FTC Business Opportunity Rule Poses New Challenges For Marketers

The FTC has approved a new Business Opportunity Rule that will be effective March 1, 2012. The Rule is intended to replace the original 1978 Trade Regulation Rule. While there are a number of important components to the new Rule, a key component is to simplify and reduce the number of required disclosures from about 20 items to one single page specific form labeled "Disclosure of important Information about Business Opportunity" While this may at first glance appear to be beneficial to marketers, in fact the new Rule will likely destroy the ability of many marketers to close a sale, especially where telemarketing is involved.

The new Disclosure form must be provided to the prospective customer at least seven days in advance of requesting that the customer sign any contract or agree to pay any money. This seven-day advance requirement may prove to be an insurmountable obstacle for telemarketers.

The Disclosure statement cover's five specific categories of information and must be on a specific form prepared by the FTC:

  1. Seller's identity.
  2. Is an earnings claim being made? The earnings claim can be express or implied. Thus you will earn $x for each widget that you sell is an express claim. Similarly, "I was able to buy a beautiful house, or a new car" would be an implied earnings claim triggering the disclosure. If yes, specific supporting information must be covered including specific level of sales, income and profit that can be reasonably expected. Moreover, if an earnings claim is made, there must be a separate document entitled "Earnings Claim Statement Required By Law" that must be presented. That statement must include the number and percentage of buyers who got the promised result.
  3. Whether the seller or its affiliates or key personnel have been involved in certain legal actions within the past 10 years, and if so a separate list of such items.
  4. Whether the seller has a cancellation or refund policy, and, if yes, the material terms.
  5. A list of, and contact information for, all other persons who have bought this opportunity within the past 3 years (up to maximum of 100,000) in order for the prospective buyer to be able to contact them, and discuss their experiences and what was told to them. This information should include the purchaser's name, state and telephone number, but not the address or city.

The Rule covers a wide variety of business opportunities and applies to commercial arrangements where a seller solicits a prospective buyer to enter into a new business, including a work at home opportunity, where the buyer is to make payment. There is no minimum payment threshold that triggers the rule. It does not apply to MLM programs. It is triggered by 3 elements:

  1. Seller must solicit prospect to enter a business.
  2. A payment must be made or promised. This does not include the purchase of a reasonable amount of inventory at bona fide wholesale prices.
  3. Seller must offer to provide locations, outlets, customers or assistance, or offer to buy back any goods that the prospect makes.

Given the onerous nature of the disclosures, this Rule threatens to severely restrict the ability of marketers of business opportunities to stay in business.

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