74 FR at 18172; 75 FR at 68559.

Throughout the Rule amendment proceedings, the Commission has described its experience in combating a wide array of business opportunity fraud through law enforcement actions. Indeed, the Commission's law enforcement experience in conducting numerous sweeps of the business opportunity industry demonstrates that deceptive and unfair practices in the sale of business opportunities are not only prevalent but persistent.
105

105
Since 1995, the Commission has conducted more than 18 law enforcement sweeps to combat deceptive business opportunity programs, many

with other law enforcement partners.
E.g.,
Operation Bottom Dollar (2010); Operation Short Change (2009); Project Fal$e Hope$ (2006); Project Biz Opp Flop (2005); Project Busted Opportunity (2002); Project Telesweep (1995); Project Biz-illion$ (1999); Operation Money Pit (1998); Project Vend Up Broke (1998); Project Trade Name Games (1997); and Operation Missed Fortune (1996). In addition to joint law enforcement sweeps, the Commission also targeted specific business opportunity ventures such as envelope stuffing (Operation Pushing the Envelope,
see
FTC News Release: Agencies “Pushing the Envelope” to Protect Consumers (Dec. 16, 2003),
available at http://www.ftc.gov/opa/2003/12/pushenvelope.shtm
); medical billing (Operation Dialing for Deception,
see
FTC News Release: FTC Sweep Protects Consumers from “Dialing for Deception” (Apr. 15, 2002),
available at http://www.ftc.gov/opa/2002/04/dialing.shtm
and Project Housecall,
see
FTC News Release: Bogus Business Opportunity Scams Targeted by FTC (Jan. 28, 1998),
available at http://www.ftc.gov/opa/1998/01/housecal.shtm
); seminars (Operation Showtime,
see
Operation “Show Time” Targets Seminars Selling Fraudulent Business Opportunities and Investments (May 5, 1998),
available at http://www.ftc.gov/opa/1998/05/showtime.shtm
); Internet-related services (Net Opportunities 1998); vending machines (Operation Yankee Trader,
see
FTC News Release: Operation “Yankee Trader” Targets Bogus Vending Machine Business Opportunities (Sept. 11, 1997),
available at http://www.ftc.gov/opa/1997/09/still.shtm
); and 900 numbers (Project Buylines,
see
FTC News Release: Newest Business Opportunity Fraud Is For 900-Number Lines, Warns Federal Trade Commission (March 7, 1996),
available at http://www.ftc.gov/opa/1996/03/buyline.shtm
).

The Commission has amended the interim Rule to address the sale of deceptive work-at-home schemes, where unfair and deceptive practices have been both prevalent and persistent. These schemes prey upon stay-at-home parents, the physically disabled, those who do not speak English, and others who cannot obtain employment outside of the home. Sellers of fraudulent work-at-home opportunities deceive their victims with promises of an ongoing relationship in which the seller will buy the output that business opportunity purchasers produce, often misrepresenting to purchasers that there is a market for the purchasers' goods and services. In addition, the Commission's law enforcement experience demonstrates that fraudulent work-at-home opportunity sellers frequently invent undisclosed conditions and limitations for rejecting the work performed by purchasers and refusing to buy back the goods the purchasers produce. Similarly, these sellers' promises of continuing support and assistance frequently prove empty, leaving work-at-home opportunity purchasers with no help in figuring out how to assemble misshapen components into finished products. Finally, as the Commission's cases and complaint data demonstrate, con artists who promote fraudulent work-at-home schemes frequently dupe consumers with false earnings claims.

Since 1990 the Commission has brought over 75 work-at-home cases.
106

These actions have targeted a variety of schemes, ranging from envelope stuffing and craft assembly programs, to technology-driven opportunities and medical billing plans.
107

106
Many of these cases were brought in connection with law enforcement sweeps of fraudulent work-at-home and related employment opportunities, including Operation Bottom Dollar (2010); Operation Short Change (2009); Project Fal$e Hope$ (2006); Project Biz Opp Flop (2005); Project Homework (2001); Operation Top Ten Dot Con,
see
FTC News Release: Law Enforcers Target “Top 10” Online Scams (Oct. 31, 2000),
available at http://www.ftc.gov/opa/2000/10/topten.shtm;
and Operation Missed Fortune,
see
FTC News Release: FTC, State Enforcers Target Get-Rich-Quick Self-Employment Schemes (Nov. 13, 1996),
available at http://www.ftc.gov/opa/1996/11/misdfort.shtm.

107

See, e.g., FTC
v.
Real Wealth, Inc.,
10-CV-0060-W-FJG (W.D. Mo. 2010) (envelope stuffing);
FTC
v.
Darling Angel Pin Creations, Inc.,
No. 8:10-cv-00335-JSM-TGW (M.D. Fla. 2010) (craft assembly);
FTC
v.
The Results Group L.L.C,
No. CV 06 2843 PHX JAT (D. Ariz. 2006) (work-at-home involving becoming a Web-based affiliate);
FTC
v.
Mazzoni & Son, Inc.,
No.1:06CV2385 (N.D. Ohio 2006) (medical billing).

Data compiled by the Commission demonstrate the prevalence of work-at-home opportunities that do not deliver the represented level of earnings. Indeed, the Commission's 2005 consumer fraud survey revealed that work-at-home plans from which the respondents who had purchased them did not earn at least half the level of promised earnings ranked fifth in terms of the estimated number of victims and third in terms of estimated number of incidents reported during the year.
108

According to the survey, an estimated 2.4 million individuals experienced work-at-home fraud, and there were an estimated 3.8 million incidents during the one year period surveyed.
109

108

See
Consumer Fraud in the United States: The Second FTC Survey (October 2007) at 22,
available at http://www.ftc.gov/opa/2007/10/fraud.pdf
(studying consumer experience with a variety of products and services, including weight-loss products, foreign lotteries, and prize promotions, among others).

109

Id.

Consumer complaints, survey data, and the Commission's law enforcement experience convince the Commission that deception is prevalent in work-at-home offers. The final Rule's disclosure requirements and prohibitions provide potential work-at-home purchasers with the tools they need to protect themselves from false claims.

In addition to work-at-home opportunities, the final Rule also covers the same types of business opportunities that previously were covered under the Original Franchise Rule and the interim Business Opportunity Rule, such as opportunities involving vending machines, rack displays, Internet kiosks, and the like, which, as the Commission's experience demonstrates, have been a persistently fertile ground for fraud and deception.
110

The Commission has conducted numerous law enforcement sweeps that targeted a wide variety of business opportunity scams involving the sale of vending machines, rack displays, and other opportunities covered by the Original Franchise Rule and the interim Business Opportunity Rule.
111

Consumer complaint data indicates that these types of business opportunities continue to be a significant source of consumer injury.
112

110

See id.
at 16 (reporting that an estimated 800,000 individuals were victims of business opportunity fraud during the year surveyed).

111

E.g.,
Project Fal$e Hope$ (2006) (vending machine and rack display opportunities); Project Biz Opp Flop (2005) (vending machine opportunities); Project Busted Opportunity (2002) (vending machine and rack display opportunities); Project Biz-illion$ (1999); Operation Money Pit (1998) (rack display opportunities); Project Vend Up Broke (1998) (vending machine opportunities); Project Trade Name Games (1997) (rack display opportunities); Operation Missed Fortune (1996); Project Telesweep (1995) (vending machine and rack display opportunities);
see also supra
note 55.

112

See
Consumer Sentinel Network Databook (March 2011) at p. 76,
available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf
(reporting that in 2010, over 12,000 complaints were filed against franchises, business opportunities, and work-at-home schemes).

B. Manner and Context in Which the Acts or Practices Are Deceptive or Unfair

The final Rule has been carefully crafted to address common deceptive or unfair practices engaged in by fraudulent business opportunity sellers.
113

By far, the most frequent allegations in the Commission's business opportunity cases pertain to inducing consumers to pay significant amounts of money by means of false or unsubstantiated earnings claims.
114

This is followed by inducement through false testimonials or fictitious references and by misrepresentations concerning: The profitability of locations; the availability of assistance; the nature of the products or services being sold; the prior success of third-party entities in finding successful locations; the full extent of

the investment costs; and refund policies.
115

The numerous business opportunity complaints that consumers submit to the Commission each year consistently reference these same concerns. The disclosure requirements under the final Rule address each of these deceptive or unfair practices.

113
An act or practice is deceptive under Section 5(a) if it involves a material representation or omission that is likely to mislead consumers, acting reasonably under the circumstances, to their detriment.
See
FTC Policy Statement on Deception,
appended to Cliffdale Associates, Inc.,
103 F.T.C. 110, 174 (1984). An act or practice is unfair under Section 5 if: (1) It causes or is likely to cause substantial injury to consumers; (2) the harm to consumers is not outweighed by any countervailing benefits; and (3) the harm is not reasonably avoidable by consumers.
See
FTC Policy Statement on Unfairness,
appended to In re International Harvester,
104 F.T.C. 949, 1062 (1984).
See
15 U.S.C. 45(n).

114

See supra
note 95.

115

See supra
note 96.

1. Earnings Claims

In the Commission's experience, earnings claims are highly material to consumers in making their investment decisions and typically are the single most decisive factor in such decisions. Earnings claims lie at the heart of business opportunity fraud, and are typically the enticement that persuades consumers to invest their money. In the overwhelming majority of the Commission's more than 245 cases against business opportunity sellers, the business opportunity seller has lured unsuspecting consumers through false or deceptive earnings representations. These claims have taken the form of purported historical earnings statistics (
e.g.,
“Our operators have earned $100,000 a year”), as well as wild and unsupported earnings projections (
e.g.,
“You will earn $100,000 in your first year”). Promoters of work-at-home opportunities frequently dupe consumers with false earnings claims. For example, in one recent envelope-stuffing case brought under Section 5 of the FTC Act, the defendants promised purchasers weekly earnings ranging from $1,200 to $4,400.
116

In another case targeting Spanish-speaking consumers, the defendants promised that purchasers could earn $1,400 per week stuffing envelopes from home.
117

Often earnings claims are express, but may be implied. Sellers often convey these false and unsubstantiated earnings claims orally, although it is not unusual for such claims to be in writing. Nor is it unusual for these false earnings claims to contradict inconspicuous disclaimers the seller has hidden in contracts or other printed materials. At any rate, false or unsubstantiated earnings claims are inherently likely to mislead consumers. Certainly, no aspect of the sales transaction is more material than the level of earnings a purchaser can reasonably expect. Moreover, prospective purchasers reasonably interpret earnings claims at face value. Thus, false or unsubstantiated earnings claims are deceptive and unlawful under Section 5 of the FTC Act.
118

116

FTC
v.
Global U.S. Resources,
No. 10-CV-1457 (RNC) (D. Conn. 2010).

117

FTC
v.
Zoilo Cruz,
No. 3:08-cv-01877-JP (D.P.R. 2008).

118

See
FTC Policy Statement on Deception,
appended to Cliffdale Associates, Inc.,
103 F.T.C. 110, 174 (1984).

Under the Original Franchise Rule and the interim Business Opportunity Rule, the Commission sought to ensure the accuracy and reliability of earnings claims, both written and oral, express or implied, by prohibiting sellers from making an earnings claim, unless the seller possessed a reasonable basis for the claim, along with written substantiation for the claim, at the time the claim was made. Sellers were also required to provide prospective purchasers with a separate earnings claims statement that set forth the claim and the substantiation for that claim. The final Rule continues to address false and deceptive earnings claims by requiring business opportunity sellers to disclose whether they make an earnings claim. Sellers who make earnings claims must attach to the required disclosure document an earnings claim statement setting forth the earnings claim, the number and percentage of purchasers who achieved the represented level of earnings, the date range during which the represented earnings were achieved, and other information. These disclosure requirements are designed to help consumers identify and evaluate an earnings claim, if one is made, or to arouse suspicion if an earnings claim is made orally but is disclaimed in writing. The final Rule, in § 437.6(d), also prohibits misrepresenting “the amount of sales, or gross or net income or profits a prospective purchaser may earn, or that prior purchasers have earned.”

2. References

The use of paid references or “shills” is a common practice in the sale of fraudulent business opportunities. In many of the Commission's cases against fraudulent business opportunity sellers, the defendants had offered to provide prospective purchasers with purportedly independent references, who in reality were nothing more than paid shills—individuals who were compensated by the defendants to claim that they were successful operators of defendants' business ventures.
119

The business opportunity sellers, however, had not disclosed to prospective purchasers that the references were paid or otherwise received a benefit for providing a favorable account of the opportunity. The use of fictitious references is an objectionable, but very effective means of misleading consumers about a highly material fact—whether other purchasers have actually achieved earnings as the seller represents, and whether those purchasers' overall experience of operating the business has been positive. When the information a reference provides on these questions is fictitious, a prospective purchaser has no way of knowing the information is false and unreliable. Thus, the use of fictitious references—shills—is a deceptive practice.
120

119

E.g., FTC
v.
Am. Entm't Distribs., Inc.,
No. 04-22431-CIV-Martinez (S.D. Fla. 2004);
U.S.
v.
Vaughn,
No. 01-20077-01-KHV (D. Kan. 2001);
FTC
v.
Hart Mktg. Enter. Ltd., Inc.,
No. 98-222-CIV-T-23 E (M.D. Fla. 1998);
FTC
v.
Inetintl.com,
No. 98-2140 (C.D. Cal. 1998);
FTC
v.
Infinity Multimedia, Inc.,
No. 96-6671-CIV-Gonzalez (S.D. Fla. 1996);
FTC
v.
Allstate Bus. Consultants Group, Inc.,
No. 95-6634-CIV-Ryskamp (S.D. Fla. 1995).

120

See
FTC Policy Statement on Deception,
appended to Cliffdale Associates, Inc.,
103 F.T.C. 110, 174 (1984).

The Original Franchise Rule and the interim Business Opportunity Rule sought to remedy this deceptive practice by requiring business opportunity sellers to provide prospective purchasers with the names and contact information for at least 10 current purchasers of the opportunity. The final Rule continues to remedy this deceptive practice by requiring a business opportunity seller to disclose a list of all prior purchasers of the business opportunity during the previous three years. The disclosure of prior purchasers is instrumental in preventing fraud because it enables prospective purchasers to independently verify the seller's claims. The final Rule also, in § 437.6(q), prohibits misrepresenting that any person has purchased a business opportunity, or that any person can provide an independent assessment of the offering, when such is not the case.

3. Refund Policies

Fraudulent business opportunity sellers often offer prospective purchasers the right to cancel or to seek a whole or partial refund, but when a purchaser seeks to cancel, he finds there are hidden limitations or conditions on the refund policy. More often, the seller simply ignores the purchaser's request. Thus, refund offers are frequently just illusory, and misleading. Cancellation or refund offers are material to prospective purchasers because they purport to reflect the potential risk of the proposed transaction, and may create the impression that the business opportunity offer is either risk free or a low financial risk. Purchasers reasonably interpret a refund policy to be, in fact, as stated. Thus, representing

an illusory refund policy is deceptive under Section 5 of the FTC Act.

Moreover, the failure to honor refund promises is an unfair practice in violation of Section 5(n) of the FTC Act.
121

It often results in substantial injury to business opportunity purchasers that they cannot reasonably avoid.
122

Moreover, the record is devoid of any evidence suggesting that this harm is outweighed by any countervailing benefits.

121
An act or practice is unfair if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. 5(n).

122

See, e.g., In re Orkin Exterminating Co.,
108 F.T.C. 263 (1986), aff'd,
Orkin Exterminating Co.
v.
FTC,
849 F.2d 1354 (11 Cir. 1988).

To remedy this practice, under the Original Franchise Rule and the interim Business Opportunity Rule, it was a violation for a seller to fail to refund a purchaser's funds, in certain instances. The final Rule continues to address this practice. Under § 437.3(a)(4) of the final Rule, a seller is not required to have a refund or cancellation policy. The seller, however, is required to disclose whether it has either a refund or cancellation policy, and if so, the seller must disclose, in an attachment to the disclosure document, the material terms of the policy. Moreover, § 437.6(k) prohibits any misrepresentation of a seller's refund or cancellation policies, and § 437.6(l) prohibits failure to provide a refund or cancellation when the purchaser has satisfied the terms and conditions disclosed.

4. Legal Actions

The Commission's law enforcement experience amply demonstrates that fraudulent business opportunity sellers often operate through multiple related affiliates, or use, sequentially or simultaneously, a variety of corporate identities in order to obscure their negative reputation or to avoid alerting consumers of the potential for fraud. This subterfuge is designed to mislead, and actually does mislead prospective business opportunity purchasers about a crucially material fact: The reliability and trustworthiness of the seller with whom the consumer is transacting. It is not unreasonable for a consumer to believe that a seller is as represented; the consumer is not obliged to suspect an apparently legitimate seller has a history of fraud hidden behind multiple defunct or impossible to trace corporate entities. Thus, it is a deceptive practice and a violation of Section 5 for a seller to obfuscate past activities that would alert a prospective purchaser of a likelihood of fraud.
123

123

See
FTC Policy Statement on Deception,
appended to Cliffdale Associates, Inc.,
103 F.T.C. 110, 174 (1984).

One of the key indicia of a seller's reliability and trustworthiness is whether there have been law enforcement actions or lawsuits for fraud and similar infractions targeting that seller. Accordingly, under the Original Franchise Rule and the interim Business Opportunity Rule, the Commission required sellers to disclose certain legal actions in which they or their principals have been involved. Similarly, the final Rule requires a business opportunity seller to disclose any legal actions that the seller, its affiliates, and certain key personnel have been involved in during the previous ten years involving misrepresentation, fraud, securities law violations, or unfair or deceptive practices, including violations of any FTC Rule. Knowledge of such legal actions against the seller and other key persons associated with the seller is material to a prospective purchaser's decision to go forward with the transaction.

These disclosure requirements are tailored to address common deceptive or unfair practices in the sale of business opportunities, as demonstrated by the Commission's extensive law enforcement experience with business opportunity fraud. In addition to these disclosures, the final Rule requires sellers to disclose certain identifying information about themselves and expressly prohibits a variety of material misrepresentations and omissions that the Commission's experience demonstrates to be most commonly associated with deceptive and unfair practices in the sale of business opportunities.

C. The Economic Effect of the Rule

At every stage of the Rule amendment proceeding, the Commission solicited comment on the economic impact of the Rule, as well as the costs and benefits of each proposed Rule amendment. In issuing the final Rule, the Commission has carefully considered the comments received and the costs and benefits of each amendment. As discussed throughout this SBP, the final Rule's disclosure requirements and specific prohibitions will provide a substantial benefit to consumers weighing the risks of investing their money in specific business opportunity offers. In particular, the mandated disclosures will help consumers evaluate the earnings claims made by a seller, investigate the litigation history of the seller, identify the seller's refund or cancellation policy, and check on the experiences of other purchasers. By providing consumers with access to this information before money changes hands, the final Rule will substantially reduce economic harm caused by misleading sales practices.

The Commission has attempted to reduce sellers' compliance costs wherever possible. In general, compliance with the final Rule's disclosure requirements is significantly less burdensome than with the Original Franchise Rule or the interim Business Opportunity Rule. Most notably, the final Rule streamlines the more than 20 separate categories of disclosures required by the interim Business Opportunity Rule to just five. The final Rule also employs specific prohibitions in place of affirmative disclosures wherever possible in an attempt to further reduce compliance costs.

A variety of other amendments have been made in an attempt to reduce compliance costs for business opportunity sellers. For example, in the RNPR, the Commission eliminated the requirement that sellers disclose the litigation histories of their sales personnel, recognizing that such disclosure would place a burden on business opportunity sellers that would not be outweighed by countervailing benefits to prospective purchasers.
124

The final Rule also does not require sellers with prior legal actions against them to detail the nature of the legal action, but rather, permits sellers to provide a brief 100-word description of the case if they so choose. Also, in an attempt to reduce compliance costs, the final Rule permits sellers to comply with the cancellation or refund disclosure requirement by attaching to the disclosure document a copy of a pre-existing document—such as a company brochure—that details the seller's cancellation or refund policy. The final Rule also provides sellers with a less burdensome means of complying with the reference disclosure requirement: In lieu of a list of the 10 prior purchasers nearest the prospect, a seller may provide a prospect with a national list of all purchasers. For example, a seller making disclosures online could simply maintain an electronic list of purchasers that it updates periodically. This would enable the seller to avoid having to tailor the disclosure to each prospective

purchaser, thereby further reducing compliance costs.

124
73 FR at 16126. The Commission's decision to narrow the Rule so that MLMs would not be burdened with unworkable disclosure requirements was similarly prompted by concern that any potential benefits would be outweighed by compliance costs.
Id.
at 16119-21.

D. The Effect of the Rule on State and Local Laws

Section 437.9(b) of the final Rule provides that the Commission does not intend to preempt state or local business opportunity laws, except to the extent that they conflict with the Rule. A law does not conflict with the Rule if it affords prospective purchasers equal or greater protection, such as a requirement for registration of disclosure documents or more extensive disclosures.

Although state laws offering equal or greater protections are not preempted, § 437.6(c) of the final Rule, which addresses extraneous materials, prohibits sellers from providing disclosures required under state law in the same document with the disclosures required under the final Rule. One of the main goals of revising and tailoring the disclosure requirements for business opportunity sellers is to simplify and streamline the disclosures into a single-page document. The Commission has determined, therefore, that allowing business opportunity sellers to mix federal and state disclosures into one document would be a means for sellers to present lengthy and confusing information to prospective purchasers, and would be contrary to the Commission's goal of requiring sellers to provide a simple, clear, and concise disclosure document.
125

125
73 FR at 16128.

III. Section-by-Section Analysis of Part 437

The final Rule is divided into ten sections. Section 437.1 defines 19 key terms employed in the Rule's text. Section 437.2 establishes the business opportunity seller's obligation to furnish prospective purchasers with material information in the form of a written basic disclosure document. Section 437.3 specifies the content and form of the disclosure document. Section 437.4 sets forth the requirements that business opportunity sellers must follow if they elect to make representations regarding earnings. Section 437.5 addresses sales conducted in Spanish or other languages besides English, and the disclosure requirements for those sales. Section 437.6 prohibits a number of specific deceptive claims and other deceptive practices in connection with business opportunity sales. Section 437.7 sets forth the Rule's recordkeeping provisions. Section 437.8 expressly exempts from the Rule those business arrangements that are covered by the Amended Franchise Rule. Finally, two administrative sections—437.9 and 437.10—address other laws, rules, and orders, and severability. The sections that follow discuss each of these rule provisions in turn.

A. Section 437.1: Definitions

The final Rule begins with a list of defined terms in alphabetical order. In several instances, the final Rule's definitions closely track those contained in the interim Business Opportunity Rule or the Commission's interpretations of the Original Franchise Rule.
126

These include the definitions for the terms “action,” “affiliate,” “disclose or state,” “earnings claim,” “person,” and “written or in writing.” In addition, the final Rule includes definitions for the terms “business opportunity,” “designated person,” “exclusive territory,” “general media,” “new business,” “prior business,” “providing locations, outlets, accounts, or customers,” “purchaser,” “quarterly,” “required payment,” and “seller,” each of which was proposed in the IPBOR and, in certain circumstances, modified in the RPBOR and the proposed Final Rule attached to the Staff Report. Finally, the final Rule includes two new definitions that were recommended in the Staff Report: (1) “Material” and (2) “signature or signed.”
127

Each definition, including the record support for the definition and the Commission's analysis, is addressed below.

126

See
16 CFR 437.1; Final Interpretive Guides (“Interpretive Guides”) accompanying the Original Franchise Rule, 44 FR 49966 (Aug. 24, 1978).

127
At the same time, the final Rule eliminates nine of the interim Business Opportunity Rule's terms and their definitions, which are no longer necessary: “prospective business opportunity purchaser,” “business day,” “time for making of disclosures,” “fractional business opportunity,” “business opportunity broker,” “sale of a business opportunity,” “cooperative association,” “fiscal year,” and “personal meeting.”

1. Section 437.1(a): Action

The term “action” appears in § 437.3(a)(3), which requires business opportunity sellers to disclose material information about the business opportunity seller's litigation history.
128

Specifically, § 437.3(a)(3) of the final Rule requires the disclosure of material information about certain civil or criminal actions within the previous ten years involving the business opportunity seller, its directors, and certain key employees,
129

as well as its affiliates or prior businesses. Information about litigation history based on allegations of misrepresentation, fraud, securities law violations, or unfair or deceptive practices is highly material to assessing investment risk. Discovering that a seller has a history of violating laws and regulations is perhaps the best indication that a particular business opportunity is a high-risk investment.

128
Section 437.3(a)(3) requires disclosure of “any civil or criminal action for misrepresentation, fraud, securities law violations, or unfair or deceptive practices, including violations of any FTC Rule.”

129
The final Rule covers “any sales managers, or any individual who occupies a position or performs a function similar to an officer, director, or sales manager of the seller.”
See
§ 437.3(a)(3)(i)(c).

The definition of “action” is intended to make clear that disclosures involving prior litigation include not only civil actions brought before a court but also matters before arbitrators.
130

It also is intended to make clear that an “action” includes all government actions, including criminal matters and actions brought to enforce FTC Rules, as well as administrative law enforcement actions, such as cease and desist orders or assurances of voluntary compliance.
131

130
71 FR at 19061.

131

Id.

During the Business Opportunity workshop, a panelist representing the DOJ suggested that bankruptcy is another type of legal action that should be disclosed to potential purchasers because a bankruptcy filing could be a red flag warning of potential risk associated with a business opportunity.
132

A panelist from the Maryland Attorney General's Office disagreed, arguing that this additional disclosure would not benefit potential business opportunity purchasers because, in his experience, fraudulent business opportunities do not typically file for bankruptcy protection.
133

Instead, in that panelist's experience, fraudulent business opportunity promoters shutter their premises and reopen as an entirely new fraudulent entity. Another panelist posited that disclosure of the existence of a bankruptcy by the business opportunity or its key personnel was not likely to identify fraudulent or problematic business opportunities that would not already be identified through the existing proposed categories of legal actions.
134

132
Jost, June 09 Tr at 32. A second panelist (Taylor, June 09 Tr at 35), and a commenter (Brooks-Workshop comment) agreed that existence of a bankruptcy might be relevant to a potential purchaser.

133
Cantone, June 09 Tr at 37.

134
MacLeod, June 09 Tr at 33.

The Commission has determined not to include bankruptcy as a type of legal action that a business opportunity seller must disclose. The Commission's law enforcement experience indicates that when targeted by law enforcement,

rather than file for bankruptcy, fraudulent business opportunity sellers tend to vanish and then simply reopen under new company names.
135

Thus, there is little meaningful correlation between filing for bankruptcy and promoting a fraudulent business opportunity. Yet, many legitimate businesses have been forced by circumstances to seek the protection of bankruptcy courts. Therefore, bankruptcy filing would not seem to be a reliable marker for potential fraud, and would not likely help business opportunity purchasers avoid being defrauded. Therefore, the final Rule's definition of action does not contain reference to bankruptcy.
136

135

See, e.g., FTC
v.
Nat'l Vending Consultants, Inc.,
CV-S-05-0160-RCJ-PAL (D. Nev. 2005);
FTC
v.
USA Beverages, Inc.,
CV-05-61682 (S.D. Fla. 2004);
FTC
v.
Allstate Bus. Distribution Ctr., Inc.,
CV-00-10335AHM (C.D. Cal. 2001);
FTC
v.
O'Rourke,
No. 93-6511-Civ-Gonzalez (S.D. Fla. 1993);
FTC
v.
Inv. Dev., Inc.,
1989 U.S. Dist. LEXIS 6502 (E.D. La. June 7, 1989).

136
Similarly, the scope of 437.3(c)(3)(i) has remained unchanged and does not require the disclosure of bankruptcy filings.

Finally, the Staff Report noted that some state administrative proceedings result in parties entering into assurances of voluntary compliance, while other states refer to such orders as assurances of discontinuance. The staff recommended, therefore, adding “assurance of discontinuance” to the categories of legal actions enumerated in the proposed definition. The Commission agrees with the staff's recommendation and the final Rule's definition of “action” now includes that phrase. Accordingly, § 437.1(a) of the final Rule defines “action” as follows: “A criminal information, indictment, or proceeding; a civil complaint, cross claim, counterclaim, or third party complaint in a judicial action or proceeding; arbitration; or any governmental administrative proceeding, including, but not limited to, an action to obtain or issue a cease and desist order, an assurance of voluntary compliance, and an assurance of discontinuance.”

The definition of “action,” as recommended in the Staff Report, received no comment, and the final Rule adopts this definition of “action” as recommended.

2. Section 437.1(b): Affiliate

The term “affiliate” appears in several sections of the final Rule, most notably in § 437.3(a)(3), which requires a business opportunity seller to disclose not only litigation in which the seller was named as a party, but any litigation naming any of the seller's “affiliates” or prior businesses. Section 437.1(b) of the final Rule defines the term “affiliate” to mean: “An entity controlled by, controlling, or under common control with a business opportunity seller.” This definition also covers litigation involving a parent or subsidiary of the business opportunity seller.

The definition of “affiliate,” as proposed in the INPR and RNPR, and recommended in the Staff Report, received no comment, and the final Rule adopts this definition of “affiliate” as recommended.

3. Section 437.1(c): Business Opportunity

The definition of “business opportunity” delineates the scope of the Rule's coverage. Under the final Rule, a “business opportunity” is a commercial arrangement that possesses three required elements. First, a seller must solicit a prospective purchaser to enter into a new business.
137

Second, the prospective purchaser of the business opportunity must make a “required payment.”
138

And third, the seller must represent that the seller or one or more designated persons will provide any of three types of business assistance: (1) Providing locations for the purchaser's use or operation of equipment, displays, vending machines, or similar devices; (2) providing outlets, accounts, or customers to the prospective purchaser; or (3) buying back any or all of the goods or services that the purchaser makes, including providing payment for such services as, for example, stuffing envelopes from the purchaser's home.

137
Section 437.1(j) defines “new business” as “a business in which the prospective purchaser is not currently engaged, or a new line or type of business.”

138

See
§ 437.1(p) (defining “required payment”).

Because this section triggers the strictures and requirements of the Rule, the definition of “business opportunity,” and in particular, its specification of the types of “business assistance” that characterize a covered business, has generated substantial comment throughout this proceeding. After careful consideration of the amassed record, the Commission has crafted the final Rule's business opportunity definition to ensure that it is broad enough to encompass many business opportunities that historically were not covered under the Original Franchise Rule or the interim Business Opportunity Rule, but which have routinely been shown to be associated with unfair or deceptive practices.
139

At the same time, the definition of “business opportunity” has been narrowly tailored to avoid inadvertently sweeping in other business arrangements, such as traditional product distribution. This has been accomplished primarily through narrowing the types of business assistance that will trigger the Rule's coverage from the five categories originally proposed in the IPBOR to the three categories described above.

139
As discussed
supra
in Section I.C, the definition of business opportunity no longer excludes transactions falling below a minimum monetary payment threshold nor does it require that the purchaser of the opportunity sell goods or services directly to end-users other than the business opportunity seller. These changes extend the scope of coverage to many business opportunities that previously escaped coverage.

Consistent with the approach proposed in the RPBOR, the final Rule's definition of business opportunity eliminates two types of business assistance that under the IPBOR would have triggered the Rule's strictures and disclosure obligations: (1) Tracking or paying, or purporting to track or pay, commissions or other compensation; and (2) providing other advice or training assistance. The sections below describe the evolution of the business opportunity definition, including the rationale for eliminating these types of assistance from the definition of business opportunity.

In the IPBOR, the proposed definition of “business opportunity” was designed to be broad enough to cover the sale of virtually any type of business opportunity, including two types in particular that historically had fallen outside the scope of the Original Franchise Rule—work-at-home and pyramid marketing opportunities.
140

As explained more fully in the INPR, the Commission's law enforcement experience and consumer complaints demonstrate that these two types of opportunities are sources of prevalent and persistent problems,
141

which the Commission has traditionally challenged under Section 5 of the FTC Act.
142

140
71 FR at 19059.

141
In 2010, pyramid schemes generated approximately 2,000 consumer complaints, while work-at-home schemes generated over 8,000 complaints.
See
Consumer Sentinel Network Databook (March 2011) at 76, 79,
available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf.

142
Many of these schemes fell outside the ambit of the Original Franchise Rule because: (1) The purchase price was less than $500, the minimum payment necessary to trigger coverage; (2) required payments were primarily for inventory, which did not count toward the $500 monetary threshold; (3) the scheme did not offer location or account assistance; or (4) the scheme involved the sale of products to the business opportunity seller rather than to end-users.
See
71 FR at 19055, 19059.

In order to reach these two types of opportunities, the INPR proposed a broad definition of “business opportunity” comprised of three

elements: (1) A solicitation to enter into a new business; (2) payment of consideration, directly or indirectly through a third party; and (3) the making of either an “earnings claim” or an offer to provide “business assistance.”
143

The IPBOR's definition of “business assistance” included assistance in the form of “tracking or paying, or purporting to track or pay, commissions or other compensation based upon the purchaser's sale of goods

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2011-30597. Public record. Not legal advice.