FTC Proposed Business Opportunity Rule
The Federal Trade Commission has proposed a new business opportunity rule which would govern income generating opportunities and include direct sales activities, but not franchises. The proposed new rule can be found here. Public comments on the new Business Opportunity Rule are due by June 16th, 2006 and the FTC strongly suggests that you email your comments. The proposed new Rule is in part the result of public hearings held in 1997 concerning modifications of the Franchise Rule. There were two public workshops on business opportunities and transcripts of the those hearings are available here. The FTC states that at the end of their public rule review of the Franchise Rule, the Commission "determined to seek additional comment on whether to address the sale of business opportunities through a separate, narrowly tailored new trade regulation rule."
The are number of interesting facts disclosed by the FTC's Notice of Proposed Rule Making. But first, some background information is important. Traditionally, the FTC used the Franchise Rule not against franchises and since there is no private cause of action, case law on the FTC Rule with respect to the adequacy of franchise disclosure is sparse. (There are a number of states that have a "little FTC" rule which does grant private causes of action.) Since 1990, there have been approximately 140 biz op cases, but no complete data on the exact consumer losses. But the data would suggest it is upwards of $100 million.
To regulate business opportunities, the Franchise Rule was employed a neat trick. Business opportunities generally don't have a trademark to lease, the hallmark of a franchise. So the Franchise Rule was drafted to include the distribution of non trademarked goods, if the seller offered "location advice" to the distributor. This became an alternative definition of "franchise". The Franchise Rule had been used to achieve quick legal success against business opportunities scams or frauds -they typically did not have the resources to satisfy the regulatory requirements of the Franchise Rule, even if they attempted to comply. Compliance with the Franchise Rule was costly and and its high cost served as a barrier to entry for the business opportunity scam and fraud criminals.
The FTC now proposes to lower that cost significantly and regulate business opportunities, direct sellers, multi-level marketing, work at home schemes, and pyramid marketing schemes with a a new disclosure document requiring only 5 affirmative disclosures: whether earnings claims are made, seller's cancellation or refund policies, statistics on cancellation and refund requests, and contact information for prior purchasers as references. The information will not be checked by the FTC nor will the disclosure document be required to be filed with the FTC.
What is wrong with the FTC approach?
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The FTC is trying to regulate fraud or scam by assuming that all the consumers need to avoid fraud is further information. This is just false, when comparing apples and oranges I need information about their nutritional value. But to discover a fraud, I need to be altered to and protected from the compliance tricks - why I am falling for this obvious misrepresentation? The FTC has simply dropped the ball here, despite a wealth of information about what techniques that business opportunities frauds have used in the past.
The two most important changes to the Business Opportunity Rule are: 1) the FTC should review the disclosure documents for their truth, and charge accordingly, 2) the disclosure document should be publicly filed and available over the internet, or any other media, upon request. I would urge any consumer who has been a victim of a business opportunity fraud to contact the FTC and request these two changes.
Technorati Tags: email, franchise rule, ftc, business opportunities, new business, business opportunity, public workshops, public comments, govern, franchises, public rule, federal trade commission, rule review
