[Federal Register Volume 71, Number 70 (Wednesday, April 12, 2006)]
[Proposed Rules]
[Pages 19054-19096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3395]



[[Page 19053]]

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Part IV





Federal Trade Commission





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16 CFR Part 437



Business Opportunity Rule; Notice of Proposed Rulemaking

  Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / 
Proposed Rules  

[[Page 19054]]


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FEDERAL TRADE COMMISSION

16 CFR Part 437


Business Opportunity Rule

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Trade Commission (the ``Commission'' or ``FTC'') 
is commencing a rulemaking to promulgate a trade regulation rule 
entitled ``The Business Opportunity Rule'' (or ``the Rule''), based 
upon the comments received in response to an Advance Notice of Proposed 
Rulemaking (``ANPR'') and other information discussed in this notice. 
The proposed Business Opportunity Rule would prohibit business 
opportunity sellers from failing to furnish prospective purchasers with 
material information needed to combat fraud and would prohibit other 
acts or practices that are unfair or deceptive within the meaning of 
section 5 of the Federal Trade Commission Act (``FTC Act'').

DATES: Written comments must be received on or before June 16, 2006. 
Rebuttal comments must be received on or before July 7, 2006.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Business Opportunity Rule, R511993'' to 
facilitate the organization of comments. A comment filed in paper form 
should include this reference both in the text and on the envelope, and 
should be mailed or delivered, with two complete copies, to the 
following address: Federal Trade Commission/Office of the Secretary, 
Room H-135 (Annex W), 600 Pennsylvania Avenue, NW., Washington, DC 
20580. The FTC is requesting that any comment filed in paper form be 
sent by courier or overnight service, if possible, because U.S. postal 
mail in the Washington area and at the Commission is subject to delay 
due to heightened security precautions. Moreover, because paper mail in 
the Washington area and at the Agency is subject to delay, please 
consider submitting your comments in electronic form, as prescribed 
below. Comments containing confidential material, however, must be 
filed in paper form, must be clearly labeled ``Confidential,'' and must 
comply with Commission Rule 4.9(c).\1\
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    Comments filed in electronic form should be submitted by clicking 
on the following weblink: https://secure.commentworks.com/ftc-bizopNPR/ 
and following the instructions on the web-based form. To ensure that 
the Commission considers an electronic comment, you must file it on the 
web-based form at the https://secure.commentworks.com/ftc-bizopNPR/ 
weblink. If this notice appears at http://www.regulations.gov, you may 
also file an electronic comment through that Web site. The Commission 
will consider all comments that regulations.gov forwards to it. You may 
also visit the FTC Web site at http://www.ftc.gov/opa/2006/04/newbizopprule.htm to read the Notice of Proposed Rulemaking and the 
news release describing this proposed Rule.
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at http://www.ftc.gov/os/publiccomments.htm. As a matter 
of discretion, the FTC makes every effort to remove home contact 
information for individuals from the public comments it receives before 
placing those comments on the FTC Web site. More information, including 
routine uses permitted by the Privacy Act, may be found in the FTC's 
privacy policy, at http://www.ftc.gov/ftc/privacy.htm.
    Comments on any proposed filing, recordkeeping, or disclosure 
requirements that are subject to paperwork burden review under the 
Paperwork Reduction Act should additionally be submitted to: Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Attention: Desk Officer for the Federal Trade Commission. Comments 
should be submitted via facsimile to (202) 395-6974 because U.S. Postal 
Mail is subject to lengthy delays due to heightened security 
precautions.

FOR FURTHER INFORMATION CONTACT: Steven Toporoff (202) 326-3135, or 
Craig Tregillus (202) 326-2970, Division of Marketing Practices, Room 
238, Bureau of Consumer Protection, Federal Trade Commission, 600 
Pennsylvania Avenue, NW., Washington, DC 20580.

SUPPLEMENTARY INFORMATION: The Commission invites interested parties to 
submit data, views, and arguments on the proposed Business Opportunity 
Rule and, specifically, on the questions set forth in Section K of this 
notice. The comment period will remain open until June 16, 2006. To the 
extent practicable, all comments will be available on the public record 
and placed on the Commission's Web site: http://www.ftc.gov/os/publiccomments.htm. After the close of the comment period, the record 
will remain open until July 7, 2006, for rebuttal comments. If 
necessary, the Commission also will hold hearings with cross-
examination and post-hearing rebuttal submissions, as specified in 
section 18(c) of the FTC Act, 15 U.S.C. 57a(c). Parties who request a 
hearing must file a comment in response to this notice and a statement 
explaining why they believe a hearing is warranted, how they would 
participate in a hearing, and a summary of their expected testimony, on 
or before June 16, 2006. Parties testifying at a hearing may be subject 
to cross-examination. For cross-examination or rebuttal to be 
permitted, interested parties must also file a comment and request to 
cross-examine or rebut a witness, designating specific facts in dispute 
and a summary of their expected testimony, on or before July 7, 2006. 
In lieu of a hearing, the Commission will also consider requests to 
hold one or more informal public workshop conferences to discuss the 
issues raised in this notice and comments.

Section A. Background

    The Commission is publishing this Notice of Proposed Rulemaking 
(``NPR'') 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. 16 CFR 
1.7, and 5 U.S.C. 551 et seq. 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).

1. FTC Regulation of Franchising and Business Opportunity Ventures

    In the 1970s, the Commission promulgated a trade regulation rule 
entitled ``Disclosure Requirements and Prohibitions Concerning 
Franchising and Business Opportunity Ventures' (the ``Franchise Rule'') 
to address deceptive and unfair practices in the sale of franchises and 
business

[[Page 19055]]

opportunity ventures.\2\ Based upon the original rulemaking record, the 
Commission found that franchise and business opportunity fraud was 
widespread, causing serious economic harm to consumers. To prevent 
fraudulent practices in the sale of franchises and business 
opportunities, the Commission adopted a pre-sale disclosure rule.
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    \2\ 16 CFR part 436. See also Statement of Basis and Purpose 
(``SBP''), 43 FR 59614 (Dec. 21, 1978).
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    The Franchise Rule does not purport to regulate the substantive 
terms of a franchise or business opportunity contract. Rather, it is 
designed to prevent fraud by prohibiting sellers from failing to 
disclose material information to prospective buyers. The Franchise Rule 
is posited on the notion that a fully informed consumer can determine 
whether a particular offering is in his or her best interest.
    The Franchise Rule requires extensive disclosures, including 
information about the seller; \3\ the business background of its 
principals and their litigation and bankruptcy histories; \4\ the terms 
and conditions of the offer; \5\ statistical analyses of existing 
franchised and company-owned outlets; \6\ prior purchasers, including 
the names and addresses of at least 10 purchasers nearest the 
prospective buyer; \7\ and audited financial statements.\8\ Additional 
disclosure and substantiation provisions apply if the seller chooses to 
make any financial performance representations.\9\
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    \3\ 16 CFR at 436.1(a)(1) and (3).
    \4\ 16 CFR at 436.1(a)(2)-(5).
    \5\ 16 CFR at 436.1(a)(7)-(15) and (17)-(18).
    \6\ 16 CFR at 436.1(a)(16).
    \7\ 16 CFR at 436.1(a)(16).
    \8\ 16 CFR at 436.1(a)(20).
    \9\ 16 CFR at 436.1(b)-(c) and (e).
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    The Commission recognized that requiring these extensive 
disclosures would likely impose significant compliance costs on covered 
businesses. It therefore sought to strike the proper balance between 
prospective purchasers' need for pre-sale disclosure and the burden 
imposed on those selling business arrangements. As a result of this 
balancing, the Commission limited the scope of the Franchise Rule's 
coverage in three significant ways.
    First, the Franchise Rule covers only those opportunities that 
require a buyer to make a payment of at least $500 within the first six 
months of operation.\10\ In transactions where a prospective purchaser 
may incur high financial losses if the seller withholds material 
information, the benefit for purchasers of the Rule's pre-sale 
disclosure requirements outweighs the cost to sellers of making those 
disclosures. By contrast, when the required investment 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 Franchise Rule does not reach opportunities that charge 
lower fees.\11\
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    \10\ 16 CFR at 436.2(a)(2) and (a)(3)(iii). In the SBP, the 
Commission noted that ``[w]here a franchisee makes no significant 
investment in the franchise business, he assumes only a limited 
risk, and the protection of the rule is inappropriate.'' 43 FR at 
59704. See also Final Interpretive Guides (``Interpretive Guides'') 
accompanying the Franchise Rule: ``The Commission's policy 
determination [is that] a significant financial investment is a 
necessary element of a franchise.'' Interpretive Guides, 44 FR 
49966, 49968 (August 24, 1978).
    \11\ Nevertheless, deceptive and unfair conduct by a business 
opportunity seller falling below the Franchise Rule's $500 threshold 
may constitute a violation of section 5 of the FTC Act. E.g., FTC v. 
Med. Billers Network, Inc., No. 05 CIV 2014 (RJH) (S.D.N.Y. 2005) 
($200-295 fee); FTC v. Kamaco Int'l, No. CV 02-04566 LGB (RNBx) 
(C.D. Cal. 2002) ($42 fee); FTC v. Healthcare Claims Network, 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. 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).
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    Second, the ``inventory exemption'' excludes certain types of 
payments from the 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.\12\ An important consequence of this policy determination is 
to eliminate from Franchise Rule coverage many pyramid marketing plans 
because the participants in 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.\13\
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    \12\ Interpretive Guides, 44 FR at 49967.
    \13\ E.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL (AJWx) 
(C.D. Cal. 2002); FTC v. Equinox, Int'l, No. CV-S-99-0969-JBR-RLJ 
(D. Nev. 1999).
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    Third, the Commission focused the Franchise Rule on the types of 
business opportunities that the record showed were likely to result in 
significant purchaser injury. The record showed that vending machines, 
rack displays, and similar opportunities frequently were sold through 
deception. A feature common to these types of schemes is the promise of 
assistance in securing locations or accounts.\14\ Thus, the Commission 
incorporated this characteristic into the Rule's definitional elements 
to ensure coverage of demonstrably injurious schemes. Other forms of 
assistance that business opportunity sellers frequently offer--such as 
training \15\ and the buy-back and resale of goods assembled by the 
purchaser (an element of many craft assembly opportunities) \16\--do 
not bring a business opportunity within the scope of the Franchise 
Rule's coverage.
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    \14\ 16 CFR at 436.2(a)(1)(ii)(B)(1)-(3).
    \15\ E.g., FTC v. Academic Guidance Serv., Inc., No. 92-3001 
(AET) (D. N.J. 1992).
    \16\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. USS Elder Enter. Inc., No. SACV-04-1039 AHS (ANx) 
(C.D. Cal. 2004); FTC v. Holiday Magic, No. C 93-4038 VRW (N.D. Cal. 
1994).
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    In addition to these limits on the scope of the 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 Rule's language further limits the Rule's scope 
of coverage. Specifically, the Rule provides that a business 
opportunity is covered only if the purchaser of the opportunity sells 
goods or services directly to end-users other than the business 
opportunity seller.\17\ The effect of this limitation is to exclude 
most work-at-home opportunities--such as envelope stuffing and craft 
assembly ventures--from Franchise Rule coverage. In those 
opportunities, the purchaser typically works directly for the seller or 
produces various goods for the seller, who then purportedly distributes 
them to end-users.\18\
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    \17\ 16 CFR at 436.2(a)(1)(ii)(A)(1)-(3).
    \18\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. Sun Ray Trading, Inc., No. 05-20402 CIV-Seitz/Bandstra 
(S.D. Fla. 2005).
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    The proposed Business Opportunity Rule calls for streamlined 
disclosures that, compared to the Franchise Rule, substantially reduce 
the compliance burden. Therefore, the kinds of limits written into the 
Franchise Rule are not necessary to achieve an appropriate balance 
between prospective purchasers' need for pre-sale disclosure and the 
burden imposed on business opportunity sellers. Accordingly, the 
proposed Rule has no minimum cost threshold, no inventory exemption, 
and no limit on scope based on the type of assistance promised as part 
of the offer. Nor is the coverage of the proposed Rule limited to 
transactions where the purchaser of the opportunity sells goods or 
services directly to end-users other than the business opportunity 
seller. In short, the scope of coverage of the proposed Rule is much 
broader than

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that of the Franchise Rule, while the compliance burden is much 
lighter.

2. Franchise Rule Review

    In 1995, the Commission conducted a regulatory review of the 
Franchise Rule to ensure that it continues to serve a useful 
purpose.\19\ One issue that the Commission explored in that proceeding 
was the application of the Franchise Rule to the sale of business 
opportunities. Specifically, the Commission noted that although the 
Franchise Rule applied to certain business opportunities, it lacked a 
clear definition of the term ``business opportunity.'' Accordingly, the 
Commission solicited comment on an appropriate definition.\20\ In 
addition, the Commission asked whether such a definition should include 
business opportunities not covered by the Franchise Rule, such as 
``multilevel marketing, seller assisted market plans, work-at-home 
plans, and certain distributorships and licenses.'' \21\
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    \19\ Rule Review, 60 FR 17656 (April 7, 1995). References to the 
Rule Review comments are cited as: The name of the commenter, RR 
comment number (e.g., NASAA, RR 43). References to the Rule Review 
workshop conferences are cited as: Name of commenter, Sept95 Tr or 
March96 Tr, respectively (e.g., D'Imperio, Sept95 Tr, and Ainsely, 
March96 Tr). A list of the Rule Review commenters and the 
abbreviations used to identify each is attached as Attachment A.
    \20\ Rule Review, 60 FR at 17656-658 (Question 13).
    \21\ Rule Review, 60 FR at 17658 (Question 13b).
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    The Commission also inquired whether the Franchise Rule's extensive 
disclosure requirements are well-suited to business opportunity sales 
and whether the Franchise Rule imposes unnecessary compliance costs on 
both business opportunity sellers and buyers. For example, certain 
Franchise Rule disclosures--such as site selection and approval and 
public figure involvement--arguably are more likely to be important to 
franchise investors than business opportunity purchasers. To ensure 
that the required disclosures protect prospective business opportunity 
purchasers, while minimizing overall compliance costs, the Commission 
solicited comment on whether any of the Rule's disclosures should be 
eliminated because they are unnecessary in the business opportunity 
context and if any additional material disclosures should be 
required.\22\
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    \22\ Rule Review, 60 FR at 17658 (Question 14).
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    At the conclusion of the Rule Review, the Commission determined to 
retain the Franchise Rule with modifications designed to harmonize it 
better with state franchise regulations. At the same time, 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. To that end, it published an 
Advance Notice of Proposed Rulemaking, as described in the next 
section.
3. Advance Notice of Proposed Rulemaking
    In 1997, the Commission published an Advance Notice of Proposed 
Rulemaking (``ANPR'') in the Federal Register,\23\ seeking further 
comment on several proposed Franchise Rule modifications, including the 
separation of disclosure requirements for sales of business 
opportunities from those for sales of franchises. The Commission also 
sought comment on the proper scope of the term ``business 
opportunity,'' \24\ the types of business opportunities that are known 
to engage in deceptive or fraudulent conduct,\25\ and the types of 
disclosures that are material to business opportunity purchasers.\26\ 
In addition to soliciting written comments, the Commission staff held 
three public workshops specifically addressing business opportunity 
sales issues. These were held in Chicago, Dallas, and Washington, DC. 
The workshop participants included: Business opportunity promoters; the 
Direct Sellers Association (``DSA''); several of DSA's multilevel 
marketer members (e.g., Amway, Longaberger Company, Pampered Chef); 
several attorneys who represent business opportunity promoters; state 
regulators; and several franchise and distribution law attorneys.
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    \23\ ANPR, 62 FR 9115 (Feb. 28, 1997). References to the ANPR 
comments are cited as: The name of the commenter, ANPR, comment 
number (e.g., NASAA, ANPR 120). References to the ANPR workshop 
conferences are cited as: Name of commenter, ANPR, date Tr (e.g., 
Bundy, ANPR, 6Nov97 Tr). A list of the ANPR commenters and the 
abbreviations used to identify each is attached as Attachment B.
    \24\ ANPR, 62 FR at 9116-117 and 9121 (Question 12).
    \25\ ANPR, 62 FR at 9121 (Questions 8-10).
    \26\ ANPR, 62 FR at 9121 (Questions 15-16).
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4. Franchise Rule Notice of Proposed Rulemaking

    After assessing the comments received in response to the ANPR, the 
Commission decided to amend the Franchise Rule and, to that end, 
published a Franchise Rule Notice of Proposed Rulemaking (``Franchise 
Rule NPR''), soliciting comment on proposed revisions to the Franchise 
Rule.\27\ At the same time, the Commission announced its intention to 
conduct a separate rulemaking to address business opportunity 
sales.\28\ Agreeing with the overwhelming view of the commenters who 
discussed this issue during the Rule Review and in response to the 
ANPR, the Commission found that franchises and business opportunities 
are distinct business arrangements that require separate disclosure 
approaches. Without proposing any specific Business Opportunity Rule 
provisions at that time, the Commission noted that:
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    \27\ Franchise Rule NPR, 64 FR 57294 (October 22, 1999). 
References to the comments responding to the Franchise Rule NPR are 
cited as: Name of commenter, FR-NPR, commenter number (e.g., IFA, 
FR-NPR 22). A list of the FR-NPR commenters and the abbreviations 
used to identify each is attached as Attachment C.
    \28\ Franchise Rule NPR, 64 FR at 57296.

[M]any of the [Franchise] Rule's pre-sale disclosures, in particular 
those pertaining to the parties' detailed relationship, do not apply 
to the sale of most business opportunities, which typically involve 
fairly simple contracts or purchase agreements. The Rule's detailed 
disclosure obligations may also create barriers to entry for 
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legitimate business opportunity sellers.

Franchise Rule NPR, 64 FR at 57296.

Section B. Need for a Separate Business Opportunity Rule

    Based upon its enforcement experience and the record developed to 
date, the Commission has determined to promulgate a separate trade 
regulation rule to address widespread fraud in the sale of business 
opportunities. This approach is consistent with the view of the vast 
majority of commenters and the regulatory approaches adopted in most 
states.
    Rule Review and ANPR commenters and participants overwhelmingly 
urged the Commission to promulgate a separate business opportunity 
rule.\29\ As an initial matter, several commenters observed that 
business opportunities and franchises are distinct business 
arrangements that pose very different regulatory challenges. For 
example,

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franchises typically are expensive and involve complex contractual 
licensing relationships, while business opportunity sales are often 
less costly, involving simple purchase agreements that pose less of a 
financial risk for purchasers.\30\ Also, in contrast to franchises, 
many business opportunity programs have no continuing relationship 
between the buyer and seller, but are a one time purchase of packaged 
information.\31\
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    \29\ E.g., Muncie, ANPR 15, at 2; Baer, ANPR 25; H&H, ANPR 28, 
at 6; Kaufmann, ANPR 33, at 6; DSA, ANPR 34, at 1; IL AG, ANPR 77, 
at 3; IFA, ANPR 82, at 2; Caffey, ANPR 94, at 1-2; Jeffers, ANPR 
116, at 2; NASAA, ANPR 120, at 4; Selden, ANPR 133, at 2; Cendant, 
ANPR 140; Wieczorek, RR 23, at 2-3; CA BLS, RR 45, at 5-6; Forte 
Hotels, RR 52, at 2. See also Harrington, Sept95 Tr at 285 (noting 
complete consensus among public workshop participants for a separate 
business opportunity rule). But see NCL, ANPR 35 (``While there may 
be clear distinctions with those involved in the trade for 
franchises and business opportunities, the consumers who contact the 
NFIC are unaware of the differences. Moreover, a review of the NFIC 
complaints received in 1996 reveals that more involve business 
opportunities than franchises. This indicates that the same pre-sale 
disclosures are needed for business opportunities as for 
franchises.''); Cory, ANPR 12; McBirney, RR 7, at 2; Perry RR 44, at 
3 (arguing that the Commission should create a level playing field 
between all income generating opportunities, subjecting each to the 
same disclosure approach).
    \30\ E.g., IFA, FR-NPR 22, at 4; NASAA, ANPR 120, at 2-3; DSA, 
RR 21, at 3-4; Wieczorek, RR 23, at 2-3; D'Imperio, Sept95 Tr at 
130; Kezios, Sept95 Tr at 365, 631.
    \31\ Caffey, ANPR 94, at 2.
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    Further, unlike most franchises, many business opportunities are 
permeated with fraud.\32\ Perhaps one business opportunity and 
franchise consultant said it best when she described many business 
opportunity sellers as:
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    \32\ E.g., Baer, ANPR 25, at 5; Wieczorek, 21Aug97 Tr at 35; 
DSA, id.; Finnigan, id. at 90; Kestenbaum, RR 14, at 3-4; Wieczorek, 
RR 23, at 2-3; Lewis, RR 40, Attachment at 3; CA BLS, RR 45, at 5-6; 
D'Imperio, Sept95 Tr at 130; Kezios, id. at 365, 631.

Individuals who go from one business opportunity to the next, 
violating laws, committing frauds, taking funds without delivering 
what was promised only to shut down the operation within a year and 
move on to another one with new officers, new company names, and new 
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products.

Chistopher, ANPR 115, at 1.\33\
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    \33\ At the Washington, DC public workshop conference, a 
business opportunity seller described an informal survey of business 
opportunity advertisements in the Boston Globe. He stated that in 
February 1997, he observed advertisements for 23 business 
opportunity ventures. When he attempted to call the advertised 
numbers the following August, he found ``20 of them were 
disconnected, meaning they shut down, left one to a thousand people 
with no customer support, no parts for machines, no parts 
whatsoever.'' M. Garceau, 20Nov97 Tr at 28-29.
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    Other commenters observed that business opportunity sellers take 
advantage of the Franchise Rule's narrow focus to avoid disclosure 
obligations.\34\ Other commenters asserted that business opportunity 
sellers do not comply with the Franchise Rule because compliance costs 
are too high.\35\ For example, attorney Kat Tidd explained:
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    \34\ Kestenbaum, RR 14, at 3-4 (``Too many companies are trying 
to avoid the disclosure requirements of the Rule by sidestepping the 
franchise definition and taking a position that what they do is not 
defined under the FTC Rule.''). See also Caffey, 20Nov97 Tr at 24 
(``I think one of the drawbacks of the existing Rule is it is very 
narrowly defined. Under the existing Rule * * * if the seller is not 
locating vending machines or providing assistance for locations, the 
seller is virtually not covered by the Rule.''); Lewis, Sept95 Tr at 
283 (observing that the narrow definition of business opportunity 
enables business opportunity sellers to conclude that they ``are not 
part of it; it's very easy to say I'm not a franchise and I'm not a 
bis op [sic].'').
    \35\ CA BLS suggested that business opportunity sellers will go 
so far as to change their program to avoid falling within the 
Franchise Rule's definition of a business opportunity, resulting in 
reduced protection for prospective purchasers:
    [I]f the only reason that a seller's program is falling within 
the definition of the Rule is that it provides personnel who assist 
the purchaser in securing sites, it may withdraw this service. In 
some instances, companies have eliminated independent owner programs 
altogether rather than attempting to comply with the Rule and the 
``patchwork quilt'' of multiple and diverse state regulations.
    CA BLS, RR 45, at 6-7. See also Muncie, ANPR 15, at 2 
(suggesting that Franchise Rule coverage of business opportunities 
``only serve[s] to drive legitimate companies out of the 
marketplace, thereby harming consumers.'').

From my experience as a franchise attorney of more than 15 years, 
many entrepreneurs will choose to risk not complying with the Rule 
because the cost of compliance is too high relative to the size of 
the company, the size of the investment to be made and/or the number 
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of, or profits to be derived from, the sale of opportunities.

Tidd, ANPR 112, at 1.\36\
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    \36\ See also, e.g., Caffey, ANPR 94, at 2; Christopher, ANPR 
115, at 1; CA BLS, RR 45, at 5-6; Huke, Sept95 Tr at 239-40.
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    The Commission is concerned that the current application of the 
Franchise Rule to the sale of business opportunities does not work 
well. Accordingly, the Commission is proposing a separate business 
opportunity rule, narrowly tailored to minimize compliance costs.\37\ 
For the present, those business opportunity sellers covered by the 
original Franchise Rule will remain covered by that rule.\38\
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    \37\ In this regard, one fairly typical comment urged that the 
Commission:
    Tailor the scope of disclosure content, creating a disclosure 
statement designed for compliance by a business opportunity seller. 
A number of sections of the FTC Rule disclosure have little 
relevance to a typical business opportunity sale. These include the 
business experience of executives of the seller, personal 
participation of the buyer in the operation of the business, 
termination/renewal information, statistical information, site 
selection, public figure involvement, financial information of the 
seller, the contract.
    Caffey, ANPR 94, at 1-2. See also Muncie, ANPR 15, at 3; Baer, 
ANPR 25, at 5; Tifford, ANPR 78, at 4-5; D'Amico, Sept95 Tr at 151, 
154; Huke, id. at 240; Simon, id. at 281; Lewis, id. at 284. A few 
commenters, however, suggested that disclosures for business 
opportunity sales should be ``stronger'' than those for franchise 
sales. E.g., Cory, ANPR 12; D'Imperio, Sept95 Tr at 132; Perry, id. 
at 258-59.
    \38\ In the event that a revised Franchise Rule is promulgated 
before a new Business Opportunity Rule, business opportunities 
presently covered by the original Franchise Rule could remain 
covered by that rule pending completion of this rulemaking. For 
example, the Commission could finalize a revised Franchise Rule (16 
CFR part 436), and simultaneously publish a modified version of the 
original Franchise Rule that would be named the ``Business 
Opportunity Rule'' (16 CFR part 437). This rule might differ from 
the original Franchise Rule in two respects. First, references to 
``franchisor'' and ``franchisee'' in the original Franchise Rule 
would be changed to ``business opportunity seller'' and ``business 
opportunity purchaser,'' respectively. Second, the term 
``franchise'' would be deleted from the original Franchise Rule's 
definitions and would be replaced with ``business opportunity.'' 
Further, the first part of the original definition--the 
``franchise'' elements--would be deleted; the revised definition 
would focus on the second part of the original definition--the 
business opportunity elements. Except for these changes, all 
disclosures and prohibitions in part 437 would be identical to those 
of the original Franchise Rule.
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Section C. Overview of the Proposed Rule

    In drafting a Business Opportunity Rule, the Commission relies 
heavily on its law enforcement experience in addressing a wide array of 
business opportunity fraud under both the Franchise Rule and section 5 
of the FTC Act. The Commission also relies on the staff's analysis of 
consumer complaints submitted to the FTC.\39\ By far, the most frequent 
allegations in Commission business opportunity cases pertain to false 
or unsubstantiated earnings claims.\40\ This is followed by 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.\41\ 
These alleged material misrepresentations or omissions also were most 
frequently mentioned in complaints to the Commission submitted by 
business opportunity purchasers.\42\
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    \39\ See Bureau of Consumer Protection Staff, Franchise and 
Business Opportunity Program Review 1993-2000: A Review of Complaint 
Data, Law Enforcement, and Consumer Education (June 2001) (``Staff 
Program Review'') (available at  http://www.ftc.gov/reports/franchise93-01.pdf). See also Tifford, ANPR 78, at 4-5 (``[T]he FTC 
should draw upon its own experience with business opportunity 
enforcement in fashioning a definition that would encompass the 
business opportunity arrangements which have been the source of most 
of the consumer injury, as well as focusing on the types of 
disclosures that are best suited for business opportunity 
purchasers.'').
    \40\ Staff Program Review, supra note 39, Table I.1; I.2. (127 
Franchise Rule allegations; 94 Section 5 allegations pertaining to 
earnings claims issues in FTC enforcement actions). See also NCL, 
ANPR 35, at 2.
    \41\ Staff Program Review, supra note 39, Table I.2.
    \42\ Id., Appendix 5 (listing earnings claims; lack of promised 
support, locations, or training; exclusive territory and cost 
misrepresentations; and refund issues among most prevalent business 
opportunity complaints).
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    The proposed Rule would address these practices by requiring five 
affirmative disclosures.\43\ The first

[[Page 19058]]

affirmative disclosure would require a business opportunity seller to 
state whether the seller chooses to make earnings claims. If the seller 
does, then the proposed Rule would require substantiation and 
additional disclosures. The other four affirmative disclosures pertain 
to certain prior litigation; the seller's cancellation or refund 
policies; statistics on cancellation and refund requests; and contact 
information for prior purchasers as references.
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    \43\ Consistent with the Franchise Rule, the Commission does not 
express any opinion about the legality of any practices that might 
be disclosed under the proposed Rule. See 16 CFR part 436, note 1. 
In the Franchise Rule SBP, the Commission recognized that the 
Franchise Rule may require franchisors to disclose practices that 
may raise antitrust issues. SBP, 43 FR at 59719. While antitrust 
issues are probably less of a concern in the narrowly tailored 
Business Opportunity Rule context, the Commission nevertheless 
reserves the right to pursue violations of antitrust laws even if a 
business opportunity seller discloses a violation in complying with 
the proposed Rule's disclosure requirements. In short, disclosure 
does not create a safe harbor for engaging in otherwise unlawful 
conduct.
    Further, a business opportunity seller may have an obligation 
under section 5 of the FTC Act to impart material information to 
prospective purchasers beyond the disclosures required by this 
proposed Rule. This clarification is critical, especially in an age 
of quickly developing changes in the marketplace. The Commission 
cannot now predict what types of business opportunities will be 
offered in the future, nor the information a business opportunity 
purchaser will find material. This does not mean that a seller must 
include additional information in its disclosure document. As noted 
below, proposed section 437.5(c) prohibits the inclusion of 
additional information in a disclosure document. Rather, when a 
seller must impart material information beyond that required by the 
Rule, it must provide the information separately from its disclosure 
document. The Commission does not purport to specify how such 
information must be disseminated, permitting sellers the flexibility 
to decide which method is best for their particular business.
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    In addition to these disclosure requirements, the proposed Rule 
would prohibit common deceptive business opportunity sales practices. 
Among other things, business opportunity sellers would be prohibited 
from misrepresenting: (1) Earnings; (2) costs or the 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) 
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) a 
business opportunity as an offer of employment; (8) territorial 
exclusivity or more limited territorial protections; (9) endorsements; 
and (10) shills as references. Finally, the proposed Rule would 
prohibit business opportunity sellers from failing to make promised 
refunds, as well as assigning ``to any purchaser a purported exclusive 
territory that, in fact, encompasses the same or overlapping areas 
already assigned to another purchaser.''

Section D. Scope of the Proposed Rule

1. Business Opportunities Covered by the Franchise Rule

    The proposed Rule would continue to cover those business 
opportunities that are presently covered by the original Franchise 
Rule. The Commission's law enforcement experience demonstrates that 
sales of these opportunities are fraught with unfair and deceptive 
practices, in particular the making of false or unsubstantiated 
earnings claims.
    Indeed, such practices are widespread. Since 1990 alone, the 
Commission has brought more than 140 Franchise Rule cases against 
vending machine, rack display, and similar opportunities. Since 1995, 
the Commission has conducted more than 11 business opportunity 
sweeps,\44\ many with other federal and state law enforcement partners, 
to combat persistent business opportunity scams violating the Franchise 
Rule, such as those involving the sale of vending machines,\45\ rack 
displays,\46\ public telephones,\47\ Internet kiosks,\48\ and 900-
number ventures,\49\ among others.
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    \44\ E.g., Project Telesweep (1995); Operation Missed Fortune 
(1996); Project Trade Name Games (1997); Project Vend Up Broke 
(1998); Project Bizillion$ (1999); Project Busted Opportunity 
(2002); and Project Biz Opp Flop (2005). In addition to joint law 
enforcement sweeps, Commission staff has also targeted specific 
business opportunity ventures such as 900 numbers (Project Buylines 
1996); vending (Project Yankee Trader 1997); seminars (Operation 
Showtime 1998); medical billing (Project House Call 1998); and 
Internet-related services (Net Opportunities 1998).
    \45\ See, e.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-
CIV-Huck (2004); FTC v. Pathway Merch., Inc., No. 01-CIV-8987 
(S.D.N.Y. 2001); U.S. 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.htm) (FTC and 10 states 
announce 40 enforcement actions against fraudulent vending business 
opportunities).
    \46\ See, e.g., U.S. v. Elite Designs, Inc., No. CA 05 058 
(D.R.I. 2005); U.S. 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 file 18 enforcement actions 
against sellers of bogus display opportunities that use trademarks 
of well-known companies).
    \47\ 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).
    \48\ See, e.g., FTC v. Bikini Vending Corp., No. CV-S-05-0439-
LDG-RJJ (D. Nev. 2005); FTC v. Network Service Depot, Inc., No. CV-
S0-05-0440-LDG-LRL (D. Nev. 2005); U.S. 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).
    \49\ See, e.g., FTC v. Bureau 2000 Int'l, Inc., No. 96-1473-DT-
(JR) (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).
---------------------------------------------------------------------------

    Further, business opportunity ventures covered by the Franchise 
Rule continue to stand out as a major source of consumer 
complaints.\50\ In fact, business opportunities covered by the 
Franchise Rule consistently rank among the top 10 categories of 
consumer fraud complaints reported to the Commission.\51\
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    \50\ See FTC, The FTC in 2005: Standing Up For Consumers and 
Competition (2005) (available at http://www.ftc.gov/os/2005/04/0504abareportfinal.pdf), at 18 (announcing 14 criminal indictments 
in connection with business opportunity fraud); FTC Staff Report, 
Consumer Fraud in the United States: An FTC Survey (Aug. 2004) 
(``Fraud Survey'') (available at http://www.ftc.gov/reports/consumerfraud/040805confraudrpt.pdf) at 48 (showing 450,000 victims 
of business opportunity fraud).
    \51\ See, e.g., 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) (defendants in FTC 
cases alone caused tens of thousands of consumers to lose a total of 
more than $100 million); FTC News Release: Law Enforcers Target 
``Top 10'' Online Scams; Consumer Protection Cops From 9 Countries, 
5 U.S. Agencies, and 23 States Tackle Internet Fraud (Oct. 31, 2000) 
(available at http://www.ftc.gov/opa/2000/10/topten.htm) (listing 
business opportunities and work-at-home schemes among the top 10 
Internet frauds). See also Prepared Statement of Federal Trade 
Commission on ``Internet Fraud'' before the House Subcomm. on 
Commerce, Trade, and Consumer Protection of the Comm. on Energy and 
Commerce (May 23, 2001) (available at http://www.ftc.gov/opa/2001/05/iftestimony.htm) (listing pyramids, business opportunities, and 
work-at-home schemes among the top Internet frauds); Prepared 
Statement of the Federal Trade Commission on ``Internet Fraud'' 
before the Senate Comm. on Finance (April 5, 2001) (available at 
http://www.ftc.gov/os/2001/04/internetfraudstate.htm) (listing 
pyramid, business opportunities, and work-at-home schemes among the 
top 10 Internet frauds based on Consumer Sentinel Database).
---------------------------------------------------------------------------

    Moreover, such scams typically cost consumers thousands of 
dollars.\52\

[[Page 19059]]

While precise figures of consumer injury from fraudulent business 
opportunity ventures is unknown, the Commission's law enforcement 
experience reveals that it is not uncommon for purchasers of fraudulent 
business opportunities to lose thousands of dollars each.\53\ For these 
reasons, the Commission has determined that sales of vending machines, 
rack displays, and similar opportunities should be covered by the 
Business Opportunity Rule, now that the Franchise Rule is being amended 
to focus exclusively on the sale of franchises.

2. Business Opportunities Not Presently Covered by the Franchise Rule

    The proposed Business Opportunity Rule would also address the sale 
of other business arrangements that are currently outside the scope of 
the Franchise Rule, but have been shown by the Commission's law 
enforcement experience and complaint data to be sources of prevalent 
and persistent problems. Two important types of fraudulent or deceptive 
opportunities that would fall within the proposed Rule's coverage are 
work-at-home schemes and pyramid marketing schemes.\54\
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    \52\ E.g., FTC v. World Traders Ass'n, Inc., No. CV05 0591 AHM 
(CTx) (C.D. Cal. 2005) (estimated $30 million in consumer injury); 
FTC v. Am. Entm't Distribs., No. 04-22431-CIV-Huck (S.D. Fla. 2004) 
(estimated $20 million in consumer injury). See also United States 
Postal Inspection Service, News Release: U.S. Postal Inspectors, 
Federal Trade Commission, Department of Justice dismantle business-
opportunity scams (``Postal Inspectors have arrested 28 individuals 
* * * who victimized more than 140,000 consumers with estimated 
losses exceeding $73 million.'').
    \53\ E.g., FTC v. Am. Entm't Distribs., No. 04-22431-CIV-Huck 
(S.D. Fla. 2004) ($28,000-$37,500 for one machine); FTC v. Accent 
Mktg., Inc., No. 02-0405-CB-M (S.D. Ala. 2002) ($8,000 initial 
payment). One measure of injury attributed to business opportunity 
fraud can be gleaned from the 2001 Staff Program Review. In its 
review of 2,665 business opportunity complaints from 1997 through 
the first half of 1999, over 70% of complainants reported losses of 
at least $1,000, with over 48% reporting losses of over $5,000. 
Approximately 24% reported losses over $10,000. Staff Program 
Review, supra note 39, at 36.
    \54\ In response to the ANPR, state regulators argued for a 
broad rule covering a wide array of opportunities. For example, in 
its ANPR Comment, NASAA recommended that the disclosure requirements 
for business opportunity ventures include business opportunity 
formats such as multilevel marketing plans, seller-assisted 
marketing plans, work-at-home plans and certain distributorships and 
licensing plans not currently covered under the Franchise Rule. 
NASAA, ANPR 120, at 5. See also James, ANPR 76; WA Securities, ANPR 
117, at 2; Maxey, Sept95 Tr at 38.
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a. Work-at-Home Schemes
    Deceptive work-at-home schemes are a persistent type of fraud, 
preying upon stay-at-home parents, the physically disabled, non-English 
speakers, and others who cannot obtain employment outside of the 
home.\55\ For the most part, they are not distinguishable in any 
material respect from business opportunities covered by the existing 
Franchise Rule.\56\
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    \55\ See, e.g., FTC v. USS A Enter., Inc., No. SA CV-04-1039 AHS 
(ANx) (C.D. Cal. 2004) (craft assembly opportunity aimed at Spanish 
speakers); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex. 
2004) (product assembly opportunity aimed at Spanish speakers); FTC 
v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. Tex. 2003) (envelope-
stuffing opportunity targeting unemployed, disabled, and elderly 
hoping to work from home); FTC v. Medicor LLC, No. CV01-1896 (CBM) 
(C.D. Cal. 2001) (work-at-home scams victimizing stay-at-home 
parents, the physically disabled, and non-English speakers). See 
also James, 21Nov97 Tr at 344 (describing work-at-home program aimed 
at the elderly and poorly-educated).
    \56\ See discussion above in Section A.1 explaining that the 
Franchise Rule's limitation requiring purchasers to sell directly to 
end-users effectively exempts many work-at-home opportunities from 
Franchise Rule coverage.
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    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 opportunity purchasers produce. These sellers 
often misrepresent that there is a market for a purchaser's goods and 
services,\57\ just as sellers of fraudulent vending machine and rack 
display opportunities falsely claim that profitable vending locations 
are available.\58\ Work-at-home opportunity sellers also often claim to 
provide ongoing training and other assistance, as business opportunity 
sellers covered by the Franchise Rule often do.\59\
    Each of these promises by work-at-home opportunity sellers is often 
just as illusory as the analogous promises made by business opportunity 
sellers covered by the Franchise Rule. In addition, 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.\60\ 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.
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    \57\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. Elec. Med. Billing, Inc., No. SA02-368 AHS (ANX) (C.D. 
Cal. 2003); FTC v. Holiday Magic, No. C 93-4038 VRW (N.D. Cal. 
1994); In re New Mexico Custom Designs, Inc., FTC C-3485 (1993); In 
re Sandcastle Creations, FTC C-3484 (1993); In re Homespun Prods., 
Inc., FTC C-3483 (1993); In re Hairbow Co., FTC C-3482 (1993). See 
James, 21Nov97 Tr at 343 (bead assembly seller falsely represented a 
relationship with J.C. Penney).
    \58\ E.g., FTC v. Nat'l Vending Consultants, Inc., No. CV-S-05-
0160-RCJ-PAL (D. Nev. 2005); FTC v. Pathway Merchandising, Inc., No. 
01-CIV-8987 (S.D.N.Y. 2001); FTC v. Int'l Computer Concepts, Inc., 
No. 1:94CV1678 (N.D. Ohio 1994).
    \59\ E.g., FTC v. USS Elder Enter., Inc., No. SA CV-04-1039 AHS 
(ANx) (C.D. Cal. 2004) (company would provide work or substantial 
assistance in obtaining work); FTC v. Leading Edge Processing, Inc., 
No. 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2003) (company would provide 
specialized software, manuals, and training); FTC v. Fin. Res. 
Unlimited, No. 03-C-8864 (N.D. Ill. 2003) (no prior experience 
necessary; company would provide all supplies needed); FTC v. 
Darrell Richmond, No. 3:02-3972-22 (D.S.C. 2003) (seller claimed to 
provide all necessary materials to perform the work-at-home envelope 
stuffing business); FTC v. Elec. Med. Billing, Inc., No. SACV02-368 
AHS (ANX) (C.D. Cal. 2003) (company promised to provide everything 
necessary to perform medical billing, including a list of doctors, 
training, and software). See also Finnigan, 21Aug97 Tr at 95 (a 
business or income-earnings opportunity inherently must offer some 
sort of assistance or training); Catalano, 20Nov97 Tr at 37 
(purchasers buy business opportunities to obtain the seller's 
expertise and know-how).
    \60\ See FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005). See also James, 21Nov97 Tr at 244-45 (describing clown 
assembly work-at-home program that repeatedly rejected goods 
produced by investor).
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    Moreover, as the Commission's cases and complaint data demonstrate, 
the con artists who promote fraudulent work-at-home schemes frequently 
dupe consumers with false earnings claims,\61\ a very prevalent 
practice among fraudulent business opportunity sellers. For example, in 
one envelope-stuffing case brought under section 5 of the FTC Act, the 
defendant allegedly offered to pay purchasers $550 to $3,000 
weekly.\62\ Similarly, in a medical billing work-at-home case, the 
defendant allegedly promised purchasers annual incomes of $25,000-
$50,000.\63\ Because the initial investment is relatively low, hundreds 
of thousands of bilked consumers do not formally complain or take 
action against these illegal operators.
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    \61\ E.g., FTC v. Sun Ray Trading, No. 05-20402 CIV-Sitz/
Bandstra (S.D. Fla. 2005) (potential weekly income of $550 to 
$3,000); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. Tex. 
2003) (earn $2,900 to $5,000 and more weekly); FTC v. Darrell 
Richmond, No. 3:02-3972-22 (D.S.C. 2002) (earn between $100 and 
$1,000 or more per week). See also James, 21Nov97 Tr at 341 
(describing a bead assembly work-at-home program that claimed 
earnings of $1,400 per $1,000 investment).
    \62\ FTC v. Fin. Res. Unlimited, No. 03-C-8864 (N.D. Ill. 2003) 
(earn ``$550.00 to $3,000 and more weekly'' stuffing envelopes).
    \63\ FTC v. Elec. Med. Billing, Inc., No. SA02-368 AHS (AN) 
(C.D. Cal. 2002).
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    The Commission's law enforcement experience demonstrates that work-
at-home scams are widespread, causing significant consumer injury. 
Indeed, since 1990 the Commission has brought over 60 work-at-home 
cases.\64\ These actions have targeted a variety of schemes, ranging 
from envelope

[[Page 19060]]

stuffing \65\ and craft assembly programs,\66\ to technology-driven 
opportunities,\67\ including medical billing plans.\68\ In some of 
these cases, what appeared to be simple work-at-home scams turned out 
to be illegal pyramid schemes.\69\
    Consumer complaints to the Commission also demonstrate the 
prevalence of fraudulent work-at-home schemes.\70\ To determine the 
level of complaints and alleged injury from work-at-home scams, the 
Commission staff analyzed fraud complaint information from the 
Commission's complaint database for the period January 1997 through 
December 2005. The staff's analysis shows 37,333 work-at-home 
complaints, resulting in alleged injury of over $15 million 
($15,408,934).\71\ Indeed, work-at-home complaints ranked among the top 
fraud complaint categories submitted to the Commission. For example, 
during the period studied, work-at-home schemes ranked among the top 20 
fraud complaint categories each year:
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    \64\ Many of these cases were brought in connection with sweeps 
of fraudulent work-at-home and related employment opportunities, 
including Project Biz Opp Flop (2005); Project Homework (2001); 
Operation Top Ten Dot Con (2000); and Operation Missed Fortune 
(1996).
    \65\ E.g., FTC v. Sun Ray Trading, No. 05-20402 CIV-Seitz/
Bandstra (S.D. Fla, 2005); FTC v. Fin. Res. Unlimited, No. 03-C-8864 
(N.D. Ill. 2003); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. 
Tex. 2003); FTC v. Patrick Cella, No. CV03-3202 GAF (SHSx) (W.D. 
Cal. 2003); FTC v. Terrance Maurice Howard, No. SA02CA0344 (W.D. 
Tex. 2002); FTC v. Stuffingforcash.com, Corp., No. 92 C 5022 (N.D. 
Ill. 2002); FTC v. America's Shopping Network, Inc., No. 02-80540-
CIV-Hurley (S.D. Fla. 2002).
    \66\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex. 2004); 
FTC v. Nat'l Crafters, Corp., No. 01-4825-CIV-Graham-Turnoff (S.D. 
Fla. 2001); FTC v. Ed Boehlke, No. 96-0482-E-BLW (D. Idaho 1996); In 
re Sandcastle Creations, FTC C-3484 (1993); In re Hairbow Co., FTC 
C-3482 (1993); FTC v. Holiday Magic, No. C 93-4038 VRW (N.D. Cal. 
1993); In re Homespun Prods., Inc., FTC C-3483 (1993); In re New 
Mexico Custom Designs, Inc., FTC C-3485 (1993). See also Prepared 
Statement of the FTC on ``Internet Fraud'' before the House Subcomm. 
on Commerce, Trade, and Consumer Protection, Comm. on Energy and 
Commerce (May 23, 2001) (listing business opportunities and work-at-
home schemes among top 10 Internet or online scams); Prepared 
Statement of the FTC on ``Internet Fraud'' before the Senate Comm. 
on Finance (April 5, 2001) (listing business opportunities and work-
at-home schemes among top 10 online scams).
    \67\ E.g., FTC v. Wealth Sys., Inc., No. CV 05 0394 PHX JAT (D. 
Ariz. 2005) (web design); FTC. v. Leading Edge Processing, Inc., No. 
6:02-CV-681-ORL-19 DAB, (M.D. Fla. 2002) (data entry); FTC v. LS 
Enter., FTC C-3884 (1999) (bulk email); In re Computer Bus. Servs., 
FTC C-3705 (1996) (in-home computer work); FTC v. AMP Publ'n, Inc., 
No. SACV-00-112-AHS-ANx (C.D. Cal. 2000) (in-home computer work).
    \68\ E.g., FTC v. Med. Billers Network, Inc., No. 05 CV 2014 
(RJH) (S.D.N.Y. 2005); FTC v. Elec. Med. Billing, No. SA02-368 AHS 
(AN) (C.D. Cal. 2002); FTC v. Elec. Processing Servs., Inc., No. CV-
S-02-0500-L.H.-R.S. (D. Nev. 2002); FTC v. Medicor, LLC, No. CV01-
1896 (CBM) (C.D. Cal. 2001); FTC v. Encore Networking Servs., No. 
00-1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. Physicians Healthcare 
Dev. Serv. Corp., No. CV-02-2936 RMT (C.D. Cal. 2000); FTC v. Data 
Med. Capital, Inc., No. SACV-99-1266 AHS (C.D. Cal. 1999); FTC v. 
Elec. Filing Acad., No. 98-0054-PHX-EHC (D. Ariz. 1998).
    \69\ E.g., FTC v. David Martinelli, Jr., No. 3:99 CV 1272 (CFD) 
(D. Conn. 1999) (income from work-at-home opportunity processing 
applications dependent upon signing new recruits to join the 
opportunity).
    \70\ In adopting amendments to the Telemarketing Sales Rule 
(``TSR''), the Commission observed ``that telemarketing fraud 
perpetuated by the advertising of work-at-home and other business 
opportunity schemes in general media sources is a prevalent and 
growing phenomenon.'' Indeed, the Commission stated that ``the 
single greatest per capita monetary loss category in complaints 
reported to the FTC is for business opportunities, including work-
at-home schemes.'' 67 FR 4492, at 4530 (Jan. 30, 2002). See also TSR 
Statement of Basis and Purpose, 68 FR 4480, at 4661 (Jan. 29, 2003).
    \71\ See also James, 21Nov97 Tr at 340-45 (describing three 
work-at-home opportunities in Florida, one of which took in $18 
million, victimizing 6,000 consumers).

------------------------------------------------------------------------
               Year                         Rank            Complaints
------------------------------------------------------------------------
1997.............................  5th..................           1,399
1998.............................  20th.................           1,653
1999.............................  19th.................           2,611
2000.............................  18th.................           3,448
2001.............................  13th.................           4,852
2002.............................  11th.................          17,307
2003.............................  9th..................          16,694
2004.............................  12th.................           6,485
2005.............................  15th.................           4,366
------------------------------------------------------------------------

    Were it not for the minimum investment requirement and direct sales 
to end-user limitation in the Franchise Rule, many work-at-home schemes 
would be covered by that rule because the same potential for abuse 
exists as with vending machines and rack display opportunities, which 
are covered. In view of the misrepresentations and omissions that 
fraudulent work-at-home opportunity sellers have used, as shown by 
consumer complaints and past Commission cases, the Commission has 
determined that the proposed business opportunity disclosure 
requirements and prohibitions would provide potential work-at-home 
purchasers with the tools they need to protect themselves from false 
claims.

b. Pyramid Marketing Schemes

    Like business opportunities covered by the existing Franchise Rule, 
pyramid schemes often deceive consumers with the promise of large 
potential incomes. It is not uncommon for promoters of these schemes to 
claim potential incomes of thousands of dollars a week or month.\72\ 
Because of the claimed high earnings potential, pyramid schemes are 
highly successful in attracting prospective investors. For example, one 
pyramid program attracted more than 150,000 consumers who collectively 
paid over $80 million during the course of three years.\73\ Indeed, 
cases brought under section 5 against pyramid marketing promotions have 
resulted in huge consumer redress, such as $40 million in Equinox and 
$20 million in SkyBiz.com.\74\
---------------------------------------------------------------------------

    \72\ E.g., FTC v. 2Xtreme Performance Int'l, LLC, No. JFM 99CV 
3679 (D. Md. 1999) (``about $2,000 in the first month * * * and then 
it went to $60,000''); FTC v. Bigsmart.com, No. CIV 01-0466 PHX ROS 
(D. Ariz. 2001) (``50 people made over $50,000 their first month! We 
also had a $100,000 first month money earner!''); FTC v. FutureNet, 
Inc., No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998) (``If you're 
serious, we can show you how to make ten thousand a month * * * And, 
you know, we have people doing thirty thousand a month.''); FTC v. 
Nia Cano, No. 97-7947-CAS (AJWx) (C.D. Cal. 1997) (as much as 
$18,000 per month); FTC v. Global Assistance Network for Charities, 
No. 96-2494 PHX RCB (D. Ariz. 1996) (promising over $89,000 a 
month); FTC v. NexGen3000.com, No. CIV-03-120 TUC WDB (D. Ariz. 
2003) (``each activated business center has the potential to earn up 
to $60,000 per week''); FTC v. SkyBiz.com, No. 01-CV-0396-EA (X) 
(N.D. Okla. 2001) (``he's making 76,000 a week and growing'').
    \73\ FTC v. 2Xtreme Performance Int'l, LLC, No. JFM 99CV 3679 
(D. Md. 1999). See also FTC v. Fortuna Alliance, LLC, No. C96-799M 
(W.D. Wash. 1996) (tens of thousands of consumers in over 60 
countries); FTC v. Jewelway, Int'l, No. CV-97 TUC JMR (D. Ariz. 
1997) (200,000 investors).
    \74\ See also FTC v. Bigsmart.com, No. CIV 01-0466 PHX ROS (D. 
Ariz. 2001) ($5 million for redress); FTC v. Nia Cano, No. 97-7947-
CAS (AJWx) (C.D. Cal. 1997) (nearly $2 million for redress); FTC v. 
Fortuna Alliance, LLC, No. C96-799M (W.D. Wash. 1996) (approximately 
$5.5 million for redress); FTC v. FutureNet, Inc., No. CV-98-1113 
GHK (BQRx) (C.D. Cal. 1998) ($1 million for redress); FTC v. 
Jewelway, Int'l, No. CV-97 TUC JMR (D. Ariz. 1997) ($5 million for 
redress); FTC v. ICR Servs., No. 03 C 5532 (N.D. Ill. 2003) ($1.5 
million for redress).
---------------------------------------------------------------------------

    The prevalence of false earnings claims is not the only similarity 
between pyramid schemes and business opportunity frauds covered by the 
current Franchise Rule. Many induce new recruits with the promise of an 
ongoing commercial relationship that will enable recruits to operate 
their own business selling various products or services.\75\ Typically, 
they promise to provide recruits with promotional assistance.\76\ Some 
also offer training.\77\ Few, however, reveal their high drop-out 
rates, much less the fact that the vast majority of those who have 
joined the program--often 90 percent or more--will not recoup their 
investment.\78\
---------------------------------------------------------------------------

    \75\ E.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL (AJWx) 
(C.D. Cal. 2002); FTC v. Equinox, Int'l, No. CV-S-99-0960-JBR-RLH 
(D. Nev. 1999); FTC v. FutureNet, Inc., No. CV-98-1113 GHK (BQRx) 
(C.D. Cal. 1998).
    \76\ E.g., FTC v. 2Xtreme Performance Int'l, LLC, No. JFM 99CV 
3679 (D. Md. 1999); FTC v. Bigsmart.com, No. CIV 01-0455 PHX ROS (D. 
Ariz. 2001); FTC v. NexGen3000.com, No. CIV-03-120 TUC WDB (D. Ariz. 
2003).
    \77\ FTC v. World Class Network, Inc., No. SACV-97-162-AHS (EEx) 
(C.D. Cal. 1997).
    \78\ Peter J. VanderNat and William W. Keep, Marketing Fraud: An 
Approach to Differentiating Multilevel Marketing from Pyramid 
Schemes, 21 J. of Pub. Pol'y & Marketing (Spring 2002), at 139-151.
---------------------------------------------------------------------------

    Further, since 1990, the Commission has brought 20 cases against 
pyramid

[[Page 19061]]

schemes under section 5.\79\ These matters have involved a wide range 
of purported product sales or investments, ranging from the mundane 
\80\ (nutritional supplements, beauty aids, weight-loss products, and 
water filters) to the unusual (auto leasing,\81\ charitable giving,\82\ 
unsecured credit cards,\83\ credit repair,\84\ travel agency 
credentials,\85\ Internet malls,\86\ and Internet access \87\). Indeed, 
pyramid fraud has gone high-tech, flooding the Internet \88\ and 
consumers' email boxes.\89\
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    \79\ E.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL (AJWx) 
(C.D. Cal. 2002); FTC v. Streamline Int'l, No. 01-6885-CIV-Ferguson 
(S.D. Fla. 2001); FTC v.  Bigsmart.com, No. CIV 01-0466 PHX ROS (D. 
Ariz. 2001); FTC v.  Five Star Auto Club, Inc., No. CIV-99-1693 
McMahon (S.D.N.Y. 1999); FTC v. 2Xtreme Performance Int'l, LLC, No. 
JFM 99CV 3679 (D. Md. 1999); FTC v. Equinox, Int'l, No. CV-S-99-
0969-JBR-RLH (D. Nev. 1999); FTC v. FutureNet, Inc., No. CV-98-1113 
GHK (BQRx) (C.D. Cal. 1998).
    \80\ E.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL (AJWx) 
(C.D. Cal. 2002); FTC v. Streamline Int'l, Inc., No. 01-6885-CIV-
Ferguson (S.D. Fla. 2001); FTC v. 2Xtreme Performance Int'l, No. JFM 
99CV 3679 (D. Md. 1999); FTC v. Equinox, Int'l, No. CV-S-99-0969-
JBR-RLH (D. Nev. 1999).
    \81\ FTC v. Five Star Auto Club, Inc., No. CIV-99-1693 McMahon 
(S.D.N.Y. 1999).
    \82\ FTC v. Universal Direct, No. C 3-02-145 (S.D. Ohio 2002); 
FTC v. Global Assistance Network for Charities, No. 96-2494 PHX RCB 
(D. Ariz. 1996).
    \83\ FTC v.  Nia Cano, No. 97-7947-CAS (AJWx) (C.D. Cal. 1997).
    \84\ FTC v. ICR Servs., No. 03 C 5532 (N.D. Ill. 2003).
    \85\ FTC v. World Class Network, Inc., No. SACV-97-162-AHS (Eex) 
(C.D. Cal. 1997).
    \86\ E.g., FTC v. NexGen3000.com, No. CIV-03-120 TUC WDB (D. 
Ariz. 2003); FTC v. Bigsmart.com, No. CIV 01-0466 PHX ROS (D. Ariz. 
2001).
    \87\ FTC v. FutureNet, Inc., No. CV-98-1113 GHK (BQRx) (C.D. 
Cal. 1998).
    \88\ E.g., FTC v. Sun Ray Trading, Inc., No. 05-20402-CIV-Seitz/
Bandstra (S.D. Fla. 2005); FTC v. 2Xtreme Performance Int'l, LLC, 
No. JFM 99CV 3679 (D. Md. 1999); FTC v. Nia Cano, No. 97-7947-CAS 
(AJWx) (C.D. Cal. 1997); FTC v. FutureNet, Inc., No. CV-98-1113 GHK 
(BQRx) (C.D. Cal. 1998).
    \89\ E.g., FTC v. David Martinelli, Jr., No. 3:99 CV 1272 (CFD) 
(D. Conn. 1999); FTC v. Universal Direct, No. C 3-02-145 (S.D. Ohio 
2002); In re Kalvin P. Schmidt, FTC C-3834 (1998).
---------------------------------------------------------------------------

    The Commission staff's analysis of consumer fraud complaint data 
also demonstrates the prevalence of deceptive pyramid marketing 
schemes.\90\ For the period January 1997 through December 2005, 
Commission staff found that consumers lodged 17,858 complaints against 
pyramid schemes, reporting alleged aggregate injury level of over $46 
million ($46,824,347). Indeed, complaints against pyramid marketing 
companies consistently ranked among the top 20 injury categories 
reported in consumer fraud complaints to the Commission.\91\ For 
example, during the period 1997 through 2005, pyramid marketing schemes 
ranked among the top 20 injury levels each year, except in 2003, as 
follows:
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    \90\ State regulators report similar data. For example, a 
Florida business opportunity regulator noted that in his office, 60% 
of the written complaints received pertain to pyramid marketing 
companies. ``They last about six months and they're gone.'' James, 
20Nov97 Tr at 115-26. The State of Washington also reported a large 
number of pyramid marketing scheme complaints. See WA Securities, 
ANPR 117 at 2.
    \91\ See also Fraud Survey, supra note 50, at 48 (1.55 million 
victims of pyramid fraud).

------------------------------------------------------------------------
               Year                         Rank              Injury
------------------------------------------------------------------------
1997.............................  9th..................        $352,769
1998.............................  5th..................       1,858,787
1999.............................  10th.................       2,011,012
2000.............................  4th..................      12,632,132
2001.............................  10th.................      10,685,083
2002.............................  18th.................       9,685,722
2003.............................  (not in top 20)......  ..............
2004.............................  18th.................       2,264,112
2005.............................  17th.................       3,347,443
------------------------------------------------------------------------

    Were it not for the minimum investment and inventory exemptions in 
the Franchise Rule, many pyramid schemes would be covered because the 
same potential for abuse exists as with vending machines and rack 
display opportunities covered by the Franchise Rule.\92\ In view of the 
misrepresentations and omissions that fraudulent pyramid scheme 
promoters have used, as shown by consumer complaints and past 
Commission cases, pre-sale disclosures and prohibitions are necessary 
to protect potential recruits from deceptive practices.
---------------------------------------------------------------------------

    \92\ See discussion above in Section A.1 explaining that the 
current Rule's minimum required payment and inventory exemptions 
effectively exempt many pyramid marketing opportunities from 
Franchise Rule coverage.
---------------------------------------------------------------------------

Section E. The Proposed Rule

    The proposed Rule is divided into nine sections. Section 437.1 
would set forth the Rule's definitions. Section 437.2 would establish 
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 would specify the content of the 
basic disclosure document. Section 437.4 would set forth the 
requirements business opportunity sellers must follow if they elect to 
make earnings representations. Section 437.5 would prohibit a number of 
deceptive claims and practices in connection with business opportunity 
sales. Section 437.6 would set forth the Rule's recordkeeping 
provisions. Section 437.7 would expressly exempt from the Business 
Opportunity Rule those business arrangements that are covered by the 
Franchise Rule. Finally, two administrative sections--437.8 and 437.9--
would address other laws, rules, and orders, and severability.

1. Proposed Section 437.1: Definitions

    The proposed Rule would begin with a definitions section setting 
forth defined terms in alphabetical order. In several instances, the 
proposed definitions closely track those contained in the current 
Franchise Rule, Commission interpretations of the Franchise Rule, and 
the states' comparable franchise disclosure document, the Uniform 
Franchise Offering Circular (``UFOC'') Guidelines. These include the 
definitions for the terms ``action,'' ``affiliate,'' ``disclose or 
state,'' ``earnings claims,'' ``person,'' and ``written.'' The 
Commission also proposes to define the terms ``business assistance,'' 
``business opportunity,'' ``cancellation or refund request,'' 
``designated person,'' ``exclusive territory,'' ``general media,'' 
``new business,'' ``prior business,'' ``providing locations, outlets, 
accounts, or customers,'' ``purchaser,'' ``quarterly,'' and ``seller.'' 
Each proposed definition is set forth below.
a. Proposed Section 437.1(a): ``Action''
    The term ``action'' arises in proposed section 437.3(a)(3), which 
would require business opportunity sellers to disclose material 
information about the seller's prior litigation. Proposed section 
437.1(a) would define the term ``action'' closely tracking the 
Commission's current interpretation of the term ``action'' in 
connection with the Franchise Rule. Specifically, it would make clear 
that disclosures involving litigation include not only civil actions 
brought before a court, but matters before arbitrators.\93\ It would 
also make clear that an ``action'' includes all governmental actions, 
including criminal matters, and administrative law enforcement actions, 
including cease and desist orders, or assurances of voluntary 
compliance.
---------------------------------------------------------------------------

    \93\ See Interpretive Guides, 44 FR at 49973; Rabenberg, Sept. 
95 Tr. at 105, 279 (arguing for the disclosure of matters in 
arbitration, which normally are not public documents). See also 
Franchise Rule NPR, 64 FR at 57297 and 57332; UFOC Guidelines, Item 
3.
---------------------------------------------------------------------------

b. Proposed Section 437.1(b): ``Affiliate''
    To combat business opportunity sales fraud, proposed section 
437.3(a)(3) would require a business opportunity seller to disclose not 
only litigation in which it was named as a party, but any litigation 
naming any of its affiliates. Closely tracking the UFOC Guidelines, 
proposed section 437.1(b) would define the term ``affiliate'' to mean: 
``an entity controlled by, controlling, or under

[[Page 19062]]

common control with a business opportunity seller.'' \94\ This 
definition would also cover litigation involving a parent and 
subsidiaries of the business opportunity seller.
---------------------------------------------------------------------------

    \94\ See NASAA Commentary on the Uniform Franchise Offering 
Circular Guidelines (1999), Bus. Franchise Guide (CCH), ]5790, at 
8,466. This is a greatly streamlined version of the definition of 
``affiliated person'' in the current Franchise Rule:
    The term affiliated person means a person * * * (1) Which 
directly or indirectly controls, is controlled by, or is under 
common control with, a franchisor; or (2) Which directly or 
indirectly owns, controls, or holds with power to vote, 10 percent 
or more of the outstanding voting securities of a franchisor; or (3) 
Which has, in common with a franchisor, one or more partners, 
officers, directors, trustees, branch managers, or other persons 
occupying similar status or performing similar functions.
    16 CFR at 436.2(i).
---------------------------------------------------------------------------

c. Proposed Section 437.1(c): ``Business assistance''
    One of the definitional elements of the term ``business 
opportunity'' in section 437.1(d) is the offer of ``business 
assistance.'' Proposed section 437.1(c) would define ``business 
assistance'' to mean `` the offer of material advice, information, or 
support to a prospective purchaser in connection with the establishment 
or operation of a new business.'' \95\ By using the concept of business 
assistance as one of the definitional elements of the term ``business 
opportunity''--the term that establishes the parameters of the Rule's 
coverage--the Commission intends to ensure coverage of those business 
relationships that involve more than the ordinary sale of goods or 
services to existing businesses.
---------------------------------------------------------------------------

    \95\ As discussed below, the term ``new business'' also includes 
a new line of business.
---------------------------------------------------------------------------

    In addition, the proposed definition of ``business assistance'' 
lists five illustrative, but not exhaustive, examples of qualifying 
assistance, corresponding to practices shown by the Commission's law 
enforcement experience, and that of the states, to be common among 
sellers of fraudulent business opportunities.\96\ The common thread 
linking each of these five examples is that the seller promotes his or 
her expertise in operating the business or in providing a market for 
the goods or services the purchaser sells to the public, or in ensuring 
compensation promised to the purchaser, thereby reducing the 
purchaser's financial risk. Each of the five illustrative examples is 
discussed immediately below.
---------------------------------------------------------------------------

    \96\ The examples are drawn from the Illinois business 
opportunity statute. Business Opportunity Sales Law of 1995, 815 
ILCS 602/5-1 through 602/5-135 (1995) (``Illinois Act''). Several 
commenters pointed to that statute as a good model. E.g., Pampered 
Chef, ANPR 86, at 1; Amway, ANPR 89, at 1; Elman, Sept. 95 Tr. at 
132-33; Wieczorek, id. at 284.
---------------------------------------------------------------------------

i. Location Assistance
    The proposed ``business assistance'' definition would include as an 
illustrative example the promise to provide locations ``for the use or 
operation of equipment, displays, vending machines, or similar devices 
on premises neither owned nor leased by the purchaser.'' This is 
substantially similar to the analogous provision in the current 
Franchise Rule.\97\ Including this example would help ensure that 
business opportunities currently covered by the Franchise Rule will 
remain covered by the Business Opportunities Rule. Indeed, the 
Commission's enforcement experience shows that the offer of location 
assistance is the hallmark of fraudulent vending machine and rack 
display route opportunities.\98\
---------------------------------------------------------------------------

    \97\ See 16 CFR at 436.2(a)(1)(ii)(B). See also Illinois Act, 
815 ILCS 602/5-510(a)(1) (``The seller or a person recommended by 
the seller will provide or assist the purchaser in finding locations 
for the use or operation of vending machines, rack display cases or 
other similar devices, on premises neither owned nor leased by the 
purchaser or seller.'').
    \98\ E.g., FTC v. Am. Entm't Distribs., No. 04-22431-CIV-Huck 
(S.D. Fla. 2004); 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. Mktg. 
and Vending Concepts, No. 00-1131 (S.D.N.Y. 2000).
---------------------------------------------------------------------------

ii. Account Assistance
    Another illustrative example of ``business assistance'' would be 
``providing, or purporting to provide, outlets, accounts, or customers, 
including, but not limited to, Internet outlets, accounts, or 
customers, for the purchaser's goods or services.'' As Commission cases 
have shown, fraudulent promises of assistance in securing accounts are 
often the linchpin of business opportunity scams such as fraudulent 
medical billing schemes.\99\ The proposed definition would be similar 
to the current ``account assistance'' provision of the Franchise 
Rule,\100\ but would update that provision by specifying that outlets, 
accounts, or customers include those on the Internet. Accordingly, the 
offer to provide Web sites or online shopping malls where the seller's 
products can be sold would also qualify as an offer of account 
assistance.\101\
---------------------------------------------------------------------------

    \99\ E.g., FTC v. Mediworks, Inc., No. 00-01079 (C.D. Cal. 
2000); FTC v. Home Professions, Inc., No. 00-111 (C.D. Cal. 2000); 
FTC v. Data Med. Capital, Inc., No. SACV-99-1266 (C.D. Cal. 1999). 
See also, FTC v. AMP Publ'n, Inc., No. SACV-00-112-AHS-ANx (C.D. 
Cal. 2000).
    \100\ See 16 CFR at 436.2(a)(1)(ii)(B). See also, Illinois Act, 
815 ILCS at 602/5-1.10(a)(2) (``The seller or a person recommended 
by the seller will provide or assist the purchaser in finding 
outlets or accounts for the purchaser's products or services.'').
    \101\ See, e.g., FTC v. NexGen3000.com, No. CIV-03-120 TUC WDB 
(D. Ariz. 2003); FTC v. Netforce Seminars, No. 00 2260 PHX FJM (D. 
Ariz. 2000); FTC v. iMall, Inc., No. 99-03650 (C.D. Cal. 1999).
---------------------------------------------------------------------------

iii. Buy-Back Assistance
    A business opportunity seller's offer to pay purchasers for their 
work by buying back their work product typifies most fraudulent work-
at-home plans, such as craft assembly opportunities.\102\ To capture 
such opportunities, the term ``business assistance'' would include as 
an illustrative example ``buying back, or purporting to buy back, any 
or all of the goods or services that the purchaser makes, produces, 
fabricates, grows, breeds, modifies, or provides.'' \103\ The proposed 
definition, however, would not include the offer to buy back inventory 
or equipment needed to start a business.\104\ In response to the ANPR, 
DSA opined that such a proposal very likely would result in 
discouraging legitimate sellers from adopting inventory or equipment 
buy-back policies.\105\ The Commission finds this argument persuasive.
---------------------------------------------------------------------------

    \102\ E.g., FTC v. Fin. Res. Unlimited, No. 03-C-8864 (N.D. Ill. 
2003); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. Tex. 
2003); FTC v. Patrick Cella, No. CV03-3202 GAF (SHSx) (W.D. Cal. 
2003); FTC v. Terrance Maurice Howard, No. SA02CA0344 (W.D. Tex. 
2002); FTC v. Stuffingforcash.com, Corp., No. 92 C 5022 (N.D. Ill. 
2002); FTC v. America's Shopping Network, Inc., No. 02-80540-CIV-
Hurley (S.D. Fla. 2002); FTC v. Esteban Barrios Vega, No. H-04-1478 
(S.D. Tex. 2004); FTC v. Nat'l Crafters, Corp., No. 01-4825-CIV-
Graham-Turnoff (S.D. Fla. 2001); FTC v. Ed Boehlke, No. 96-0482-E-
BLW (D. Idaho 1996); In re Sandcastle Creations, FTC C-3484 (1993); 
In re Hairbow Co., FTC C-3482 (1993); FTC v. Holiday Magic, No. C 
93-4038 VRW (N.D. Cal. 1993); In re Homespun Prods., Inc., FTC C-
3483 (1993); In re New Mexico Custom Designs, Inc., FTC C-3485 
(1993).
    \103\ See Illinois Act, 815 ILCS at 602/5-1.10(a)(3) (``The 
seller or a person specified by the seller will purchase any or all 
products made, produced, fabricated, grown, bred, or modified by the 
purchaser.''). See also California Contracts for Seller Assisted 
Marketing Plans, Cal. Civ. Code at Sec.  1812.201(a)(3) (CA SAMP) 
(The ``seller will buy back or is likely to buy back any product 
made, produced, fabricated, grown or bred by the purchaser using in 
whole or in part, the product, supplies, equipment, or services 
which were initially sold or leased or offered for sale or lease to 
the purchaser by the seller assisted marketing plan seller'').
    \104\ Cf. Illinois Act, 815 ILCS at Sec.  5-5.10(a)(5) 
(attaching coverage where ``[t]he seller will refund all or part of 
the price paid to the seller, or repurchase any of the products, 
equipment or supplies provided by the seller or a person recommended 
by the seller, if the purchaser is dissatisfied with the 
business'').
    \105\ Elman, 21-Aug-97 Tr. at 106-08. See also, Wieczorek, id. 
at 108-09 (a broad buy-back policy would result in business 
opportunity coverage where a franchisor permits a prospective 
franchisee to ``test drive'' an opportunity for a limited period of 
time).

---------------------------------------------------------------------------

[[Page 19063]]

iv. Payment Assistance
    The proposed list of illustrative business assistance examples also 
includes ``tracking or paying, or purporting to track or pay, 
commissions or other compensation based upon the purchaser's sale of 
goods or services or recruitment of other persons to sell goods or 
services.'' Many pyramid marketing plans offer this type of assistance, 
purporting to compensate participants not only for their own product 
sales but also for sales made by their participants' downline 
recruits.\106\ The inclusion of this illustrative example would help to 
make it clear that the Rule encompasses business opportunities in the 
form of pyramid schemes. As noted above, the Commission's law 
enforcement experience shows that these schemes cause significant 
injury to consumers.
---------------------------------------------------------------------------

    \106\ E.g., FTC v. NexGen3000.com, No. CIV-03-120 TUC WDB (D. 
Ariz. 2003); FTC v. Bigsmart.com, No. CIV 01-0466 PHX ROS (D. Ariz. 
2001); FTC v. SkyBiz.com, No. 01-CV-0396-EA (X) (N.D. Okla. 2001); 
FTC v. 2Xtreme Performance Int'l, LLC, No. JFM 99CV 3679 (D. Md. 
1999); FTC v. FutureNet, Inc., No. CV-98-1113 GHK (BQRx) (C.D. Cal. 
1998); FTC v. Nia Cano, No. 97-7947-CAS (AJWx) (C.D. Cal. 1997); FTC 
v. Global Assistance Network for Charities, No. 96-2494 PHX RCB (D. 
Ariz. 1996). See also, FTC v. Am. Safe Mktg., No. 1:89-CV-462-RLV 
(N.D. Ga. 1989).
---------------------------------------------------------------------------

v. Other Advice or Training Assistance
    The final illustrative example of ``business assistance'' is 
``advising or training, or purporting to advise or train, the purchaser 
in the promotion, operation, or management of a new business, or 
providing, or purporting to provide, the purchaser with operational, 
managerial, technical, or financial guidance in the operation of a new 
business.'' Our law enforcement experience shows that the promise of 
such assistance is a key feature of many fraudulent business 
opportunity ventures, such as vending, rack display scams, and medical 
billing work-at-home schemes.\107\
---------------------------------------------------------------------------

    \107\ E.g., FTC v. Inspired Ventures, Inc., No. 02-21760-CIV-
Jordan (S.D. Fla. 2002); FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. 
La. 1989). FTC v. Home Professions, Inc., No. 00-111 (C.D. Cal. 
2000); FTC v. Star Publ'g Group, Inc., No. 00-023 (D. Wyo. 2000) FTC 
v. Hi Tech Mint Sys., Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); 
FTC v. Fresh-O-Matic Corp., No. 96-CV-315-CAS (E.D. Mo. 1996) FTC v. 
Joseph Hayes, No. 4:96CV06126SNL (E.D. Mo. 1996). See Illinois Act, 
815 ILCS at Sec.  602/5-5.15 (The seller offers a marketing plan, 
defined as ``advice or training * * * includ[ing], but not limited 
to * * * training, regarding the promotion, operation or management 
of the business opportunity; or operational, managerial, technical, 
or financial guidelines or assistance.'').
---------------------------------------------------------------------------

    The proposed ``business assistance'' definition concludes with an 
important proviso--that the term ``business assistance'' does not 
include ``a written product warranty or repair contract, or guidance in 
the use, maintenance, and/or repair of any product to be sold by the 
purchaser or of any equipment acquired by the purchaser.'' This proviso 
is necessary to distinguish ordinary support and warranty commitments 
that many manufacturers or retailers offer in connection with the sale 
of their products from the more extensive assistance that characterizes 
a business opportunity offer. For example, a copier manufacturer may 
advise customers on how to operate and perform service on a copier 
machine. Or, a camera retailer may demonstrate routine maintenance on a 
high-end camera sold to a professional photographer. In both of these 
instances, the printing business and photographer may well find the 
promised assistance valuable even if they are already operating 
established businesses. In addition, this type of assistance is not 
likely to cause someone contemplating a new business to conclude that 
he or she is assured of success even if they have no prior business 
experience. For these reasons, offers of such product-related 
assistance, without more, do not rise to the level of ``business 
assistance'' necessary for coverage under the proposed Rule.
d. Proposed Section 437.1(d): ``Business opportunity''
    This definition establishes the proposed Rule's scope. The proposed 
definition of ``business opportunity'' is intended to capture the sale 
of true business opportunities without regulating the ordinary sale of 
goods and services to businesses. The three definitional elements of 
the term ``business opportunity'' are: (1) A solicitation to enter into 
a new business; (2) payment of consideration, directly or indirectly 
through a third party; and (3) either an earnings claim or an offer to 
provide business assistance. Each of these elements is discussed 
immediately below.
i. Solicitation to Enter Into a New Business
    The proposed definition of ``business opportunity'' set forth at 
section 437.1(d)(1) contemplates that business opportunity sellers will 
solicit prospective purchasers to enter into new businesses, as opposed 
to merely soliciting purchasers for goods or services.\108\ A business 
opportunity seller typically advertises the sale of a business, not 
just goods or services. In contrast, a typical retailer may sell 
various goods that could be used in a business, and may even recommend 
that its goods be used in a particular business, but the retailer does 
not ordinarily promote the business itself.
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    \108\ ``New business'' is a term defined at section 437.(1)(k) 
of the proposed Rule: `` `new business' means a new business in 
which the prospective purchaser is not engaged, or a new line or 
type of business.'' See Illinois Act, 815 ILCS at Sec.  5-510(a) (`` 
`Business opportunity' means a contract or agreement * * * wherein 
it is agreed that the seller or a person recommended by the seller 
shall provide to the purchaser any product, equipment, supplies, or 
services enabling the purchaser to start a business'').
---------------------------------------------------------------------------

ii. Consideration
    The proposed definition of ``business opportunity'' in section 
437.1(d) would apply where the purchaser pays consideration to the 
seller.\109\ ``Consideration'' is to be read broadly to include a 
monetary payment, share of profits, or a current obligation to make a 
payment at a future date.\110\ The proposed definition also would make 
clear that consideration can be paid directly to the seller, or 
indirectly through a third party, such as a broker, lead generator, or 
locator. This provision is designed to close a potential loophole that 
would subvert the proposed Rule's anti-fraud protections. Without such 
a provision, fraudulent business opportunity sellers could circumvent 
the Rule by requiring payment to a third party with whom the seller has 
a formal or informal business relationship.\111\
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    \109\ As discussed below in connection with section 437.7 
(exemptions), the proposed Business Opportunity Rule, unlike the 
Franchise Rule, would not include a minimum required payment 
exemption.
    \110\ This is consistent with the broad definition of 
``payment'' in the current Franchise Rule. See Interpretive Guides, 
44 FR at 49967.
    \111\ See Illinois Act, 815 ILCS at Sec.  602/5-5.10 (a) 
(``payment to the seller or a person recommended by the seller'').
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iii. An Earnings Claim or an Offer to Provide Business Assistance
    The definition of ``business opportunity'' in section 437.1(d) 
would specify that either the making of an earnings claim or the 
promise of business assistance by a seller in connection with an offer 
to sell a new business will trigger Rule coverage. These elements are 
discussed in greater detail in the sections immediately below.
1. Earnings Claims
    The Commission's law enforcement history demonstrates that the 
making of earnings claims underlies virtually all fraudulent business 
opportunity schemes. As detailed above, the Commission to date has 
brought over 140 cases against a multitude of business opportunities 
and related schemes, each of which lured

[[Page 19064]]

unsuspecting consumers through false or deceptive earnings 
representations.\112\ 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''). In 
the Commission's experience, such claims are highly relevant to 
consumers in making their investment decisions and typically are the 
single most decisive factor in such decisions.
---------------------------------------------------------------------------

    \112\ See Section D above, discussing the scope of the proposed 
Rule. See also Franchise Rule SBP, 43 FR at 59630-632; 59684-689.
---------------------------------------------------------------------------

    Some commenters questioned whether the making of an earnings claim 
alone should be sufficient to bring the sale of a business opportunity 
within the ambit of the Rule, thereby triggering disclosure and other 
obligations. Pointing to various state business opportunity laws, these 
commenters contended that the disclosure and other requirements of the 
proposed Rule should be triggered only if either: (1) The seller 
guarantees a level of earnings; or (2) the seller represents that the 
purchaser will earn at least as much as his or her investment.\113\
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    \113\ E.g., Wieczorek, 20Nov97 Tr at 32-33; Cantone, id. at 33; 
Catalano; id. at 34. See Illinois Act, 815 ILCS at Sec.  602/5-
5.10(a)(4) (``The seller guarantees that the purchaser will derive 
income from the business which exceeds the price paid to the 
seller.''); CA SAMP, Cal. Civ. Code, at Sec.  1812.201(a)(1) 
(``represented that the purchaser will earn, is likely to earn, or 
can earn an amount in excess of the initial payment paid by the 
purchaser for participation in the seller assisted marketing 
plan'').
---------------------------------------------------------------------------

    Given the prevalence of earnings claims in business opportunity 
sales, the Commission believes that a broad earnings disclosure 
requirement is necessary to prevent fraud. Limiting the Rule's coverage 
to scenarios in which a seller either makes an express earnings 
guarantee or represents that the purchaser will recoup his or her 
investment would effectively clear the way for fraudulent sellers to 
make other types of earnings claims to deceive prospects. We see little 
difference, for example, between a seller representing that ``our 
purchasers earn $10,000 a month'' and ``we guarantee you $10,000 a 
month.'' In both instances, prospective purchasers are likely to give 
the claim significant weight in making their investment decision.\114\
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    \114\ See Grant, 20Nov97 Tr at 40-41 (``I'm concerned that using 
the word guarantee would be too limiting, that it would actually 
prevent the FTC going after companies that we are all concerned 
about for maybe not using the word guaranteeing but in their 
representations virtually guaranteeing through a variety of 
implications a level or range that the person can expect.'').
---------------------------------------------------------------------------

2. An Offer of Business Assistance
    Proposed section 437.1(d) brings within the scope of the Rule's 
coverage those business opportunity sellers that do not make earnings 
claims, but offer business assistance. As one business opportunity 
representative put it: ``[Purchasers are] buying the seller's expertise 
to an extent. * * * The [sellers] know how to do it and that's why 
[purchasers are] paying a premium.'' Catalano, 20Nov97 Tr at 37.\115\ 
At the same time, the ``business assistance'' prong of the definition 
helps to distinguish the sale of a business opportunity from the 
ordinary sale of goods or services: The proposed definition of 
``business assistance'' is limited to only those situations involving 
``the establishment or operation of a new business.'' Assistance 
provided by a seller in connection with the sale of off-the-shelf 
goods, for example, would be excluded. The proposed definition of 
``business assistance,'' therefore, expressly states that `` `business 
assistance' does not include a written product warranty or repair 
contract, or guidance in the use, maintenance, and/or repair of any 
product to be sold by the purchaser or of any equipment acquired by the 
purchaser.''
---------------------------------------------------------------------------

    \115\ See also Christopher, 20Nov97 Tr at 68; Grant, id. at 69.
---------------------------------------------------------------------------

e. Proposed Section 437.1(e): ``Cancellation or Refund Request''
    Section 437.3(a)(5) uses the term ``cancellation or refund 
request.'' It would require a business opportunity seller to disclose 
the number of cancellation or refund requests received in the last two 
years.\116\ As explained more fully below, this provision would enable 
the prospective purchaser to assess previous buyers' satisfaction with 
the business opportunity purchase. In that regard, it is analogous to 
the Franchise Rule's disclosure of terminations, cancellations, and 
non-renewals.\117\ Proposed section 437.1(e) would define 
``cancellation or refund request'' broadly to mean ``any request to 
cancel or rescind a business opportunity purchase, or any request to 
seek a refund, in whole or in part, for a business opportunity 
purchase, whether or not the purchaser has a contractual right to 
cancel, rescind, or seek a refund.''
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    \116\ Like other provisions of the proposed Rule, this provision 
would be subject to the Rule's quarterly updating requirement set 
forth at proposed section 437.3(b). For example, a seller offering 
business opportunities on November 5, 2006, would disclose the data 
for the period October 1, 2004 through October 1, 2006, the last 
eight quarters before the date of disclosure. See also proposed 
section 437.1(p) (defining the term ``quarterly'' to mean January 1, 
April 1, July 1, and October 1).
    \117\ See 16 CFR at 436.1(a)(16).
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f. Proposed Section 437.1(f): ``Designated Person''
    The term ``designated person'' appears in section 437.1(d)(3)(ii), 
the business assistance element of the proposed ``business 
opportunity'' definition. That section specifies that offered business 
assistance underlying a business opportunity solicitation need not be 
provided to a purchaser directly by the seller. Rather, a seller who 
represents that business assistance may or will be provided by a third 
party, such as a locator or supplier, will still be covered by the Rule 
and subject to its disclosure requirements and prohibitions.\118\ 
Proposed section 437.1(d)(3)(ii) uses the term ``designated person'' as 
a convenient way to refer to any third parties who would provide 
business assistance to a business opportunity purchaser. Section 
437.1(f) would define the term ``designated person'' to mean ``any 
person, other than the seller, whose goods or services the seller 
suggests, recommends, or requires that the purchaser use in 
establishing or operating a new business, including, but not limited 
to, any person who finds or purports to find locations for equipment.''
---------------------------------------------------------------------------

    \118\ This approach is consistent with the current Franchise 
Rule's analogous definitional elements, extending the scope of that 
rule's coverage to reach transactions in which the franchisor 
provides to the franchisee the services of a person able to secure 
the retail outlets, accounts, sites, or locations. 16 CFR at 
436.2(a)(1)(ii)(B)(3). See also, e.g., Illinois Act, 815 ILCS at 
Sec.  602/5-5.10(a)(1) (``The seller or a person recommended by the 
seller will provide or assist the purchaser in finding 
locations.'').
---------------------------------------------------------------------------

    The definition of ``designated person'' and the use of this defined 
term in setting the scope of what constitutes a ``business 
opportunity'' are designed to close a potential loophole. For example, 
a fraudulent vending machine route seller would not be able to 
circumvent the Rule by representing to a prospective purchaser that a 
specific locator will place machines for the purchaser, because that 
would qualify as ``business assistance,'' bringing the transaction 
within the ambit of the Rule. Similarly, a fraudulent rack display 
seller could not evade Rule coverage by simply recommending that a 
prospective purchaser use a particular rack supplier. The 
recommendation itself would be sufficient to constitute ``business 
assistance'' under the Rule.
g. Proposed Section 437.1(g): ``Disclose or State''
    Proposed section 437.1(g) would define the terms ``disclose'' and 
``state''

[[Page 19065]]

to mean ``to give information in writing that is clear and conspicuous, 
accurate, concise, and legible.'' \119\ This ensures that a prospective 
purchaser will receive complete information in a form that can easily 
be read. For example, the furnishing of a disclosure document without 
punctuation or appropriate spacing between words would not be 
``clear.'' Similarly, required information such as the number and 
percentage of prior purchasers obtaining a represented level of 
earnings would not be ``conspicuous'' if set in small type, printed in 
a low-contrast ink, or buried amid extraneous information.
---------------------------------------------------------------------------

    \119\ The Franchise Rule contains a comparable provision, 16 CFR 
at 436.1(a), as do the UFOC Guidelines. UFOC Guidelines, General 
Instruction 150.
---------------------------------------------------------------------------

h. Proposed Section 437.1(h): ``Earnings Claim''
    Proposed section 437.1(h) would define the term ``earnings claim'' 
as ``any oral, written, or visual representation to a prospective 
purchaser that conveys, expressly or by implication, a specific level 
or range of actual or potential sales, or gross or net income or 
profits.''\120\ It is intended to cover all variations of earnings 
representations that the Commission's law enforcement experience shows 
are associated with business opportunity fraud.
---------------------------------------------------------------------------

    \120\ See UFOC Guidelines, Item 19.
---------------------------------------------------------------------------

    The definition also provides examples of communications that 
constitute earnings claims. The first of these examples is taken from 
the UFOC Guidelines' description of common types of potentially 
fraudulent earnings claims: ``a chart, table, or mathematical 
calculation that demonstrates possible results based upon a combination 
of variables.'' UFOC Guidelines, Item 19, at i.\121\ This is intended 
to clarify that sales matrixes that purport to show income from an 
array of ``vends'' per day from a vending machine, for example, would 
constitute an ``earnings claim'' under the proposed Rule.\122\
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    \121\ See also Staff Advisory Opinion, Handy Hardware Centers, 
Bus. Franchise Guide (CCH) ;] 6426 (1980).
    \122\ E.g., FTC v. Inspired Ventures, Inc., No. 02-21760-CIV-
Jordan (S.D. Fla. 2002); FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. 
La. 1989).
---------------------------------------------------------------------------

    The second example incorporates the principle, as expressed in the 
Interpretive Guides to the Franchise Rule, that ``any statements from 
which a prospective purchaser can reasonably infer that he or she will 
earn a minimum level of income'' constitutes an earnings claims. Such 
implied claims are at least as likely to mislead prospective purchasers 
as express claims. The proposed definition includes three specific 
examples illustrative of this type of earnings claim, as follows: 
``earn enough to buy a Porsche,'' ``earn a six-figure income,'' and 
``earn your investment back within one year.'' \123\ Each of these 
three illustrative examples imply a minimum value--the cost of the 
lowest priced Porsche in the first example, at least $100,000 in the 
second, and an amount equal to the purchaser's initial investment in 
the third.\124\ Accordingly, the proposed language makes it clear that 
these types of representations are indistinguishable from direct, 
express earnings claims.
---------------------------------------------------------------------------

    \123\ See Interpretive Guides, 44 FR at 49967.
    \124\ See Interpretive Guides, 44 FR at 59685 n. 486.
---------------------------------------------------------------------------

i. Proposed Section 437.1(i): ``Exclusive Territory''
    As discussed below, proposed section 437.5(n) would prohibit 
misrepresentations concerning exclusive territories. Representations 
about exclusive territories are material because they purport to assure 
a purchaser that he or she will not face competition from other 
business opportunity purchasers of the same type in his or her chosen 
location, or from the seller offering the same goods or services 
through alternative channels of distribution. Exclusive territory 
promises go to the viability of the business opportunity and to the 
level of risk entailed in the purchase. Indeed, misrepresented 
territories are commonly made by business opportunity sellers to lure 
consumers into believing that the offer poses little financial 
risk.\125\
---------------------------------------------------------------------------

    \125\ See Staff Program Review, supra note 39, at 39, 57. E.g., 
FTC v. Vendors Fin. Serv., Inc., No. 98-1832 (D. Colo. 1998); FTC v. 
Int'l Computer Concepts, Inc., No. 1:94CV1678 (N.D. Ohio 1994); FTC 
v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D. Fla. 1993); FTC v. Am. 
Safe Mktg., No. 1:89-CV-462-RLV (N.D. Ga. 1989).
---------------------------------------------------------------------------

    Proposed section 437.1(i) would define an exclusive territory as 
follows:
a specified geographic or other actual or implied marketing area in 
which the seller promises not to locate additional purchasers or 
offer the same or similar goods or services as the purchaser through 
alternative channels of distribution.

Thus, the definition of ``exclusive territory'' would reflect the 
common industry practice of establishing geographically delimited 
territories--such as a city, county, or state borders--as well as other 
marketing areas, such as those delineated by population.\126\ It 
includes both representations that other business opportunity 
purchasers will not be allowed to compete with a new purchaser within 
the territory, as well as representations that the business opportunity 
seller itself or other purchasers will not compete with the new 
purchaser through alternative means of distribution, such as through 
Internet sales. It also includes implied marketing areas, such as 
representations that the seller or other operators will not compete 
with the purchaser, without delineating a specific territory, or 
stating a vague or undefined territory, such as ``in the metropolitan 
area,'' or ``in this region.'' If false, any of these kinds of 
representations can mislead a prospect about the likelihood of his or 
her success.
---------------------------------------------------------------------------

    \126\ See UFOC Guidelines, Item 12 Instructions, ii.
---------------------------------------------------------------------------

j. Proposed Section 437.1(j): ``General Media''
    The term ``general media'' appears in proposed section 437.4(b), 
which prohibits business opportunity sellers from making 
unsubstantiated earnings claims in the ``general media.''\127\ Proposed 
section 437.1(j) would define the term ``general media'' as follows: 
``any instrumentality through which a person may communicate with the 
public, including, but not limited to, television, radio, print, 
Internet, billboard, Web site, and commercial bulk e-mail.''\128\ Thus, 
the definition includes traditional advertising media, such as 
television, radio, and newspapers, as well as new technologies such as 
the Internet (both standard advertisements and pop-up window ads), and 
Web sites.\129\ It also includes commercial bulk e-mail messages that 
are unsolicited, and often sent to individuals who have not previously 
expressed an interest in receiving an e-mail from the particular 
business opportunity seller.\130\
---------------------------------------------------------------------------

    \127\ This proposed provision is based on an analogous provision 
in the current Franchise Rule. 16 CFR at 436.1(e). The Commission 
has alleged violations of this provision in numerous cases, for 
example: FTC v. Wealth Sys., Inc., No. CV 05 0394 PHX JAT (D. Ariz. 
2005); U.S. v. Am. Coin-Op Servs., Inc., No. 00-0125 (N.D.N.Y. 
2000); U.S. v. Cigar Factory Outlet, Inc., No. 00-6209-CIV-Graham-
Turnoff (S.D. Fla. 2000); U.S. v. Emily Water & Beverage Co., Inc., 
No. 4-00-00131 (W.D. Mo. 2000); and U.S. v. Greeting Card Depot, 
Inc., No. 00-6212-CIV-Gold (S.D. Fla. 2000).
    \128\ See Interpretative Guides, 44 FR at 49984-85 (earnings 
claims made ``for general dissemination'' includes ``claims made in 
advertising (radio, television, magazines, newspapers, billboards, 
etc.), as well as those contained in speeches or press releases.'' 
We also note that the Interpretive Guides recognize several 
exemptions to the general media claim, such as claims made to the 
press in connection with bona fide news stories, as well as claims 
made directly to lending institutions. Id. We propose that future 
Compliance Guides to the new Business Opportunity Rule retain these 
standard general media claims exemptions.
    \129\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004) (challenging earnings claims posted on 
seller's Web site).
    \130\ See Informal Staff Advisory 04-2, Bus. Franchise Guides 
(CCH) ] 6522 (2004).

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[[Page 19066]]

k. Proposed Section 437.1(k): ``New Business''
    The term ``new business'' appears in section 437.1(d), setting 
forth the definitional elements of the term ``business opportunity.'' 
As noted above, the proposed ``business opportunity'' definition 
includes a ``solicitation to enter into a new business'' prong in order 
to distinguish the sale of a business opportunity from the ordinary 
sale of products and services. Section 437.1(k) would define the term 
``new business'' to mean ``a business in which the prospective 
purchaser is not currently engaged, or a new line or type of 
business.'' Thus, the definition covers not only the establishment of a 
new business, but also entry into a new ``line or type of business.'' 
The intention in including the latter language is to cover sales of 
business opportunities to persons who may already be in a business. It 
is reasonable to assume that an existing businessperson could be 
defrauded like any other consumer when expanding his or her business to 
include new products or services not currently offered for sale. For 
example, an existing tire business could purchase a vending machines 
route, or a beverage vending machine route owner could purchase an 
envelope stuffing opportunity.\131\ In such instances, the veteran 
businessperson may need the proposed Rule's protections as much as a 
novice.
---------------------------------------------------------------------------

    \131\ One commenter questioned whether the Rule should cover 
existing businesses that seek to expand into new lines of business. 
Caffey, 20Nov97 Tr at 25-27. In his view, experienced businesses may 
not need full disclosure, noting that the Commission recognized this 
point in including a fractional franchise exemption in the Franchise 
Rule. Id. We disagree. As a preliminary matter, we note that the 
current Franchise Rule's fractional franchise exemption is very 
narrow, covering instances where the purchaser has been in the same 
type of business for more than two years and the parties anticipate 
sales arising from the relationship will represent no more than 20% 
of total sales. 16 CFR at 436.2(a)(3)(i) and (h). The fractional 
franchise exemption's prior experience prerequisite recognizes the 
fact that, because a businessperson may be experienced in one 
sector--such as snack vending--does not necessarily mean that he or 
she is experienced enough to understand the potential for success 
and the risk of loss in another line of business, such as a greeting 
card rack display or envelope stuffing. Moreover, we are inclined to 
believe that a ``fractional'' exemption is unnecessary in the 
business opportunity context, given the greatly streamlined 
disclosure document contemplated by the proposed Rule, since the 
benefits of disclosure would outweigh the minimal compliance costs.
---------------------------------------------------------------------------

l. Proposed Section 437.1(l): ``Person''
    Proposed section 437.1(l) would define the term ``person,'' a term 
used in many of the proposed Rule's definitional or substantive 
provisions.\132\ As in the current Franchise Rule, the term would 
include: ``an individual, group, association, limited or general 
partnership, corporation, or any other entity.''\133\ Accordingly, the 
term ``person'' is to be read broadly to refer to both natural persons, 
businesses, associations, and other entities. Where the proposed Rule 
refers to a natural person only, it uses the term ``individual.''
---------------------------------------------------------------------------

    \132\ E.g., sections 437.1(o); 437.5(p).
    \133\ See 16 CFR at 436.2(b).
---------------------------------------------------------------------------

m. Proposed Section 437.1(m): ``Prior Business''
    As discussed below, section 437.3(a)(3) of the proposed Rule would 
require business opportunity sellers to disclose litigation in which 
they have been involved, in whole or in part, as well as that in which 
any of their affiliates or any prior businesses have been involved. 
Proposed section 437.1(m) defines ``prior business'' as
    (1) A business from which the seller acquired, directly or 
indirectly, the major portion of the business' assets, or
    (2) any business previously owned or operated by the seller, in 
whole or in part, by any of the seller's officers, directors, sales 
managers, or by any other individual who occupies a position or 
performs a function similar to that of an officer, director, or sales 
manager of the seller.
    Thus, the definition is broader than the definition of 
``predecessor'' found in the UFOC Guidelines, for example, which covers 
only an entity from whom a seller acquired, directly or indirectly, the 
major portion of the seller's assets.\134\ It includes instances where 
the seller owned or operated companies that ceased operations. This 
broader definition is necessary to eliminate a potential loophole that 
would exist under a more restrictive definition. The Commission's law 
enforcement experience shows that sellers of fraudulent business 
opportunities frequently ply their trade through multiple companies 
simultaneously or sequentially, disappearing in order to avoid 
detection, and then reemerging in some new form or different part of 
the country under new names. Accordingly, the broader ``prior 
business'' is needed to capture all of a seller's operations that might 
fall outside a narrower term like ``predecessor.''\135\
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    \134\ See UFOC Guidelines, Item 1 Instructions, iii.
    \135\ E.g., FTC v. Joseph Hayes, No. 4:96CV06126 SNL (E.D. Mo. 
1996); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D. Fla. 1993); 
FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. La. 1989).
---------------------------------------------------------------------------

n. Proposed Section 437.1(n): ``Providing Locations, Outlets, Accounts, 
or Customers''
    As noted above, one of the hallmarks of fraudulent business 
opportunities is the offer to find locations, outlets, or accounts for 
prospective purchasers. The seller itself may purport to secure 
locations, or may represent that third parties will do so for the 
business opportunity purchaser.\136\ Proposed section 437.1(n) would 
make clear that ``providing locations, outlets, accounts, or 
customers'' means:
---------------------------------------------------------------------------

    \136\ See, e.g., FTC v. Showcase Distribs., Inc., No. 95-1368-
PHX-SMM (D. Ariz. 1995) (location assistance found where investor 
introduced to a third party to secure locations or sites or provided 
with a list of such persons); FTC v. Jordan Ashley, Inc., No. 93-
2257-CIV-Nesbitt (S.D. Fla. 1994) (locations assistance found where 
purchasers referred to a professional locator); U.S. v. Hill, No. 
IP-154-CR (S.D. Inc. 1991) (location assistance found, in contempt 
action, where the promoter permitted investors to find their own 
locations or engaged the services of independent locating companies, 
but introduced investors to one or two ``favored'' locators). See 
also FTC v. World Traders Ass'n, Inc., No. CV05 0591 AHM (CTx) (C.D. 
Cal. 2005) (assistance in finding businesses to purchase surplus 
goods).

furnishing the prospective purchaser with existing or potential 
locations, outlets, accounts, or customers; requiring, recommending, 
or suggesting one or more locators or lead generating companies; 
collecting a fee on behalf of one or more locators or lead 
generating companies; or training or otherwise assisting the 
prospective purchaser in obtaining his or her own locations, 
---------------------------------------------------------------------------
outlets, accounts, or customers.

Accordingly, ``providing locations,'' for example, includes both an 
offer to provide locations that have already been found, as well as an 
offer to furnish a list of potential locations. It includes not only 
directly furnishing locations, but also recommending to a prospective 
purchaser specific locators, providing a list of locators who will 
furnish the locations, and training or otherwise assisting prospects in 
finding their own locations.\137\ The Commission's law enforcement 
history shows that in either case, misrepresentations of this nature 
are particularly potent fraudulent devices to which prospective 
purchasers are susceptible because of their reliance on the seller's 
expertise in making their investment decision.\138\
---------------------------------------------------------------------------

    \137\ The scope of this definition is consistent with the 
parallel scope of ``location assistance'' required for business 
opportunity coverage by the Franchise Rule. See Staff Advisory 
Opinion 95-10, Bus. Franchise Guide (CC) ] 6475 (1995).
    \138\ See, e.g., FTC v. Greeting Cards of Am., Inc., No. 03-
60745-CIV-Gold (S.D. Fla. 2003); FTC v. Home Professions, Inc., No. 
00-111 (C.D. Cal. 2000); FTC v. Hart Mktg. Enter. Ltd., Inc., No. 
98-222-CIV-T-23 E (M.D. Fla. 1998); FTC v. Hi Tech Mint Sys., Inc., 
No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); FTC v. Fresh-O-Matic Corp., 
No. 96-CV-315-CAS (E.D. Mo. 1996).

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[[Page 19067]]

o. Proposed Section 437.1(o): ``Purchaser''
    Proposed section 437.1(o) would define the term ``purchaser'' to 
mean ``a person who buys a business opportunity.'' By operation of the 
definition of ``person'' in section 437.1(l), a natural person, as well 
as any of various entities, would qualify as a business opportunity 
purchaser.\139\
---------------------------------------------------------------------------

    \139\ See 16 CFR at 436.2(b).
---------------------------------------------------------------------------

p. Proposed Section 437.1(p): ``Quarterly''
    To ensure accuracy and reliability of disclosures, proposed section 
437.3(b) would require sellers to revise their disclosures at least 
``quarterly.'' \140\ Proposed section 437.1(p) would set forth a bright 
line rule that is easy to follow and that would ensure uniformity of 
disclosures: ``quarterly'' means ``as of January 1, April 1, July 1, 
and October 1.'' Thus, the proposed Rule would require sellers to 
update their disclosure by those specific dates each year.
---------------------------------------------------------------------------

    \140\ See 16 CFR at 436.1(a)(22).
---------------------------------------------------------------------------

q. Proposed Section 437.1(q): ``Seller''
    Proposed section 437.1(q) defines the term ``seller'' to mean: ``a 
person who offers for sale or sells a business opportunity.'' Like the 
``purchaser'' definition, it contemplates that both natural persons and 
entities may be business opportunity sellers.
r. Proposed Section 437.1(r): ``Written'' or ``In Writing''
    Proposed section 437.1(r) would define the terms ``written'' or 
``in writing,'' which are used throughout the proposed Rule.\141\ The 
terms are defined to include type-set, word processed, printed, 
handwritten, and faxed documents. The definition also would include new 
technologies, such as information stored in computer disks or CD-ROMs, 
as well as information sent via email or posted on the Internet.\142\ 
Nevertheless, the definition seeks a balance, minimizing compliance 
costs while preventing fraud. To that end, the definition would make 
clear that all electronic media must be in a form ``capable of being 
downloaded, printed, or otherwise preserved in tangible form and 
read,'' thus ensuring that a prospective purchaser who receives 
disclosures electronically can read them, share them with an advisor, 
and retain them for future use.
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    \141\ E.g, sections 437.2, 437.3(a), 437.4(a).
    \142\ Cf. Franchise Rule NPR, 64 FR at 57333. This proposal 
would effectively permit business opportunity sellers to comply with 
the proposed Rule electronically, consistent with the Electronic 
Signatures in Global and National Commerce Act, 15 U.S.C. 7001.
---------------------------------------------------------------------------

2. Proposed Section 437.2: The Obligation To Furnish Written Documents

    Proposed section 437.2 would set forth the Rule's basic disclosure 
obligation. It would specify that it is a violation of the Rule and 
section 5 of the FTC Act for a seller to fail to furnish a prospective 
business opportunity purchaser with a complete and accurate basic 
disclosure document containing particular items of material information 
(section 437.3(a)) and, where applicable, an earnings claim statement 
(section 437.4(a)). The provision requires that these disclosures must 
be provided to prospective purchasers ``at least seven calendar days 
before the earlier of the time that the prospective purchaser: (1) 
Signs any contract in connection with the business opportunity sale; or 
(2) makes a payment or provides other consideration to the seller, 
directly or indirectly through a third party.'' These two requirements 
are discussed immediately below.
a. ``Seven Calendar Days''
    The proposed seven calendar-day timing period is modeled on the 
current Franchise Rule requirement that franchisors furnish prospective 
purchasers with a completed copy of the franchise agreement at least 
five business days (which typically works out to be seven calendar 
days), before the agreement is executed.\143\ The Commission believes 
that seven calendar days is sufficient to enable a prospective 
purchaser to review the basic disclosure document and any earnings 
claims statement, as well as conduct a due diligence review of the 
offering, including contacting references. Nevertheless, the Commission 
recognizes that for business opportunity sales--as opposed to more 
complex franchise sales--a shorter period may be warranted. 
Accordingly, the Commission solicits comment on whether it should adopt 
a shorter time period.
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    \143\ 16 CFR 436.1(g). See NASAA, ANPR 120, at 4 (advocating 10 
business days); Wieczorek, 21Aug97 Tr at 113-14 (suggesting a seven-
day or 10 calendar-day waiting period). But see Caffey, ANPR 94, at 
2 (opposing any waiting period).
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b. Signing a Contract or Making a Payment as the Trigger for the 
Disclosure Obligation
    Proposed section 437.2 would set forth two events before which the 
seller must furnish disclosures: The execution of any contract in 
connection with the business opportunity sale, or the payment of any 
consideration.\144\ This provision ensures a uniform standard for 
determining when sellers must furnish disclosures, while ensuring 
sufficient time for prospective purchasers to review the sellers' 
disclosures before putting money at risk. To prevent circumvention of 
this requirement, section 437.2 clarifies that payment to the seller 
can be made either directly to the seller or indirectly through a third 
party, such as a broker or locator.\145\
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    \144\ This is similar to the comparable Franchise Rule 
provision. 16 CFR at 436.1(a) and 436.2(g).
    \145\ This proposal is narrower than the original Franchise Rule 
approach. Under the original Franchise Rule, a franchisor must 
furnish a disclosure document before the signing of a contract or 
``the payment by a prospective franchisee, about which the 
franchisor, franchise broker, or any agent, representative, or 
employee thereof, knows or should know, of any consideration in 
connection with the sale or proposed sale of a franchise.'' 16 CFR 
at 436.2(g). Accordingly, a franchisor must furnish the disclosures 
if it knows or should know that a prospective franchisee is going to 
pay for required equipment from a third party. See Interpretive 
Guides, 44 FR 49970. To reduce compliance burdens, the proposed 
Business Opportunity Rule, in contrast, would provide that a seller 
must provide required disclosure seven calendar days before it 
actually receives consideration, directly or indirectly from a third 
party.
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3. Proposed Section 437.3: The Basic Disclosure Document

    Proposed section 437.3 specifies the items of material information 
that must be included in the basic disclosure document. As an initial 
matter, we note that the proposed Rule specifies that only sellers of 
business opportunities have an obligation to prepare and furnish a 
basic disclosure document. Other persons involved in the sale of a 
business opportunity--such as brokers, locators, or suppliers--would 
have no obligation to prepare basic disclosure documents or to furnish 
such documents. The ultimate responsibility to ensure that disclosures 
are accurately prepared and disseminated would rest with the 
seller.\146\
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    \146\ See Wieczorek, 20Nov97 Tr at 13. This is the same approach 
staff has recommended with respect to the Franchise Rule. See Staff 
Report on the Proposed Revised FTC Franchise Rule, at 85 (Aug. 25, 
2004) (``Franchise Rule Staff Report'') (available at http://www.ftc.gov/os/2004/08/0408franchiserulerpt.pdf.
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    Proposed Sec.  437.3(a) would provide instructions for preparing 
the basic disclosure document. Specifically, sellers must present the 
information in ``a single written document in the form and using the 
language set forth in Appendix A to part 437''. The single written 
document requirement is necessary to ensure that disclosures are not 
furnished in piecemeal fashion that can easily be overlooked or lost. 
It

[[Page 19068]]

would also prevent a seller from circumventing the Rule by presenting 
damaging information in a format that is not sufficiently prominent to 
be noticed and understood, or not readily accessible.\147\ By 
specifying that the basic disclosure document be ``in the form and 
using the language set forth in Appendix A,'' the Commission intends to 
make clear that all of the standard disclosures and other wording shown 
in Appendix A are to be followed without deviation. Failure to follow 
Appendix A's form and language would violate the Rule.
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    \147\ See 16 CFR at 436.1(a)(21).
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    Appendix A to part 437 would set forth the required format and 
language of the disclosure document. It consists of a single page and 
certain attachments that in some instances may be necessary. 
Specifically, Appendix A prescribes required introductory identifying 
information, a standard preamble, and five substantive disclosures: (1) 
Earnings claims; (2) legal actions; (3) cancellation or refund policy; 
(4) cancellation or refund request history; and (5) references. Three 
of these disclosure items--earnings claims, legal actions, and 
cancellation or refund policy--take the form of a ``yes'' or ``no'' 
check box on the disclosure document. Finally, the seller must include 
a copy of the basic disclosure document to be signed by the prospect as 
a receipt. Each of these elements of the required disclosure document 
is explained in greater detail below.
a. Identifying Information
    The basic disclosure document would begin with identifying 
information about the seller.\148\ Proposed section 437.3(a)(1) would 
specify that the seller must include the seller's name, business 
address, telephone number, the name of the salesperson offering the 
opportunity,\149\ and the date. This background information is material 
because it would enable a prospective purchaser to contact the seller 
and any salesperson for additional information, while providing a 
written record of who provided the required disclosures and when for 
law enforcement purposes.
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    \148\ See 16 CFR at 436.1(a)(1) (requiring the disclosure of the 
official name and address of the principal place of business of the 
franchisor); UFOC Guidelines, Cover Page, at 2; Item 1. The 
Commission has long recognized the materiality of a business 
opportunity seller's background information. For example, in the 
Franchise Rule SBP, the Commission concluded that:
    The failure to disclose such material information * * * may 
mislead the [prospect] as to the business experience of the parties 
with whom he or she is dealing and * * * could easily result in 
economic injury to the [prospect] because of the * * * dependence 
upon the business experience and expertise of the [business 
opportunity seller].
    43 FR at 59642. Other Commission trade regulation rules 
similarly require identity disclosures. E.g., Wool Products Labeling 
Rule, 16 CFR at 300.14 (recognizing that names on a label may 
mislead consumers about the actual manufacturer); Fur Products 
Labeling Rule, 16 CFR at 301.43 (recognizing that corporate name may 
mislead consumers about the character of the product).
    \149\ See D'Imperio, Sept95 Tr at 278 (asserting that disclosure 
of salesperson is an imperative disclosure).
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b. Preamble
    After the identifying information, the basic disclosure document 
would prescribe a preamble that briefly explains the purpose and 
limitations of the disclosures to prospective purchasers. Specifically, 
the preamble would state that the information contained in the 
disclosure document ``can help you in deciding whether to purchase a 
business opportunity.'' At the same time, it cautions that ``no 
governmental agency has verified the information.'' \150\ It also 
advises prospects to seek more information from the FTC by calling the 
FTC or visiting the FTC's Web site.\151\ It also advises prospects to 
check for information about additional state law requirements with 
their state's attorney general office.
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    \150\ This is very similar to the current Franchise Rule 
approach. See 16 CFR at 436.1(a)(21).
    \151\ The reference to the FTC Web site will further reduce 
fraud by giving prospects access to a wealth of information about 
business opportunities, including news releases on individual cases 
and joint enforcement sweeps, consumer education materials, and 
Commission reports.
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c. ``Yes'' or ``No'' Disclosure Items
    As noted above, the basic disclosure document would instruct the 
seller to check a box providing ``yes'' or ``no'' as to whether it: (1) 
Makes earnings claims; (2) has been the subject of legal actions; and 
(3) offers cancellation or refund rights.
i. Proposed Section 437.3(a)(2): Earnings Claims
    Proposed section 437.3(a)(2) would address earnings claims. As 
discussed further below in connection with section 437.4, the Rule 
would permit sellers to make an earnings claim, provided there is a 
reasonable basis for the claim and the seller can substantiate the 
claim at the time it is made.\152\ If the seller makes no earnings 
claim, then section 437.3(a)(2) would direct the seller simply to check 
the ``no'' box. If the seller does make an earnings claim, however, 
then the Rule would require the seller to check the ``yes'' box and to 
furnish the prospective purchaser with an earnings claim statement 
attached to the basic disclosure document.\153\
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    \152\ This is consistent with analogous provisions in the 
Franchise Rule, 16 CFR 436.1(b), (c), and (e), as well as the UFOC 
Guidelines, Item 19.
    \153\ Business opportunity sellers must also make the following 
prescribed cautionary statement in close proximity to the ``yes'' or 
``no'' check boxes: ``Read this statement carefully. You may wish to 
show this information to an advisor or accountant.'' Obviously, this 
statement would not apply when a seller checks the ``no'' box.
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ii. Proposed Section 437.3(a)(3): Legal Actions
    Proposed section 437.3(a)(3) would address fraud in the sale of 
business opportunities by requiring the disclosure of material 
information about certain prior legal actions.\154\ Specifically, if 
the seller or certain persons associated with the seller have been the 
subject of specific types of actions within the last 10 years, the 
seller would be required to check the ``yes'' box. The types of actions 
covered by this provision include ``any civil or criminal actions for 
misrepresentation, fraud, securities law violations, or unfair or 
deceptive practices.'' Knowledge of actions of this nature against the 
seller or other persons associated with the seller would obviously 
affect a prospective purchaser's decision to go forward with the 
transaction. Moreover, the obligation to disclose these actions is not 
narrowly confined to the seller in its specific current corporate 
identity. It extends to any ``affiliate or prior business of the 
seller,'' any of the seller's ``officers, directors, sales managers, or 
any individual who occupies a position or performs a function similar 
to an officer, director, or sales manager of the seller,'' as well as 
any of the seller's ``employees who are involved in business 
opportunity sales activities.'' If there are no actions to disclose, 
the seller would simply check the ``no'' box.
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    \154\ This provision is based upon analogous provisions of the 
original Franchise Rule, 16 CFR 436.1(a)(4), and UFOC Guidelines, 
UFOC Item 3. In connection with the Franchise Rule, the Commission 
stated in the Franchise Rule SBP that litigation history is material 
because it bears on the ``integrity and financial standing of the 
[seller].'' 43 FR at 59649. E.g., FTC v. Joseph Hayes, No. 
4:96CV02162SNL (E.D. Mo. 1996) (full disclosure would have revealed 
prior state fines and injunctions); FTC v. Inv. Dev. Inc., No. 89-
0642 (E.D. La. 1989) (full disclosure would have revealed arson and 
insurance fraud convictions).
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    Disclosure of actions against ``any affiliate or prior business of 
the seller'' is necessary to prevent circumvention of the Rule. 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

[[Page 19069]]

avoid detection.\155\ The requirement to disclose legal actions against 
affiliates or prior businesses is designed to thwart such attempts to 
skirt the Rule.
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    \155\ See discussion of section 437.1(m) (``prior business'') 
above.
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    The obligation to disclose prior legal actions reaches ``any of the 
seller's officers, directors, sales managers, or any individual who 
occupies a position or performs a function similar to an officer, 
director, or sales manager of the seller'' \156\ to ensure that key 
officers and sales personnel with prior litigation against them cannot 
evade the Rule by merely foregoing a formal title. It is the function 
such individuals perform, not a title, that triggers the proposed 
Rule's disclosure obligation. In the Commission's experience, there is 
often little correlation between titles and functions performed in 
business opportunity scams. Business opportunity sellers often operate 
as a ``d/b/a.'' \157\ Even when a seller operates through a 
corporation, there often is no compliance with corporate formalities, 
or other separations of the entity from its owners, and any of the 
individuals involved in such operations may go on to operate multiple 
frauds in a variety of corporate formats.\158\ Accordingly, any person 
who acts as a corporate director, officer, or sales manager would be 
deemed to fall within the ambit of the lawsuit disclosure requirement, 
whether or not he or she has a formal corporate title.
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    \156\ The original Franchise Rule and UFOC Guidelines have 
comparable disclosure requirements. See 16 CFR at 436.1(a)(2) and 
(3) (directors, executives, including the chief executive and chief 
operating officer, financial, franchise marketing, training and 
service officers); UFOC Guidelines, Items 2 and 3 (affiliates 
offering franchises under the franchisor's principal trademark, 
directors, trustees and/or general partners, the principal officers, 
and other executives or subfranchisors who will have management 
responsibility relating to the offered franchises). Cf. Franchise 
Rule Staff Report, supra note 146, at 101 (recommending that a 
franchisor identify all individuals who control the franchisor, 
regardless of any formal title).
    \157\ E.g., FTC v. Am. Universal Vending Corp., No. 00-0155 
(W.D.N.Y. 2000); FTC v. Data Med. Capital, Inc., No. SACV-99-1266 
(C.D. Cal. 1999).
    \158\ E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir. 2003); FTC 
v. Inv. Dev. Inc., No. 89-0642 (E.D. La. 1989).
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    The section 437.3(a)(3) litigation disclosure would also extend to 
the ``seller's employees who are involved in business opportunity sales 
activities.'' \159\ The Commission's law enforcement experience shows 
that sales employees, like officers, often make material 
misrepresentations to induce prospects to purchase a business 
opportunity.\160\ To enable a prospective purchaser to evaluate better 
such salesperson's statements, the Rule would require a business 
opportunity seller to disclose certain information about sales 
personnel's prior adverse legal history.
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    \159\ See D'Imperio, Sept95 Tr at 278 (asserting that 
salesperson litigation is a critical disclosure).
    \160\ E.g., FTC v. Universal Greeting Card Corp., No. 02-21753-
CIV-Jordan (S.D. Fla. 2002); FTC v. Raymond Urso, No. 97-2680-CIV-
Ungaro-Benages (S.D. Fla. 1997). See also FTC v. America's Shopping 
Network, Inc., No. 02-80540-CIV-Hurley (S.D. Fla. 2002).
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    The seller, however, would have no obligation to disclose 
litigation against other employees--secretarial, clerical, and 
accounting staff, for example. Indeed, because a prospective purchaser 
typically does not rely on these individuals' expertise, and does not 
expect these individuals to perform under the business opportunity 
agreement, any litigation in which they may have been involved is 
largely immaterial to the business opportunity sale.
    To minimize compliance costs, only criminal proceedings or civil 
actions involving ``misrepresentation, fraud, securities law 
violations, or unfair or deceptive practices'' would be disclosed.\161\ 
As previously noted in the discussion of the term ``action,'' 
disclosure of such actions is required regardless of whether the claim 
is brought in a court or administrative action or arbitration 
proceeding, and whether it is brought by a private party or a 
governmental agency.\162\ The Commission believes that these types of 
actions are the most relevant in addressing business opportunity 
fraud.\163\
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    \161\ This is narrower than the range of actions that must be 
disclosed under the Franchise Rule. See 16 CFR at 436.1(a)(4) (legal 
actions that must be disclosed include embezzlement, fraudulent 
conversion, misappropriation of property, and actions filed by 
franchisees involving the franchise relationship). See also UFOC 
Guidelines, Item 3 (franchise, antitrust, or securities law, fraud, 
unfair or deceptive practices, or comparable allegations). One 
commenter suggested that the enumerated list of legal actions that 
must be disclosed in the Franchise Rule context may be unwarranted 
for business opportunities. We agree. See Wieczorek, 21Aug97 Tr at 
124 (suggesting that disclosure of embezzlement, fraudulent 
conversion, and restraint of trade litigation for business 
opportunities may go too far).
    \162\ The proposed disclosure of legal actions is broader than 
the comparable disclosure under the Franchise Rule in one respect. 
The proposed Rule contemplates that a business opportunity seller 
must disclose prior suits even if the seller prevailed. In contrast, 
franchisors need not disclose isolated instances of suits in which 
they prevailed if such suits are not material. See 16 CFR at 
436.1(a)(4)(ii) (only material individual civil actions need be 
listed). With respect to business opportunities, the filing of a 
suit for fraud or misrepresentation, for example, is likely to 
indicate discontent with the business opportunity seller, which is a 
material fact needed for a prospective purchaser to assess the 
quality of the relationship between the seller and prior purchasers. 
In that regard, it is comparable to the disclosure of requests for 
cancellation or refund, even if the sales agreement contemplates no 
cancellations or refunds, addressed below. See also 16 CFR at 
436.1(a)(4)(ii) (requiring disclosure of ``any group of civil 
actions which, irrespective of the materiality of any single such 
action, in the aggregate is material'').
    \163\ See Finnigan, 21Aug97 Tr at 123 (observing that litigation 
disclosures are ``crucial information,'' but should be limited); 
Sokol, id. (suggesting fraud litigation by an enforcement body 
should be disclosed).
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    To minimize compliance costs further, the proposed Rule would not 
require sellers to detail the nature of each legal action, as in the 
Franchise Rule.\164\ If the seller has litigation to disclose, it need 
only state in an attachment to the disclosure document the full caption 
of each legal matter (names of the principal parties, case number, full 
name of court, and filing date). We note that the disclosure document 
itself instructs prospects that the legal matters disclosed pertain to 
``misrepresentation, fraud, securities law violation, or unfair or 
deceptive practices.'' This will provide the prospect with a basic 
understanding of the subject matter of the action. Armed with the full 
caption, a prospective purchaser can seek additional information if he 
or she so chooses.\165\
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    \164\ Cf. 16 CFR at 436.1(a)(4) (``Such statement shall set 
forth the identity and location of the court or agency; the date of 
conviction, judgment, or decision; the penalty imposed; the damages 
assessed; the terms of the settlement or the terms of the order; and 
the date, nature, and issuer of each such order or ruling.'').
    \165\ We note that the public's ability to review complaints in 
legal proceedings has become significantly easier since the advent 
of the Internet. Many legal documents are now routinely posted on 
court or related websites.
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iii. Proposed Section 437.3(a)(4): Cancellation or Refund Policy
    Proposed section 437.3(a)(4) would require sellers to disclose all 
terms and conditions of any cancellation or refund policy.\166\ This 
pertains to a common practice among business opportunity sellers, 
namely, offering prospective purchasers the right to cancel or to seek 
a whole or partial refund.\167\ Such

[[Page 19070]]

cancellation or refund offers are material to prospective purchasers 
because they involve the potential risk of the proposed transaction, 
creating the impression that the business opportunity offer is either 
risk free or a low financial risk. Indeed, the Staff Program Review 
found that 24% of business opportunity complaints involved consumers 
seeking to cancel their purchase (818 of 4512 complaints), and 22% 
involved a refund policy issue (752 of 4512 complaints).\168\
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    \166\ The Commission adopted the same approach in the TSR. See 
16 CFR at 310.3(a)(1)(iii) (If a seller makes a representation about 
a refund policy, it must disclose ``a statement of all material 
terms and conditions of such policy.''). See also Cecal, 21Aug97 Tr 
at 126 (suggesting there should be a refund policy statement).
    \167\ See, e.g., FTC v. AMP Publ'n., Inc., No. SACV-00-112-AHS-
ANx (C.D. Cal. 2001); FTC v. Home Professions, Inc., No. SACV 00-111 
AHS (Eex) (C.D. Cal. 2001); FTC Innovative Prods., No. 3:00-CV-0312-
D (N.D. Tex. 2000); FTC v. Encore Networking Servs., No. 00-1083 WJR 
(AIJx) (C.D. Cal. 2000); FTC v. Mediworks, Inc. No. 00-01079 (C.D. 
Cal. 2000). Indeed, allegations that business opportunity sellers 
misrepresented their refund policies ranks among the top 10 
complaint allegations in Commission business opportunity cases 
brought under Section 5. See Staff Program Review, supra note 39, at 
39.
    \168\ Staff Program Review, supra note 39, at 57.
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    The proposed Rule does not require any seller to offer cancellation 
or a refund. Rather, if a seller does make a cancellation or refund 
offer, it must disclose the terms and conditions prior to the sale. 
Specifically, a seller that offers a cancellation or refund policy must 
check the ``yes'' box on the disclosure document and also must attach 
to the disclosure document a written description of its policy. To 
minimize compliance costs, the seller may comply with this disclosure 
by attaching to the disclosure document a copy of a pre-existing 
document that details the seller's cancellation or refund policy. For 
example, a seller may detail its refund policy in a company brochure. 
If so, the seller need only attach to the disclosure document the 
particular page setting forth the refund policy. As in the other 
examples above, if no cancellation or refund is offered, then the 
seller need only check the ``no'' box.
d. Proposed Section 437.3(a)(5): Cancellation and Refund History
    In addition to the ``yes'' or ``no'' items discussed above, the 
proposed Rule would require sellers to disclose information about prior 
cancellation or refund requests. This information is material to 
prospective purchasers because it goes to the viability of the 
business, the success of past purchasers, and their satisfaction with 
the business opportunity. Knowing that a seller has received a large 
number of cancellation or refund requests would likely influence a 
prospective purchaser's decision as to whether to go forward with a 
transaction.
    In many instances, business opportunity sellers make false or 
deceptive claims about the success of prior purchasers.\169\ Such 
claims are similar to false earnings representations in that they imply 
that the purchaser will also be successful, or, at the very least, that 
the seller's offer is a safe investment.\170\ The most effective 
measure to combat such practices might be to require a business 
opportunity seller to disclose the drop-out rate of prior purchasers of 
the same opportunity within a given time period. Such an approach would 
be similar to the Franchise Rule requirement of detailed disclosures 
about the number of existing franchisees, as well as those who have 
left the system in the previous year.\171\
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    \169\ E.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL (AJWx) 
(C.D. Cal. 2002); FTC v. 2Xtreme Performance Int'l, LLC, No. JFM 
99CV 3679 (D. Md. 1999); In re Computer Bus. Servs., FTC C-3705 
(1996); FTC v. Roche, No. SACV 96-481 LHM (Eex) (C.D. Cal. 1996); 
FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez (S.D. 
Fla. 1996).
    \170\ Cf. Franchise Rule SBP, 43 FR at 59670-71 (``statistical 
information gives [prospects] material information about the size of 
the * * * system they are contemplating joining and sheds light on 
the prospect's likelihood of success.'').
    \171\ See 16 CFR at 436.1(a)(16); UFOC Guidelines, Item 20. See 
also Finnigan, 21Aug97 Tr at 167 (identifying success rate of a 
business opportunity as a ``crucial piece of information''). On the 
other hand, DSA and its members contended that a drop-out rate may 
be misleading in the multilevel marketing field, where, because of 
the low entry costs, people may test the waters for a period before 
deciding whether to continue with the program. E.g., Elman, 21Aug97 
Tr at 155-56; 168-69; Brown, id. at 157-58, 168. In such 
circumstances, a drop-out rate disclosure may overstate the 
difficulty of succeeding in the business. But see In re Amway, 93 
FTC 618 (1979) (ordering Amway to make such a disclosure). The 
approach taken in the proposed Rule does not require a drop-out 
rate. Rather than requiring disclosure of a broad drop-out rate, it 
focuses narrowly on a subset of purchasers who have ceased 
operations, namely those who have requested to cancel or to obtain a 
refund.
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    The Commission recognizes, however, that a business opportunity 
seller may not have access to detailed information about prior 
purchasers who have ceased operations. For example, a vending business 
opportunity seller may have no further contacts with purchasers after 
locating the machines and, therefore, would not necessarily know if the 
purchaser subsequently abandons the business. This is in contrast with 
the typical business format franchise, where the franchisor maintains 
direct and extensive contacts with its franchisees during the entire 
course of the franchise relationship. With respect to a typical 
business opportunity transaction, therefore, the Commission believes it 
would be impracticable to mandate a drop-out rate disclosure.
    In lieu of a drop-out rate, the Commission proposes that sellers 
disclose cancellation or refund requests \172\ made by prior purchasers 
during the past two years.\173\ Specifically, proposed section 
437.3(a)(5) would require sellers to state first the number of 
purchasers of the business opportunity during the two years prior to 
the date of disclosure.\174\ This number would serve as a base line. 
Second, the seller would disclose the number of those purchasers who, 
during the same two-year period, asked to cancel their purchase or 
sought a refund, whether or not the purchaser has the contractual right 
to receive a cancellation or refund. This two-fold disclosure is 
reflected in Appendix A to the proposed Rule, setting forth the 
required format and language of the disclosure requirement.
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    \172\ As discussed above, the definition of ``cancellation or 
refund request'' is broad, including any request for cancellation or 
a full or partial refund, whether or not the requester has the 
contractual right to receive such a remedy.
    \173\ Cf. Illinois Act, 815 ILCS Sec.  602/5-35(b)(16)(B) (``The 
names and addresses of purchasers who have requested a refund or 
rescission from the seller within the last 12 months and the number 
of those who have received the refund or rescission). See also CA 
BLS, RR 45, at 9 (``If there is a promise to refund if the purchaser 
is not satisfied with the business opportunity, the number of times 
this has occurred during a certain period of time is relevant.'').
    \174\ See Wieczorek, 21Aug97 Tr at 157; Cecal, id. at 159.
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    The Commission believes that this proposed disclosure is narrowly 
tailored and would impose minimal compliance costs. It does not require 
a seller to gather statistics about the status of prior purchasers. 
Rather, the seller need only report the number of sales, as well as the 
total number of requests for cancellations or refunds that it has 
received,\175\ both of which should be easy to tally. In addition, it 
would require sellers to disclose only the number of cancellation 
requests or refunds, not the identity of individual cancellation or 
refund requesters.
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    \175\ For purposes of this disclosure, the term ``past two 
years'' means the eight quarters immediately preceding the date of 
the disclosure document. This would require quarterly updating, 
consistent with the Rule's general updating provision, discussed 
below at proposed section 437.3(b).
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    While the Commission believes that information on refund requests 
can provide material information on the satisfaction of previous 
purchasers, it is also aware that it is possible that such a disclosure 
requirement might cause some sellers to discourage refund requests by 
not offering refunds or by limiting the situations in which refunds are 
offered. On the other hand, the absence of a refund provision or the 
presence of a very restrictive provision might reduce the 
attractiveness of the offer. Therefore, the Commission invites comment 
on the likely effect of this provision on the willingness of business 
opportunity sellers to offer refunds.

[[Page 19071]]

e. Proposed Section 437.3(a)(6): References
    Proposed section 437.3(a)(6) would require the disclosure of a 
limited number of prior purchasers as references. As in the current 
Franchise Rule,\176\ the Commission believes that the disclosure of 
prior purchasers is very important to prevent fraud because it enables 
prospects to verify the seller's claims independently.\177\ Such a 
disclosure has been required for over 25 years for business 
opportunities covered by the Franchise Rule.
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    \176\ 16 CFR at 436.1(a)(16)(iii).
    \177\ See Franchise Rule SBP, 43 FR at 59673 (The disclosure of 
current franchisees' names and addresses ``will provide prospective 
franchisees with a means to (a) ascertain the problems confronting 
franchisees operating under conditions similar to those under which 
the prospective franchisees would be operating, and (b) verify the 
representations by the franchisor concerning the franchise'').
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    Nevertheless, this proposed disclosure was one of the most 
controversial proposals in the ANPR. Several business opportunity 
seller representatives asserted that names of prior purchasers are 
proprietary information, essentially comprising a customer list. They 
maintained that there are certain fundamental differences between 
franchises and business opportunities with respect to the sensitivity 
of such information. They argued that in franchise relationships, 
franchisees are often subject to supplier agreements that compel them 
to purchase goods or services from specific sources contractually 
mandated by the franchisor. Accordingly, competing suppliers would not 
approach a franchisee listed in a disclosure document as a potential 
customer. In contrast, the seller of a business opportunity, such as a 
vending machine route, may supply the purchaser not only with machines, 
but products to fill the machines. Often, however, there is no ongoing 
contractual provision limiting the purchaser's source of supplies. A 
list of prior business opportunity purchasers, therefore, is 
essentially a list of potential customers.\178\
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    \178\ See, e.g., Catalano, ANPR 27, at 2-4 (``[U]nscrupulous 
competitors [with] access to the customer base of legitimate 
business opportunity sellers * * * would have a `field day' 
contacting customers of other sellers, attempting to sell them 
competing products and services.''); Brown, 21Aug97 Tr at 167 
(contending that Amway would fight ``tooth and nail'' to not 
disclose purchaser information, which it views as its customer 
list); Silverman 20Nov97 Tr at 222-23.
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    While the commenters' concern is not without merit, the Commission 
believes that the value to prospects of information about prior 
purchasers is so great as to outweigh any potential detriment to 
sellers jealous of their customer base. First, the only way prospects 
can reasonably protect themselves from a seller's fraudulent claims is 
to conduct their own due diligence review of the business opportunity 
offer by contacting prior purchasers.\179\ Unlike franchisees 
identified by a common trademark or trade name, who can be identified 
by looking in the yellow pages or other business directories, business 
opportunity purchasers are not readily identifiable. Indeed, many 
business opportunities are conducted out of the purchaser's home, 
making them difficult, if not impossible, to find. Under the 
circumstances, the Commission concludes that a disclosure of references 
is essential.
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    \179\ See Rabenberg, Sept95 Tr at 105-06 (business opportunity 
purchaser asserting that the disclosure of names and addresses of 
existing purchasers is material information needed to conduct a due 
diligence investigation of the offer); D'Imperio, RR 16, at 3 
(priority should be given to mandatory disclosure of reliable 
contact information).
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    The Commission has taken care to limit the scope of proposed 
section 437.3(a)(6). The seller need only disclose the name, city and 
state,\180\ and telephone number of each prior purchaser (if fewer than 
10), or at least the 10 prior purchasers nearest to the prospective 
purchaser's location.\181\ In order to minimize compliance costs 
further, the proposed Rule provides an alternative: 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.\182\ For example, the 
seller making disclosures online could maintain a master list of 
purchasers on its website that can be updated periodically. This would 
enable the seller to avoid having to tailor the disclosure to each 
prospective purchaser. Proposed section 437.3(a)(6) specifies that 
sellers selecting the national option must insert the words ``See 
Attached List'' and attach a list of the references to the disclosure 
document.
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    \180\ The proposed Rule would not require the disclosure of 
prior purchasers' street addresses. The Commission believes that 
prospects can readily contact a prior purchaser if provided with the 
prior purchaser's name, city and state, and telephone number. This 
approach enables prospects to contact references while minimizing 
the intrusion into prior purchasers' privacy.
    \181\ See 16 CFR at 436.1(a)(16)(iii).
    \182\ See Catalano, ANPR 27, at 5. Mr. Catalano opposed the 
required disclosure of prior purchasers. He stated, however, that if 
the Commission were to mandate such a requirement, then sellers may 
prefer disclosing a single national reference list to the regulatory 
burden imposed by compiling individualized reference lists for each 
prospective purchaser. Id.
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    In addition, proposed section 437.3(a)(6) would limit the 
disclosure of references to those who have purchased the business 
opportunity within the last three years. The Commission believes that 
purchasers within the last three years--as opposed to those who 
purchased the business opportunity earlier than that--are likely to 
have the most current information about the seller and its business 
operation. Limiting the disclosure of references to a three-year period 
will also minimize compliance costs.
    Finally, proposed section 437.3(a)(6) would address the privacy 
concerns raised by the use of purchaser information. As noted above, 
the proposed Rule would require a seller to disclose the name, city and 
state, and telephone number of certain purchasers to serve as 
references. The Commission has concerns about privacy protection with 
respect to requiring the disclosure of prior purchasers' contact 
information--notwithstanding the fact that this type of information is 
often readily available and in the public domain from such sources as 
telephone directories. To address this concern, the Commission proposes 
that sellers be required to state the following language clearly and 
conspicuously in their disclosure document and in immediate conjunction 
with the list of references: ``If you buy a business opportunity from 
the seller, your contact information can be disclosed in the future to 
other buyers.''
    The Commission seeks comments and suggestions on balancing the need 
to enable prospective purchasers to verify sellers' claims with privacy 
concerns. Specifically, the Commission seeks comment on ways that the 
Commission might achieve availability of independent information about 
purchasers' experience consistent with protecting those purchasers' 
privacy. The Commission seeks comment on alternatives, including 
approaches that may be used by states with business opportunity laws 
containing reference disclosures. In addition, the Commission seeks 
comment on whether the Rule should permit purchasers the opportunity to 
opt-out of the disclosure of their contact information.
f. Proposed Section 437.3(a)(7): Receipt
    Proposed section 436.3(a)(7) would set forth a receipt requirement. 
Specifically, the seller must attach a duplicate copy of the basic 
disclosure page to be signed and dated by the purchaser. A designation 
for the signature and date is included at the bottom of the page. This 
requirement is designed to document proper

[[Page 19072]]

disclosure. The receipt is especially important to prove proper 
disclosure with respect to electronic documents. A seller furnishing 
disclosures online, either through email or access to a Web site, has 
the burden of establishing that the prospect was actually able to 
access the electronic document. Completion and submission of the 
receipt serves that purpose.
    The proposed Rule does not impose any particular method of 
transmitting the receipt. In order to minimize compliance costs, the 
Commission believes that the parties should have maximum flexibility to 
determine the best method for their business opportunity. Accordingly, 
proposed section 437.3(a)(7) would permit the seller to inform the 
prospective purchaser how to return the signed receipts, for example, 
by sending the receipt to a street address, or through email address, 
or facsimile.
g. Proposed Section 437.3(b): Updating
    To ensure that a seller's disclosures are current, proposed section 
437.3(b) would require sellers to update their disclosures 
periodically. Specifically, the provision states that it would be a 
violation of the Rule for a seller to fail to update the disclosures to 
reflect any material changes in the information presented in the basic 
disclosure document on at least a quarterly basis.\183\ The Commission 
believes that quarterly updating strikes the right balance between the 
need for accurate disclosure and the costs and burdens more frequent 
updating would entail. Nevertheless, proposed section 437.3(b) would 
include a proviso that would require more frequent updating in one 
respect: the list of references. Specifically, a seller would be 
required to update the list of references monthly until such time that 
it is able to include the full list of 10 purchaser/references. This is 
particularly necessary for start-up systems that may have few or no 
prior purchaser references when they commence business opportunity 
sales. The Commission believes that prospective purchasers' ability to 
contact at least 10 purchasers in their due diligence investigation of 
business opportunity offers outweighs any costs of more frequent 
updating until the list of 10 is compiled.
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    \183\ See 16 CFR at 436.1(a)(22).
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4. Proposed Section 437.4: Earnings Claims

    Section 437.4 of the proposed Rule would address earnings 
claims.\184\ For the most part, this section is similar to the parallel 
section of the Franchise Rule. Like the Franchise Rule, the proposed 
Rule would not require business opportunity sellers to make an earnings 
claim. Rather, the disclosure of earnings information is strictly 
voluntary. Also, like the analogous provision in the Franchise Rule, 
proposed section 437.4(a) would require a seller making an earnings 
claim to: (1) Have a reasonable basis for the claim at the time the 
claim is made; \185\ (2) have in its possession written materials that 
substantiate the claim at the time the claim is made; \186\ (3) make 
the written material available to the prospect and the Commission upon 
request; \187\ and (4) furnish the prospect with an earnings claim 
statement.\188\ Also, like the Franchise Rule, proposed section 
437.4(b) would set forth the requirements for making earnings claims in 
the general media.\189\ Finally, proposed section 437.4(d), like the 
analogous section of the Franchise Rule, would require sellers to 
notify prospects in writing of any changes in earnings information 
before the prospect enters into a contract or provides any 
consideration to the seller, directly or indirectly through a third 
party.\190\ At the same time, the proposed Rule would differ from the 
original Franchise Rule by addressing in proposed section 437.4(c) the 
use of industry financial or earnings information. Each of these issues 
is discussed in the following section.
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    \184\ Commenters widely supported earnings disclosure and 
substantiation. E.g., Christopher, ANPR 115, at 2; Caffey, ANPR 94, 
at 2; NASAA, ANPR 120, at 3-4; NCL, ANPR 142; Samson, 21Aug97 Tr at 
173; Finnigan, id.; Wieczorek, RR 23, at 2-3; NASAA, RR 43, at 2; 
Simon, Sept95 Tr at 281-82. Cf. TSR, 16 CFR at 310.3(a)(2)(vi) 
(prohibiting misrepresentations about any ``material aspect of an 
investment opportunity including, but not limited to, risk, 
liquidity, earnings potential, or profitability'').
    \185\ E.g., 16 CFR at 436.1(b)(2); 436.1(c)(2). Consistent with 
the Franchise Rule NPR, the Commission also proposes not to include 
in the proposed Business Opportunity Rule a ``geographic relevance'' 
requirement on the grounds that that prerequisite is subsumed in the 
``reasonable basis'' requirement. See Franchise Rule NPR, 64 FR at 
57310.
    \186\ 16 CFR at 436.1(b)(2); 436.1(c)(2).
    \187\ 16 CFR at 436.1(b)(2); 436.1(c)(2).
    \188\ 16 CFR at 436.1(d).
    \189\ 16 CFR at 436.1(e).
    \190\ 16 CFR at 436.1(d)(2) and 436.1(e)(6) (each prospective 
franchisee to whom the representation is made shall be notified of 
any material change in the information contained in the earnings 
claims document).
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a. Proposed Section 437.4(a)(4): The Earnings Claim Statement
    Proposed section 437.4(a)(4) would prescribe the content of the 
earnings claim statement. To ensure ease of review, each earnings claim 
statement must be a single written document.\191\ The document must be 
titled ``EARNINGS CLAIM STATEMENT REQUIRED BY LAW'' in capital, bold 
type letters. This ensures that the prospective purchaser can readily 
determine from the face of the document the importance of its text. The 
title is followed by the name of the person making the claim, and the 
date of the claim.
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    \191\ See 16 CFR at 436.1(e)(5).
---------------------------------------------------------------------------

    After the title and identifying information, the proposed Rule 
requires the seller to state the specific earnings claim. The proposed 
Rule does not specify any particular format or formula for an earnings 
claim. Consistent with the Franchise Rule, the proposed Rule allows 
flexibility in presenting earnings information in the manner that is 
appropriate for each opportunity, provided that any such claim have a 
reasonable basis and that there be written substantiation for the claim 
at the time it is made, as noted above.
    The proposed Rule would also require the seller making an earnings 
claim to disclose the beginning and ending dates when the represented 
earnings were achieved.\192\ This information is material because a 
prospective purchaser cannot begin to evaluate an earnings 
representation without knowing how recently the supporting data was 
collected. For example, a seller may have conducted a survey of 
opportunity purchasers in 2002. The Rule would not necessarily prohibit 
the use of that survey information in 2005 or beyond.\193\ Nonetheless, 
the prospect should be made aware of the applicable time period in 
order to assess the relevance of the claim to current market 
conditions. Similarly, a prospect may reasonably give greater weight to 
a survey of purchasers over an extended period of time (for example, 
over a three-year period), than a more limited survey (for example, 
over a three-month period).
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    \192\ See, e.g., 16 CFR at 436.1(b)(5)(ii).
    \193\ Of course, supporting data may become so stale that a 
seller would no longer have a reasonable basis for making an 
earnings representation because the data, even if true when 
collected, no longer reflects current market conditions. Any such 
determination is necessarily fact-specific and can only be made on a 
case-by-case basis.
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    Further, this section of the proposed Rule would require the 
disclosure of the number and percentage of all purchasers during the 
relevant time period who have achieved at least the claimed 
earnings.\194\ This information is highly material because it enables 
the prospect to determine whether the claimed earnings of prior 
purchasers are typical.

[[Page 19073]]

For example, a seller may claim that purchasers have average earnings 
of $50,000 a year. Even if true, this statement may not reflect the 
experience of the typical purchaser because a few purchasers with 
unusually high earnings could skew the average. Thus, the number and 
percentage of purchasers earning $50,000 a year might actually be very 
low.
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    \194\ See, e.g., 16 CFR at 436.1(e)(5)(ii).
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    In addition to the earnings claim and substantiation requirements, 
this section of the proposed Rule would require a seller making an 
earnings claim to disclose any characteristics that distinguish 
purchasers who achieved at least the represented level of earnings from 
those characteristics of the prospective purchasers.\195\ For example, 
a survey of ice cream vending route purchasers operating only in the 
South may not be readily applicable to other regions, such as the 
North. Similarly, a survey limited to large urban areas may not be 
applicable to smaller, rural areas. Distinguishing characteristics of 
opportunity purchasers who achieved a represented level of earnings is 
very material information because it enables a prospect to assess the 
relevance of an earnings claim to his or her particular market.
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    \195\ This is a more streamlined approach than the current 
Franchise Rule, which requires earnings claims be presented with a 
statement of the material bases and assumptions upon which the claim 
is made. See 16 CFR at 436.1(b)(3); 436.1(c)(3).
---------------------------------------------------------------------------

    Finally, the proposed Rule would require a seller making an 
earnings claim to disclose to the prospective purchaser that written 
substantiation for the claim will be made available upon request. 
Requiring that a prospective purchaser can obtain and review, or have 
his or her own advisor review, substantiation for earnings claims 
increases the likelihood that such claims actually have a reasonable 
basis, thus reducing fraud.\196\ This proposal balances the prospective 
purchaser's need for material information with the necessity of 
minimizing the seller's compliance costs. Thus, a seller need only 
provide such substantiation upon request.
---------------------------------------------------------------------------

    \196\ See, e.g., 16 CFR at 436.1(b)(2); 436.1(c)(2).
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b. Proposed Section 437.4(b): General Media Claims
    Proposed section 437.4(b) would address the making of earnings 
claims in the general media.\197\ Specifically, a seller can make an 
earnings claim in the general media provided the seller: (1) Has a 
reasonable basis for the claim at the time the claim is made; \198\ (2) 
has written material that substantiates the claim at the time the claim 
is made; \199\ and (3) states in immediate conjunction with the claim 
the beginning and ending date when the represented earnings were 
achieved and the number and percentage of those who have achieved the 
presented earnings in the given time period.\200\ These requirements 
are necessary to prevent deceptive and misleading earnings 
representations in advertisements, as well as to enable a prospect to 
assess the typicality of any advertised earnings claim.\201\
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    \197\ The Franchise Rule has an analogous section. See 16 CFR at 
436.1(e).
    \198\ See 16 CFR at 436.1(e)(1).
    \199\ See 16 CFR at 436.1(e)(1).
    \200\ See 16 CFR at 436.1(e)(3).
    \201\ E.g., FTC v. Inspired Ventures, Inc., No. 02-21760-CIV-
Jordan (S.D. Fla. 2002); FTC v. MegaKing, Inc., No. 00-00513-CIV-
Lenard (S.D. Fla. 2000).
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c. Proposed Section 437.4(c): Industry Statistics
    As noted above, proposed section 437.4(c) would address a problem 
that is prevalent among business opportunity sellers: The use of real 
or purported industry statistics in the marketing of business 
opportunity ventures. It is common for vending machine promoters, for 
example, to tout what are purported to be industry-wide vending sales 
statistics. A matrix of potential earnings based upon an industry-
average sliding scale of ``vends per day'' is typical.\202\ The use of 
such industry statistics in the promotion of a business opportunity 
creates the impression that the level of sales or earnings is typical 
in the industry, and by extrapolation, that the prospective purchaser 
will achieve similar results.
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    \202\ E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir. 2003); FTC 
v. Inspired Ventures, Inc., No. 02-21760-CIV-Jordan (S.D. Fla. 
2002); FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. La. 1989).
---------------------------------------------------------------------------

    To prevent this type of deceptive earnings claim, proposed section 
437.4(c) would prohibit the use of industry financial, earnings, or 
performance information ``unless the seller has written substantiation 
demonstrating that the information reflects the typical or ordinary 
financial, earnings, or performance experience of purchasers of the 
business opportunity being offered for sale.'' Accordingly, before a 
seller could use industry statistics, it must be able to measure the 
performance of existing purchasers and document that the industry 
statistics reflect the existing purchasers' typical performance. For 
example, a start-up business opportunity with no or very limited prior 
sales would probably not be able to use industry statistics because it 
would lack a sufficient basis to demonstrate that the industry 
statistics reflect the typical or ordinary experience of the start-up's 
prior purchasers.
d. Prospective Section 437.4(d): Material Changes
    Proposed section 437.4(d) would address post-disclosure changes in 
earnings information. Consistent with the Franchise Rule, it would 
prohibit any seller making an earnings claim from failing to notify the 
prospective purchaser, before the prospect enters into a contract or 
pays any consideration, of any material change that has occurred and 
that calls into question the relevance or reliability of the 
information contained in its earnings claim statement.\203\ Such 
material changes include the issuance of a new survey or other facts 
that would lead the seller to conclude that a prior survey is no longer 
valid. As with the analogous provisions of the Franchise Rule, proposed 
section 437.4(d) recognizes the high degree of materiality of earnings 
information for prospective purchasers. At the same time, the 
Commission seeks to minimize compliance costs. The proposal would not 
require a seller, for example, to prepare a revised earnings claim 
statement immediately, but would simply require written notification of 
the change. The Commission believes this approach strikes the right 
balance between accurate disclosure to prevent deception and compliance 
costs that would result from a more frequent updating requirement.
---------------------------------------------------------------------------

    \203\ See 16 CFR at 436.1(e)(6).
---------------------------------------------------------------------------

5. Proposed Section 437.5: Other Prohibited Practices

    In addition to the disclosure requirements and earnings claims 
provisions discussed above, section 437.5 of the proposed Rule would 
prohibit sellers from engaging in a number of deceptive practices, 
directly or through a third party, that are common in the sale of 
fraudulent business opportunity ventures. Each of these proposed 
prohibitions is discussed in detail below.
a. Proposed Section 437.5(a): Disclaimers
    Proposed section 437.5(a) would prohibit a seller, directly or 
through a third party, from disclaiming, or requiring a prospective 
purchaser to waive reliance on, any statement made in any of the 
disclosures required or permitted by the Rule. This provision is 
parallel to the anti-disclaimer prohibition proposed in the revised

[[Page 19074]]

Franchise Rule.\204\ It is intended to preserve the reliability and 
integrity of pre-sale disclosures. Otherwise, the Rule's very purpose 
would be undermined by signaling to prospects that they cannot trust or 
rely on the Rule's mandated disclosures. It would prevent sellers from 
using disclaimers or waivers as a means of insulating themselves from 
the consequences of materially false or deceptive statements in their 
own disclosure documents.
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    \204\ Franchise Rule NPR, 64 FR at 57323. Like the analogous 
proposed Franchise Rule revisions, this provision would not ban the 
use of disclaimers such as integration clauses. Integration clauses 
often serve valid purposes, putting a prospect on notice that he or 
she should rely solely on information authorized by the franchisor.
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b. Proposed Section 437.5(b): Inconsistent or Contradictory Information
    Proposed section 437.5(b) would prohibit sellers from making any 
representation, directly or through a third party, that is inconsistent 
with or that contradicts any statement made in the basic disclosure 
document or in any earnings claim disclosures required by the 
Rule.\205\ Inconsistent or contradictory statements can be made orally, 
visually, or in writing. Without this proposed prohibition, a seller, 
for example, would be free to show a prospect a graph with earnings 
information, even though the seller's disclosure document states that 
it does not make an earnings claim. Our law enforcement experience 
shows that this is a prevalent problem.\206\ Accordingly, this 
provision, like the anti-disclaimer provision noted above, is necessary 
to preserve the reliability and integrity of the required disclosures.
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    \205\ This provision is similar to the current Franchise Rule 
prohibition against the making of statements that contradict 
required disclosures. See 16 CFR at 436.1(f). See also UFOC 
Guidelines, General Instruction 190.
    \206\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Inspired Ventures, Inc., No. 02-
21760-CIV-Jordan (S.D. Fla. 2002); FTC v. Mortgage Serv. Assocs., 
Inc., No. 395-CV-13362 (AVC) (D. Conn. 1995); FTC v. Tower Cleaning 
Sys., Inc., No. 96 58 44 (E.D. Pa. 1996). See also FTC v. Minuteman 
Press, 53 F. Supp. 2d 248, at 262 (E.D.N.Y. 1998) (``[A] conflict 
between a specific disclaimer and a contrary oral representation--
typically fatal to a reasonable reliance argument in a purely 
private suit--is * * * ipso facto, actionable by the FTC as 
violative of Franchise Rule 436.1(f) if the disclaimer is in a 
[disclosure document.]'').
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c. Proposed Section 437.5(c): Extraneous Materials
    Proposed section 437.5(c) would prohibit the inclusion of any 
additional information in a disclosure document that is not explicitly 
required or permitted by the Rule. This preserves the clarity, 
coherence, readability, and utility of the disclosures by ensuring that 
a seller does not include extraneous materials that may overwhelm 
purchasers, distracting them from the required disclosures.\207\ The 
proposed provision also reflects the Commission's acknowledgment that 
some sellers may wish to furnish disclosures electronically and, to 
that end, expressly permits the use of common navigational tools, such 
as scroll bars and internal links that facilitate review of an 
electronic document. The proposed provision would expressly prohibit 
other electronic features--such as audio, video, animation, or pop-up 
screens--that may distract attention from the core disclosures.\208\
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    \207\ As with the Franchise Rule, a seller may provide a 
prospective purchaser with truthful, consistent and non-
contradictory information in materials that are separate and apart 
from the required disclosures. See 16 CFR at 436.1(a)(21).
    \208\ This is the same approach proposed in the Franchise Rule 
NPR. 64 FR at 57318.
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    The prohibition on including extraneous materials extends to 
information required or permitted by state law. This approach toward 
the treatment of state law disclosures contrasts with the analogous 
provision of the Franchise Rule. The Franchise Rule permits franchisors 
great latitude to include information required or permitted by state 
law. This approach is appropriate in the franchise context because all 
the states with franchise disclosure laws have adopted the UFOC 
disclosure format. As a result, state additions to an FTC disclosure 
document generally are fitted smoothly into that uniform format. 
Because of this relative uniformity, such additions do not impede a 
prospect's ability to compare easily among various franchise offerings. 
This approach also reduces compliance burdens. If adding state 
materials were prohibited, franchisors would have to incur significant 
costs to prepare and disseminate separate federal and state disclosure 
documents simultaneously, without any corresponding benefit to 
consumers.
    In contrast, business opportunity laws vary widely from state to 
state. Were the proposed Rule to permit the inclusion of the varied 
additional information and disclosures required by various states, the 
resulting disclosure document would likely confuse prospective 
purchasers with an overload of divergent and possibly inconsistent 
information.\209\ Under the circumstances, we believe that the 
Commission's disclosures should be kept separate from any disclosures 
mandated by state law. Moreover, any additional costs associated with 
complying with separate federal and state business opportunity 
disclosure laws are likely to be small, given the proposed Rule's 
greatly streamlined disclosures. The Commission specifically requests 
comment on the appropriateness of this approach and seeks alternatives 
that could reconcile federal and state business opportunity disclosure 
laws while reducing compliance burdens.
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    \209\ To illustrate the lack of consistency among state business 
opportunity statutes, the staff compared disclosure requirements in 
five states: Alaska (Alaska Stat. Sec.  45.66.010-090); California 
(Cal. Civ. Code Sec.  1812.200-1812.221); Florida (Fla. Stat. ch. 
559.80-815); Kentucky (KRS 367.801-819), and Ohio (Ohio Rev. Code 
Ann. Sec.  1334.01-99). In many instances, certain disclosures are 
required in some of the five states only. For example, Alaska and 
California require disclosures about the owners of the business 
opportunity, while Florida, Kentucky, and Ohio do not. Alaska alone 
requires a disclosure about other registration attempts by the 
seller. California, Florida, and Ohio require disclosures about bond 
and guarantees of credit requirements, while Alaska and Kentucky do 
not. Ohio requires disclosures about refunds, while California, 
Florida, Kentucky, and Alaska do not. Florida, however, requires a 
disclosure stating that the purchaser is permitted to cancel the 
business opportunity agreement if ``the seller fails to deliver the 
product * * * within 45 days.'' Ohio requires disclosure about 
affiliated persons with whom the purchaser is required to do 
business, while Alaska, Florida, and Kentucky do not. In addition to 
these inconsistent disclosure requirements, the timing requirements 
for making disclosures differ significantly. For example, Alaska 
requires disclosure within ``ten days;'' Florida requires ``three 
working days;'' California requires at least ``48 hours;'' and Ohio 
requires ``ten business days.''
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d. Proposed Section 437.5(d): False Earnings Claims
    As noted throughout this NPR, the making of false earnings claims 
is the most prevalent problem in the offer and sale of business 
opportunities.\210\ Proposed section 437.5(d) would prohibit sellers 
from misrepresenting, directly or through a third party, the amount of 
sales, or gross or net income or profits a prospective purchaser may 
earn or that prior purchasers have earned. This prohibition would 
complement the Rule's proposed earnings substantiation requirements 
detailed in proposed section 437.4. Thus, both unsubstantiated and 
false earnings claims would be prohibited by the Rule.
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    \210\ In the Franchise Rule SBP, the Commission found that one 
of the most frequent abuses occurring in the marketing of franchises 
and business opportunities is the use of deceptive past and 
potential sales, income, and profit claims. Indeed, the Commission 
stated that the ``use of deceptive and inaccurate profit and loss 
statements * * * has resulted in a legion of `horror stories.' '' 43 
FR at 59684.
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e. Proposed Section 437.5(e): Misrepresentations Regarding the Law as 
to Earnings Claims
    Proposed section 437.5(e) would prohibit sellers from 
misrepresenting,

[[Page 19075]]

directly or through a third party, that any law prohibits the 
furnishing of earnings information. This addresses a recurring problem 
identified in the rulemaking record--sellers misrepresenting that 
federal law or the FTC prohibits the making of earnings claims.\211\ In 
effect, this prohibition ensures that prospective purchasers are not 
misled into believing that earnings information is unavailable to them 
as a matter of law. Prospective purchasers can then understand that if 
the seller provides no earnings information, it is because none exists, 
or because the seller chooses not to make such information available.
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    \211\ In the Franchise Rule context, the Commission proposed to 
address this problem through a new requirement that franchise 
sellers include a specific preamble in the financial performance 
section of their disclosures. Among other things, the prescribed 
preamble would make clear that franchisors can make financial 
performance information available, assuming they have a reasonable 
basis for their claims. Franchise Rule NPR, 64 FR at 57309-310; 
ANPR, 62 FR at 9118. In an effort to streamline the business 
opportunity disclosure document and reduce compliance costs, the 
proposed Rule takes a different approach. It would bar sellers from 
representing that any law prohibits the furnishing of earnings 
information. We believe this approach is sufficient to address 
deceptive business opportunity sales: whereas the Franchise Rule 
seeks to encourage franchisors to make earnings claims, no such 
encouragement is needed in the business opportunity field, where 
such claims are all too common.
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f. Proposed Section 437.5(f): Written Substantiation for Earnings 
Claims
    Proposed section 437.5(f) would prohibit a seller who makes an 
earnings claim from failing to provide written substantiation to 
prospective purchasers and to the Commission upon request.\212\ Rather 
than mandating that business opportunity sellers include documentation 
for earnings claims--which could be voluminous--in the earnings claim 
statement itself, section 437.5(f) would reduce compliance costs by 
requiring only that such materials be provided to potential purchasers 
and to the Commission upon request. Purchasers could then review the 
documentation if they so choose.
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    \212\ See 16 CFR at 436.1(b)(2); 436.1(c)(2). See also 16 CFR at 
436.1(e)(1).
---------------------------------------------------------------------------

g. Proposed Section 437.5(g): Payments From the Seller
    Proposed section 437.5(g) would prohibit sellers from 
misrepresenting, directly or through a third party, how or when 
commissions, bonuses, incentives, premiums, or other payments from the 
seller to the purchaser will be calculated or distributed. Our law 
enforcement experience shows that these kinds of misrepresentations 
underlie work-at-home and pyramid opportunities, where prospective 
purchasers rely on the seller as the source of income, or where the 
seller manages the system's cash flow.\213\ Absent this prohibition, 
the Rule would not address false promises about the compensation 
sellers will provide post-sale.
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    \213\ E.g., FTC v. Sun Ray Traders, Inc., No. 05-20402-CIV-
Seitz/Bandstra (S.D. Fla. 2005); FTC v. Castle Publ'g, Inc., No. 
AO3CA 905 SS (W.D. Tex. 2003); FTC v. Trek Alliance, Inc., No. 02-
9270 SJL (AJWx) (C.D. Cal. 2002); FTC v. Terrance Maurice Howard, 
No. SA02CA0344 (W.D. Tex. 2002); FTC v. America's Shopping Network, 
Inc., No. 02-80540-CIV-Hurley (S.D. Fla. 2002); FTC v. Equinox, 
Int'l, No. CV-S-99-0969-JAR-RLH (D. Nev. 1999).
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h. Proposed Section 437.5(h): Costs and Material Characteristics
    A common complaint of victims of business opportunity fraud arises 
from misrepresentations about the costs or the performance, efficacy, 
nature, or central characteristics of a business opportunity offered to 
a prospective purchaser, or the goods or services needed to operate the 
business opportunity. For example, a seller may misrepresent the total 
costs involved in purchasing or operating a business opportunity.\214\ 
In other instances, a seller may misrepresent the quality of goods 
offered by the business opportunity seller, either for use in operating 
the business (e.g., vending machines) or for ultimate resale to 
consumers (e.g., novelty items).\215\ Proposed section 437.5(h) would 
make such deception, directly or through a third party, actionable as a 
violation of the proposed Rule.
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    \214\ E.g., FTC v. World Traders Ass'n, Inc., No. CV05 0591 AHM 
(CTx) (C.D. Cal. 2005); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS 
(W.D. Tex. 2003); FTC v. End70 Corp., No. 3 03CV-0940N (N.D. Tex. 
2003); FTC v. Darrell Richmond, No. 3:02-3972-22 (D.S.C. 2003); FTC 
v. Carousel of Toys USA, Inc., No. 97-8587 CIV-Ungaro-Benages (S. D. 
Fla. 1997); FTC v. Parade of Toys, Inc., No. 97-2367-GTV (D. Kan. 
1997); FTC v. Telecomm. of Am., Inc., No. 95-693-CIV-ORL-22 (M.D. 
Fla. 1995). In the Franchise Rule SBP, the Commission recognized 
that the failure to disclose complete and accurate information about 
fees is deceptive because ``it (1) misleads, or at least confuses 
[prospects] as to the amount of the required initial * * * 
investment and (2) could readily result in economic injury to a 
[prospect] unable to fully obtain all such funds or unable to recoup 
the full amount of such funds in the course of the * * * business.'' 
43 FR at 59653. Indeed, pre-sale disclosure of cost information is a 
remedial approach taken in many Commission trade regulation rules. 
E.g., 900 Number Rule, 16 CFR at 308.3(b); Telemarketing Sales Rule, 
16 CFR at 310.3; Funeral Rule, 16 CFR at 453.2.
    \215\ E.g., FTC v. Kitco of Nevada, 612 F. Supp. 1282 (D. Minn. 
1985); FTC v. Associated Record Distribs., Inc., No. 02-21754-CIV-
Graham/Garber (S.D. Fla. 2002); FTC v. Home Professions, Inc., No. 
00-111 (C.D. Cal. 2000); FTC v. Worldwide Mktg. and Distrib. Co., 
Inc., No. 95-8422-CIV-Roettger (S.D. Fla. 1995). See also FTC v. 
Med. Billers Network, No. 05 CV 2014 (RJH) (S.D.N.Y. 2005).
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i. Proposed section 437.5(i): Assistance
    Another area for potential fraud is the misrepresentation of post-
sale assistance offered to a prospective purchaser.\216\ The 
Commission's enforcement experience shows that this practice is an 
element common to many business opportunity frauds targeted in our 
cases.\217\ Also, consumer complaints about misrepresentations 
concerning the type and amount of assistance promised but not received 
are among the top categories of reported deceptive business opportunity 
practices.\218\ The Commission believes that the best way to address 
this deceptive practice is through a direct prohibition. Section 
437.5(i), therefore, would prohibit business opportunity sellers from 
misrepresenting, directly or through a third party, any material aspect 
of assistance provided to purchasers.
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    \216\ In the Franchise Rule SBP, the Commission recognized that 
promises of assistance made to induce prospects to purchase a 
franchise are material, especially to those prospects with ``little 
or no experience at running a business.'' 43 FR at 59676-77.
    \217\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. USS Elder Enter., Inc., No. SA CV-
04-1039 AHS (ANx) (C.D. Cal. 2004); FTC v. Kitco of Nevada, 612 F. 
Supp. 1282 (D. Minn. 1985), FTC v. Leading Edge Processing, Inc., 
No. 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2003); FTC v. Darrell 
Richmond, No. 3:02-3972-22 (D.S.C. 2003); FTC v. Elec. Med. Billing, 
Inc., No. SA02-368 AHS (ANX) (C.D. Cal. 2003); FTC v. Transworld 
Enter., Inc., No. 00 8126-CIV-Graham (S.D. Fla. 2000); FTC v. 
Advanced Pub. Commc'ns Corp., No. 00-00515-CIV-Ungaro-Benages (S.D. 
Fla. 2000); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV 5881 (JES) 
(S.D.N.Y. 1998); U.S. v. QX Int'l, Inc., No. 398-CV-0453-D (N.D. 
Tex. 1998). See Cory, ANPR 12 (misrepresented training); SBA 
Advocacy, ANPR 36, at 6-7 (observing improper training and 
credentials in a travel opportunity). Cf. 16 CFR at 436.1(a)(18) 
(requiring a description of any training program); UFOC Guidelines, 
Item 11 (disclosure of franchisor's obligations including pre-
opening advertising and training assistance).
    \218\ See Staff Program Review, supra note 39, Table I.2; 
Appendix 5.
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j. Proposed Section 437.5(j): Locations, Outlets, Accounts, Customers
    In many instances, business opportunity sellers promise to find 
locations or outlets for purchasers' equipment, or accounts or 
customers for the purchasers' services. Indeed, the Commission's law 
enforcement experience shows that business opportunity sellers not only 
offer such assistance, but also represent that the seller or some other 
third party will find locations, outlets, accounts, or customers for 
the purchaser.\219\ Such

[[Page 19076]]

representations include claims that a particular locator is successful 
in finding locations, as well as representations that the seller or 
other third party has already found and entered into contracts with 
location owners or customers.\220\ These types of representations are 
material to a prospective purchaser because they foster the expectation 
that a profitable market exists for the goods or services the purchaser 
will sell. To prevent fraudulent location assistance representations, 
proposed Section 437.5(j) would prohibit sellers, directly or through a 
third party, from misrepresenting ``the likelihood that a seller, 
locator, or lead generator will find locations, outlets, accounts, or 
customers for the purchaser.''
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    \219\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Int'l Trader, No. CV-02-02701 AHM 
(JTLx) (C.D. Cal. 2002); FTC v. Elec. Processing Servs, Inc., No. 
CV-S-02-0500-L.H.-R.S. (D. Nev. 2002); FTC v. Home Professions, 
Inc., No. SACV 00-111 AHS (Eex) (C.D. Cal. 2001); FTC v. Encore 
Networking Servs., No. 00-1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. 
AMP Publ'n, Inc., No. SACV-00-112-AHS-ANx (C.D. Cal. 2001); FTC v. 
Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez (S.D. Fla. 
1996). See Staff Program Review, supra note 39, Table I.2, Appendix 
5; Samson, 21Aug97 Tr at 100; Wieczorek, id. at 76-77; Cecal, id. at 
78-79; James, 20Nov97 Tr at 19; Rabenberg, Sept95 Tr at 105.
    \220\ E.g., FTC v. Hart Mktg. Enter. Ltd., Inc., No. 98-222-CIV-
T-23 E (M.D. Fla. 1998); FTC v. Vendors Fin. Servs., Inc., No. 98-
1832 (D. Colo. 1998); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV 
5881 (S.D.N.Y. 1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-
CIV-Gonzalez (S.D. Fla. 1996). Similarly, a Florida business 
opportunity regulator noted that during sales presentations, sellers 
of vending machines typically claim that they have ``15 locations in 
X community. And in fact there [are] no locations there. They have 
to hire a locator, a second locator, or a second person. A second 
check is written to the locator. And the consumer invariably ends up 
with a second-rate location because there [were none] to start 
with.'' James, 20Nov97 Tr at 19.
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k. Proposed Section 437.5(k): Cancellation or Refund Policy
    The Commission's law enforcement experience demonstrates that, in 
many instances, business opportunity sellers claim that they permit a 
purchaser to cancel the purchase, guarantee a 100% refund, or promise 
to buy back some or all of the products sold to a purchaser.\221\ These 
representations have lured prospective purchasers into believing that 
the investment is either low-risk or even risk-free.\222\ As noted 
above, however, a high level of business opportunity purchaser 
complaints received by the Commission revolve around cancellation and 
refund issues.\223\ Accordingly, proposed section 437.5(k) would 
prohibit a seller from misrepresenting, directly or through a third 
party, the terms and conditions of any cancellation or refund policy. 
The Commission emphasizes, however, that this prohibition does not 
compel any seller to offer cancellation or a refund, nor does it 
dictate the terms and conditions under which a seller may offer such 
relief. Rather, it simply ensures that any cancellation or refund offer 
a seller makes before the sale is truthful and accurate.
---------------------------------------------------------------------------

    \221\ E.g., FTC v. Med. Billers Network, No. 05 CV 2014 (RJH) 
(S.D.N.Y. 2005); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. 
Tex. 2003); FTC v. America's Shopping Network, Inc., No. 02-80540-
CIV-Hurley (S.D. Fla. 2002); FTC v. Home Professions, Inc., No. SACV 
00-111 AHS (Eex) (C.D. Cal. 2001); FTC v. Encore Networking Servs., 
No. 00-1083 WJR (AIJx) (C.D. Cal. 2000).
    \222\ In the Franchise Rule SBP, the Commission noted the 
difficulty consumers have in obtaining promised refunds from 
franchisors. ``It is clear from the record that all franchisors do 
not adequately adhere to the refund policies they themselves agree 
to in their contracts. By requiring strict adherence to their own 
refund policies, [the Rule] serves an essential remedial purpose.'' 
43 FR at 59696-697.
    \223\ See, e.g., Staff Program Review, supra note 39, Table I.2 
and Appendix 5.
---------------------------------------------------------------------------

l. Proposed Section 437.5(l): Failure To Cancel or Make a Refund
    Proposed section 437.5(l) would prohibit a seller from failing to 
cancel a purchase or make a refund when the purchaser has qualified for 
such relief under the seller's cancellation or refund policy.\224\ As 
noted above, proposed section 437.5(k) would prohibit a seller from 
misrepresenting, pre-sale, the seller's cancellation or refund policy. 
Proposed section 437.5(l) complements that section and is intended to 
address sellers' post-sale conduct, prohibiting the seller from failing 
to honor cancellation or refund requests when purchasers have satisfied 
all the terms and conditions disclosed in the seller's basic disclosure 
document for obtaining such relief.\225\ In our experience, the failure 
of business opportunities sellers to make promised refunds or to honor 
cancellation policies ranks high among issues raised by business 
opportunity purchasers.\226\
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    \224\ This is consistent with the current Franchise Rule 
approach. See 16 CFR at 436.1(h). See also Franchise Rule SBP, 43 FR 
at 59697.
    \225\ E.g., FTC v. AMP Publ'ns, Inc., No. SACV-00-112-AHS-ANx 
(C.D. Cal. 2001) (failure to honor 90-day money back guarantee); FTC 
v. Star Publ'g Group, Inc., No. 00-023 (D. Wyo. 2000) (failure to 
honor 90-day refund policy). See 16 CFR at 436.1(h). See also Cory, 
ANPR 12 (describing difficulty in securing a refund).
    \226\ See Staff Program Review, supra note 39, at 28-29 (nearly 
25% of business opportunity complaints indicated the consumer's 
desire to cancel, and more than 20% indicated that consumers failed 
to receive a refund or were dissatisfied with the company's refund 
policies.). See, e.g., FTC v. AMP Publ'ns, Inc., No. 00-112 (C.D. 
Cal. 2000); FTC v. Home Professions, Inc., No. 00-111 (C.D. Cal. 
2000); FTC v. Innovative Prods., No. 3-00-0312 (N.D. Tex. 2000); FTC 
v. Mediworks, Inc., No. 00-01079 (C.D. Cal. 2000).
---------------------------------------------------------------------------

m. Proposed Section 437.5(m): Employment Opportunity
    Proposed section 437.5(m) would prohibit business opportunity 
sellers from misrepresenting, directly or through a third party, a 
business opportunity as an employment opportunity.\227\ The 
Commission's law enforcement experience demonstrates that some business 
opportunity sellers lure unsuspecting consumers by falsely representing 
that they are offering employment when, in fact, they are offering 
vending, work-at-home, or pyramid sales opportunities. For example, in 
many instances consumers have responded to advertisements seeking sales 
executives, only to discover that the ``position'' requires them to 
purchase equipment or products from the seller and, in turn, to sell 
the products or to recruit a downline to sell the products for 
them.\228\
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    \227\ See Wis. Admin. Code Sec.  ACP 116.06 (prohibiting 
misrepresented employment offers).
    \228\ See, e.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL 
(AJWx) (C.D. Cal. 2002) (defendants placed ads in ``Help Wanted'' 
sections of newspaper offering salaried position); FTC v. Leading 
Edge Processing, Inc., No. 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2003) 
(defendants sent emails to job seekers who posted their resumes on 
job websites, falsely representing the availability of jobs and 
guaranteeing a steady stream of work); FTC v. David Martinelli, Jr., 
No. 3:99 CV 1272 (D. Conn. 2000) (defendants sent unsolicited emails 
falsely offering a $13.50 per hour position processing applications 
for credit, loans, or employment); FTC v. Equinox, Int'l, No. CV-S-
99-0969-JAR-RLH (D. Nev. 1999) (defendants allegedly ran classified 
ads in the ``Help Wanted'' sections of newspapers, impliedly 
offering a salaried position).
---------------------------------------------------------------------------

n. Proposed Section 437.5(n): Territories
    Proposed section 437.5(n) would prohibit misrepresentations made 
directly by the seller or through a third party about the terms of any 
territorial exclusivity or limited territorial protection offered to a 
prospective purchaser.\229\ In the Commission's experience, 
representations about territorial exclusivity or more limited 
territorial protections are material because they often induce a 
prospective purchaser into believing that he or she will not be 
competing for customers with the seller or other purchasers, thereby 
increasing the purchaser's likelihood of success.\230\ As noted

[[Page 19077]]

above, the Staff Program Review revealed that false promises about 
territories are a common deceptive practice reported by business 
opportunity purchasers.\231\
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    \229\ See 16 CFR at 436.1(a)(13) (requiring a description of any 
limited geographic area or territorial protections); UFOC 
Guidelines, Item 12 (disclosure of the nature and scope of any 
exclusive territory). In some instances, a business opportunity 
seller may offer a prospect an exclusive territory, in which no 
other person has the right to compete within the territory. In other 
instances, a seller may offer a more limited protection. For 
example, the seller may prohibit other purchasers from operating in 
the territory, but reserve to itself the ability to conduct 
telemarking or Internet sales in the territory. Regardless of the 
scope of the territorial protection, section 437.5(n) prohibits 
business opportunity sellers from misrepresenting the nature of the 
territory.
    \230\ E.g., FTC v. Advanced Pub. Commc'ns Corp., No. 00-00515-
CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Summit Photographix, No. 
398-CV-0449-T (N.D. Tex. 1998); FTC v. Telecard Dispensing Corp., 
No. 98-7058 (S.D. Fla. 1998); FTC v. Vendors Fin. Servs., Inc., No. 
98-1832 (D. Colo. 1998); U.S. v. QX Int'l, Inc., No. 398-CV-0453-D 
(N.D. Tex. 1998); FTC v. Am. Legal Distribs., No. 1:88-CV-519-MHS 
(N.D. Ga. 1988). See also Franchise Rule SBP, 43 FR at 59662 
(recognizing that sales restrictions and limited territories impact 
upon a purchaser's ability to conduct business and are, therefore, 
material).
    \231\ See Staff Program Review, supra note 39, Table I.2; 
Appendix 5.
---------------------------------------------------------------------------

o. Proposed Section 437.5(o): Assignment of Territories
    Proposed section 437.5(o) would prohibit a seller from assigning a 
single ``exclusive'' territory to more than one purchaser. This 
prohibition complements section 437.5(n), which prohibits sellers from 
misrepresenting territories. It is intended to address sellers' post-
sale conduct, prohibiting the seller from failing to honor its promises 
regarding exclusive or protected territories. Consumer complaints 
indicate, and the Commission's law enforcement experience confirms, 
that fraudulent business opportunity sellers often sell the same 
purportedly exclusive territory to several unsuspecting 
purchasers.\232\ In these circumstances, purchasers who have been lured 
to invest in an opportunity on the basis of promises of an exclusive 
territorial lock on their market find that their chances of success are 
materially reduced by competition from the other purchasers.
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    \232\ E.g., FTC v. Am. Safe Mktg., No. 1:89-CV-462-RLV (N.D. Ga. 
1989).
---------------------------------------------------------------------------

p. Proposed Section 437.5(p): Third-Party Endorsements
    To prevent endorsement fraud, Proposed section 437.5(p) would 
prohibit business opportunity sellers from misrepresenting, directly or 
through a third party, that ``any person, trademark or service mark 
holder, or governmental entity, directly or indirectly benefits from, 
sponsors, participates in, endorses, approves, authorizes, or is 
otherwise associated with the sale of the business opportunity or the 
goods or services sold through the business opportunity.'' \233\ Our 
law enforcement experience reveals that business opportunity frauds 
often lure consumers by misrepresenting that their opportunities have 
been approved or endorsed by a government agency or well-known third 
party.\234\ In other instances, business opportunity sellers falsely 
claim that their opportunities are sponsored by or associated with a 
charity, or that a charity will benefit from a percentage of 
sales.\235\ Such claims are material to a purchaser because an alleged 
endorsement or shared-profit arrangement may create the impression that 
the opportunity is legitimate or that the affiliation will enhance 
sales and profits.
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    \233\ Cf. TSR, 16 CFR at 310.3(a)(vii) (prohibiting 
misrepresentations concerning ``affiliation with, or endorsement or 
sponsorship by, any person or government entity'').
    \234\ E.g., FTC v. Streamline Int'l, No. 01-6885-CIV-Ferguson 
(S.D. Fla. 2001) (misrepresented FDA approval); FTC v. Bus. 
Opportunity Ctr., Inc., No. 95 8429-CIV-Zloch (S.D. Fla. 1995) 
(misrepresented FDA approval); FTC v. Star Publ'g Group, Inc., No. 
00-023 (D. Wyo. 2000) (misrepresented HUD approval). See also FTC v. 
Hawthorne Commc'ns, No. 93-7002 AAH (JGX) (C.D. Cal. 1993) (order 
restricting use of testimonials and endorsements in the sale of 
business opportunities); James, 21Nov97 Tr at 343 (work-at-home 
promoter falsely represented that JCPenney was a buyer of its 
products).
    \235\ E.g., FTC v. Global Assistance Network for Charities, No. 
96-2494 PHX RCB (D. Ariz. 1996). See also NCL, ANPR 35, at 2.
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q. Proposed Section 437.5(q): Shills
    Proposed section 437.5(q) would address one of the most pernicious 
practices common in fraudulent business opportunity sales--the use of 
shill references to lure unsuspecting consumers to invest.\236\ The 
Commission has brought many actions against business opportunity 
sellers who provided prospects with the names of individuals they 
falsely claimed were independent prior purchasers or independent third 
parties, but who in fact were paid by the seller to give favorable 
false reports confirming the seller's claims, especially their earnings 
claims.\237\ The use of paid shills to give false reports induces 
prospective purchasers into believing that the opportunity is a safe 
and lucrative investment.
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    \236\ Staff Program Review, supra note 39, Table I.2 (after 
earnings claims, false testimonials and shill references are the 
most common Section 5 allegations in Commission business 
opportunities cases). See also NCL, ANPR 35, at 2; Cecal, 21Aug97 
Tr, at 67-68 (observing the common use of shills to sell business 
opportunities in Illinois).
    \237\ 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). See also Cantone, 20Nov97 Tr 
at 245 (``Shills may be one of the most common problems in the 
business opportunity industry.''); James, id. at 246 (``It is a 
huge, huge problem.'').
---------------------------------------------------------------------------

    To address this deceptive practice, Proposed section 437.5(q) 
contains two related prohibitions. First, it would prohibit any seller 
from misrepresenting, directly or through a third party, that any 
person ``has purchased a business opportunity from the seller.'' This 
would prevent a seller, for example, from claiming that a company 
employee, locator, or other third party is a prior purchaser of the 
opportunity, when that is not the case. Second, the provision would 
prohibit a seller from misrepresenting that any person--such as a 
locator, broker, or organization that purports to be an independent 
trade association--``can provide an independent or reliable report 
about the business opportunity or the experiences of any current or 
former purchaser.'' Providing a prospect with a list of brokers who are 
paid to give favorable reports, for example, would violate this 
provision because any statement a person on such a list makes would 
fail the ``independence and reliability'' test.\238\
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    \238\ E.g., FTC v. Affiliated Vendors Ass'n, Inc., No. 02-CV-
0679-D (N.D. Tex. 2002); FTC v. Raymond Urso, No. 97-2680-CIV-
Ungaro-Benages (S.D. Fla. 1997). See Cantone, 20Nov97 Tr at 251-52 
(voicing concern about reports from groups that purport to be 
independent consumer associations. ``I know from our standpoint in 
Maryland, we have a lot of complaints from buyers who * * * got a 
report from who they thought was an independent company like a 
Better Business Bureau for business opportunities.''); McKee, id. at 
252 (observing that the Internet permits anyone to set up a website 
that purports to belong to an independent organization providing 
reports similar to those of the Better Business Bureau).
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r. Proposed Section 437.5(r): Paid Consideration or Prior Relationship
    Proposed section 437.5(r) would complement the prohibition in 
section 437.5(q) against fictitious references by requiring sellers to 
disclose any compensation paid to an endorser \239\ and the existence 
of any personal or business relationship between the seller and an 
endorser. The Commission has long held that the failure to disclose 
compensation paid to an endorser is a deceptive practice in violation 
of section 5.\240\ Obviously, an individual

[[Page 19078]]

paid for his or her assessment of an opportunity is likely to be 
biased, and any story of success or high earnings from a person paid to 
tell it is suspect. The proposed Rule would clarify that the term 
``consideration'' is to be interpreted broadly. Specifically, proposed 
section 437.5(r)(1) would state that consideration includes not only 
direct cash payments, but indirect financial benefits, such as 
forgiveness of debt, as well as other tangible benefits such as 
equipment, services, and discounts.
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    \239\ E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir. 2003); FTC 
v. Wolf, No. 94-8119 CIV-Ferguson (S. D. Fla. 1994); FTC v. Jordan 
Ashley, No. 93-2257-CIV-Nesbitt (S.D. Fla. 1993); FTC v. Nat'l Bus. 
Consultants, 781 F. Supp. 1136 (E.D. La. 1991).
    \240\ See Guides Concerning Use of Endorsements and Testimonials 
in Advertising, 16 CFR at 255.5 (``When there exists a connection 
between the endorser and the seller of the advertised product which 
might materially affect the weight or credibility of the endorsement 
(i.e, the connection is not reasonably expected by the audience) 
such connection must be fully disclosed. * * * [W]hen the endorser 
is neither represented in the advertisement as an expert nor is 
known to a significant portion of the viewing public, the advertiser 
should clearly and conspicuously disclose either the payment or 
promise of compensation prior to and in exchange for the endorsement 
or the fact that the endorser knew or had reasons to know or to 
believe that if the endorsement favors the advertised product some 
benefit, such as an appearance on TV, would be extended to the 
endorser.''). See also UFOC Guidelines, Item 18 (disclosure of any 
compensation or other benefit given or promised to a public figure).
---------------------------------------------------------------------------

    Similarly, proposed section 437.5(r)(2) would also prohibit a 
seller from failing to disclose any personal or business relationship 
with any endorser. For example, an endorser may have a personal 
relationship with the seller (e.g., family member), or an ongoing 
business relationship with the seller (e.g., as a broker, supplier, or 
locator) other than a relationship created by the prior purchase of the 
business opportunity being offered for sale.\241\ In each instance, the 
prior business or personal relationship is material to a prospective 
purchaser because it calls into question the endorser's independence 
from the seller.
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    \241\ See, e.g., FTC v. Inspired Ventures, Inc., No. 02-21760-
CIV-Jordan (S.D. Fla. 2002); FTC v. Universal Greeting Cards Corp., 
No. 02-21753-CIV-Jordan (S.D. Fla. 2002); FTC v. Inetintl.com, Inc., 
No. 98-2140 (C.D. Cal. 1998).
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6. Proposed Section 437.6: Record Retention

    Proposed section 437.6 would establish minimal record retention 
requirements necessary to document compliance and permit effective Rule 
enforcement. This section applies to both the business opportunity 
seller and its principals to ensure that records required by the Rule 
are not destroyed if the seller goes out of business or otherwise 
ceases operations. As detailed below, sellers and their principals must 
keep, and make available to the Commission, the following five types of 
records for a period of three years:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Proposed section 437.6(a)..............  Each materially different
                                          version of all documents
                                          required by the Rule;
Proposed section 437.6(b)..............  Each purchaser's disclosure
                                          receipt;
Propsed section 437.6(c)...............  Each executed written contract
                                          with a purchaser;
Proposed section 437.6(d)..............  Each oral or written
                                          cancellation or refund request
                                          received from a purchaser; and
Proposed section 437.6(e)..............  All substantiation upon which
                                          the seller relies from the
                                          time an earnings claim is
                                          made.
------------------------------------------------------------------------

The Commission believes that these limited recordkeeping requirements 
strike the right balance, requiring no more than necessary for 
effective law enforcement, while reducing compliance costs.

7. Proposed Section 437.7: Franchise Exemption

    Proposed section 437.7 is designed to eliminate potential overlap 
between the Business Opportunity Rule's coverage and that of the 
Franchise Rule, so that no business would face duplicative compliance 
burdens.\242\ Specifically, section 437.7 would exempt from the 
proposed Rule's coverage those business opportunities that: (1) Satisfy 
the definitional elements of the term ``franchise'' under the Franchise 
Rule; (2) entail a written contract between the seller and the business 
opportunity buyer; and (3) require the buyer to make a payment that 
meets the Franchise Rule's minimum payment requirement. These criteria 
are designed to accomplish two ends: to ensure that certain categories 
of businesses ``carved out'' from the Franchise Rule's coverage are not 
inappropriately subjected to coverage by the proposed Business 
Opportunity Rule; and, simultaneously, to obviate any loophole that 
could be exploited by certain other types of business opportunities 
that are exempt from the Franchise Rule but that should be regulated by 
the proposed Business Opportunity Rule.
---------------------------------------------------------------------------

    \242\ See, e.g., Illinois Act, 815 ILCS Sec.  601/5-10.(f) 
(exempting opportunities falling under the Franchise Disclosure Act 
of 1987); CA SAMP, Cal. Civ. Code at Sec.  1812.201(b)(2) (exempting 
opportunities falling under the Franchise Investment Law).
---------------------------------------------------------------------------

    Thus, for example, businesses exempt from Franchise Rule coverage 
pursuant to the exemption for fractional franchises \243\ and the 
exemption for ``leased department'' arrangements \244\ would not be 
subjected to coverage by the proposed Business Opportunity Rule because 
such businesses would meet the criteria of proposed section 437.7. This 
is an appropriate result because the same rationale underlying 
exemption of these types of businesses from the Franchise Rule would 
also dictate that they not be covered by the proposed Business 
Opportunity Rule--i.e., in the case of a fractional franchise, the 
franchisor is not likely to deceive the prospective franchisee or to 
subject the prospective franchisee to significant investment risk. 
Therefore, imposing the requirements of either the Franchise Rule or 
the proposed Business Opportunity Rule would not be justified.
    On the other hand, certain businesses carved out of Franchise Rule 
coverage should not escape regulation by the proposed Business 
Opportunity Rule--specifically, those exempt from the Franchise Rule's 
coverage due to the minimum payment exemption \245\ or the oral 
agreement exemption.\246\ While these two exemptions are warranted in 
the franchise context to ensure that the significant disclosure costs 
imposed by the Franchise Rule are cost-justified, they do not apply to 
the proposed Business Opportunity Rule, with its comparatively much 
lighter disclosure burden.
---------------------------------------------------------------------------

    \243\ 16 CFR at 436.2(a)(3)(i).
    \244\ 16 CFR at 436.2(a)(3)(ii).
    \245\ 16 CFR at 436.2(a)(3)(iii).
    \246\ 16 CFR at 436.2(a)(3)(iv).
---------------------------------------------------------------------------

    In response to the ANPR, DSA and its members argued for additional 
exemptions that would keep multilevel programs, in particular, from 
falling within the proposed Rule's purview.\247\ DSA asserted that pre-
sale disclosures are unnecessary in the context of direct selling where 
the risk of financial loss is low.\248\ To that end, DSA and its 
members recommended that the Commission preserve the inventory

[[Page 19079]]

exemptions from the minimum payment requirement.\249\ In addition, they 
contended that a Business Opportunity Rule should not cover 
opportunities with a repurchase or buy-back plan.\250\ They also 
suggested that the minimum payment threshold should be raised from the 
current $500 to at least $1,000,\251\ in order not to impose 
significant costs on small direct sellers. In short, DSA and its 
members asserted that any regulation of the multilevel marketing 
industry is likely to impose significant costs on small proprietors. 
Rather, in DSA's view, the problem in the industry is not from 
multilevel marketers, but from fraudulent pyramid schemes, which the 
Commission can address through current law.\252\
---------------------------------------------------------------------------

    \247\ The comments submitted by DSA and its members urging 
various exemptions from the proposed Rule apparently contemplated 
extensive disclosures, something akin to the current Franchise Rule. 
For example, during the Rule Review and ANPR proceedings, comments 
suggested a wide array of disclosures for business opportunities. 
E.g., Christopher, ANPR 115, at 2 (adding officer histories, 
financial statements); NASAA, ANPR 120, at 3-4 (adding business 
experience of promoters and bankruptcy information); Simon, Sept95 
Tr at 281-82 (adding audited financials, guarantee of sites); 
Wieczorek, Sept95 Tr at 284 (adding background on the seller, 
bankruptcy, fees and initial investment, financials). In light of 
the streamlined proposed Rule, such exemptions are unnecessary.
    \248\ DSA, ANPR 34, at 6.
    \249\ E.g., Longaberger, ANPR 31, at 1; DSA, ANPR 34, at 4; 
Amway, ANPR 89, at 2; Mary Kay, ANPR 110, at 2.
    \250\ DSA, ANPR 34, at 5. DSA explained that its code requires 
all members to repurchase 90% of all inventory on hand from a 
terminating direct seller if that inventory was purchased within one 
year prior to termination. Id. See also Amway, ANPR 89 at 2 (buyback 
of unused, marketable inventory within 12 months). DSA and its 
supporters also contended that the Commission should retain the 
current 'sales kit exemption.'' In the Interpretive Guides, the 
Commission said that the sale of sales kits or the distribution of 
promotional materials alone would not constitute 'significant 
assistance'' for coverage as a franchise. Interpretive Guides, 44 FR 
at 49967.
    \251\ E.g., DSA, ANPR 34, at 3-4; Pampered Chef, ANPR 86, at 2; 
Amway, ANPR 89, at 2; Mary Kay, ANPR 110.
    \252\ DSA, RR 21, at 5; Elman, Sept95 Tr at 42. Similarly, DSA 
asserted that false earnings claims can be addressed through section 
5 of the FTC Act. Elman, Sept95 Tr at 265. See also Catalano, 
20Nov97 Tr at 20 (noting that 25-26 states already have business 
opportunity laws on the books).
---------------------------------------------------------------------------

    We note, however, that DSA's position on raising the minimum 
payment threshold was opposed by many other commenters. Several 
commenters noted that the purpose of the Rule is to prevent fraud, 
regardless of the amount at issue. Others asserted that a monetary 
threshold simply provides scam operators a means to circumvent the 
Rule, noting that business opportunities frequently charge $495 to 
skirt the current Franchise Rule's disclosure requirements. For 
example, NCL stated that the:

$500 minimum investment * * * leaves many consumers without the 
disclosures and other protections that they need. Nearly one-third 
of the consumers who reported to the NFIC last year that they had 
lost money to fraudulent or deceptive business opportunities paid 
less than $500. . . . Whatever minimum amount might be set, 
fraudulent operators will price their services below it, and 
consumers will be victimized.

NCL, ANPR 35, at 11.\253\
---------------------------------------------------------------------------

    \253\ See also SBA Advocacy, ANPR 36, at 6 (``threshold should 
be lowered to $100 in order to curtail the number of unsavory 
companies that are beyond the reach of the FTC because they sell 
their scandalous `business opportunities' for $495.''); James, ANPR 
76 (lower the threshold to $300); M. Garceau, 20Nov97 Tr at 53 (``it 
should be one dollar''); Finnigan, 21Aug97 Tr at 188-99 (``They'll 
go right to $999 and that's the experience of every state.''); 
D'Imperio, Sept95 Tr at 130 (``I don't care if it's $10, fraud is 
fraud.''); Purvin, id. at 280 (``companies use that threshold to 
avoid regulation and consequently have their entry fee be under 
$500, which seems to me forces the amount of money that a 
prospective purchaser can lose within a very acceptable norm'').
---------------------------------------------------------------------------

    The Commission agrees with the commenters that the scope of the 
Rule should be broadened to reach all business opportunities that our 
anti-fraud law enforcement history and consumer complaints show are a 
widespread and persistent problem. This expansion of Rule coverage, 
however, would be balanced by drastically reduced compliance costs, as 
discussed above.

8. Proposed Section 437.8: Other Orders and Preemption

    Proposed section 437.8 would address the effect the proposed Rule 
may have on outstanding Commission orders. It also discusses preemption 
of state business opportunity laws.
a. Proposed Section 437.8(a): Effect on Prior Commission Orders
    The Commission recognizes that the proposed Rule significantly 
changes the disclosure obligations for those sellers who are now under 
order in prior Commission Franchise Rule and section 5 actions. For 
example, the proposed Business Opportunity Rule contemplates greatly 
streamlined disclosures, as compared to the Franchise Rule's extensive 
disclosures. At the same time, the proposed Rule would require new 
disclosures not present in the Franchise Rule, such as the disclosure 
of the seller's cancellation or refund history. To enable business 
opportunity sellers to take advantage of the Business Opportunity 
Rule's reduced disclosure obligations, as well as to reduce any 
potential conflicts between existing orders and the proposed Business 
Opportunity Rule, proposed section 437.8(a) would permit persons under 
order to petition the Commission for relief consistent with the 
provisions of the new Rule. Specifically, ``business opportunities 
covered by FTC or court order to follow the Franchise Rule, 16 CFR part 
436, may petition the Commission to amend the order so that the 
business opportunity may follow the provisions of the Business 
Opportunity Rule.'' Such determinations, however, will be made on a 
case-by-case basis.
b. Proposed Section 437.8(b): Preemption
    Proposed section 437.8(b) would adopt the preemption policy 
currently found at note 2 of the Franchise Rule.\254\ It would provide 
that the Commission does not intend to preempt state or local business 
opportunity laws, except to the extent of any conflict with the Rule. 
Further, a law does not conflict if it affords prospective purchasers 
equal or greater protection, such as a requirement for registration of 
disclosure documents or more extensive disclosures.
---------------------------------------------------------------------------

    \254\ This approach is consistent with other Commission trade 
regulation rules. See, e.g., Appliance Labeling Rule, 16 CFR at 
305.17; Cooling-Off Rule, 16 CFR at 429.2; Mail Order Rule, 16 CFR 
at 435.3(b)(2).
---------------------------------------------------------------------------

9. Proposed Section 437.9: Severability

    Finally, proposed section 437.9 would adopt the severability 
provision currently found in the Franchise Rule at 16 CFR at 436.3. 
This provision would make clear that, if any part of the Rule is held 
invalid by a court, the remainder will still be in effect.\255\
---------------------------------------------------------------------------

    \255\ This provision is comparable to the severability 
provisions in other Commission trade regulation rules. E.g., 900-
Number Rule, 16 CFR at 308.8; TSR, 16 CFR at 310.9.
---------------------------------------------------------------------------

Section F--Rulemaking Procedures

    Pursuant to 16 CFR 1.20, the Commission will use the following 
rulemaking procedures. These procedures are a modified version of the 
rulemaking procedures specified in section 1.13 of the Commission's 
Rules of Practice.
    First, the Commission is publishing this Notice of Proposed 
Rulemaking. The comment period will be open until June 16, 2006, 
followed by a rebuttal period until July 7, 2006. Interested parties 
are invited to submit written comments. Written comments must be 
received on or before June 16, 2006. Rebuttal comments must be received 
on or before July 7, 2006. All comments should be filed as prescribed 
in the ADDRESSES section above.
    Second, pursuant to Section 18(c) of the Federal Trade Commission 
Act, 15 U.S.C. 57a(c), the Commission will hold hearings with cross-
examination and rebuttal submissions only if an interested party 
requests a hearing by the close of the comment period. Parties 
interested in a hearing must submit within the comment period the 
following: (1) A comment in response to this notice; (2) a statement 
how they would participate in a hearing; and (3) a summary of their 
expected testimony. Parties wishing to cross-examine witnesses must 
also file a request by the

[[Page 19080]]

close of the 20-day rebuttal period, designating specific facts in 
dispute and a summary of their expected testimony. If requested to do 
so, the Commission will hold one or more informal public workshop 
conferences in lieu of hearings. After the close of the comment period, 
the Commission will publish a notice in the Federal Register stating 
whether hearings (or a public workshop conference in lieu of hearings) 
will be held and, if so, the time and place of the hearings and 
instructions for those wishing to present testimony or engage in cross-
examination of witnesses.
    Finally, after the conclusion of the rebuttal period, and any 
hearings or additional public workshop conferences, Commission staff 
will issue a Report on the Business Opportunity Rule (``Staff 
Report''). The Commission will announce in the Federal Register the 
availability of the Staff Report and will accept comment on the Staff 
Report for a period of 75 days.

Section G--Communications to Commissioners and Commissioner Advisors by 
Outside Parties

    Pursuant to Commission Rule 1.18(c)(1), the Commission has 
determined that communications with respect to the merits of this 
proceeding from any outside party to any Commissioner or Commissioner 
advisor shall be subject to the following treatment. Written 
communications and summaries or transcripts of oral communications 
shall be placed on the rulemaking record if the communication is 
received before the end of the comment period. They shall be placed on 
the public record if the communication is received later. Unless the 
outside party making an oral communication is a member of Congress, 
such communications are permitted only if advance notice is published 
in the Weekly Calendar and Notice of ``Sunshine'' Meetings.\256\
---------------------------------------------------------------------------

    \256\ See 15 U.S.C. 57a(i)(2)(A); 45 FR 50814 (1980); 45 FR 
78626 (1980).
---------------------------------------------------------------------------

Section H--Paperwork Reduction Act

    The Commission has submitted this proposed Rule and a Supporting 
Statement for Information Collection Provisions to the Office of 
Management and Budget (``OMB'') for review under the Paperwork 
Reduction Act (``PRA''), 44 U.S.C. 3501-3517. In this notice, the 
Commission proposes to promulgate a trade regulation rule governing 
business opportunity sales. The proposed Rule would cover those 
business opportunities currently covered by the Franchise Rule, as well 
as those not covered by the Franchise Rule, including work-at-home and 
multilevel marketing programs. The proposed Rule would require business 
opportunity sellers to disclose information and to maintain certain 
records relating to business opportunity sales transactions and refund 
requests.
    The current public disclosure and recordkeeping burden associated 
with the Franchise Rule is 37,000 hours, approved under OMB Control No. 
3084-0107. In the FTC's most recent submission for extension of the 
clearance for the Franchise Rule, the Commission staff estimated that 
there were 5,000 franchisors (2,500 business and product format 
franchises and 2,500 business opportunity sellers).\257\ As discussed 
below, the proposed Rule would reduce the burden on business 
opportunity sellers by streamlining disclosure requirements to minimize 
compliance costs.\258\
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    \257\ 70 FR 51819 (Aug. 31, 2005).
    \258\ If the Commission ultimately issues a final rule for 
business opportunity sellers, the Commission staff will request that 
OMB adjust the clearance for the Franchise Rule because the 
Franchise Rule will no longer apply to business opportunity sellers.
---------------------------------------------------------------------------

    The proposed Rule is designed to streamline and reduce 
substantially the quantity of information required to be disclosed by 
business opportunity sellers. The proposals would impact sellers 
differently, depending upon whether they are currently covered by the 
Franchise Rule. The Commission staff estimates that there are 
approximately 3,200 business opportunity sellers, comprised of some 
2,500 vending machine, rack display, and related opportunity sellers, 
550 work-at-home opportunity sellers, and 150 multilevel marketing 
companies.
    For the 2,500 vending machine, rack display, and related 
opportunity sellers presently covered by the Franchise Rule, the 
proposed Rule would reduce the number of disclosures from 20 categories 
of information to five mandatory disclosures pertaining to earnings 
claims, lawsuits, refund policy, cancellation and refund requests, and 
references. For the 700 business opportunity sellers presently exempted 
from the Franchise Rule, the disclosures, as noted below, are 
streamlined to minimize compliance costs.

1. Reduced Mandatory Disclosures

    The proposed Business Opportunity Rule contains five mandatory 
disclosures pertaining to earnings claims, lawsuits, refund policy, 
cancellation and refund requests, and references. With respect to 
earnings claims, business opportunity sellers must disclose whether or 
not they make earnings claims. However, the decision to make an 
earnings claim is optional. While the disclosures of references and 
earnings claims retain, for the most part, the current Franchise Rule 
requirements, the required disclosures for lawsuits and refund requests 
are reduced from the Franchise Rule.
a. Lawsuits
    As noted above, the current Franchise Rule requires an extensive 
list of suits that must be disclosed including those involving 
allegations of fraud, unfair or deceptive business practices, 
embezzlement, fraudulent conversion, misappropriation of property, and 
restraint of trade. Franchisors also must disclose suits filed against 
them involving the franchise relationship. 16 CFR at 436.1(a)(4). In 
contrast, the proposed Rule's lawsuit disclosure requirements are 
limited to suits for misrepresentation, fraud, or unfair or deceptive 
business practices only.
b. Cancellation and Refund Requests
    The current Franchise Rule requires detailed statistical 
information reflecting changes in the number of franchises during the 
previous year, specifically the number of:
    (1) Franchises sold; (2) franchises voluntarily terminated or not 
renewed; (3) franchises otherwise reacquired by the franchisor; (4) 
franchises for which the franchisor refused renewal; (5) franchises 
cancelled or terminated; as well as the reasons for any reacquisitions, 
refusals to renew, or terminations. 16 CFR at 436.1(a)(16). In 
contrast, the proposed Rule requires only the disclosure of the number 
of sales in the last two years and the number of cancellation and 
refund requests received by the seller during the same period.

2. Incorporation of Existing Materials

    The proposed Rule also reduces collection and dissemination costs 
by permitting sellers to reference in their disclosure documents 
materials already in their possession. For example, a seller need not 
repeat its refund policy in the text of the disclosure document, but 
may incorporate its contract or brochures, or other materials that 
already provide the necessary details.

3. Use of Electronic Dissemination of Information

    The proposed Rule redefines the term ``written'' to include 
electronic media. Accordingly, all business opportunities covered by 
the proposed Rule are permitted to use the Internet and other 
electronic media to furnish disclosure

[[Page 19081]]

documents. Allowing this distribution method could greatly reduce 
sellers' compliance costs over the long run, especially costs 
associated with printing and distributing disclosure documents. As a 
result of this proposal, the Commission expects sellers' compliance 
costs will decrease substantially over time.

4. Use of Computerized Data Collection Technology

    Finally, because of advances in computerized data collection 
technology, the Commission staff anticipates that the costs of 
collecting information and recordkeeping requirements imposed by the 
Rule will be minimal. For example, a seller can easily maintain a 
spreadsheet of its purchasers, which can be sorted by location. This 
would enable a seller to comply easily with the proposed reference list 
requirement (at least 10 prior purchasers in the last three years who 
are located nearest the prospective purchaser, or, if there are not 10, 
then all prior purchasers). In the alternative, the proposed Rule 
permits a seller to maintain a national list of purchasers. Such a list 
could be posted on the seller's Web site, for example.
    As a result of these proposals, the Commission staff estimates that 
compliance with the proposed Rule by business opportunity sellers, on 
average, will require one to three hours to prepare an initial 
disclosure document, and one to two hours per year to maintain the 
necessary records. Staff assumes that in many instances an attorney 
likely would prepare or update the disclosure document. Accordingly, 
staff estimates the total number of hours initially to comply with the 
proposed Rule to be approximately 16,000 (3,200 sellers x 5 hours), at 
a total initial labor cost of $4,000,000 (16,000 hours x $250). The 
Commission staff expects that the annual disclosure burden will 
diminish after the first year to one to two hours to prepare 
disclosures and one to two hours to retain records, resulting in 
approximately 12,800 hours (3,200 sellers x 4 hours) or fewer, for a 
total average cost of $3,200,000 (12,800 hours x $250), or less.
    The Commission invites comments that will enable it to:
    1. Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
utility;
    2. Evaluate the accuracy of the Commission's estimate of the burden 
of the collection of information, including the validity of the 
methodology and assumptions used;
    3. Enhance the quality, usefulness, and clarity of the information 
to be collected; and
    4. Minimize the burden of collection of information on those who 
are to respond, including through the use of appropriate automated 
electronic, mechanical, or other technological collection techniques, 
or other forms of information technology, for example, permitting 
electronic submission of responses.
    Comments on any proposed filing, recordkeeping, or disclosure 
requirements that are subject to paperwork burden review under the 
Paperwork Reduction Act should additionally be submitted to: Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Attention: Desk Officer for the Federal Trade Commission. Comments 
should be submitted via facsimile to (202) 395-6974 because U.S. Postal 
Mail is subject to lengthy delays due to heightened security 
precautions.
    OMB will act on this request for review of the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives the comment within 30 days of publication. This does 
not affect the deadline for the public to comment to the FTC on the 
proposed regulation.

Section I--Regulatory Analysis

    Section 22 of the FTC Act, 15 U.S.C. 57b, requires the Commission 
to issue a preliminary regulatory analysis when publishing a Notice of 
Proposed Rulemaking, but requires the Commission to prepare such an 
analysis for a rule amendment proceeding only if it: (1) Estimates that 
the amendment will have an annual effect on the national economy of 
$100,000,000 or more; (2) estimates that the amendment will cause a 
substantial change in the cost or price of certain categories of goods 
or services; or (3) otherwise determines that the amendment will have a 
significant effect upon covered entities or upon consumers. To the 
extent that this Document constitutes a Notice of Proposed Rulemaking, 
the Commission has set forth in Section J below, in connection with its 
Initial Regulatory Flexibility Analysis (``IRFA'') under the Regulatory 
Flexibility Act, and has discussed elsewhere in this Document: (1) The 
need for and objectives of the proposed Rule (see IRFA ] 2); (2) a 
description of reasonable alternatives that would accomplish the Rule's 
stated objectives consistent with applicable law (see IRFA ] 6); and a 
preliminary analysis of the benefits and adverse effects of those 
alternatives (see id.). Alternatively, to the extent that this 
proceeding proposes to amend the existing Franchise Rule, the 
Commission has preliminarily determined that the proposed amendments to 
the Franchise Rule will not have such an effect on the national 
economy, on the cost or prices of goods or services sold through 
business opportunities, or on covered businesses or consumers. As noted 
in the Paperwork Reduction Act discussion above, the Commission staff 
estimates each business affected by the Rule will likely incur only 
minimal compliance costs. Specifically, approximately 3,200 businesses 
will spend not more than $750 (3 hours x $250 each) to create an 
initial disclosure document and not more than $500 (2 hours x $250 
each) to update the four required disclosures on an annual basis. To 
ensure that the Commission has considered all relevant facts, however, 
it requests additional comment on these issues.

Section J--Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-612, 
requires an agency to provide an IRFA with a proposed rule and a Final 
Regulatory Flexibility Analysis (``FRFA'') with the final rule, if any, 
unless the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities. See 5 U.S.C. 
603-605. The FTC does not expect that the proposed Business Opportunity 
Rule will have a significant economic impact on a substantial number of 
small entities. The abbreviated disclosure and recordkeeping 
requirements of the proposed Business Opportunity Rule are the minimum 
necessary to give consumers the information they need to protect 
themselves and permit effective enforcement of the rule. As such, the 
economic impact of the proposed Rule will be minimal. In any event, the 
burdens imposed on small businesses are likely to be relatively small, 
and in the Commission's enforcement experience, insignificant in 
comparison to their gross sales and profits.
    This document serves as notice to the Small Business Administration 
of the agency's certification of no effect. Nonetheless, the Commission 
has determined that it is appropriate to publish an IRFA in order to 
inquire into the impact of the proposed Rule on small entities. 
Therefore, the

[[Page 19082]]

Commission has prepared the following analysis.

1. Description of the Reasons That Action by the Agency Is Being 
Considered

    The Commission's law enforcement experience provides ample evidence 
that fraud is pervasive in the sale of many business opportunities 
marketed to consumers. The pre-sale disclosures provided by the 
proposed Business Opportunity Rule will give consumers the minimal 
information they need to protect themselves from fraudulent sales 
claims, while minimizing the compliance costs and burdens on sellers.

2. Succinct Statement of the Objectives of, and Legal Basis for, the 
Proposed Rule

    The objective of the proposed Rule is to provide consumers 
considering the purchase of a business opportunity with material 
information they need to investigate the offering thoroughly so they 
can protect themselves from fraudulent claims. The legal basis for the 
proposed Rule is Section 18 of the FTC Act, 15 U.S.C. 57a, which 
authorizes the Commission to promulgate, modify, and repeal trade 
regulation rules that define with specificity acts or practices in or 
affecting commerce that are unfair or deceptive within the meaning of 
section (5)(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1).

3. Description of and, Where Feasible, Estimate of the Number of Small 
Entities to Which the Proposed Rule Will Apply

    The proposed Rule primarily applies to ``sellers'' of business 
opportunities, including vending, rack display, medical billing and 
work-at-home (e.g., craft assembly, envelope stuffing) opportunities, 
as well as pyramid schemes masquerading as multilevel sales programs. 
The FTC staff believes that many of these sellers will fall into the 
category of small entities. Determining the precise number of small 
entities affected by the proposed Rule, however, is difficult due to 
the wide range of types of businesses engaged in business opportunity 
sales. The staff estimates that there are approximately 3,200 business 
opportunity sellers, including some 2,500 vending machine, rack 
display, and related opportunity sellers; 550 work-at-home opportunity 
sellers; and 150 multilevel marketing companies. Most established and 
some start-up business opportunities would likely be considered small 
businesses according to the applicable SBA size standards.\259\ The FTC 
staff estimates that as many as 70% of business opportunities, as 
defined by the Rule, are small businesses. The Commission invites 
comments and information on this issue.
---------------------------------------------------------------------------

    \259\ Since October 2000, SBA size standards have been based on 
the North American Industry Classification System (``NAICS''), in 
place of the Standard Industrial Classification (``SIC'') system. In 
general, a company in a non-manufacturing industry is a small 
business if its average annual receipts are $6 million or less. See 
http://www.sba.gov/size/indexguide.html. Thus, the size standard for 
vending machine operators is $6 million in annual receipts (NAICS 
454210), and the same size standard applies to other direct selling 
establishments (NAICS 454390), marketing consulting services (NAICS 
541613), other management consulting services (NAICS 541618) and 
other business support services (NAICS 561499 and 561990). See 
http://www.sba.gov/size/sizetable2002.html.
---------------------------------------------------------------------------

4. Projected Reporting, Recordkeeping and Other Compliance 
Requirements, Including an Estimate of the Classes of Small Entities 
That Will Be Subject to the Requirement and the Type of Professional 
Skills Necessary for Preparation of the Report or Record

    The proposed Rule imposes disclosure and recordkeeping 
requirements, within the meaning of the Paperwork Reduction Act, on the 
``sellers'' of business opportunities and their principals. Section 
437.2 of the proposed Rule would require ``sellers'' of covered 
business opportunities to provide potential purchasers with a one-page 
disclosure document, as specified by section 437.3 and Appendix A, at 
least seven calendar days before they sign a contract or pay any money 
toward a purchase. If a seller elects to make an earnings claim, 
section 437.4 would require that written substantiation for the claim 
be provided to the purchaser in a separate ``earnings claim statement'' 
document. However, the proposed Rule would not require sellers to make 
an earnings claim, and thus any compliance costs incurred in connection 
with such claims are strictly optional.
    Section 437.6 of the proposed Rule prescribes recordkeeping 
requirements necessary for effective enforcement of the Rule. 
Specifically, sellers of a covered business opportunity, and their 
principals, must retain for at least three years the following six 
types of documents: (1) Records of any oral cancellation or refund 
requests received from a purchaser; (2) each materially different 
version of all documents required by the Rule; (3) each purchaser's 
disclosure receipt; (4) each executed written contract with a 
purchaser; (5) each cancellation or refund request received from a 
purchaser; and (6) all substantiation upon which the seller relies for 
each earnings claim made. The proposed Rule requires that these records 
be made available for inspection by the Commission, but does not 
otherwise require production of the records. The Commission is seeking 
clearance from the Office of Management and Budget (``OMB'') for these 
requirements and the Commission's Supporting Statement submitted as 
part of that process will be made available on the public record of 
this rulemaking.
    As discussed in section H above, FTC staff estimates that the total 
number of hours initially to comply with the proposed Rule to be 
approximately 16,000 (3,200 sellers x 5 hours), with a total initial 
legal and clerical cost of $4,000,000 (16,000 hours x $250). FTC staff 
expects that the annual burden will diminish after the first year, 
however, to approximately 12,800 hours (3,200 sellers x 4 hours) or 
fewer, for a total average of annual legal and clerical labor costs of 
$3,200,000 (12,800 hours x $250), or less.

5. Other Duplicative, Overlapping, or Conflicting Federal Rules

    There are no other federal statutes, rules, or policies that would 
conflict with the proposed Business Opportunity Rule. The Commission's 
Franchise Rule, 16 CFR Part 436.1, is the only federal regulation 
currently applicable to some of the business opportunities covered by 
the proposed Rule. When the proposed Business Opportunity Rule takes 
effect, its requirements for business opportunity sellers will 
supercede the requirements of the Franchise Rule, so that any possible 
conflict between the two rules will be avoided.
    The Commission notes, however, that it is aware that 22 states have 
statutes specifically governing the sale of business opportunities. The 
Commission therefore seeks comment and information about any state 
statutes or rules that may conflict with the proposed requirements, as 
well as any other state, local, or industry rules or policies that 
require covered entities to implement practices that conflict or 
comport with the requirements of the proposed Rule.

[[Page 19083]]

6. Description of Any Significant Alternatives to the Proposed Rule 
That Would Accomplish the Stated Objectives of Applicable Statutes and 
That Minimize Any Significant Economic Impact of the Proposed Rule on 
Small Entities, Including Alternatives Considered, Such as: (1) 
Establishment of Differing Compliance or Reporting Requirements or 
Timetables That Take Into Account the Resources Available to Small 
Entities; (2) Clarification, Consolidation, or Simplification of 
Compliance and Reporting Requirements Under the Rule for Such Small 
Entities; and (3) Any Exemption From Coverage of the Rule, or Any Part 
Thereof, for Such Small Entities

    The proposed Rule's disclosure and recordkeeping requirements are 
designed to impose the minimum burden on all affected business 
opportunity sellers, regardless of size. In formulating the proposed 
Rule, the Commission has taken a number of significant steps to 
minimize the burdens the proposed Rule would impose on large and small 
businesses. These include: (1) Limiting the required pre-sale 
disclosure to a one-page document, with check boxes provided to 
simplify disclosure responses; (2) allowing the disclosure to refer to 
information in other existing documents to avoid needless duplication; 
(3) permitting the disclosure document itself to be furnished in 
electronic form to minimize printing and distribution costs; and (4) 
employing specific prohibitions in place of affirmative disclosures 
whenever possible. Moreover, because many of the sellers covered by the 
proposed Rule are already required to comply with the Commission's 
Franchise Rule and the business opportunity laws in 22 states, FTC 
staff anticipates that the proposed Rule will drastically reduce their 
current compliance costs, while imposing exceedingly modest ongoing 
compliance costs on all covered sellers. Consequently, the Commission 
believes that the proposed Rule will not have a significant economic 
impact upon small businesses.
    The proposed Rule would require business opportunity sellers to 
provide only five affirmative disclosures in a one-page disclosure 
document. This is a significant reduction from the 20 disclosures now 
required by the Commission's Franchise Rule, with which many business 
opportunity sellers are now obligated to comply. The proposed Rule 
limits required disclosures to information about the sellers' 
litigation history, refund policy, refund request history, and prior 
purchaser references. Because the proposed Rule does not require 
sellers to make information about potential earnings available to 
potential purchasers, such earnings claims are entirely optional. Thus, 
if sellers make no earnings claims whatsoever, they can avoid the 
proposed Rule's requirement that any person making an earnings claim 
provide a potential purchaser with an earnings claim representation in 
writing that provides substantiation for the claim.
    Thus, the Commission does not believe that the proposed Rule will 
impose a significant economic impact on a substantial number of small 
businesses. Nonetheless, the Commission specifically requests comment 
on the question whether the proposed Rule imposes a significant impact 
upon a substantial number of small entities, and what modifications to 
the Rule the Commission could make to minimize the burden on small 
entities. Moreover, the Commission requests comment on the general 
question whether new technology or changes in technology can be used to 
reduce the burdens mandated by the Act.
    In some situations, the Commission has considered adopting a 
delayed effective date for small entities subject to a new regulation 
in order to provide them with additional time to come into compliance. 
In this case, however, in light of the proposed Rule's flexible 
standard and modest compliance costs, the Commission believes that 
small entities should feasibly be able to come into compliance with the 
proposed Rule by the proposed effective date, six months following 
publication of the final Rule. Nonetheless, the Commission invites 
comment on whether small businesses might need additional time to come 
into compliance and, if so, why.
    In addition, the Commission has the authority to exempt any persons 
or classes of persons from the Rule's application pursuant to section 
18(g) of the FTC Act. The Commission therefore requests comment on 
whether there are any persons or classes of persons covered by the 
proposed Rule that it should consider exempting from the Rule's 
application pursuant to section 18(g). However, the Commission notes 
that the proposed Rule's purpose of protecting consumers against fraud 
could be undermined by the granting of a broad exemption to small 
entities.

7. Questions for Comment To Assist Regulatory Flexibility Analysis

    a. Please provide information or comment on the number and type of 
small entities affected by the proposed Rule. Include in your comment 
the number of small entities that will be required to comply with the 
Rule's disclosure and recordkeeping requirements.
    b. Please provide comment on any or all of the provisions in the 
proposed Rule with regard to: (a) The impact of the provision(s) 
(including benefits and costs to implement and comply with the Rule or 
Rule provision), if any; and (b) what alternatives, if any, the 
Commission should consider, as well as the costs and benefits of those 
alternatives, paying specific attention to the effect of the proposed 
Rule on small entities in light of the above analysis. In particular, 
please provide the above information with regard to the disclosure and 
recordkeeping provisions of the proposed Rule set forth in sections 
437.2, 437.3, 437.4 and 437.6, and describe any ways in which the 
proposed Rule could be modified to reduce any costs or burdens for 
small entities consistent with the proposed Rule's purpose. Costs to 
implement and comply with a Rule provision include expenditures of time 
and money for: Any employee training; attorney, computer programmer or 
other professional time; preparing relevant materials (e.g., disclosure 
documents), and recordkeeping.
    c. Please describe ways in which the Rule could be modified to 
reduce any costs or burdens on small entities, including whether and 
how technological developments could further reduce the costs of 
implementing and complying with the proposed Rule for small entities.
    d. Please provide any information quantifying the economic costs 
and benefits of the proposed Rule on the entities covered, including 
small entities.
    e. Please identify any relevant federal, state, or local rules that 
may duplicate, overlap or conflict with the proposed Rule.

Section K--Request for Comments

    The Commission invites members of the public to comment on any 
issues or concerns they believe are relevant or appropriate to the 
Commission's consideration of the proposed Business Opportunity Rule. 
The Commission requests that factual data upon which the comments are 
based be submitted with the comments. In addition to the issues raised 
above, the Commission solicits public comment on the specific questions 
identified below. These questions are designed to assist the public and 
should not be construed as a limitation on the issues on which public 
comment may be submitted.

[[Page 19084]]

1. General Questions

    Please provide comment, including relevant data, statistics, 
consumer complaint information, or any other evidence, on each 
different provision of the proposed Rule. Regarding each provision, 
please include answers to the following questions:
    a. How prevalent is the practice the provision seeks to address?
    b. What is the impact (including any benefits and costs), if any, 
on:
    1. Prospective business opportunity purchasers;
    2. Existing business opportunity purchasers; and
    3. Business opportunity sellers (including small business 
opportunity sellers and start-up sellers)?
    c. What alternative proposals should the Commission consider? How 
would these proposed alternatives affect the costs and benefits of the 
proposed Rule?

2. Questions on Specific Proposals

    In response to each of the following questions, please provide: (1) 
Detailed comment, including data, statistics, consumer complaint 
information, and other evidence, regarding the issues addressed in the 
question; (2) comment as to whether the proposal does or does not 
provide an adequate solution to the problems it is intended to address; 
and (3) suggestions for additional changes that might better maximize 
consumer protections or minimize the burden on business opportunity 
sellers.

Definitions

    1. Proposed section 437.1(d) would limit the definition of 
``business opportunity'' to instances where a seller solicits a 
purchaser to enter into a new business (or new line or type of 
business). This limitation seeks to distinguish the sale of business 
opportunity ventures from the ordinary sale of goods and services. Is 
limiting the definition of ``business opportunity'' to solicitations to 
enter into a new business adequate to make this distinction? If not, 
what alternative limitation should the Commission consider? What would 
be the costs and benefits of each alternative?
    2. Proposed section 437.1(d) contemplates that a business 
arrangement will constitute a ``business opportunity'' if the seller 
either promises business assistance or makes an earnings claim. Are 
both alternatives necessary? Are there business opportunities that 
offer assistance without making an earnings claim? Are there business 
opportunities that make earnings claims that do not offer assistance? 
Should the definition of ``business opportunity'' focus on the offer of 
assistance alone or on the making of earnings claims alone? What 
alternatives should the Commission consider? What would be the costs 
and benefits of each alternative?
    3. Proposed section 437.1(d) contemplates that a business 
arrangement will constitute a ``business opportunity'' if the purchaser 
pays consideration to the seller, directly or indirectly through a 
third party. The proposed definition, however, does not contain a 
minimum payment threshold. The Commission believes that, in light of 
the limited compliance costs--far less than under the Franchise Rule--
all business opportunity sellers (with the exception of franchisors 
under the Franchise Rule), should comply with the Rule. Further, the 
record shows that whatever threshold might be set forth in a Business 
Opportunity Rule, fraudulent business opportunity sellers will price 
their opportunities at an amount just under the threshold in order to 
avoid compliance. Nevertheless, should the Commission consider a 
monetary threshold and if so, why? At what level should the threshold 
be set? If so, how can the Commission ensure that fraudulent business 
opportunity sellers will not price their opportunities just under the 
threshold in order to avoid Rule coverage? What alternatives should the 
Commission consider? What would be the costs and benefits of each 
alternative?
    4. Proposed section 437.1(c) would define the term ``business 
assistance,'' setting forth five examples. Are each of these examples 
warranted? What other examples, if any, might better capture the nature 
of business assistance offered by business opportunity sellers? What 
would be the costs and benefits of each alternative?
    5. Proposed section 437.1(c) would include as an example of 
``business assistance'' the tracking or paying, or purporting to track 
or pay, commissions or other compensation based upon the sale of goods 
or services or recruitment of other persons to sell goods or services. 
This example is intended to capture pyramid marketing programs that 
assist program participants in tracking commissions to be paid or by 
paying commissions to participants' downstream. Does this example 
adequately capture pyramid schemes? Is it too broad, sweeping in 
business arrangements other than pyramids? If so, what alternative, if 
any, should the Commission consider to capture pyramid programs? What 
would be the costs and benefits of each alternative?
    6. Proposed section 437.1(k) would make clear that the Rule applies 
to persons already in business who are seeking to enter into a new line 
of business. Do persons already in business need the protection of the 
proposed Rule? Does this provision impose unwarranted costs? Should the 
Commission consider alternatives regarding persons already in business 
who are either looking to purchase a new business opportunity or to 
expand their line of business? If so, what would be the costs and 
benefits of each alternative?

Timing Provision

    7. Proposed section 437.2 contemplates that a seller must furnish a 
prospective purchaser with a disclosure document at least seven 
calendar days before the earlier of the time that the prospective 
purchaser: (1) Signs any contract in connection with the business 
opportunity sale; or (2) makes a payment or provides other 
consideration to the seller, directly or indirectly through a third 
party, for the purchase or lease of goods or services. Is a seven 
calendar-day period warranted to enable prospective purchasers to 
investigate and make an informed investment decision? Is a seven 
calendar-day period necessary to enable prospective purchasers to 
review any earnings claims? Would a seven calendar-day review period 
impose unnecessary delay or excessive costs when the prospective 
purchaser is already in business? Should the review period be shortened 
to five or three days? What would be the costs and benefits of each 
alternative time period?

Liability

    8. Proposed section 437.3 would provide that only a seller has the 
obligation to furnish a basic disclosure document. While a seller may 
hire brokers or others to arrange for sales, the seller ultimately has 
the obligation to ensure that disclosures are properly prepared and 
disseminated to prospective purchasers. Is it proper to limit liability 
for preparing and disseminating disclosure documents to the seller? 
Should other individuals or entities involved in a business opportunity 
sale also be liable for either failing to furnish disclosure documents 
or for the contents of an incomplete or inaccurate disclosure 
documents? What alternatives, if any, should the Commission consider? 
What would be the costs and benefits of each alternative?

The Disclosure Document

    9. Proposed section 437.3(a) requires that disclosure documents be 
``in the form and using the language set forth in

[[Page 19085]]

Appendix A.'' Is this instruction sufficient to inform business 
opportunity sellers on how to prepare a basic disclosure document? 
Should the Commission revise the proposed Rule specifically to 
reference each of the required boilerplate disclosures? What 
alternatives, if any, should the Commission consider? What would be the 
costs and benefits of each alternative?
    10. The one-page disclosure document set forth in Appendix A is 
intended to provide prospective purchasers with material information 
with which to make an informed investment decision. Can the overall 
presentation of the information in the one-page disclosure document be 
improved? Are there specific sections that can be improved by 
simplifying the presentation to make it easier for prospective 
purchasers to understand? How could the presentation be improved? What 
would be the costs and benefits of each alternative?
    11. The one-page disclosure document set forth in Appendix A is 
intended to assist prospective purchasers by describing the nature of 
the information disclosed. For example, where a seller checks the 
``yes'' box in connection with earnings claims, it clarifies for 
prospective purchasers that the seller or its representative is 
furnishing sales, income, or profit data. At the same time, the one-
page disclosure document sets forth legal standards, summarizing for 
sellers and prospective purchasers the more lengthy disclosure 
obligations found in the text of the Rule. Accordingly, the Commission 
has tried to balance, as much as possible, the use of clear language 
readily understandable by prospective purchasers with the need for 
clear legal standards applicable to sellers. Has the Commission 
succeeded in striking the appropriate balance? Are there areas where 
the understandability of the one-page disclosure document may be 
improved, without sacrificing clear legal standards? Are there specific 
sections where the proposed language does not accurately convey the 
substance of the corresponding Rule provision? What improvements should 
the Commission consider to the language found in the one-page 
disclosure document? What would be the costs and benefits of each 
alternative?
    12. The disclosure document provides a space for the name of the 
``Seller.'' In addition to any company or d/b/a name listed next to 
``Seller,'' should ``Seller'' also include the principal officers' 
names? Should the addition of such names depend on whether or not the 
seller is a d/b/a? What are the costs and benefits of including both 
the company and the principal officers' names next to ``Seller''? 
Should previous business opportunities offered by the seller's 
principal officers be disclosed? What are the costs and benefits of 
including such information?
    13. Proposed section 437.3(a)(3) would require sellers to furnish 
certain litigation information. Specifically, the seller would disclose 
information about itself, as well as any affiliates and prior 
businesses, any of the seller's officers, directors, sales managers (or 
other individuals who occupy a similar position or perform similar 
functions), and employees who are involved in business opportunity 
sales activities. The intent of this provision is to capture all 
individuals who function as officers, directors, or sales managers, 
even though they may not have a formal title. In addition, it also 
captures those employees who are involved in sales activities. Does 
this provision adequately capture the types of individuals whose 
litigation should be disclosed? Is the phrase ``any individual who 
occupies a similar position or performs a function similar to an 
officer, director, or sales manager of the seller'' adequate to 
identify those who act as or perform the functions of officers, 
directors, or sales managers? Similarly, is the language ``employees 
who are involved in business opportunity sales activities'' too broad? 
What alternative language, if any, should the Commission consider? What 
would be the costs and benefits of each alternative?
    14. Proposed section 437.3(a)(3) would limit the types of suits 
that must be disclosed to civil and criminal actions involving 
misrepresentation, fraud, securities law violations, or unfair or 
deceptive practices within 10 years immediately preceding the date that 
the business opportunity is offered. Are these types of actions 
sufficient to enable a prospective purchaser to assess the risk of 
purchasing an opportunity from the seller? Should the list be expanded 
to include bankruptcy? Should it be expanded to include suits against 
the seller for breach of contract? How often do business opportunity 
purchasers sue sellers for breach of contract, as opposed to 
misrepresentation or fraud? Is 10 years a sufficient period to track 
prior litigation? Is a 10-year period too long? If so, what alternative 
time period, if any, should the Commission consider? What would be the 
costs and benefits of each alternative?
    15. Proposed section 437.3(a)(3) would require a seller disclosing 
litigation to include the full caption of each action, including the 
names of the principal parties, case number, full name of the court, 
and the filing date. Should more detail be provided about legal 
actions? Should the business opportunity seller also have to provide 
information about any of the following topics: the final disposition of 
the action; the penalties imposed; the damages assessed; the terms of 
the settlement; or the terms of the order? What would be the costs and 
benefits of including such additional information?
    16. Proposed section 437.3(a)(4) would require a seller to disclose 
whether or not the seller has a cancellation or refund policy. In 
addition, proposed section 437.3(a)(5) would require the seller to 
state the number of purchasers of the business opportunity during the 
two years prior to the date of the disclosure and the number of 
cancellation and refund requests submitted by prior purchasers during 
the same period. The purpose of this provision is to assist the 
prospective purchaser in assessing the viability of the offer and the 
likelihood of the seller's post-sale performance. The focus on 
cancellations and refunds assumes that a seller would be better able to 
disclose information about such requests that it receives than 
information about the current status of prior purchasers. Is this 
assumption correct? To what extent do business opportunity sellers 
track the current status of prior purchasers? Is cancellation or refund 
request information relevant in a business opportunity sale? Does such 
information correctly imply dissatisfaction or problems within a 
business opportunity system? Would such a disclosure requirement 
actually discourage sellers from offering cancellations or refunds? 
What alternatives, if any, should the Commission consider? What would 
be the costs and benefits of each alternative?
    17. Proposed section 437.3(a)(6) would require each seller to 
disclose the name, city and state, and telephone number for at least 10 
prior purchasers nearest to the prospective purchaser's location. The 
Commission believes the disclosure of this information is critical to 
enable a prospective business opportunity purchaser to verify the 
seller's claims and to conduct a due diligence investigation of the 
offering. Is this information proprietary for the seller? If so, do the 
benefits of such disclosure to prospective purchasers outweigh the 
costs to sellers? Are there other ways to identify prior purchasers? 
What alternatives, if any, should the Commission consider? What would 
be

[[Page 19086]]

the costs and benefits of each alternative?
    18. As an alternative, proposed section 437.3(a)(6) would enable a 
seller to furnish prospective purchasers with a national list of prior 
purchasers. Is this a viable option? Would sellers be inclined to 
publish a single national list rather than individualized lists of 
purchasers ``nearest to the prospective purchaser's location?'' Under 
what circumstances should the Rule permit a seller to post a national 
list of purchasers on its Web site? What protections should be put in 
place to limit access to the list? What protections might be sufficient 
to prevent those who merely want to sell fraudulent business 
opportunities from accessing such a list? What other options, if any, 
should the Commission consider? Would these options enable the seller 
to select only those prior purchasers who are successful or who 
otherwise would give a favorable report on the seller? What would be 
the costs and benefits of each alternative?
    19. Proposed section 437.3(b) would require the disclosure of 
contact information, raising privacy concerns. Accordingly, the 
Commission proposes that sellers include in the references section of 
the disclosure document the following: ``If you buy a business 
opportunity from the seller, your contact information can be disclosed 
in the future to other buyers.'' Are there alternative methods that 
would protect prior purchasers' privacy? Should the Commission consider 
an opt-out provision, enabling purchasers to decline having their 
contact information listed in a disclosure document? Would sellers 
likely exploit an opt-out provision by inducing purchasers to opt out, 
thereby avoiding the obligation to disclose prior purchasers as 
references? Would sellers use an opt-out provision to create, in 
effect, a self-serving list of successful purchasers or shills? Are 
there alternative methods employed by the states that the Commission 
should consider?
    20. Once the Rule becomes effective, sellers must disclose contact 
information for prior purchasers. However, individuals who have 
purchased a business opportunity before the Rule becomes effective 
probably will have received no notice that their contact information 
can be disclosed to other purchasers in the future. How should the 
Commission balance the goals of disclosing prior purchasers as 
references with the fact that, at least initially, some prior 
purchasers will not have received any privacy notice? Should the 
Commission phase in the use of references? For example, should the 
seller update its reference list on a monthly basis drawing only from 
those purchasers who have received a privacy notice? Is a monthly 
updating requirement feasible? What alternative updating requirement 
should the Commission consider? Would a monthly updating requirement 
disadvantage those purchasers who buy a business opportunity 
immediately after the Rule goes into effect, when no or few prior 
purchasers will have received the required privacy notice? What 
alternatives should the Commission consider? What would be the costs 
and benefits of each alternative?
    21. Are there other disclosures that should be included in the 
disclosure document? Specifically, should any proposed initial 
purchaser price of the business opportunity and/or payments to be sent 
to third parties be listed on the disclosure document? Why or why not? 
What would be the costs and benefits of including such information?

Earnings Claims

    22. Proposed section 437.4(a)(4) would set forth the required 
content of an earnings claims statement. It includes the name of the 
person making the claim, the date of the claim, the claim, the 
beginning and ending dates when the represented earnings were achieved, 
the number and percentage of all purchasers during the stated time 
frame who achieved at least the stated level of earnings, and a 
description of any characteristics of the purchasers who achieved the 
represented earnings that may be materially different from the 
characteristics of the prospective purchasers being offered the 
business opportunity. Is this information sufficient to enable a 
prospective purchaser to assess the validity of an earnings claim? What 
other substantiation, if any, should be required? Should a seller be 
able to make an earnings claim if it does not have complete and 
accurate information on the number and percentage of prior purchasers 
who have achieved the represented level of earnings? If so, under what 
conditions should such earnings claims be permitted? What alternatives, 
if any, should the Commission consider? What would be the costs and 
benefits of each alternative?
    23. Proposed section 437.4(c) would address the dissemination of 
industry financial, earnings, or performance information. Specifically, 
a seller would be barred from using such information unless the seller 
has written substantiation demonstrating that the information reflects 
the typical or ordinary financial performance experience of purchasers 
of the business opportunity being offered for sale. Should a seller be 
required to disclose the number and percentage of its purchasers that 
have achieved at least the same level of performance as the industry 
figures? Would number and percentage information be sufficient to 
enable a prospective purchaser to assess the applicability of industry 
information to the opportunity being offered? Do business opportunity 
sellers collect performance data from purchasers? Is such information 
readily available? What other alternatives, if any, should the 
Commission consider? What would be the costs and benefits of each 
alternative?

Prohibited Acts and Practices

    24. Proposed section 437.5 would set forth a number of prohibited 
acts or practices. Is the proposed list complete? Are there any other 
practices common among business opportunity sellers that should be 
prohibited? Are any of the proposed prohibitions unnecessary? What 
would be the costs and benefits of each proposed prohibition? What 
alternatives, if any, should the Commission consider? What would be the 
costs and benefits of each alternative?
    25. Proposed section 437.5 would prohibit sellers from 
misrepresenting the business opportunity, directly or through third 
parties. Accordingly, a business opportunity could be held liable for 
misrepresentations made about the business opportunity through third 
parties, such as a locator or broker. Should third parties involved in 
the business opportunity sales process be held liable for 
misrepresenting the seller's disclosures? Proposed section 437.5 also 
does not address when a third party--such as a shill--makes his or her 
own misrepresentations outside of the disclosure document. The 
Commission believes that third parties can be held liable for their own 
misrepresentations under section 5 of the FTC Act. Is section 5 of the 
FTC Act sufficient to address independent misrepresentations made 
outside of a disclosure document by such third parties? What 
alternatives, if any, should the Commission consider? What would be the 
costs and benefits of each alternative?

Federal and State Relations

    26. The proposed Rule would prohibit business opportunity sellers 
from adding any other information to the required disclosures, 
including information required by state law. This approach is different 
from the Franchise

[[Page 19087]]

Rule approach, which enables franchisors to include additional 
materials in a disclosure document that are required or permitted by 
state law. Because the proposed disclosure document comprises a single 
page (and any attachments), sellers can easily attach the federal 
disclosure document to any disclosure document required under state 
law, without imposing significant costs or burdens. In light of the 
vastly different laws governing business opportunities on the state 
level, this approach will also preserve the uniformity of federal 
disclosure documents. Is this approach proper? How can the Commission 
best accommodate divergent state business opportunity approaches? What 
alternatives, if any, should the Commission consider? What would be the 
costs and benefits of each alternative?

Record Retention

    27. Proposed section 437.6 would require that records be kept for 
``each oral or written cancellation or refund request received from a 
purchaser.'' How should oral cancellation or refund requests be kept? 
Is there certain information that should be preserved in a written 
form, such as name, address, amount of request, date, and resolution of 
the request? What would be the costs and benefits of requiring such 
record retention obligations?

Section L--Proposed Rule

    For the reasons set forth in the preamble, the Federal Trade 
Commission proposes to amend 16 CFR Chapter I by adding part 437 to 
read as follows:

PART 437--BUSINESS OPPORTUNITY RULE

Sec.
437.1 Definitions.
437.2 The obligation to furnish written documents.
437.3 The disclosure document.
437.4 Earnings claims.
437.5 Other prohibited practices.
437.6 Record retention.
437.7 Franchise exemption.
437.8 Other laws, rules, orders.
437.9 Severability.

Appendix A to Part 437--Model Document

    Authority: 15 U.S.C. 41-58.


Sec.  437.1  Definitions.

    The following definitions shall apply throughout this part:
    (a) Action means 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, and an assurance of voluntary 
compliance.
    (b) Affiliate means an entity controlled by, controlling, or under 
common control with a business opportunity seller.
    (c) Business assistance means the offer of material advice, 
information, or support to a prospective purchaser in connection with 
the establishment or operation of a new business.
    (1) Business assistance includes, but is not limited to:
    (i) Providing, or purporting to provide, locations for the use or 
operation of equipment, displays, vending machines, or similar devices, 
on premises neither owned nor leased by the purchaser;
    (ii) Providing, or purporting to provide, outlets, accounts, or 
customers, including, but not limited to, Internet outlets, accounts, 
or customers, for the purchaser's goods or services;
    (iii) Buying back, or purporting to buy back, any or all of the 
goods or services that the purchaser makes, produces, fabricates, 
grows, breeds, modifies, or provides;
    (iv) Tracking or paying, or purporting to track or pay, commissions 
or other compensation based on the purchaser's sale of goods or 
services or recruitment of other persons to sell goods or services; and
    (v) Advising or training, or purporting to advise or train, the 
purchaser in the promotion, operation, or management of a new business, 
or providing, or purporting to provide, the purchaser with operational, 
managerial, technical, or financial guidance in the operation of a new 
business.
    (2) Provided, however, that ``business assistance'' does not 
include a written product warranty or repair contract, or guidance in 
the use, maintenance, and/or repair of any product to be sold by the 
purchaser or of any equipment acquired by the purchaser.
    (d) Business opportunity means a commercial arrangement in which:
    (1) The seller solicits a prospective purchaser to enter into a new 
business;
    (2) The prospective purchaser makes a payment or provides other 
consideration to the seller, directly or indirectly through a third 
party; and
    (3) The seller, expressly or by implication, orally or in writing, 
either:
    (i) Makes an earnings claim; or
    (ii) Represents that the seller or one or more designated persons 
will provide the purchaser with business assistance.
    (e) Cancellation or refund request means any request to cancel or 
rescind a business opportunity purchase, or any request to seek a 
refund, in whole or in part, for a business opportunity purchase, 
whether or not the purchaser has a contractual right to cancel, 
rescind, or seek a refund.
    (f) Designated person means any person, other than the seller, 
whose goods or services the seller suggests, recommends, or requires 
that the purchaser use in establishing or operating a new business, 
including, but not limited to, any person who finds or purports to find 
locations for equipment.
    (g) Disclose or state means to give information in writing that is 
clear and conspicuous, accurate, concise, and legible.
    (h) Earnings claim means any oral, written, or visual 
representation to a prospective purchaser that conveys, expressly or by 
implication, a specific level or range of actual or potential sales, or 
gross or net income or profits. Earnings claims include, but are not 
limited to:
    (1) Any chart, table, or mathematical calculation that demonstrates 
possible results based upon a combination of variables; and
    (2) any statements from which a prospective purchaser can 
reasonably infer that he or she will earn a minimum level of income 
(e.g., ``earn enough to buy a Porsche,'' ``earn a six-figure income,'' 
or ``earn your investment back within one year'').
    (i) Exclusive territory means a specified geographic or other 
actual or implied marketing area in which the seller promises not to 
locate additional purchasers or offer the same or similar goods or 
services as the purchaser through alternative channels of distribution.
    (j) General media means any instrumentality through which a person 
may communicate with the public, including, but not limited to, 
television, radio, print, Internet, billboard, Web site, and commercial 
bulk e-mail.
    (k) New business means a business in which the prospective 
purchaser is not currently engaged, or a new line or type of business.
    (l) Person means an individual, group, association, limited or 
general partnership, corporation, or any other entity.
    (m) Prior business means:
    (1) A business from which the seller acquired, directly or 
indirectly, the major portion of the business' assets, or
    (2) Any business previously owned or operated by the seller, in 
whole or in part, by any of the seller's officers, directors, sales 
managers, or by any other individual who occupies a

[[Page 19088]]

position or performs a function similar to that of an officer, 
director, or sales manager of the seller.
    (n) Providing locations, outlets, accounts, or customers means 
furnishing the prospective purchaser with existing or potential 
locations, outlets, accounts, or customers; requiring, recommending, or 
suggesting one or more locators or lead generating companies; 
collecting a fee on behalf of one or more locators or lead generating 
companies; or training or otherwise assisting the prospective purchaser 
in obtaining his or her own locations, outlets, accounts, or customers.
    (o) Purchaser means a person who buys a business opportunity.
    (p) Quarterly means as of January 1, April 1, July 1, and October 
1.
    (q) Seller means a person who offers for sale or sells a business 
opportunity.
    (r) Written or in writing means any document or information in 
printed form or in any form capable of being downloaded, printed, or 
otherwise preserved in tangible form and read. It includes: type-set, 
word processed, or handwritten documents; information on computer disk 
or CD-ROM; information sent via e-mail; or information posted on the 
Internet. It does not include mere oral statements.


Sec.  437.2  The obligation to furnish written documents.

    In connection with the offer for sale, sale, or promotion of a 
business opportunity, it is a violation of this Rule and an unfair or 
deceptive act or practice in violation of section 5 of the Federal 
Trade Commission Act (``FTC Act'') for any seller to fail to furnish a 
prospective purchaser with the material information required by 
Sec. Sec.  437.3(a) and 437.4(a) of this Rule in writing at least seven 
calendar days before the earlier of the time that the prospective 
purchaser:
    (a) Signs any contract in connection with the business opportunity 
sale; or
    (b) makes a payment or provides other consideration to the seller, 
directly or indirectly through a third party.


Sec.  437.3  The disclosure document.

    In connection with the offer for sale, sale, or promotion of a 
business opportunity, it is a violation of this Rule and an unfair or 
deceptive act or practice in violation of section 5 of the FTC Act, for 
any seller to:
    (a) Fail to disclose to a prospective purchaser the following 
material information in a single written document in the form and using 
the language set forth in Appendix A to part 437:
    (1) Identifying information. State the name, business address, and 
telephone number of the seller, the name of the salesperson offering 
the opportunity, and the date when the disclosure document is furnished 
to the prospective purchaser.
    (2) Earnings claims. If the seller makes an earnings claim, check 
the ``yes'' box and attach the earnings statement required by section 
437.4. If not, check the ``no'' box.
    (3) Legal actions.
    (i) If any of the following persons has been the subject of any 
civil or criminal action for misrepresentation, fraud, securities law 
violations, or unfair or deceptive practices within the 10 years 
immediately preceding the date that the business opportunity is 
offered, check the ``yes'' box:
    (A) The seller;
    (B) Any affiliate or prior business of the seller;
    (C) Any of the seller's officers, directors, sales managers, or any 
individual who occupies a position or performs a function similar to an 
officer, director, or sales manager of the seller; or
    (D) Any of the seller's employees who are involved in business 
opportunity sales activities.
    (ii) If the ``yes'' box is checked, disclose all such actions in an 
attachment to the disclosure document. State the full caption of each 
action (names of the principal parties, case number, full name of 
court, and filing date).
    (iii) If there are no actions to disclose, check the ``no'' box.
    (4) Cancellation or refund policy. If the seller offers a refund or 
the right to cancel the purchase, check the ``yes'' box. If so, state 
the terms of the refund or cancellation policy in an attachment to the 
disclosure document. If no refund or cancellation is offered, check the 
``no'' box.
    (5) Cancellation or refund requests. State the total number of 
purchasers of the same type of business opportunity offered by the 
seller during the two years prior to the date of disclosure. State the 
total number of oral and written cancellation requests during that 
period for the sale of the same type of business opportunity. For 
purposes of this disclosure, ``two years'' means the eight quarters 
immediately preceding the date of the disclosure document.
    (6) References.
    (i) State the name, city and state, and telephone number of all 
purchasers who purchased the business opportunity within the last three 
years. If more than 10 purchasers purchased the business opportunity 
within the last three years, the seller may limit the disclosure by 
stating the name, city and state, and telephone number of at least the 
10 purchasers within the past three years who are located nearest to 
the prospective purchaser's location. Alternatively, a seller may 
furnish a prospective buyer with a list disclosing all purchasers 
nationwide within the last three years. If choosing this option, insert 
the words ``See Attached List'' without removing the list headings or 
the numbers 1 through 10, and attach a list of the references to the 
disclosure document.
    (ii) Clearly and conspicuously, and in immediate conjunction with 
the list of references, state the following: ``If you buy a business 
opportunity from the seller, your contact information can be disclosed 
in the future to other buyers.''
    (7) Receipt. Attach a duplicate copy of the disclosure page to be 
signed and dated by the purchaser. The seller may inform the 
prospective purchaser how to return the signed receipt (for example, by 
sending to a street address, email address, or facsimile telephone 
number).
    (b) Fail to update the disclosures required by paragraph (a) of 
this section at least quarterly to reflect any changes in the required 
information, including, but not limited to, any changes in the seller's 
refund or cancellation policy, the total number of purchasers, the 
number of cancellation requests, or the list of references; provided, 
however, that until a seller has 10 purchasers, the list of references 
must be updated monthly.


Sec.  437.4  Earnings claims.

    In connection with the offer for sale, sale, or promotion of a 
business opportunity, it is a violation of this Rule and an unfair or 
deceptive act or practice in violation of section 5 of the FTC Act, for 
the seller to:
    (a) Make any earnings claim to a prospective purchaser, unless the 
seller:
    (1) Has a reasonable basis for its claim at the time the claim is 
made;
    (2) Has in its possession written materials that substantiate its 
claim at the time the claim is made;
    (3) Makes the written substantiation available upon request to the 
prospective purchaser and to the Commission; and
    (4) Furnishes to the prospective purchaser an earnings claim 
statement. The earnings claim statement shall be a single written 
document and shall state the following information:
    (i) The title ``EARNINGS CLAIM STATEMENT REQUIRED BY LAW'' in 
capital, bold type letters;
    (ii) The name of the person making the earnings claim and the date 
of the earnings claim;

[[Page 19089]]

    (iii) The earnings claim;
    (iv) The beginning and ending dates when the represented earnings 
were achieved;
    (v) The number and percentage of all purchasers during the stated 
time period who achieved at least the stated level of earnings;
    (vi) Any characteristics of the purchasers who achieved at least 
the represented level of earnings, such as their location, that may 
differ materially from the characteristics of the prospective 
purchasers being offered the business opportunity; and
    (vii) A statement that written substantiation for the earnings 
claim will be made available to the prospective purchaser upon request.
    (b) Make any earnings claim in the general media, unless the 
seller:
    (1) Has a reasonable basis for its claim at the time the claim is 
made;
    (2) Has in its possession written material that substantiates its 
claim at the time the claim is made;
    (3) States in immediate conjunction with the claim:
    (i) The beginning and ending dates when the represented earnings 
were achieved; and
    (ii) The number and percentage of purchasers during that time 
period who achieved the represented earnings.
    (c) Disseminate industry financial, earnings, or performance 
information unless the seller has written substantiation demonstrating 
that the information reflects the typical or ordinary financial, 
earnings, or performance experience of purchasers of the business 
opportunity being offered for sale.
    (d) Fail to notify any prospective purchaser in writing of any 
material changes affecting the relevance or reliability of the 
information contained in an earnings claim statement before the 
prospective purchaser signs any contract or makes a payment or provides 
other consideration to the seller, directly or indirectly, through a 
third party.


Sec.  437.5  Other prohibited practices.

    In connection with the offer for sale, sale, or promotion of a 
business opportunity, it is a violation of this Rule and an unfair or 
deceptive act or practice in violation of section 5 of the FTC Act for 
any seller, directly or indirectly through a third party, to:
    (a) Disclaim, or require a prospective purchaser to waive reliance 
on, any statement made in any document or attachment that is required 
or permitted to be disclosed under this Rule;
    (b) Make any claim or representation, orally, visually, or in 
writing, that is inconsistent with or contradicts the information 
required to be disclosed by Sec. Sec.  437.3 (basic disclosure 
document) and 437.4 (earnings claims document) of this Rule;
    (c) Include in any disclosure document or earnings claim statement 
any materials or information other than what is explicitly required or 
permitted by this Rule. For the sole purpose of enhancing the 
prospective purchaser's ability to maneuver through an electronic 
version of a disclosure document or earnings statement, the seller may 
include scroll bars and internal links. All other features (e.g., 
multimedia tools such as audio, video, animation, or pop-up screens) 
are prohibited;
    (d) Misrepresent the amount of sales, or gross or net income or 
profits a prospective purchaser may earn or that prior purchasers have 
earned;
    (e) Misrepresent that any governmental entity, law, or regulation 
prohibits a seller from furnishing earnings information to a 
prospective purchaser;
    (f) Fail to make available to prospective purchasers, and to the 
Commission upon request, written substantiation for the seller's 
earnings claims;
    (g) Misrepresent how or when commissions, bonuses, incentives, 
premiums, or other payments from the seller to the purchaser will be 
calculated or distributed;
    (h) Misrepresent the cost, or the performance, efficacy, nature or 
central characteristics of the business opportunity or the goods or 
services offered to a prospective purchaser;
    (i) Misrepresent any material aspect of any assistance offered to a 
prospective purchaser;
    (j) Misrepresent the likelihood that a seller, locator, or lead 
generator will find locations, outlets, accounts, or customers for the 
purchaser;
    (k) Misrepresent any term or condition of the seller's refund or 
cancellation policies;
    (l) Fail to provide a refund or cancellation when the purchaser has 
satisfied the terms and conditions disclosed pursuant to Sec.  
437.3(a)(4);
    (m) Misrepresent a business opportunity as an employment 
opportunity;
    (n) Misrepresent the terms of any territorial exclusivity or 
territorial protection offered to a prospective purchaser;
    (o) Assign to any purchaser a purported exclusive territory that, 
in fact, encompasses the same or overlapping areas already assigned to 
another purchaser;
    (p) Misrepresent that any person, trademark or service mark holder, 
or governmental entity, directly or indirectly benefits from, sponsors, 
participates in, endorses, approves, authorizes, or is otherwise 
associated with the sale of the business opportunity or the goods or 
services sold through the business opportunity;
    (q) Misrepresent that any person:
    (1) Has purchased a business opportunity from the seller or has 
operated a business opportunity of the type offered by the seller; or
    (2) Can provide an independent or reliable report about the 
business opportunity or the experiences of any current or former 
purchaser.
    (r) Fail to disclose:
    (1) Any consideration promised or paid to any person identified as 
a purchaser or operator of a business opportunity of the type offered 
by the seller. Consideration includes, but is not limited to, any 
payment, forgiveness of debt, or provision of equipment, services, or 
discounts to the person or to a third party on the person's behalf;
    (2) Any personal relationship or any past or present business 
relationship other than as the purchaser or operator of the business 
opportunity being offered by the seller.


Sec.  437.6  Record retention.

    To prevent the unfair and deceptive acts or practices specified in 
this part, business opportunity sellers and their principals must 
prepare, retain, and make available for inspection by Commission 
officials copies of the following documents for a period of three 
years:
    (a) Each materially different version of all documents required by 
this Rule;
    (b) Each purchaser's disclosure receipt;
    (c) Each executed written contract with a purchaser;
    (d) Each oral or written cancellation or refund request received 
from a purchaser; and
    (e) All substantiation upon which the seller relies for each 
earnings claim from the time each such claim is made.


Sec.  437.7  Franchise exemption.

    The provisions of this part shall not apply to any business 
opportunity that:
    (a) Constitutes a ``franchise,'' as defined in the Franchise Rule, 
16 CFR part 436;
    (b) Has a written contract; and
    (c) Requires purchasers to make a payment that meets the minimum 
payment requirement set forth in the Franchise Rule (part 436 of this 
chapter).

[[Page 19090]]

Sec.  437.8  Other orders and preemption.

    (a) If an outstanding FTC or court order applies to a person, but 
imposes requirements that are inconsistent with any provision of this 
regulation, the person may petition the Commission to amend the order. 
In particular, business opportunities required by FTC or court order to 
follow the Franchise Rule, 16 CFR part 436, may petition the Commission 
to amend the order so that the business opportunity may follow the 
provisions of the Business Opportunity Rule.
    (b) The FTC does not intend to preempt the business opportunity 
sales practices laws of any state or local government, except to the 
extent of any conflict with the Rule. A law is not in conflict with 
this Rule if it affords prospective purchasers equal or greater 
protection, such as registration of disclosure documents or more 
extensive disclosures. All such disclosures, however, must be made in a 
separate state disclosure document.


Sec.  437.9  Severability.

    The provisions of this Rule are separate and severable from one 
another. If any provision is stayed or determined to be invalid, it is 
the Commission's intention that the remaining provisions shall continue 
in effect.
BILLING CODE 6750-01-P

[[Page 19091]]

[GRAPHIC] [TIFF OMITTED] TP12AP06.001

BILLING CODE 6750-01-C


[[Page 19092]]


    By direction of the Commission.
Donald S. Clark,
Secretary.

    Note: The following attachments will not appear in the Code of 
Federal Regulations.

Attachment A: Rule Review Commenters

RR 1. Robert E. Mulloy, Jr. (``Mulloy'')
RR 2. Stanley M. Dub, Dworken & Bernstein (``Dub'')
RR 3. Marvin J. Migdol, Nationwide Franchise Marketing Services 
(``Migdol'')
RR 4. SCPromotions, Inc. (``SCPromotions'')
RR 5. R. Dana Pennell (``Pennell'')
RR 6. Robin Day Glenn (``Glenn'')
RR 7. Jack McBirney, McGrow Consulting (``McBirney'')
RR 8. SRA International (``SRA International'')
RR 9. Harold Brown, Brown & Stadfeld (``Brown'')
RR 10. Ronald N. Rosenwasser (``Rosenwasser'')
RR 11. Louis F. Sokol (``Sokol'')
RR 12. J. Howard Beales III, Professor, George Washington University 
(``Beales'')
RR 13. Peter Lagarias (``Lagarias'')
RR 14. Harold L. Kestenbaum (``Kestenbaum'')
RR 15. Walter D. Wilson, Better Business Bureau of Central Georgia, 
Inc. (``Wilson'')
RR 16. Connie B. D'Imperio, Color Your Carpet, Inc. (``D'Imperio'')
RR 17. Q.M. Marketing, Inc (``Q.M. Marketing'')
RR 18. David Gurnick, Kindel & Anderson (``Gurnick'')
RR 19. U-Save Auto Rental (``U-Save Auto Rental'')
RR 20. The Longaberger Co. (``Longaberger'')
RR 21. Direct Selling Association (``DSA'')
RR 22. American Bar Association, Section on Antitrust Law (``ABA AT'')
RR 23. Dennis E. Wieczorek, Rudnick & Wolfe (``Wieczorek'')
RR 24. Real Estate National Network (``RENN'')
RR 25. Attorney General Jim Ryan (``General Ryan''), State of Illinois
RR 26. Alan S. Nopar (``Nopar'')
RR 27. Snap-On, Inc. (``Snap-On'')
RR 28. Steven Rabenberg, Explore St. Louis (``Rabenberg'')
RR 29. Douglas M. Brooks, Martland & Brooks (``Brooks'')
RR 30. Robert N. McDonald (``Commissioner McDonald''), Securities 
Commissioner, State of Maryland
RR 31. Little Caesars (``Little Caesars'')
RR 32. International Franchise Association (``IFA'')
RR 33. Brownstein, Zeidman & Lore (``Brownstein Zeidman'')
RR 34. Jere W. Glover (``Glover''), Counsel for Advocacy, U.S. Small 
Business Administration (``SBA Advocacy'')
RR 35. Jan Meyers, Chair, House Committee on Small Business 
(``Representative Myers'')
RR 36. Neil A. Simon, Hogan and Hartson (``Simon'')
RR 37. Deborah Bortner (``Bortner''), Washington State Department of 
Financial Institutions, Securities Division
RR 38. American Franchisee Association (``AFA'')
RR 39. American Association of Franchisees & Dealers (``AAFD'')
RR 40. Warren Lewis, Lewis & Trattner (``Lewis'')
RR 41. Century 21 Real Estate Corp. (``Century 21'')
RR 42. John Hayden (``Hayden'')
RR 43. North American Securities Administrators Association (``NASAA'')
RR 44. Robert L. PeRRy (``Perry'')
RR 45. The State Bar of California, Business Law Section (``CA BLS'')
RR 46. Mike Gaston, Barkely & Evergreen (``Gaston'')
RR 47. The Southland Corp. (``Southland'')
RR 48. Medicap Pharmacies, Inc. (``Medicap'')
RR 49. Rochelle B. Spandorf (``Spandorf''), ABA Forum on Franchising, 
Andrew C. Selden (``Selden''), David J. Kaufman (``Kaufmann'')
RR 50. Joyce G. Mazero, Locke Pernell Rain Harrell (``Mazero'')
RR 51. Mark B. Forseth, Locke Pernell Rain Harrell (``Forseth'')
RR 52. Forte Hotels (``Forte Hotels'')
RR 53. R.A. Politte (``Politte'')
RR 54. Politte (see supra RR 53).
RR 55. Brown (see supra RR 9).
RR 56. Wieczorek (see supra RR 23).
RR 57. Scott Shane, Georgia Institute of Technology (``Shane'')
RR 58. Friday's (``Friday's'')
RR 59. Carl E. Zwisler, Keck, Mahin & Cate (``Zwisler'')
RR 60. Wieczorek (see supra RR 23)
RR 61. Enrique A. Gonzalez, Gonzalez Cavillo Y Forastierei 
(``Gonzalez'')
RR 62. Pepsico Restaurants (``Pepsico'')
RR 63. IFA (see supra RR 32)
RR 64. Atlantic Richfield Co (``ARCO'')
RR 65. David Clanton (``Clanton'')
RR 66. Leonard Swartz, Arthur Andersen & Co. (``Swartz'')
RR 67. John R.F. Baer, Keck, Mahin & Cate (``Baer'')
RR 68. Lynn Scott (``Scott'')
RR 69. Eversheds (``Eversheds'')
RR 70. Brownstein Zeidman (see supra RR 33)
RR 71. Penny Ward, Baker & McKenzie (``Ward'')
RR 72. Matthias Stein (``Stein'')
RR 73. Byron Fox, Hunton & Williams (``Fox'')
RR 74. Papa John's Pizza (``Papa Johns'')
RR 75. Harold L. Kestenbaum (see supra RR 14)

Rule Review September 1995 Public Workshop Conference

Panelists

Harold Brown, Brown & Stadfeld (``Brown'')
Sam Damico, Q.M. Marketing, Inc. (``Damico'')
Connie B. D'Imperio, Color Your Carpet, Inc. (``D'Imperio'')
Eric Ellman (``Ellman''), Direct Selling Assocation (``DSA'')
Mark B. Forseth, Locke Purnell Rain Harrell (``Forseth'')
Mike Gason, Barkely & Evergreen (``Gaston'')
Susan Kezios, American Franchisee Association (``AFA'') (``Kezios'')
William Kimball, Iowa Coalition for Responsible Franchising 
(``Kimball'')
Warren Lewis, Lewis & Trattner (``Lewis'')
Steven Maxey (``Maxey''), North American Securities Administrators 
Association (``NASAA'')
Joyce G. Mazero, Locke Purnell Rain Harrell (``Mazero'')
Barry Pineles (``Pineles''), U.S. Small Business Administration (``SBA 
Advocacy'')
Robert Purvin, American Association of Franchisees & Dealers (``AAFD'') 
(``Purvin'')
Steven Rabenberg, Explore St. Louis (``Rabenberg'')
Matthew R. Shay (``Shay''), International Franchise Association 
(``IFA'')
Neil A. Simon, Hogan & Hartson (``Simon'')
Robin Spencer (``Spencer''), representing American Franchisee 
Association
Leonard Swartz, Arthur Anderson & Co. (``Swartz'')
John Tifford, Brownstein Zeidman & Lore
Ronnie Volkening (``Volkening''), The Southland Corp. (``Southland'')
Dennis E. Wieczorek, Rudnick & Wolfe (``Wieczorek'')
William J. Wimmer (``Wimmer''), Iowa Coalition for Responsible 
Franchising

Public Participants

Peter Denzen (``Denzen'')

[[Page 19093]]

Bob Hessler, Wendy's (``Hessler'')
Chris Huke, SC Promotions (``Huke'')
Michael Jorgensen (``Jorgensen'')
Robert L. Perry (``Perry'')
Brian Schnell, Gray, Plant Mooty (``Schnell'')

March 1996 Public Workshop Conference

Panelists

Kay M. Ainsley, Ziebart Intl, Corp. (``Ainsley'')
John R.F. Baer, Keck, Mahin & Cate (``Baer'')
Michael Brennan, Rudnick & Wolfe (``Brennan'')
Joel R. Buckberg, HFA, Inc. (``Buckberg'')
David A. Clanton, Baker & McKenzie (``Clanton'')
Kenneth R. Costello, Loeb & Loeb (``Costello'')
Edward J. Fay, Kwik Kopy Corp. (``Fay'')
Mark B. Forseth, Locke Purnell Rain Harrell (``Forseth'')
Byron E. Fox, Hunton & Williams (``Fox'')
Bruce Harsh, International Trade Specialist, U.S. Department of 
Commerce (``Harsh'')
Arnold Janofsky, Precision Tune (``Janofsky'')
Susan P. Kezios (``Kezios''), American Franchisee Association (``AFA'')
Alex S. Konigsberg, QC (``Konigsberg''), Lapoint Rosenstein
Andrew P. Loewinger, Abraham Pressman & Bauer (``Loewinger'')
H. Bret Lowell, Brownstein Zeidman (``Lowell'')
John Melle, Office of U.S. Trade Representative (``Melle'')
Raymond L. Miolla, Burger King Corp. (``Miolla'')
Alex Papadakis, Hurt Sinisi Papadakis (``Papadakis'')
Matthew R. Shay (``Shay''), International Franchise Association 
(``IFA'')
Neil A. Simon, Hogan & Hartson (``Simon'')
Leonard Swartz, Arthur Anderson & Co. (``Swartz'')
Greg L. Walther, Outback Steakhouse Intl (``Walther'')
Dennis E. Wieczorek, Rudnick & Wolfe (``Wieczorek'')
Erik B. Wulff, Hogan & Hartson (``Wulff'')
Philip F. Zeidman (``Zeidman'')
Carl Zwisler, Keck, Mahin & Cate (``Zwisler'')

Public Participants

Jeff Brams, Sign-A-Rama and Shipping Connections (``Brams'')
Pamela Mills, Baker & McKenzie (``Mills'')

Attachment B: Advance Notice of Proposed Rulemaking Commenters

ANPR 1. Kevin Brendan Murphy, Mr. Franchise (``Murphy'')
ANPR 2. Murphy (see supra ANPR 1).
ANPR 3. Mike Bruce, The Michael Bruce Fund (``Bruce'')
ANPR 4. Harold Brown, Brown & Stadfeld (``Brown'')
ANPR 5. Frances L. Diaz (``Diaz'')
ANPR 6. Brown (see supra ANPR 4).
ANPR 7. Diaz (see supra ANPR 5).
ANPR 8. Marian Kunihisa (``Kunihisa'')
ANPR 9. Kevin Bores, Domino's Pizza Franchisee (``Bores'')
ANPR 10. Terrence L. Packer, Supercuts Franchisee (``Packer'')
ANPR 11. John Delasandro (``Delasandro'')
ANPR 12. William Cory (``Cory'')
ANPR 13. Joseph Manuszak, Domino's Franchisee (``Manuszak'')
ANPR 14. Daryl Donafin, Taco Bell Franchisee (``Donafin'')
ANPR 15. David Muncie, National Claims Service, Inc. (``Muncie'')
ANPR 16. Patrick E. Meyers, The Quizno's Corp. (``Quizno's'')
ANPR 17. David Weaver, Domino's Pizza Franchisee (``Weaver'')
ANPR 18. Karen M. Paquet, Domino's Pizza Franchisee (``Paquet'')
ANPR 19. Gary R. Duvall Graham & Dunn (``Duvall'')
ANPR 20. Andrew J. Sherman, Greenberg & Tauris (``Sherman'')
ANPR 21. S. Beavis Stubbings (``Stubbings'')
ANPR 22. Jim & Evalena Gray, Pearle Vision Franchisee (``J&E Gray'')
ANPR 23. Ernest Higginbotham (``Higginbotham'')
ANPR 24. Henry C. Su & Bryon Fox (``Su'')
ANPR 25. John R.F. Baer, Keck, Mahin & Cate (``Baer'')
ANPR 26. Clay Small & Lowell Dixon, Nat'l Franchise Mediation Program 
Steering Committee (``NFMP'')
ANPR 27. Richard T. Catalano (``Catalano'')
ANPR 28. Neil Simon & Erik Wulff, Hogan & Hartson (``H&H'')
ANPR 29. Glenn A. Mueller, Domino's Pizza Franchisee (``Mueller'')
ANPR 30. Doug Bell et al. Supercuts Franchisees (``Supercut 
Franchisees'')
ANPR 31. Michael L. Bennett, Longaberger Co. (``Longaberger'')
ANPR 32. John Rachide, Domino's Pizza Franchisee (``Rachide'')
ANPR 33. David J. Kaufmann, Kaufmann, Feiner, Yamin, Gildin & Robbins 
(``Kaufmann'')
ANPR 34. Joseph N. Mariano, Direct Selling Association (``DSA'')
ANPR 35. Linda F. Golodner & Susan Grant, National Consumers League 
(``NCL'')
ANPR 36. Jere W. Glover & Jennifer A. Smith, U.S. Small Business 
Administration Office of Chief Counsel for Advocacy (``SBA Advocacy'')
ANPR 37. Robert Chabot, Domino's Pizza Franchisee (``Chabot'')
ANPR 38. Teresa Maloney, National Coalition of 7-Eleven Franchisees 
(``Maloney'')
ANPR 39. BLANK
ANPR 40. Harold L. Kestenbaum (``Kestenbaum'')
ANPR 41. Samuel L. Sibent, KFC Franchisee (``Sibent'')
ANPR 42. Oren C. Crothers, KFC Franchisee (``Crothers'')
ANPR 43. Matthew Jankowski, KFC Franchisee (``Jankowski'')
ANPR 44. Rodney A. DeBoer, KFC Franchisee (``DeBoer'')
ANPR 45. Liesje Bertoldi, KFC Franchisee (``L. Bertoldi)'
ANPR 46. Steve Bertoldi, KFC Franchisee (``S. Bertoldi'')
ANPR 47. Charles Buckner, KFC Franchisee (``Buckner'')
ANPR 48. Walter J. Knezevich, KFC Franchisee (``Knezevich'')
ANPR 49. Jeffrey W. Gray, KFC Franchisee (``J. Gray'')
ANPR 50. Fred Jackson, KFC Franchisee (``Jackson'')
ANPR 51. Ronald L. Rufener, KFC Franchisee (``Rufener'')
ANPR 52. Tim Morris, KFC Franchisee (``Morris'')
ANPR 53. Scarlett Norris Adams, KFC Franchisee (``Adams'')
ANPR 54. Calvin G. White, KFC Franchisee (``White'')
ANPR 55. Nick Iuliano, KFC Franchisee (``N. Iuliano'')
ANPR 56. Dolores Iuliano, KFC Franchisee (``D. Iuliano'')
ANPR 57. Ralph A Harman, KFC Franchisee (``R. Harman'')
ANPR 58. Saundra S. Harman, KFC Franchisee (``S. Harman'')
ANPR 59. Richard Braden, KFC Franchisee (``Barden'')
ANPR 60. K.F.C. of Pollys, KFC Franchisee (``Pollys'')
ANPR 61. Joan Fiore, McDonalds Franchisee (``Fiore'')
ANPR 62. Susan P. Kezios, American Franchisee Association (``AFA'')
ANPR 63. Kenneth R. Costello, Loeb & Loeb (``Costello'')
ANPR 64. AFA (see supra ANPR 62)
ANPR 65. Susan Rich, KFC Franchisee (``Rich'')
ANPR 66. Fiore (see supra ANPR 61)
ANPR 67. Mike Johnson, Subway Franchisee (``Johnson'')
ANPR 68. Laurie Gaither, GNC Franchisee (``L. Gaither'')
ANPR 69. Greg Gaither, GNC Franchisee (``G. Gaither'')

[[Page 19094]]

ANPR 70. Greg Suslovic, Subway Franchisee (``Suslovic'')
ANPR 71. Richard Colenda, GNC Franchisee (``Colenda'')
ANPR 72. Bob Gagliati, GNC Franchisee (``Gagliati'')
ANPR 73. Pat Orzano, 7-Eleven Franchisee (``Orzano'')
ANPR 74. Linda Gaither, GNC Franchisee (``Li Gaither'')
ANPR 75. Kevin 100 (``Kevin 100'')
ANPR 76. Robert James, Florida Department of Agriculture & Consumer 
Services (``James'')
ANPR 77. Robert A. Tingler, Office of the Attorney General, State of 
Illinois (``IL AG'')
ANPR 78. John M. Tifford, Rudnick, Wolfe, Epstien & Zeidman 
(``Tifford'')
ANPR 79. Robert L. Purvin, Jr. (``Purvin'')
ANPR 80. Teresa Heron, My Favorite Muffin Franchisee (``Heron'')
ANPR 81. Purvin (see supra ANPR 79)
ANPR 82. Matthew R. Shay, International Franchise Association (``IFA'')
ANPR 83. Duvall (see supra ANPR 19)
ANPR 84. Lance Winslow, Car Wash Guys (``Winslow'')
ANPR 85. Winslow (see supra ANPR 84)
ANPR 86. Rick Gue, The Pampered Chef, (``Pampered Chef'')
ANPR 87. John M. Tifford, Coverall North America (``Coverall'')
ANPR 88. John M. Tifford, Merchandise Mart Properties (``Merchandise 
Mart'')
ANPR 89. Dirk C. Bloemendaal, Amway Corporation (``Amway'')
ANPR 90. Winslow (see supra ANPR 84)
ANPR 91. Winslow (see supra ANPR 84)
ANPR 92. Winslow (see supra ANPR 84)
ANPR 93. Winslow (see supra ANPR 84)
ANPR 94. Andrew A. Caffey (``Caffey'')
ANPR 95. Entrepreneur Media, Inc. (``Entrepreneur'')
ANPR 96. Brown (see supra ANPR 4)
ANPR 97. Raymond & Robert Buckley, Scorecard Plus Franchisees 
(``Buckley'')
ANPR 98. Mark A. Kirsch, Rudnick, Wolfe, Epstien & Zeidman (``Kirsch'')
ANPR 99. Dale E. Cantone, Maryland Division of Securities, Office of 
the Attorney General (``Md Securities'')
ANPR 100. Roger C. Haines, Scorecard Plus Franchisee (``Haines'')
ANPR 101. David E. Myklebust, Scorecard Plus Franchisee (``Myklebust'')
ANPR 102. Robert Larson (``Larson'')
ANPR 103. Brown (see supra ANPR 4)
ANPR 104. Mark B. Forseth, CII Enterprises (``CII'')
ANPR 105. Bertrand T. Unger, PR One (``Pr One'')
ANPR 106. Dennis E. Wieczorek, Rudnick & Wolfe (``Wieczorek'')
ANPR 107. Gerald A. Marks, Marks & Krantz (``Marks'')
ANPR 108. Brown (see supra ANPR 4)
ANPR 109. Everett W. Knell (``Knell'')
ANPR 110. Anne Crews, Mary Kay, Inc. (``Mary Kay'')
ANPR 111. Carl Letts, Domino's Pizza Franchisee (``Letts'')
ANPR 112. Kat Tidd (``Tidd'')
ANPR 113. Ted Poggi, National Coalition of Associations of 7-Eleven 
Franchisees (``NCA 7-Eleven Franchisees)
ANPR 114. Gary R. Duvall & Nadine C. Mandel (``Duvall & Mandel'')
ANPR 115. Sherry Christopher, Christopher Consulting, Inc. 
(``Christopher'')
ANPR 116. Carl C. Jeffers, Intel Marketing Systems, Inc. (``Jeffers'')
ANPR 117. Deborah Bortner, State of Washington, Department of Financial 
Institutions, Securities Divisions (``WA Securities'')
ANPR 118. Carmen D. Caruso, Noonan & Caruso (``Caruso'')
ANPR 119. Howard Bundy, Bundy & Morrill, Inc.(``Bundy'')
ANPR 120. Franchise & Business Opportunity Committee, North American 
Securities Administrations Association (``NASAA'')
ANPR 121. Tifford (see supra ANPR 78)
ANPR 122. Wieczorek (see supra ANPR 106)
ANPR 123. John & Debbie Lopez, Baskin & Robbins Franchisee (``Lopez'')
ANPR 124. Susan R. Essex & Ted Storey, California Bar, Business Law 
Section (``CA BLS'')
ANPR 125. Peter C. Lagarias, The Legal Solutions Group (``Lagarias'')
ANPR 126. James G. Merret, Jr. (``Merret'')
ANPR 127. W. Michael Garner, Dady & Garner (``Garner'')
ANPR 128. Jeff Brickner (``Brickner'')
ANPR 129. Bernard A. Brynda, Baskin & Robbins Franchisee (``Brynda'')
ANPR 130. Caron B. Slimak, Jacadi USA Franchisee (``Slimak'')
ANPR 131. Dr. Ralph Geiderman, Pearl Vision Franchisee (``Geiderman'')
ANPR 132. Felipe Frydmann, Minister of Economic & Trade Affairs, 
Embassy of the Argentine Republic (``Argentine Embassy'')
ANPR 133. Andrew C. Selden, Briggs & Morgan (``Selden'')
ANPR 134. Robert Zarco, Zarco & Pardo (``Zarco & Pardo'')
ANPR 135. Jason H. Griffing, Baskin & Robbins Franchisee (``Griffing'')
ANPR 136. Erik H. Karp, Witmer, Karp, Warner & Thuotte (``Karp'')
ANPR 137. William D. Brandt, Ferder, Brandt, Casebeer, Copper, Hoyt & 
French (``Brandt'')
ANPR 138. Robert S. Keating, Baskin & Robbins Franchisee (``Keating'')
ANPR 139. A. Patel, Baskin & Robbins Franchisee (``A. Patel'')
ANPR 140. Joel R. Buckberg, Cendant Corporation (``Cendant'')
ANPR 141. Duvall (see supra ANPR 19)
ANPR 142. NCL (see supra ANPR 35)
ANPR 143. AFA (see supra ANPR 62)
ANPR 144. Catalano (see supra ANPR 27)
ANPR 145. DSA (see supra ANPR 34)
ANPR 146. Keating (see supra ANPR 139)
ANPR 147. Kathie & David Leap, Baskin & Robbins Franchisee (``Leap'')
ANPR 148. Ted D. Kuhn, Baskin & Robbins Franchisee (``Kuhn'')
ANPR 149. Mike S. Lee, Baskin & Robbins Franchisee (``Lee'')
ANPR 150. R. Deilal, Baskin & Robbins Franchisee (``Deilal'')
ANPR 151. Frank J. Demotto, Baskin & Robbins Franchisee (``Demotto'')
ANPR 152. Thomas Hung, Baskin & Robbins Franchisee (``Hung'')
ANPR 153. Jean Jones, Baskin & Robbins Franchisee (``Jones'')
ANPR 154. Hang, Baskin & Robbins Franchisee (``Hang'')
ANPR 155. Dilip Patel, Baskin & Robbins Franchisee (``D. Patel'')
ANPR 156. Terry L. Glase, Baskin & Robbins Franchisee (``Glase'')
ANPR 157. R.E. Williamson, Baskin & Robbins Franchisee (``Williamson'')
ANPR 158. R.M. Valum, Baskin & Robbins Franchisee (``Valum'')
ANPR 159. Rajendra Patel, Baskin & Robbins Franchisee (``R. Patel'')
ANPR 160. Jerry & Debbie Robinett, Baskin & Robbins Franchisee 
(``Robinett'')
ANPR 161. Ronald J. Rudolf, Baskin & Robbins Franchisee (``Rudolf'')
ANPR 162. Kamlesh Patel, Baskin & Robbins Franchisee (``K. Patel'')
ANPR 163. Nicholas & Marilyn Apostal, Baskin & Robbins Franchisee 
(``Apostal'')
ANPR 164. Patrick Sitin, Baskin & Robbins Franchisee (``Sitin'')
ANPR 165. Paul & Lisa SeLander, Baskin & Robbins Franchisee 
(``SeLander'')
ANPR 166. S. Bhilnym, Baskin & Robbins Franchisee (``Bhilnym'')
ANPR 167. Mike & Kathy Denino, Baskin & Robbins Franchisee (``Denino'')

ANPR Workshop Participants

Michael Bennett, Longaberger Company (``Bennett'')
Kennedy Brooks (``Brooks'')
John Brown, Amway Corporation (``J. Brown'')
Howard Bundy, Bundy & Morrill (``Bundy'')

[[Page 19095]]

Delia Burke, Jenkins & Gilchrist (``Burke'')
Andrew Caffey, Esq. (``Caffey'')
Dale Catone, Office of the Maryland Attorney General (``Cantone'')
Emilio Casillas, Washington State Securities Division (``Casillas'')
Richard Catalano, Esq. (``Catalano'')
Sherry Christopher, Esq. (``Christopher'')
Michael W. Chiodo, Domino's Franchisee (``Chiodo'')
Martin Cordell, Washington State Securities Division (``Cordell'')
Joseph Cristiano, Carvel Franchisee (``Cristiano'')
John D'Alessandro, Quaker State Lube Distributor (``D'Alessandro'')
Mark Deutsch, former franchisee (``Deutsch'')
Steve Doe, Franchisee (``Doe'')
Gary Duvall, Graham & Dunn (``Duvall'')
Eric Ellman, Direct Selling Association (``Ellman'')
Debbie Fetzer, Snap-On Franchisee (``Fetzer'')
David Finigan, Illinois Securities Department (``Finigan'')
Mark B. Forseth, Jenkens & Gilchrist (``Forseth'')
Richard W. Galloway, Domino's Pizza Franchisee (``Galloway'')
Elizabeth Garceau, Pro Design (``E. Garceau'')
Michael Garceau, Pro Design (``M. Garceau'')
Roger Gerdes, Microsoft Corp. (``Gerdes'')
Rick Geu, The Pampered Chef (``Geu'')
Judy Gitterman, Jenkens & Gilchrist (``Gitterman'')
Susan Grant, National Consumers League (``Grant'')
Bruce Hoar, Hanes Franchisee (``B. Hoar'')
Thomas Hoar, Hanes Franchisee (``T. Hoar'')
Nelson Hockert-Lotz, Domino's Pizza Franchisee (``Hockert-Lotz'')
Tee Houston-Aldridge, World Inspection Network (``Houston-Aldridge'')
Robert James, Florida Dept. of Agriculture & Consumer Services 
(``James'')
Carl Jeffers, Intel Marketing Systems (``Jeffers'')
Erik Karp, Witmer, Karp, Warner & Thuotte (``Karp'')
David Kaufmann, Kaufmann, Feiner, Yamin, Gildin & Robbins 
(``Kaufmann'')
Harold Kestenbaum, Hollenbrug, Bleven, Solomon, Ross (``Kestenbaum'')
Susan Kezios, American Franchisee Association (``Kezios'')
Mark Kirsch, Rudnick Wolfe, Epstien & Zeidman (``Kirsch'')
Charles Lay, Brite Site Franchisee (``Lay'')
Mike Ludlum, Entrepreneur Media (``Ludlum'')
Marge Lundquist, Franchisee (``Lundquist'')
Gerald Marks, Marks & Krantz (``Marks'')
Philip McKee, National Consumers League (``McKee'')
Dianne Mousley, Mike Schmidt's Phil. Hoagies Franchisee (``Mousley'')
Joseph Punturo, Office of the New York Attorney General (``Punturo'')
Mehran Rafizadeh, GNC Franchisee (``Rafizadeh'')
David R. Raymond, Esq. (``Raymond'')
Iris Sandow, Blimpie Franchisee (``Sandow'')
Philip Sanson, Illinois Securities Department (``Sanson'')
Matthew Shay, International Franchise Association (``IFA'')
David Silverman, Sportworld Int'l (``Silverman'')
Neil Simon, Hogan & Hartson (``Simon'')
Caron Slimak (``Slimak''), Jacadi USA Franchisee
J.H. Snow, Jenkens & Gilcrist (``Snow'')
Adam Sokol, Illinois Attorney General's Office (``Sokol'')
Kat Tidd, Esq. (``Tidd'')
John Tifford, Rudnick Wolfe, Epstien & Zeidman, (``Tifford'')
Robert Tingler, Franchise Bureau Chief, Illinois Attorney General's 
Office (``Tingler'')
Bertrand Unger, PR One (``Unger'')
Dr. Spencer Vidulich, Pearle Vision Franchisee (``Vidulich'')
Dick Way, PR One (``Way'')
Dennis Wieczorek, Rudnick & Wolfe (``Wieczorek'')
Erik Wulff, Hogan & Hartson (``Wulff'')
Barry Zaslav, Coverall North America (``Zaslav'')

Attachment C: Franchise Rule Notice of Proposed Rulemaking Commenters

FR-NPR 1. Patrick E. Meyers, The Quizno's Corporation (``Quizno's'')
FR-NPR 2. Steven A. Rosen, Frannet (``Frannet'')
FR-NPR 3. Robert Tingler, Franchise Bureau Chief, Illinois Attorney 
General (``IL AG'')
FR-NPR 4. Dennis E. Wieczorek, Piper Marbury Rudnick & Wolfe 
(``PMR&W'')
FR-NPR 5. Jack Schuessler, Wendy's Intl, Inc. (``Wendy's'')
FR-NPR 6. Curtis S. Gimson, Triarc Restaurant Group (``Triarc'')
FR-NPR 7. Eugene Stachowiak, McDonald's (``McDonalds'')
FR-NPR 8. David E. Holmes (``Holmes'')
FR-NPR 9. Erik B. Wulff, John F. Dienelt, Hogan & Hartson (``H&H'')
FR-NPR 10. Ronnie R. Volkening, 7-Eleven, Inc. (``7-Eleven'')
FR-NPR 11. John R.F. Baer, Robert T. Joseph, Alan H. Silberman, 
Sonnenschein Nath & Rosenthal (``Baer'')
FR-NPR 12. Morton A. Aronson, Neil A. Simon, David J. Kaufmann, 
National Franchise Council (``NFC'')
FR-NPR 13. Alaska Turner (``Turner'')
FR-NPR 14. Susan P. Kezios, American Franchisee Association (``AFA'')
FR-NPR 15. Warren L. Lewis, Lewis & Kolton (``Lewis'')
FR-NPR 16. John W. Regnery, Snap-On Inc. (``Snap-On'')
FR-NPR 17. Dale E. Cantone, Stephen W. Maxey, Joseph J. Punturo, NASAA 
Franchise and Business Opportunity Project Group (``NASAA'')
FR-NPR 18. Howard E. Bundy, Bundy & Morrill, Inc. (``Bundy'')
FR-NPR 19. Laurie Taylor (``Taylor'')
FR-NPR 20. Jonathan Hubbell, Prudential Real Estate Affiliates 
(``PREA'')
FR-NPR 21. David Gurnick, Arter & Hadden (``Gurnick'')
FR-NPR 22. Don J. DeBolt, Matthew R. Shay, International Franchise 
Association (``IFA'')
FR-NPR 23. L. Seth Stadfeld, Weston, Patrick, Willard & Redding 
(``Stadfeld'')
FR-NPR 24. Eric H. Karp, Witmer, Karp, Warner & Thuotte (``Karp'')
FR-NPR 25. Janet L. McDavid, American Bar Association, Section of 
Antitrust Law (``ABA AT'')
FR-NPR 26. Randall Loeb, NaturaLawn of America (``NaturaLawn'')
FR-NPR 27. Tony Rolland, National Franchisee Association (``NFA'')
FR-NPR 28. Andrew P. Loewinger, Buchanan Ingersoll (``BI'')
FR-NPR 29. Jeffrey E. Kolton, Frandata (``Frandata'')
FR-NPR 30. AFC Enterprises (``AFC'')
FR-NPR 31. Howard Morrill, Bundy & Morrill, Inc. (``Morrill'')
FR-NPR 32. Carl E. Zwisler, Jenkens & Gilchrist (``J&G'')
FR-NPR 33. Diane T. Nauer, TruServ Corporation (``TruServ'')
FR-NPR 34. Brian H. Cole, Tricon (``Tricon'')
FR-NPR 35. Steven Goldman, Mark Forseth, Marriott Corp. (``Marriott'')
FR-NPR Rebuttal 36. Gurnick (see supra FR-NPR 21)
FR-NPR Rebuttal 37. Kezios (see supra FR-NPR 14)
FR-NPR Rebuttal 38. IL AG (see supra FR-NPR 3)
FR-NPR Rebuttal 39. Bundy (see supra FR-NPR 18)

[[Page 19096]]

FR-NPR Rebuttal 40. John W. Fitzgerald, Gray, Plant, Mooty, Mooty & 
Bennett (``GPM'')

[FR Doc. 06-3395 Filed 4-11-06; 8:45 am]
BILLING CODE 6750-01-P