When buying a franchise, business opportunity or a...
When buying a franchise, business opportunity or a distributorship, purchasers are often told that the seller is not allowed by the "Government" to make an earnings claim, or for the seller to explain how much money the franchise, business opportunity or distributorship might make for the purchaser.
This conduct is flatly false, and in recognition its deception, in its new Business Opportunity Rule, the FTC has specifically identified the practice as deceptive and misleading.
However, in Ontario, purchasers of hotel condos such as the Trump Tower, will be told that the Government prevents the real estate agent from making any representations about the earnings potential of the hotel condo unit as a rental unit.
Is it true? Strangely, it is. The Ontario Securities Commission granted the Trump International Hotel Tower, being built in Toronto, an exemption from sections 25 and 53 of the Ontario Securities Act, on the condition that the hotel condo units not be marketed by real estate agents using rental or cashflow projects.
I believe that the SEC has also taken the same position in the US.
What the FTC was trying to do is to prevent the "back of the napkin" estimates of the franchise's income, and so it required that any and all earning's claims be made in the UFOC, Uniform Franchise Offering Circular, at item 19. The sellers then continued the "back of the napkin" disclosure, by making no item 19 disclosure and then telling the purchaser that "it was illegal" to make a earnings claim. This simply whets the purchaser's interest in the illicit information.
The OSC's position will simply increase the likelihood of false earnings claims being made being made by real estate agents, with the developer being able to hide behind its condominium agreement and disclosure when sued for misrepresentation.
The solution is straightforward: allow commercial condo projects to make earnings claims, if they want. Regulate a miniumum content of earnings claims, and make it deceptive conduct to telll the purchaser that "it is illegal to provide earnings claims for hotel condos".
No doubt we will have to see many ordinary investors lose their homes, declare bankrupcty, and many millions of dollars before the OSC will make this obvious change. In this regard, we will watch the developments at the Hotel condo at 1 King Street West, as reported by Jennifer Wells of the Toronto Star with interest.
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