The Cooling Off Period in the Proposed FTC's Business Opportunity Rule
We have all experienced the giddy rush of adrenaline when buying that must have item, only to have our expectations cruelly dashed several days later when using the damn thing. To forestall overall loss of confidence in the marketplace, consumer laws generally provide a 2 or 3 day cooling off period, a time to reflect away from the marketplace pressures. We need to be protected from our base urges.
In Ontario, there is even a 10 day cooling off period for purchasers of new condominiums, no doubt a testimony to the persuasiveness of real estate sales agents.
The FTC has proposed a cooling off period for the purchase of a business opportunity; seven days before any money is sent to the operator, or operator's affiliates, the purchaser must receive the operator's business opportunity disclosure document. After the seven days are up, the transaction can proceed.
Is seven days enough time for the purchaser to conduct due diligence? What we know is that the purchaser will not review the disclosure document except to find evidence that confirms his or her belief in the efficacy of the system and will downgrade any evidence to the contrary as not being "reliable". Once a person has committed to the purchase, objective information will be systemically treated as confirming the "wisdom" of the purchase. This phenomena is well studied in business takeovers: the winner generally pays too high a price. All that lovely confirming evidence for "synergy" was too attractive to ignore.
What would be a better solution for the FTC to adopt? We have to make a distinction between what is needed for due diligence and the need for a cooling off period. What is needed for the marketplace to perform its magic is public information, at a minimum. The new business opportunity disclosure documents have to be public, much in the same way that the franchise disclosure documents are public at the California Corporations Site. Second, the cooling off period should not prevent a person from engaging in the opportunity, or preventing the transaction from occurring. Rather, the cooling off period should a period in which the purchaser can evaluate if the opportunity is worthwhile on a risk free basis - 90 days with a guaranteed return of 75% of the purchase price and inventory if it is not working out. Finally, require the business opportunity seller to deposit 75% of the distributor fee in a trust account for 90 days, only to be put in the business opportunity seller's general account after the 90 trial period. In consumer world, it is called a charge back.
Technorati Tags: cooling off period, purchaser, business opportunity, real estate sales, due diligence, disclosure document, marketplace, ftc
