[Federal Register Volume 73, Number 59 (Wednesday, March 26, 2008)]
[Proposed Rules]
[Pages 16110-16138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-6059]



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Part II





Federal Trade Commission





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16 CFR Part 37



Business Opportunity Rule; Proposed Rule

  Federal Register / Vol. 73, No. 59 / Wednesday, March 26, 2008 / 
Proposed Rules  

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FEDERAL TRADE COMMISSION

16 CFR Part 437

RIN 3084-AB04


Business Opportunity Rule

AGENCY: Federal Trade Commission.

ACTION: Revised Notice of Proposed Rulemaking.

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SUMMARY: The Federal Trade Commission (the ``Commission'' or ``FTC'') 
is publishing a revised Notice of Proposed Rulemaking to amend Part 
437, the trade regulation rule governing sale of business opportunities 
that are not covered by the amended Franchise Rule. The revised 
proposed Business Opportunity Rule (or ``the Rule'') is based upon the 
comments received in response to an Advance Notice of Proposed 
Rulemaking (``ANPR''), a Notice of Proposed Rulemaking (``NPRM''), and 
other information discussed in this notice. The revised proposed 
Business Opportunity Rule would require business opportunity sellers to 
furnish prospective purchasers with specific information that is 
material to the consumer's decision as to whether to purchase a 
business opportunity and which should help the purchaser identify 
fraudulent offerings. The proposed rule also would prohibit other acts 
or practices that are unfair or deceptive within the meaning of Section 
5 of the Federal Trade Commission Act (the ``FTC Act'').

DATES: Written comments must be received on or before May 27, 2008. 
Rebuttal comments must be received on or before June 16, 2008.

ADDRESS: 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 S), 600 Pennsylvania Avenue, NW, Washington, DC 
20580. 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\ 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.
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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 using the 
following weblink: https://secure.commentworks.com/ftc-bizopRNPR/ (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 weblink https://secure.commentworks.com/ftc-bizopRNPR/. If this notice appears at http://www.regulations.gov, you 
may also file an electronic comment through that website. The 
Commission will consider all comments that regulations.gov forwards to 
it. You may also visit the FTC website at http://www.ftc.gov/opa/index.shtml to read the Revised 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. The Commission will consider all timely and responsive 
public comments that it receives, whether filed in paper or electronic 
form. Comments received will be available to the public on the FTC 
website, to the extent practicable, at http://www.ftc.gov. 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 website. 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: Monica Vaca (202) 326-2245, Division 
of Marketing Practices, Room 286, Bureau of Consumer Protection, 
Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 
20580.

SUPPLEMENTARY INFORMATION: This Revised Notice of Proposed Rulemaking 
seeks comment on a revised proposed Business Opportunity Rule. In 
addition to minor wording and punctuation changes to improve clarity, 
the revised proposed rule modifies the initial proposal in six 
significant ways:
     It narrows the scope of the proposed Rule to avoid broadly 
sweeping in sellers of multi-level marketing opportunities, while 
retaining coverage of those business opportunities sellers historically 
covered by the FTC's original Franchise Rule (and by the FTC's interim 
Business Opportunity Rule), as well as coverage of sellers of work-at-
home schemes;
     It cures a potential overbreadth problem that may have 
inadvertently swept in companies using traditional product distribution 
arrangements;
     It eliminates the previously-proposed requirement that a 
covered business opportunity seller disclose the number of cancellation 
and refund requests it received;
     It eliminates the requirement to disclose litigation 
history of certain sales personnel (while retaining the requirement to 
disclose litigation history of the seller, its principals, officers, 
directors, and sales managers, as well as any individual who occupies a 
position or performs a function similar to an officer, director, or 
sales manager);
     It adds a requirement to include a citation to the Rule in 
the title of the required disclosure document; and
     It prohibits misrepresenting that the government or any 
law forbids providing prospects with a list of prior purchasers of a 
business opportunity.
    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 J of this notice. 
The comment period will remain open until May 27, 2008. To the extent 
practicable, all comments will be available on the public record and 
placed on the Commission's website: http://www.ftc.gov/os/publiccomments.htm. After the close of the comment period, the record 
will remain open until June 16, 2008, for rebuttal comments. If 
necessary, the Commission also will hold hearings with cross-
examination and post-

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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 May 
27, 2008. Note that because the NPR has been revised, parties 
interested in a hearing must resubmit their request in comments to this 
Revised NPR. 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 June 16, 2008. 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 Revised Notice of Proposed 
Rulemaking 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).
    On December 21, 1978, 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 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. The Commission adopted the Franchise Rule to prevent 
fraudulent practices in the sale of franchises and business 
opportunities through pre-sale disclosure of specified items of 
material information.
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    \2\ Statement of Basis and Purpose (``SBP''), 43 FR 59614 (Dec. 
21, 1978) (Franchise Rule codified at 16 CFR 436).
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    The purpose of the Franchise Rule was not to regulate the 
substantive terms of a franchise or business opportunity agreement but 
to ensure that sellers disclose material information to prospective 
buyers. The Franchise Rule was posited on the notion that a fully 
informed consumer can determine whether a particular offering is in his 
or her best interest.
    As part of the Commission's overall policy of periodic review of 
its trade regulation rules, in 1995 the Commission commenced a 
regulatory review of the Franchise Rule.\3\ From the outset of that 
review proceeding, the predominant theme sounded by commenters and 
other participants was that the Rule, insofar as it concerned sales of 
business format franchises, should be more closely harmonized with 
state franchise regulations--i.e., the Uniform Franchise Offering 
Circular (``UFOC'') Guidelines. A corollary theme was that business 
opportunity sales should be governed by a separate regulation, in 
accordance with the approach followed generally at the state level.
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    \3\ Rule Review, 60 FR 17656 (Apr. 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 in this notice is cited in the 
Notice of Proposed Rulemaking for the Business Opportunity Rule 
(``Business Opportunity Rule NPR''). See 71 FR 19054, 19092-93.
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    Moreover, early in the review the issue arose as to whether the 
Franchise Rule's extensive disclosure requirements were well-suited to 
business opportunity sales and whether the Franchise Rule imposed 
unnecessary compliance costs on both business opportunity sellers and 
buyers. 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 as unnecessary in the business 
opportunity context and whether any additional material disclosures 
should be required.\4\
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    \4\ 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 requirements. 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.
    In 1997, the Commission published an Advance Notice of Proposed 
Rulemaking (``ANPR'') in the Federal Register,\5\ 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,''\6\ the types of business opportunities that are known to 
engage in deceptive or fraudulent conduct,\7\ and the types of 
disclosures that are material to business opportunity purchasers.\8\
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    \5\ 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 cited in the NPR. See 71 FR 
at 19093-19095.
    \6\ 62 FR at 9116-117 and 9121 (Question 12).
    \7\ Id. at 9121 (Questions 8-10).
    \8\ Id. at 9121 (Questions 15-16).
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    After assessing the comments received in response to the ANPR, the 
Commission decided to amend the Franchise Rule to harmonize it better 
with the UFOC. Accordingly, the Commission published a Franchise Rule 
Notice of Proposed Rulemaking (``Franchise Rule NPR''), soliciting 
comment on proposed revisions to the Franchise Rule,\9\ and 
simultaneously announcing the intention to conduct a separate 
rulemaking to address business opportunity sales.\10\ 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.
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    \9\ Franchise Rule NPR, 64 FR 57294 (Oct. 22, 1999).
    \10\ Id. at 57296.
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    After addressing each of the required stages of rulemaking under 
Section 18 of the FTC Act, the Commission announced adoption of an 
amended Franchise Rule on January 23, 2007, and published the amended 
rule and accompanying Statement of Basis and Purpose on March 30, 
2007.\11\ In that Federal Register notice, the Commission also 
separated the Franchise Rule into two distinct CFR parts--part 436 
governing the sales of business format franchises, and a new part 437, 
governing the sales of non-franchise business opportunities. Part

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437 is identical to the original Franchise Rule, with all of the 
definitional elements and references regarding business format 
franchising deleted.\12\ Part 437 will continue to govern sales of non-
franchise business opportunities, pending completion of the Business 
Opportunity rulemaking proceedings advanced in a Notice of Proposed 
Rulemaking published April 12, 2006.\13\
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    \11\ Amended Franchise Rule Statement of Basis and Purpose 
(``Amended Franchise Rule SBP'') 72 FR 15444 (March 30, 2007) 
(Amended Franchise Rule codified at 16 CFR 436).
    \12\ The interim Business Opportunity Rule differs from the 
original Franchise Rule in three respects. First, references to 
``franchisor'' and ``franchisee'' in the original Franchise Rule 
have been changed to ``business opportunity seller,'' and ``business 
opportunity purchaser,'' respectively. Second, the original 
definition of ``franchise'' set out at 436(a)(2) has been changed to 
``business opportunity,'' and the first part of the original 
definition--the ``franchise'' elements--has been deleted; the 
definition now focuses on the second part of the original 
definition--the business opportunity elements. Third, part 437 sets 
forth a new exemption for franchises that comply with or are exempt 
from part 436. Amended Franchise Rule SBP, 72 FR at 15444.
    \13\ Business Opportunity Rule NPR, 71 FR 19054 (April 12, 
2006).
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Section B. The Notice of Proposed Rulemaking

    Having determined to create a separate rule for business 
opportunities, in 2006 the Commission published in the Federal Register 
a Notice of Proposed Rulemaking (``NPR'') on a Business Opportunity 
Rule,\14\ which would amend what is now designated as 16 CFR Part 437. 
The NPR explained the need for a Business Opportunity Rule separate 
from the Franchise Rule, noting particularly that business 
opportunities and franchises are distinct business arrangements that 
pose very different regulatory challenges. For example, 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.
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    \14\ Id.
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    Yet, the Commission's law enforcement experience in conducting 
numerous sweeps of the business opportunity industry demonstrates that 
fraud is not only prevalent but persistent, and many comments also 
sounded this theme.\15\ Just in the period since 1990, the Commission 
has brought some 150 Franchise Rule cases against vending machine, rack 
display, and similar opportunities. Since 1995, the Commission has 
conducted more than 15 business opportunity sweeps,\16\ many with other 
federal and state law enforcement partners, to combat persistent 
business opportunity frauds violating the Franchise Rule, such as those 
involving the sale of vending machines,\17\ rack displays,\18\ public 
telephones,\19\ Internet kiosks,\20\ and 900-number ventures,\21\ among 
others. The great majority of these cases alleged Franchise Rule 
violations. To attack other forms of business opportunity fraud--
notably, work-at-home and pyramid schemes--the Commission used Section 
5 of the FTC Act, because these schemes were not covered by the 
original Franchise Rule.\22\
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    \15\ 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. But see MLMIA, 
at 7 & Exhibit A (comment submitted in response to the NPR and its 
attached declaration argue that fraud is not widespread in the 
business opportunity sector). The exhibit attached to the MLMIA's 
comment is belied by the Commission's law enforcement experience, 
described above, as well as that of the Department of Justice, 
described in its comment. DOJ, at 1.
    \16\ E.g., Project Fal$e Hope$ (2006); Project Biz Opp Flop 
(2005); Project Busted Opportunity (2002); Project Telesweep (1995); 
Project Bizillion$ (1999); Operation Money Pit (1998); Project Vend 
Up Broke (1998); Project Trade Name Games (1997), and Operation 
Missed Fortune (1996). In addition to joint law enforcement sweeps, 
Commission staff has also targeted specific business opportunity 
ventures such as envelope stuffing (Operation Pushing the Envelope 
2003, medical billing (Operation Dialing for Deception 2002, and 
Project Housecall 1997); seminars (Operation Showtime 1998); 
Internet-related services (Net Opportunities 1998); vending (Project 
Yankee Trader 1997); and 900 numbers (Project Buylines 1996).
    \17\ E.g., FTC v. American Entm't Distribs., Inc., No. 04-22431-
CIV-Martinez (S.D. Fla. 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).
    \18\ 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).
    \19\ 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).
    \20\ 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 alsoFTC v. FutureNet, Inc., 
No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998); FTC v. TouchNet, Inc., 
No. C98-0176 (W.D. Wash. 1998).
    \21\ 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).
    \22\ Likewise, they are not covered under 16 CFR Part 437.
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    The NPR highlighted features of the original Franchise Rule that 
excluded from its coverage certain types of schemes, such as pyramid 
schemes and work-at-home schemes.\23\ The Commission noted that many of 
these schemes fell outside the ambit of the Franchise Rule because: (1) 
the purchase price was less than $500, the minimum payment necessary to 
trigger coverage under the original Franchise Rule; (2) required 
payments were primarily for inventory, which did not count toward the 
$500 monetary threshold; (3) the scheme did not offer location or 
account assistance; or (4) the scheme involved the sale of products to 
the business opportunity seller rather than to end-users, a further 
limitation on coverage under the original Franchise Rule.\24\
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    \23\ Two types of work-at-home schemes mentioned in the NPR were 
product assembly schemes and envelope-stuffing schemes. 71 FR at 
19059-19060.
    \24\ The limits on coverage of the original Franchise Rule and 
the effects of those limitations are discussed in detail in the NPR. 
See 71 FR at 19055.
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    To bring the wide array of fraudulent business opportunities within 
the scope of the Rule, the NPR proposed an expansive definition of 
``business opportunity.'' In addition to those business opportunities 
that had been covered by the original Franchise Rule, the Initial 
Proposed Business Opportunity Rule (the ``IPBOR'') aimed to cover work-
at-home schemes and pyramid schemes.\25\
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    \25\ Id. at 19059.
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    To reach these schemes, the NPR proposed a broad definition of 
``business opportunity'' that would have included commercial 
arrangements where the seller made ``earnings claims'' or offered 
``business assistance.''\26\ The Commission recognized that the most 
frequent allegation in its law enforcement actions against business 
opportunity frauds has been that the seller made false and 
unsubstantiated earnings claims. Therefore, the IPBOR incorporated the 
broad definition of ``earnings claims'' from the original Franchise 
Rule.\27\
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    \26\ IPBOR, 437.1(d)(3).
    \27\ IPBOR, 437.1(h).
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    The IPBOR also defined a new term, ``business assistance,'' in a 
broad manner, using five illustrative examples

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of the types of assistance that would trigger coverage.\28\ Among these 
examples, the IPBOR included ``buy back'' assistance, which refers to a 
seller's offer to buy back products that consumers have assembled at 
home.\29\ Another example captured the tracking of payments and 
commissions, a type of assistance that pyramid schemes routinely 
offer.\30\ Additionally, the definition of ``business assistance'' 
expressly included assistance in the form of training.\31\
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    \28\ IPBOR, 437.1(c).
    \29\ IPBOR, 437.1(c)(1)(iii).
    \30\ IPBOR, 437.1(c)(1)(iv).
    \31\ IBPOR, 437.1(c)(v).
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    At the same time, the IPBOR excised two features of the original 
Franchise Rule that limited the scope of its coverage: the $500 minimum 
payment threshold, and the exemption for purchases of inventory at bona 
fide wholesale prices. By eliminating the $500 minimum payment 
requirement, the IPBOR would have included within its scope the various 
types of fraudulent business opportunity sellers that have evaded 
coverage under the disclosure requirements of the Franchise Rule by 
pricing their schemes below $500. Envelope stuffing, product assembly, 
medical billing schemes, and other schemes frequently are priced below 
the monetary threshold of Franchise Rule coverage.\32\ Additionally, 
the IPBOR would have ensured coverage of pyramid schemes by eliminating 
the inventory exemption.
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    \32\ See infra Section D.1.a.1.ii.
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    In response to the NPR, the Commission received more than 17,000 
comments.\33\ The overwhelming majority of these comments came from the 
multilevel marketing\34\ (``MLM'') industry, including industry 
representatives, companies, and individual distributors. These 
commenters urged the Commission to narrow the scope of the IPBOR, to 
implement various safe-harbor provisions, and/or to reduce the required 
disclosures. Thousands of comments were form letters\35\ submitted by 
participants in various MLM operations, including Quixtar, Shaklee, 
PartyLite, Xango, among others.\36\ The Commission also received 
approximately 187 comments, primarily from individual consumers or 
consumer groups, in favor of the IPBOR.\37\ Only a handful of comments 
came in from non-MLM companies and industry groups, expressing various 
concerns about obligations that the IPBOR would impose upon them.
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    \33\ References to the comments responding to the Business 
Opportunity Rule NPR are cited by the name of the commenter and the 
page number. Individual commenters are identified by their first and 
last names. Companies and organizations are identified by 
abbreviated names. A list of companies and organization that are 
cited herein and the abbreviations used to identify each is attached 
as Attachment A.
    \34\ Multi-level marketing is one form of direct selling, and 
refers to a business model in which a company distributes products 
through a network of distributors who earn income from their own 
retail sales of the product and from retail sales made by the 
distributors' direct and indirect recruits. Because they earn a 
commission from the sales their recruits make, each member in the 
MLM network has an incentive to continue recruiting additional sales 
representatives into their ``down lines.'' See Peter J. Vander Nat 
and William W. Keep, Marketing Fraud: An Approach to Differentiating 
Multilevel Marketing from Pyramid Schemes, 21 J. of Pub. Pol'y & 
Marketing (Spring 2002), (``Vander Nat and Keep'') at 140.
    \35\ Some commenters provided information demonstrating that 
certain MLM companies solicited their distributors to submit letters 
in their proposed form or template to the FTC. See e.g., James 
Kellogg (Quixtar); Smith (Arbonne); Anonymous (PartyLite).
    \36\ In addition, the Commission received form letters from 
participants in AdvoCare, Tastefully Simple, Nature's Sunshine, 
Arbonne, Lia Sophia, Mannatech, Cookie Lee Jewelry, Sunrider, Scent 
Station, Neways, Synergy Worldwide, Freelife, Young Living Essential 
Oils, and Vemma. In addition, the Commission received thousands of 
letters that were individualized but followed a template that 
covered the same issues as the form letters.
    \37\ Numerous letters came from individuals with negative 
experience with various MLMs, including Quixtar, 4Life, Mary Kay, 
Arbonne, Liberty League International, Financial Freedom Society, 
Herbalife, Xango, Melaleuca, EcoQuest, Pre-Paid Legal, PartyLite, 
Shaklee, Vartec/Excel, and Vemma.
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Section C. Scope of the Proposed Rule

    The revised proposed Business Opportunity Rule (``RPBOR'') is more 
narrowly tailored than the IPBOR. The RPBOR expressly excludes from 
coverage training and/or educational organizations that, as the 
comments showed, may have been inadvertently covered. In addition, the 
revised proposal does not attempt to cover MLMs. Instead, the 
Commission will continue to use Section 5, a flexible and effective 
weapon, against MLMs that engage in unfair or deceptive practices.
    In recognition of the prevalence of fraud in the sale of business 
opportunities, including work-at-home and pyramid schemes, the 
Commission had designed the IPBOR with an expansive scope in order to 
reach various fraudulent practices. While expanding the scope of the 
original Franchise Rule's coverage of business opportunities, the IPBOR 
greatly reduced the compliance burden that the original Franchise Rule 
imposed on business opportunity sellers. The Commission recognized that 
the extensive disclosures of the original Franchise Rule would entail 
disproportionate compliance costs for comparatively low-cost 
transactions involving the sale of business opportunities.\38\ 
Therefore, in an attempt to strike the proper balance, the Commission 
mitigated the compliance burden by including in the IPBOR substantially 
simplified and streamlined disclosure requirements.
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    \38\ 71 FR at 10057.
---------------------------------------------------------------------------

    However, the streamlining did not fully achieve the Commission's 
purpose. Two key problems emerged with the IPBOR's breadth of coverage. 
First, the IPBOR would have unintentionally swept in numerous 
commercial arrangements where there is little or no evidence that fraud 
is occurring. Second, the IPBOR would have imposed greater burdens on 
the MLM industry than other types of business opportunity sellers 
without sufficient countervailing benefits to consumers.

1. Traditional Product Distribution Arrangements and Others

    Several commenters contended that the IPBOR would have regulated a 
wide range of legitimate and traditional product distribution 
arrangements that are not associated with the types of fraud that 
business opportunity laws are designed to remedy.\39\ As one commenter 
described it, the IPBOR would have swept in traditional arrangements 
for distribution of ``food and beverages, construction equipment, 
manufactured homes, electronic components, computer systems, medical 
supplies and equipment, automotive parts, automotive tools and other 
tools, petroleum products, industrial chemicals, office supplies and 
equipment, and magazines.''\40\ For example, one commenter, a footwear 
manufacturer, suggested that the IPBOR could be read to cover the 
commenter's product distribution through retail stores simply because 
the retailer pays for inventory and the manufacturer provides sales 
training to its retail accounts.\41\ Thus, this aspect of the 
commenter's operations would meet the definition of ``business 
opportunity'' in the IPBOR because: (1) the ``payment''

[[Page 16114]]

prong of the definition did not exempt voluntary purchases of 
inventory; and (2) providing retail staff with sales training would 
satisfy the ``business assistance'' prong of the definition.\42\ 
Moreover, review of the comments suggests that even if a company 
provides no ``business assistance,'' a product distribution arrangement 
still easily could have fallen within the scope of the IPBOR if the 
company made some representation about sales or profits sufficient to 
constitute an ``earnings claim.''\43\ One trade association notes, 
``[a]s a practical matter, suppliers will find it difficult to enter 
into a business relationship with a distributor or dealer without at 
least discussing possible sales volumes or profit levels.''\44\
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    \39\ E.g., IBA, at 1, 5; PMI, at 2; Timberland, at 1; 
Sonnenschein, at 1-2 (stating that the rule would cover 
``manufacturers, suppliers and other traditional distribution firms 
that have relied on the bona fide wholesale price exclusion to avoid 
coverage'' under the rule). The Cosmetic, Toiletry and Fragrance 
Association posits that the IPBOR would cover the relationship 
between a manufacturer and an independent contractor who sells the 
product to beauty supply companies, salons, and others. CTFA, at 4. 
See also LHD&L at 2 (noting that the IPBOR could cover the 
relationship between a manufacturer and a regional distributor of 
products).
    \40\ IBA, at 5; Timberland, at 1 (noting that numerous 
manufacturers structure their retail distribution in this manner).
    \41\ Timberland, at 1.
    \42\ IPBOR, 437.1(d)(2); IPBOR, 437.1(c)(v).
    \43\ IPBOR, 437.1(d)(3)(i).
    \44\ IBA, at 4. See also PMI, at 3 n. 1.
---------------------------------------------------------------------------

    Other commenters argued that the IPBOR would have been broad enough 
to cover: bona fide educational programs offered by colleges and 
universities;\45\ the sale of certain books by publishers or book 
stores;\46\ and even the relationship between newspapers and 
independent carriers who distribute the papers to homes and 
businesses.\47\ Because application of the IPBOR to these types of 
arrangements was unintended, the Commission has narrowed the proposed 
definition of the term ``business opportunity,'' to exclude from 
coverage distribution arrangements in which the only required payment 
is for reasonable amounts of inventory at bona fide wholesale prices. 
In addition, the proposed definition of ``business opportunity'' has 
been substantially narrowed as explained in Section D, infra.
---------------------------------------------------------------------------

    \45\ Chadbourne, at 7 - 13 (illustrating the point with numerous 
course offering descriptions that could arguably fall within the 
definition of ``business opportunity''); Venable, at 3-5 (same).
    \46\ Venable, at 2 - 3.
    \47\ NAA, at 1-3.
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2. The MLM Industry

    The second problem with the breadth of the IPBOR's coverage relates 
to the Commission's attempt to reach pyramid schemes with the Business 
Opportunity Rule. An overwhelming majority of commenters\48\ argued 
that the IPBOR failed to differentiate between unlawful pyramid schemes 
and legitimate companies using an MLM business model. These commenters 
argued that the requirements of the IPBOR simultaneously would have 
been insufficient to curb pyramid fraud\49\ yet devastating to MLM 
companies and individual MLM distributors. Criticism was not confined 
to industry comments. Two consumer groups also filed comments asserting 
that, although MLMs should be covered, the disclosures the Commission 
proposed in the IPBOR would be inadequate to remedy deceptive earnings 
claims.\50\ On balance, based upon this record and its law enforcement 
experience, the Commission does not believe it is practicable or 
sufficiently beneficial to consumers to attempt to apply the proposals 
advanced in this rulemaking against multi-level marketing companies, 
particularly when considering the burdens upon industry. The 
Commission, therefore, has determined that at this point, it will 
continue to use Section 5 to challenge unfair and deceptive acts or 
practices in the MLM industry.
---------------------------------------------------------------------------

    \48\ Of the more than 17,000 comments that the Commission 
received, it is fair to estimate that well over 95% came from 
members of the MLM industry expressing opposition to the IPBOR. As 
noted above, many of these were form letters.
    \49\ DSA, at 21 (positing that compliance with the new mandates 
would be ignored by fraudulent pyramid schemes).
    \50\ The Consumer Awareness Institute and Pyramid Scheme Alert 
each submitted comments and rebuttal comments.
---------------------------------------------------------------------------

a. Industry comments
    MLM industry representatives, MLM companies, and independent 
distributors for those companies submitted numerous comments. The 
strongly stated theme common to all these comments was that the low 
economic risks of participating in a typical MLM do not justify 
imposing burdensome regulations that would threaten to strangle the MLM 
industry.
    These commenters pointed out that the fees top MLM companies charge 
prospective distributors for the right to sell products are low--often 
less than $100.\51\ Furthermore, commenters argued, the risk that 
consumers will lose money through large purchases of inventory is low. 
The Direct Selling Association (``DSA''), a national trade association 
of direct selling firms that claims to account for 95% of the 
industry's sales in the United States,\52\ asserts that its members 
offer a 90% refund on resalable inventory and on other start-up costs, 
as well.\53\ Certain MLM companies commented that they do not require 
distributors to purchase any inventory in advance of selling it.\54\ As 
one commenter put it, purchasing a direct selling opportunity ``is less 
complicated and carries less financial risk for a participant than 
purchasing a flat-screen TV set.''\55\ Commenters contended that the 
low-risk nature of the distributorship is essential to facilitate ease 
of entry because the MLM industry relies on part-time and seasonal 
distributors.\56\ Furthermore, these commenters argued that there is no 
evidence that the MLM industry is permeated with fraud.\57\
---------------------------------------------------------------------------

    \51\ Shaklee, at 3 ($19.95); Avon, at 10 ($10 or $60); Quixtar, 
at 5 ($45); Pampered Chef, at 2 ($90); Mary Kay, at 3 ($100).
    \52\ DSA, at 4. According to the DSA, 84% of direct selling 
firms use some form of multilevel compensation. DSA, at 9, 13 
(defining direct selling as ``the sale of a consumer product or 
service, in a face-to-face manner, away from a fixed retail 
location'').
    \53\ DSA, at 24 n. 45 (describing the Code of Ethics that 
members must follow). See also, e.g., Shaklee, at 6 (stating it has 
a 90% buy back requirement for its products and start-up kit 
purchased within the last two years); Quixtar at 3.
    \54\ Primerica Rebuttal, at 6; Avon, at 4; Quixtar, at 5; Mary 
Kay, at 4.
    \55\ Primerica Rebuttal, at 17.
    \56\ E.g., Mary Kay, at 4 (estimating that 80% of its sales 
force members are part-time); Avon, at 3 (``With its low cost / low 
risk design, many Representatives take advantage of its ease of 
entry and exit to come and go as their needs / goals change.''); 
CTFA, at 2.
    \57\ E.g., SIA, at 5; Primerica, at 34; DSA, at 18-20.
---------------------------------------------------------------------------

    The MLM industry commenters also sharply criticized each of the 
primary requirements of the IPBOR. They argued that, balanced against 
the low risk of financial loss, it would be excessively burdensome to 
mandate a seven-day waiting period and the various disclosure and 
recordkeeping obligations. The seven-day waiting period would require 
sellers to wait seven days after presenting disclosure documents to the 
prospective purchaser before collecting any money or obtaining an 
executed contract.\58\ The provision is designed to allow prospective 
purchasers the opportunity to review required disclosures thoroughly or 
to speak with an advisor. The proposed seven-day waiting period drew 
intense criticism from industry groups, and was characterized as 
``regulatory overkill'' by Primerica Financial Services, Inc.\59\
---------------------------------------------------------------------------

    \58\ IPBOR, 437.2.
    \59\ Primerica Rebuttal, at 16. See also MLM DRA, at 5 (stating 
that ``the majority of MLM distributors are very small mom and pop 
businesses'' and that ``this burden would very likely ruin their 
business.''). United States Congressman Tom Cole also submitted a 
comment expressing the opinion that the seven-day waiting period is 
inappropriate for business opportunity sales costing less than $500. 
Cole, at 1.
---------------------------------------------------------------------------

    MLM industry commenters argued that the waiting period would 
undercut the basic MLM business model, characterized by minimal risk of 
financial loss and maximum ease of entry. The DSA submitted a survey 
showing that the level of interest in becoming a direct salesperson 
drops at least 33% and as much as 57% when a waiting period is 
imposed.\60\ Commenters opined that the waiting

[[Page 16115]]

period would make entry into this business much harder; moreover, some 
commenters stated that the waiting period would significantly burden 
recruiting because multiple visits would be necessary for each 
potential recruit.\61\
---------------------------------------------------------------------------

    \60\ DSA, at 24.
    \61\ DSA, at 25-26 (positing that three visits would be required 
to sign up a prospective participant); Shaklee, at 6 (stating that a 
waiting period would be ``as though regulators had painted a big `X' 
on the backs of direct selling companies, warning consumers `not to 
go there.'''); Avon, at 14.
---------------------------------------------------------------------------

    Industry commenters also contended that the various disclosure 
obligations of the IPBOR are ill-suited to the MLM business model. For 
example, industry commenters assert that an MLM's list of distributors 
is proprietary information\62\ that is kept strictly confidential 
because distributors necessarily compete with each other to recruit 
additional distributors into their ``down lines.''\63\ The IPBOR would 
have required an MLM distributor to provide to every potential recruit 
a disclosure document that includes a list of other distributors as 
references.\64\ As one commenter put it, furnishing a list of 
distributors to every individual who inquires about an MLM 
distributorship, ``would be like requiring a salesman to introduce his 
customer to ten competing salesmen and then wait seven days before 
attempting to close a sale.''\65\ The Commission notes that another 
characteristic of the MLM model may undermine the utility of the list 
of references that the IPBOR would have required MLMs to disclose. 
Specifically, a previous purchaser on the reference list likely would 
stand to receive a financial benefit if a prospect who contacts them 
were successfully recruited by that previous purchaser. Under these 
circumstances, information from such a reference might not be the most 
reliable basis for the prospect's purchasing decision.
---------------------------------------------------------------------------

    \62\ Shaklee, at 7 (``a company's distributor and customer lists 
are its most important and confidential information which 
competitors must be kept from accessing.''); DSA, at 30 (stating 
that the list of sellers has been kept confidential even from the 
IRS); Avon, at 16-17;
    \63\ Avon, at 16-17 (stating that direct selling companies 
compete for same recruits); DSA, at 30-31.
    \64\ IPBOR, 437.3(a)(6).
    \65\ Quixtar, at 31-32.
---------------------------------------------------------------------------

    Other disclosure obligations of the IPBOR, industry commenters 
contended, ``will paint all direct selling companies in a falsely 
negative light.''\66\ For example, according to one commenter, the 
proposed obligation to disclose legal actions\67\ would cast successful 
and long-established companies in a worse light than a fly-by-night 
fraudulent business opportunity promoter ``simply because bigger 
companies with more sales representatives and more years of operation 
are likely to get involved in a larger number of cases.''\68\ Some 
commenters pointed out that as publicly-traded companies, information 
about their legal actions is already publicly available.\69\
---------------------------------------------------------------------------

    \66\ Pre-Paid Legal, at 8.
    \67\ IPBOR, 437.3(a)(3).
    \68\ Quixtar, at 34. See also SPC, at 3 (stating that it is a 
subsidiary of Time, Inc., and the litigation disclosure of affiliate 
companies would encompass all of Time Warner, which includes 
hundreds of companies).
    \69\ Avon, at 10, 15; Pre-Paid Legal, at 14.
---------------------------------------------------------------------------

    Similarly, according to these commenters, the obligation to 
disclose refund requests and cancellations\70\ would penalize MLM 
industry members who deliberately structure their business model to 
facilitate ease of entry by offering refunds. Because companies with 
liberal refund policies are more likely to have refund requests than 
those offering no refunds, disclosure of refund requests could mislead 
consumers into thinking that the company offering liberal refunds is 
less reputable than the company offering no refunds.\71\ The rule would 
create a perverse incentive to discontinue refund policies.\72\
---------------------------------------------------------------------------

    \70\ IPBOR, Section 437.3(a)(5).
    \71\ E.g., Pre-Paid Legal at 15-16; DSA, at 29 (stating that 
because individuals enter and exit direct selling each year to meet 
short term goals, the number of cancellation requests is likely to 
be artificially high and misleading). See also Quixtar, at 39 
(asserting that because individuals join and leave for various 
personal reasons, information on cancellations would be ``of little, 
if any, benefit''); PANM, at 3 (stating that reporting cancellations 
and refunds serves no purpose at all where the fee is nominal).
    \72\ MLMIA, at 51-52, Pre-Paid Legal, at 16; Herbalife, at 10. 
See also Carico, at 1 (stating that because dishonest companies 
would not honor an agreement to make refunds, the IPBOR would only 
have a negative effect on legitimate companies).
---------------------------------------------------------------------------

    Some industry commenters contended that the IPBOR's earnings claim 
disclosure requirement\73\ would itself be misleading or incomplete. 
While some commenters stated they already make an earnings disclosure, 
they opposed the IPBOR's provisions for a variety of reasons.\74\ For 
example, some industry commenters argued that only the earnings of so-
called ``active'' distributors should be considered because many 
individuals use their distributorship as a ``buyers club'' and are only 
interested in purchasing goods at a wholesale price for their own use, 
not for resale.\75\ Commenters argued that those who use the 
distributorship in this way do not expect to earn money, and so the 
earnings of these inactive distributors should not be counted.\76\ 
Further, one commenter stated that a disclosure of average earnings may 
unfairly suggest that distributors achieve low earnings when, in fact, 
those earnings are substantial given the amount of time spent 
selling.\77\
---------------------------------------------------------------------------

    \73\ IPBOR, 437.3(a) and 437.4.
    \74\ E.g., Quixtar, at 25-26 (proposing an earnings disclosure 
that would include only ``active'' distributor earnings and would 
allow the company to ``infer a reasonable level of `retail' 
profit''); Melaleuca, at 9-10 (stating that it publishes income 
statistics but opposing a federally mandated disclosure); FreeLife, 
at 4 (preferring disclaimers to the IPBOR's requirements).
    \75\ E.g., Shaklee, at 3 (stating that 85% of individuals who 
sign up with Shaklee do so as ``wholesale buyers'' rather than 
distributors); Quixtar, at 8; Herbalife, at 2.
    \76\ E.g., Quixtar, at 25 & n. 30; Primerica Rebuttal, at 34.
    \77\ Avon, at 19. See also DSA, at 33 (questioning the relevance 
of earnings statistics to an individual who enters as discount buyer 
or for short term supplemental income).
---------------------------------------------------------------------------

    Furthermore, many industry commenters argued that the IBPOR's 
required earnings disclosure would be far too complicated because it 
would require a disclosure of the material characteristics of 
purchasers who earned the claimed income.\78\ As such, some industry 
commenters expressed concern that the proposed earnings disclosure 
would unnecessarily complicate a simple and low-risk transaction.\79\ 
Furthermore, other commenters pointed out that it would be extremely 
burdensome for legitimate businesses that attempted to comply,\80\ but 
it would not be helpful to consumers in evaluating the opportunity or 
in distinguishing fraudulent claims.\81\ One commenter went further, 
stating that: ``the required disclosures do not address the crucial 
distinction between pyramids and legitimate multi-level marketing--
i.e., in pyramids, compensation is based on recruitment, rather than 
sales for consumption.''\82\
---------------------------------------------------------------------------

    \78\ The IPBOR would require disclosure of ``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.'' IPBOR, 437.4(a)(4)(vi).
    \79\ Avon, at 18; Quixtar, at 21 (stating that the goal should 
not be ``to provide a maze of intricate calculations and disclosures 
but to instead put across the simple point that most participants in 
the business opportunity earn modest incomes'').
    \80\ E.g., DSA, at 33; HIG, at 3; Pre-Paid Legal, at 10. Some 
commenters contend that it would be impossible to comply with this 
requirement. Shaklee, at 10; Xango, at 6; Vector, at 3.
    \81\ E.g., DSA, at 33; Xango, at 6; Mary Kay, at 10; Synergy, at 
2. See also Xango, at 6 (``[s]uch complicated compilations will only 
serve to confuse prospective purchasers''); Symmetry, at 2.
    \82\ Primerica, at 26.
---------------------------------------------------------------------------

    Finally, echoing the concerns raised above, industry commenters 
uniformly asserted that the cost of compliance with the IPBOR would be 
extremely high, much higher than the Commission

[[Page 16116]]

estimated.\83\ The costs of complying would arise, first, from the 
burden of developing, providing, and keeping records of the proposed 
disclosures, and second, from the impaired ability to recruit. With 
regard to the first point, industry commenters contended that the 
burden of making the proposed disclosures would fall disproportionately 
on established, legitimate businesses.\84\ For example, the single page 
disclosure would be simple for a new--possibly fraudulent--company that 
has no litigation history and fewer than 10 references.\85\ For long-
established MLMs, however, the costs would be quite high: having polled 
its members on this issue, the DSA states that the median total 
compliance cost for a small firm would be approximately $130,000 
annually, and more than $567,000 annually for a large firm.\86\ DSA 
further estimates that because about 5 million people are recruited 
into direct selling each year, the paperwork burden would include 
distributing over 750 million pages of disclosure documents 
annually.\87\ Furthermore, according to the DSA, the IPBOR's 
requirement to retain documents for three years would require 2.25 
billion pieces of paper to be generated and warehoused.\88\
---------------------------------------------------------------------------

    \83\ Mary Kay, at 9 (estimating that the record keeping 
requirement would cost ``between $300,000 and $500,000 per year in 
additional expenses, software and training'').
    \84\ Primerica, at 15-16.
    \85\ Id.
    \86\ DSA, at 21-22 (stating that 26 firms responded to its July 
2006 survey on compliance costs). See also Shaklee, at 9 (estimating 
that the cost of compliance would likely exceed $100 million for the 
industry); MLMIA, at 12 (estimating that cost of compliance for each 
MLM distributor would be between $25,000 to $45,000 for the first 
year and $10,000 to $20,000 per year thereafter).
    \87\ Id. at 21 (reporting that respondents estimate disclosing 
15 pages of documents under the IPBOR). See also Vector, at 3 
(estimating that the proposed disclosure would require Vector to 
provide over 100 million pieces of paper annually to potential 
recruits).
    \88\ Id. at 21. See also Melaleuca, at 5 - 6 (estimating that 
Melaleuca would need to store 1.8 million disclosure documents over 
a rolling three-year period).
---------------------------------------------------------------------------

    Second, and apart from the direct cost of complying, industry 
commenters contend that the IPBOR's requirements would impose high 
costs because it would significantly impair the ability to recruit.\89\ 
According to Primerica, ``[b]ased on a conservative estimate that the 
Proposed Rule would reduce Primerica's recruiting by 25 percent, 
Primerica projected an economic loss of $1 billion for Primerica alone 
over the next ten years if the [IPBOR were] promulgated.''\90\ The cost 
of impaired recruiting, some commenters argued, would be borne by the 
millions of individual MLM distributors who would find their home 
businesses adversely affected.\91\ Indeed, the MLM Distributors Rights 
Association (``DRA'') warned that the IPBOR would put ``millions out of 
business,'' and concluded with a plea to ``come up with a new rule that 
will protect without damaging the little guy in America trying to make 
a living.''\92\ Numerous letters submitted by individual MLM 
participants echo this theme, as well.\93\
---------------------------------------------------------------------------

    \89\ ``If a new application, disclosure document and seven-day 
waiting period were required for a Member to become a Distributor, 
the number of Members who choose to build a small home-based 
business would dramatically decline.'' Shaklee, at 6 (stating that 
recruitment dropped when Shaklee introduced two applications instead 
of one).
    \90\ Primerica Rebuttal, at 11 (emphasis in original).
    \91\ MLM DRA, at 2, 5 (estimating that there are between 13 
million and 15 million MLM distributors in the United States); 
Babener, at 3 (the IPBOR would cripple ``the livelihoods of 14 
million Americans that look to direct selling to help support their 
families'').
    \92\ DRA, at 2, 7. The DRA demands that the Commission drop the 
IPBOR in its entirety. DRA, at 2.
    \93\ E.g., Tina Bailey, at 1 (``This bill would kill my business 
and I would loose (sic) my ability to be a stay at home mom with an 
income.''); Eric Gang, at 1 (``If adopted, the Rule would destroy my 
small business that I have worked so hard to develop.''); Anne 
Trevaskis, at 1 (``As a person with a disability, unable to go out 
to work, if [the IPBOR] is adopted, I will be prevented, continuing 
as an independent distributor''); Marian Warshauer, at 1 (``Please 
don't penalize and ruin and honest earning opportunity for tens of 
thousands of people with legitimate companies); Noelle Marino, at 1 
(``I'm very concerned about [the IPBOR], because I believe it will 
jeopardize my business.'').
---------------------------------------------------------------------------

b. Consumer group comments
    The Commission received comments from two consumer groups, the 
Consumer Awareness Institute (``CAI'') and Pyramid Scheme Alert 
(``PSA''),\94\ a few other consumer advocates,\95\ individuals who 
regret becoming involved in MLMs,\96\ and other individual MLM 
participants in favor of a Business Opportunity Rule that would cover 
MLMs.\97\ Consumer advocates contend that the MLM industry is comprised 
primarily of pyramid scheme operators masquerading as legitimate 
companies.\98\ While commenters lauded the Commission's efforts to 
impose a business opportunity rule that would cover MLM firms, they 
argued that the rule's earnings disclosure requirements were 
insufficient to expose a fraudulent MLM company as a pyramid 
scheme.\99\ CAI expressly recommended a different disclosure for MLM 
companies than for all other forms of business opportunities.\100\
---------------------------------------------------------------------------

    \94\ CAI and PSA each submitted comments with numerous reports 
attached. Citations to their comments will specifically note the 
submitting entity and the name of the report.
    \95\ See Eric Scheibeler (author of Merchants of Deception, a 
book ostensibly warning the public about Quixtar); Bruce Craig 
(former Assistant Attorney General for the State of Wisconsin); 
Douglas Brooks (law practitioner who has represented class actions 
against MLM companies).
    \96\ E.g., Katy Li (``If I had been given basic statistics about 
the company I never would have joined''); Marshelle Hinojosa 
(``Please pass the BUSINESS OPPORTUNITY LAW and stop these pyramid 
schemes!''); Valerie Andersen (``Words cannot express the 
humiliation, financial loss and lost respect and trust from friends 
and family members ... whom [sic] were persuaded by me because they 
trusted me ... to join the MLM ...''); J Padgett (describing his 
wife's involvement in an MLM); Robin Smith (stating that she would 
not have joined an MLM if she had known the background of the 
principals); David McHenry (``Make these MLMs legally responsible 
for their claims with documentation that is accurate from the 
beginning.''); James Kenny; Charles Wagner; Brian Wess; Kelly 
Boucher, Rebuttal; Carol Franklin, Rebuttal.
    \97\ E.g., Barbara Avery (``Direct selling or mlm CAN be a good 
program if done with honesty and integrity- enacting laws to protect 
the consumer would be a welcome change!!''); Kristine Keesler (``I 
think this new legislation would be very beneficial. If I had seven 
days to consider my decision and 10 references I would not have 
jumped into the ... business so quickly.'').
    \98\ CAI, at 2 (``I can certify that MLM (sic) are not direct 
selling programs, but chain selling programs''); CAI Rebuttal of DSA 
Comments, at 3 (``The Direct Selling Association (DSA), recently 
taken over by chain sellers now promotes chain selling (pyramid 
marketing) - even more than legitimate direct selling''). See also 
Brooks, at 2 (``In my opinion, most MLM firms operate in a deceptive 
or fraudulent manner'').
    \99\ CAI, at 3; PSA, at 2. See also Douglas Brooks, at 3 
(stating that disclosures will not prevent consumer injury caused by 
pyramid schemes).
    \100\ CAI, at 6.
---------------------------------------------------------------------------

    According to these consumer groups, virtually all MLMs are pyramid 
schemes that enrich those at the top through the endless recruitment of 
new participants.\101\ These commenters contended that the purported 
sale of products to end users (i.e., typical customers) is just a 
mirage, because the MLM sales force seldom engages in retail 
selling.\102\
---------------------------------------------------------------------------

    \101\ CAI, at 2 (``out of hundreds of MLM programs we have 
evaluated, no more than a (sic) three of them could qualify as 
legitimate retail-based programs.''). See also PSA, at 1.
    \102\ PSA, The Myth of Income Opportunity in Multi-Level 
Marketing, at 4.
---------------------------------------------------------------------------

    Further, according to these commenters, MLMs deceptively market 
distributorships as a low-risk opportunity with high earnings 
potential. In fact, the cost of participating in an MLM can be quite 
high, including not only the registration fees, but also the cost of 
product purchases, training and seminars, and other features purported 
to enhance a recruit's performance in an MLM.\103\ The typical 
earnings, by contrast, are extremely small and cannot be

[[Page 16117]]

considered anything but a net loss when business expenses are 
considered.\104\ In fact, these commenters contended, more than 99% of 
individuals who participate in MLMs lose money.\105\
---------------------------------------------------------------------------

    \103\ PSA, The Myth of Income Opportunity in Multi-Level 
Marketing, at 4 (pointing to Amway/Quixtar's sale of books, tapes 
and seminar registrations to new recruits); Douglas Brooks, at 4, 5; 
Scott Johnson, at 1.
    \104\ PSA, The Myth of Income Opportunity in Multi-Level 
Marketing, at 3 (stating that 99% of all sales representatives in 
the sample of companies analyzed earned less than $14 per week, a 
figure that does not count any business expenses, such as inventory 
purchases).
    \105\ PSA, at 2; CAI, The 5 Red Flags, at 15-16. One commenter, 
noting that some MLMs require no advance purchases of inventory, 
strongly disagreed with this conclusion: ``The facts in the record 
provide no basis for deducting assumed `costs' from the available 
income estimates and jump to the conclusion that participants 
actually lose money . ... It is simply not possible that agents are 
required to pay more money to Primerica than they receive in 
commissions, because there is no requirement that they buy anything 
from Primerica.'' Primerica Rebuttal at 6 (emphasis in original).
---------------------------------------------------------------------------

    These consumer groups recommended implementing a number of changes 
to the disclosure requirements in the IPBOR. To begin with, the IPBOR 
would have required business opportunity sellers to state whether they 
make any earnings claim, and if they do, to have written substantiation 
for the claim.\106\ PSA argued that MLMs are presented to consumers as 
income opportunities, and therefore, should not be allowed the option 
of asserting that they make no earnings claim.\107\ With regard to the 
earnings disclosure itself, they recommended two changes to the IPBOR. 
First, they recommended that the earnings disclosure state the average 
retail-based income that participants achieve.\108\ They argued that, 
by focusing on dollars earned from retail sales, the disclosure 
document would highlight the key feature that distinguishes a 
legitimate company from a pyramid scheme--the sale of products to end 
users.\109\
---------------------------------------------------------------------------

    \106\ 437.3(a)(2) & 437.4(a)(2).
    \107\ PSA at 2. Several individuals filed form comments, with 
small variations, making this point as well. E.g., Jean Smith; 
Douglas Konkol; Harold Ducre; Rachel Quill; N Gursahani; Petteri 
Haipola; Bradford Chase; Curtis Marburger; Joel Rolfe; Marshall 
Massengill; Marcus Batte. See also CAI, at 6 (asserting that if MLMs 
present themselves as offering an ``income opportunity,'' they 
should have to disclose earnings).
    \108\ PSA, at 2.
    \109\ PSA, at 2. CAI, Red Flags at 5 (acknowledging that an MLM 
may be legitimate if it allows a person to earn a significant income 
from retailing products to end users).
---------------------------------------------------------------------------

    Second, these commenters asserted that the earnings disclosure 
should state not only the revenue paid to participants, but also should 
reveal the payments by participants for products and services.\110\ CAI 
argued that product purchases--necessary to advance in the MLM 
hierarchy--are often a major element of the overall investment in an 
MLM; typically, the initial registration fee is nominal, and is just 
the beginning of the total investment.\111\ PSA also argued that the 
earnings disclosures that some MLMs make are deceptive because they 
fail to include the money participants pay out to the MLM.\112\ In 
addition, according to PSA, MLMs routinely include only the income of 
``active'' participants in their averages, and thus conceal ongoing and 
mounting losses of new investors.\113\
---------------------------------------------------------------------------

    \110\ CAI, at 7; PSA, at 2.
    \111\ CAI, Red Flags, at 10.
    \112\ PSA, at 2.
    \113\ PSA, The Myth of Income Opportunity in Multi-Level 
Marketing, at 3.
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    Regarding the other provisions of the IPBOR, CAI supported the 
requirement of disclosing refund history, but noted that it is not 
particularly useful in the MLM context, inasmuch as ``[i]t is extremely 
rare for MLM victims to recognize the fraud in an MLM program without 
intensive de-programming by a knowledgeable consumer advocate.''\114\ 
CAI also recommended that the ten referrals to prior purchasers should 
include at least five ex-participants in the business,\115\ and that 
there should be a three-day waiting period that includes a 
recommendation to search the internet for information about the 
company.\116\
---------------------------------------------------------------------------

    \114\ CAI, Red Flags at 11; CAI, at 7.
    \115\ CAI, at 7.
    \116\ CAI, at 6.
---------------------------------------------------------------------------

3. Analysis

    Section 18(d)(2)(B) of the FTC Act, 15 U.S.C. 57a(d)(2)(B), states 
that ``[a] substantive amendment to, or repeal of, a rule promulgated 
under subsection (a)(1)(B) shall be prescribed, and subject to judicial 
review, in the same manner as a rule prescribed under such 
subsection.'' The standard for amending or repealing a section 18 rule 
is identical to that for promulgating a trade regulation rule pursuant 
to section 18.
    When deciding whether to amend a rule, the Commission engages in a 
multi-step inquiry. Initially, the Commission requires evidence that an 
existing act or practice is legally unfair or deceptive. The Commission 
then requires affirmative answers, based upon the preponderance of 
reliable evidence, to the following four questions:
    (1) Is the act or practice prevalent?\117\
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    \117\See 15 U.S.C. Section 57a(b)(3) (stating that prevalence 
may be established if information available to the Commission 
indicates a widespread pattern of unfair or deceptive acts or 
practices).
---------------------------------------------------------------------------

    (2) Does a significant harm exist?
    (3) Would the rule provisions under consideration reduce that harm? 
and
    (4) Will the benefits of the rule exceed its costs?
    See Credit Practices Rule, 49 FR 7740, 7742 (Mar. 1, 1984).\118\
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    \118\See also 15 U.S.C. Section 57a(d)(1)(A)--(C) (requiring in 
the Statement of Basis and Purpose accompanying the rule a statement 
as to prevalence, the manner in which the acts or practices are 
unfair or deceptive, and the economic effect of the rule); Federal 
Trade Commission Organization, Procedures and Rules of Practice, 16 
CFR 1.14(a) (i)-(iv).
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    The discussion below addresses, first, the question of whether 
there are widespread unfair or deceptive acts or practices that cause 
consumer harm. Second, the discussion reviews the various proposals for 
reducing consumer harm and the adequacy of case-by-case law enforcement 
under sections 5 and 13(b) of the FTC Act to address existing problems. 
To summarize, while there is a significant concern that some pyramid 
schemes masquerade as legitimate MLMs, assessing the incidence of such 
practices is difficult. In any event, commenters broadly concur that 
the IPBOR would not help consumers make an informed decision about the 
risks of joining a particular MLM. Further, the comments do not provide 
sufficient information about how to tailor the proposed rule so that 
disclosures assist in the purchase decision in a manner that is likely 
to reduce consumer harm. Moreover, it is appears that the burden of 
complying with the IBPOR would be costly to legitimate companies using 
the MLM business model without the promise of sufficient offsetting 
benefits to prospective purchasers of MLM distributorships.
a. Prevalence of deceptive practices causing significant consumer harm
    In considering whether to impose an industry-wide rule covering 
MLMs, the threshold inquiry is identifying the unfair or deceptive 
practices at issue. If such practices exist, the Commission evaluates 
whether such practices are prevalent and cause significant consumer 
harm. While these are separate areas of consideration, these inquiries 
overlap and are discussed together to avoid unnecessary redundancy.
    There are two related but distinct allegations of deceptive 
practices regarding MLM companies. The debate about the legitimacy of 
MLM companies typically centers on whether an MLM operates as a 
pyramid. By their very nature, pyramid schemes are deceptive and 
violate the FTC Act. Equally serious, however, is the question of 
whether an MLM is engaged in making false earnings claims. These 
allegations are clearly related in that any claim that the average 
participant in a pyramid

[[Page 16118]]

scheme will make money is necessarily false. But even if an MLM is not 
operating as a pyramid scheme, it violates the FTC Act if it makes 
false earnings projections to consumers.
    The comments received about the legitimacy of MLMs, discussed 
above, demonstrate sharply divergent points of view. The record in this 
proceeding to date is largely comprised of thousands of letters from 
consumers who operate as MLM distributors.\119\ Many of these 
commenters extolled the benefits of the products they sell and 
overwhelmingly urged the Commission not to impose a rule that would 
hamper their ability to run their small businesses.\120\ Organizations 
representing distributors also voiced strong opposition to the 
IPBOR.\121\ In addition, the National Association of Consumer Agency 
Administrators (``NACAA''), after canvassing its members nationwide, 
stated that they ``reported there was no appreciable number of 
complaints filed against direct sellers that are member companies of 
the Direct Selling Association.''\122\ One comment presented a survey 
finding that an ``average'' distributor earns $418 per month,\123\ and 
DSA presented another survey\124\ finding that 85% of direct sellers 
say that direct selling meets or exceeds their expectations as a good 
way to supplement their income.\125\ Given the overwhelming number of 
comments from consumers who operate as MLM distributors and from 
organizations representing such distributors, the Commission does not 
dispute the proposition that MLM companies can operate legitimately.
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    \119\ In response to the NPR, the Commission received comments 
from approximately 16,700 individual MLM distributors. While several 
thousands of these were form letters, thousands more included 
individual recitations of positive personal experiences with the MLM 
distributorships.
    \120\E.g., Tom Hadley, at 1 (pastor stating that he uses the 
income he receives from his XanGo distributorship to pay his 
childrens' college expenses); Gary Minor, at 1 (distributor of Young 
Living Essential Oils states he believes the product is exceptional 
and he makes money from selling product); Kelly Radke, at 1 
(Tastefully Simple distributor stating that direct selling is a way 
for moms to stay home with their kids, pay off bills, and even save 
for vacations and retirement).
    \121\ The Commission received comment from the World Association 
of Persons with disAbilities, Inc., the MLM Distributor Rights 
Association, and the Professional Association for Network Marketing, 
expressing opposition to the IPBOR.
    \122\ NACAA, at 1 (stating that ``NACAA currently represents 
more than 160 government agencies and 50 corporate consumer offices 
in the United States and abroad.''). The Chamber of Commerce of the 
United States of America also filed a comment stating that in 
``coordination with key industry leaders,'' it has concluded that 
the IPBOR would ``impose a tremendous burden on legitimate 
businesses with little benefit to consumers.'' CC USA, at 1. 
Although it does not expressly mention the DSA, the Commission 
believes that the CC USA is referring to the direct selling 
industry. Similarly, the National Black Chamber of Commerce filed a 
comment urging the Commission to tailor the IPBOR more narrowly 
because of the impact on direct selling companies. NBCC at 1-2.
    \123\ MLMIA, Appendix A at 13 (Coughlan and Grayson, Network 
Marketing Organizations: Compensation Plans, Retail Network Growth, 
and Profitability, 15 International Journal of Research in Marketing 
401 (1998)).
    \124\ DSA Rebuttal, at 3.
    \125\ PSA argued to the contrary, pointing to its study of seven 
companies which ostensibly shows that 99% of MLM distributors earn 
no profit from company rebates, and further stating that it is 
practically impossible for distributors to earn money through 
product sales. PSA, The Myth at 24, 29 (reviewing pay-outs that 
seven MLM companies made to distributors between 1998 and 2004). But 
see Primerica Rebuttal, at 5 (characterizing the data as ``both 
unrepresentative and unreliable.'').
---------------------------------------------------------------------------

    Sharply diverging from the comments of industry advocates are those 
of consumer advocates who argued that by and large, MLMs victimize 
consumers by claiming to provide an opportunity to earn money that 
cannot realistically be achieved. The Commission's law enforcement 
experience shows that some MLMs have violated the law by making false 
earnings representations and have operated as pyramid schemes. In the 
last ten years, the Commission has sued fourteen pyramid schemes that 
purported to be legitimate MLM businesses selling products to end-
users.\126\FTC v. Equinox International Corp. provides a prime example 
of how a pyramid scheme could masquerade as a legitimate MLM. Equinox 
purported to offer distributorships to sell products, including water 
filters, vitamins, nutritional supplements, and skin care 
products.\127\ However, the company emphasized to new distributors that 
the real way to make money was through recruiting additional 
distributors, not through product sales. The company extracted money 
from its recruits by encouraging them to enter the MLM at the 
``manager'' level, which required a purchase of $5,000 worth of 
products; to rent desk space for $300 to $500 per month; to subscribe 
to a phone line so they could recruit others; and to attend trainings 
and seminars at a cost of $300 to $1,000.
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    \126\ FTC v. BurnLounge, No. 2:07-cv-03654-GW-FMO (C.D. Cal. 
2007); FTC v. Mall Ventures, Inc., No. CV 04-0463 FMA (PLAx) (C.D. 
Cal. 2004); FTC v. NexGen3000.com, No. 03-120 TUC WDB (D. Ariz. 
2003); FTC v. Trek Alliance, Inc. , No. CV-02-9270 (C.D. Cal. 2002); 
FTC v. Streamline Int'l, Inc., 01-6885-CIV-Ferguson (S.D. Fla. 
2001); FTC v. Bigsmart.com, No. CIV 01- 0466 PHX ROS (D. Ariz. 
2001); FTC v. Netforce Seminars, Inc., No. 00 2260 PHX FJM (D. Ariz. 
2000); FTC v. 2Xtreme Performance Int'l, LLC, No. Civ. JFM 99CV 3679 
(D. Md. 1999); FTC v. Equinox Int'l, Corp., No. CV-S-99-0969-JBR-RLH 
(D. Nev. 1999); FTC v. Five Star Auto Club, Inc., No. CIV-99-1693 
McMahon (S.D. N.Y. 1999); FTC v. FutureNet, Inc., No. CV-98-1113 GHK 
(C.D. Cal.1998); FTC v. JewelWay, No. 97-383 TUC JMR (D. Ariz. 
1997); FTC v. World Class Network, Inc., No. SACV-97-162-AHS (Eex) 
(C.D. Cal. 1997); FTC v. Mentor Network, Inc., No. SACV 96-1104 LHM 
(Eex) (C.D. Cal. 1996).
    \127\ See http://www.ftc.gov/opa/1999/08/equinox1.shtm.
---------------------------------------------------------------------------

    Equinox had ostensibly implemented safeguards to show it was not a 
pyramid scheme. For example, Equinox purported to link compensation to 
retail sales, including requiring distributors to produce receipts 
showing retail purchases. However, the evidence revealed that such 
policies were not enforced.\128\ Like other members of the DSA, Equinox 
purported to offer refunds on inventory purchases. Yet, the net loss to 
consumers who participated in Equinox was more than $330 million.\129\ 
Indeed, pyramid schemes masquerading as legitimate MLMs can implement 
numerous purported safeguards to appear legitimate.\130\
---------------------------------------------------------------------------

    \128\See also FTC v. Trek Alliance, Inc., CV-02-9270 (C.D. Cal. 
2002); http://www.ftc.gov/opa/2003/08/trek.shtm.
    \129\ Documented proof of claim forms received from consumer-
victims of Equinox reveal that the net loss to consumers was at 
least $330 million. The defendants settled FTC charges by paying 
cash, corporate and individual assets in the amount of nearly $50 
million, which comprised virtually all the assets of the defendants. 
As part of the settlement, the individual defendant, William Gouldd 
was barred permanently from engaging in any multi-level marketing 
operations. See http://www.ftc.gov/opa/2000/04/equinox.shtm.
    \130\ In Webster v. Omnitrition Int'l, Inc., distributors sued 
Omnitrition, an MLM company, alleging that it was a pyramid scheme. 
The Ninth Circuit reviewed the safeguards that the MLM purportedly 
used to ensure retail sales. Webster v. Omnitrition Int'l, Inc., 79 
F.3d 776 (9th Cir. 1998). These included requiring no payment to 
become a distributor; imposing no quota of products that 
distributors were required to buy from the MLM; imposing an 
affirmative obligation that distributors certify that 70% of 
products they ordered have been resold and that they have made sales 
to at least 10 retail customers in the past month; and affording a 
90% refund on resaleable inventory if the distributor resigns from 
the company. Id. at 780. In spite of these safeguards, the Ninth 
Circuit concluded that summary judgment in favor of Omnitrition was 
inappropriate because ``the structure of the scheme suggests that 
Omnitrition's focus was in promoting the program rather than selling 
the products.'' Id. at 782. The Court further noted that Omnitrition 
failed to show that it enforced its 70% resale rule or its buy-back 
rule on distributors. Id. at 784.
---------------------------------------------------------------------------

    Apart from operating as illegal pyramids, MLMs also could be 
engaged in making false earnings representations. In the Commission's 
law enforcement experience, all of its pyramid cases\131\ against 
purportedly legitimate MLMs alleged that the defendant made false 
earnings representations. Notably, at least one other case the 
Commission brought against an MLM company alleged false earnings 
representations.\132\ Nevertheless, MLM industry advocates

[[Page 16119]]

argue that a government regulation is not needed to protect individuals 
taking low financial risks, such as the great many MLM distributors who 
participate on a part-time or seasonal basis. However, while MLM 
commenters contended that the cost of joining is typically very small, 
they often referred only to the minimum required fees, and did not 
mention all costs necessary to qualify for higher levels of 
compensation.\133\ Such costs are problematic to the extent that MLM 
firms market their distributorships with lifestyle representations\134\ 
that do not correlate to the small part-time income that active MLM 
distributors primarily earn.\135\
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    \131\See supra note 126.
    \132\In re Nu Skin Int'l Inc., Docket C-3489, 117 F.T.C. 316, 
324 (1994).
    \133\ In Webster v. Omnitrition, the Ninth Circuit observed that 
while there was no cost to becoming a distributor in the MLM 
company, the cost of qualifying for higher compensation was 
``substantial.'' 79 F.3d at 782.
    \134\ Depending upon the particular representations, touting 
grandiose lifestyles may be considered an earnings claim--rather 
than mere puffery--that must be substantiated. The Commission has 
long held that an earnings claim includes statements from which a 
prospective purchaser could reasonably infer ``a specific level or 
range of income,'' such as ``earn enough money to buy a new 
Porsche.'' See Franchise Rule Final Interpretive Guides, 44 FR 
49965, 49982 (Aug. 24, 1979).
    \135\E.g., MLMIA, Appendix A at 13 (presenting a survey finding 
that earnings for an average distributor are $418 per month); DSA at 
15 (``A direct seller's median annual gross income from direct 
selling is about $2,400 per year.''); Avon, at 19 (``those selling 
on a part-time basis may show low earnings, which, in fact, may be 
quite substantial given the amount of time they spend selling Avon 
products.'').
---------------------------------------------------------------------------

    On the basis of its law enforcement experience and the rulemaking 
record, the Commission concludes that some MLMs engage in unfair or 
deceptive acts or practices. These practices include operation of 
pyramid schemes and false or unsubstantiated earnings claims. It is 
beyond a doubt that where they occur, these practices cause significant 
consumer harm. The Equinox case alone illustrates that the harm to 
consumers resulting from such practices is enormous--not just in the 
aggregate, but individually.
    The further question as to whether such deceptive practices are 
prevalent, however, is elusive. It is difficult to gauge the incidence 
of such practices among MLMs. As noted in more detail below, 
determining whether a company operates as a pyramid requires a fact-
specific inquiry that depends on evaluating a number of factors. Even 
if deceptive practices were established as prevalent in the MLM 
industry, however, the Commission has determined at this time that 
neither the IPBOR nor the alternative proposals that commenters 
advanced appear likely to be sufficiently effective to remedy these 
practices.
b. Whether the IPBOR or other proposals would reduce consumer harm
    After careful consideration, the Commission believes that the 
consumer harm flowing from deceptive practices in the MLM industry can 
more effectively be addressed at this time through targeted law 
enforcement under Section 5. Commenters on all sides generally agree 
that the IPBOR's required disclosures would not help consumers identify 
a fraudulent scheme. As discussed below, a simple earnings disclosure 
is unlikely to enable consumers to determine whether an MLM company is 
operating lawfully. Further, at this time, the record indicates that 
the proposed alternatives that various commenters suggested would not 
effectively counter deceptive practices and would not enable consumers 
to avoid a fraud.
    As commenters noted, an earnings disclosure, such as the one 
proposed in the IPBOR, will not help prospective purchasers determine 
whether an offering is a pyramid or is a legitimate MLM because it does 
not reveal the source of the income.\136\ The main difference between a 
pyramid scheme and a legitimate MLM is that the legitimate company 
actually derives its income primarily from the retail sale of products 
to end users, while the pyramid scheme supplies income to participants 
at the top of the pyramid primarily through fees that new participants 
pay for the right to participate in the venture.\137\ In a pyramid 
scheme, a participant can reap rewards only by obtaining a portion of 
the fees paid by those who join the scheme later. People who join 
later, in turn, pay their fees in the hope of profiting from payments 
of those who enter the scheme after they do. In this way, a pyramid 
scheme simply transfers monies from losers to winners. For each person 
who substantially profits from the scheme, there must be many more 
losing all, or a portion, of their investment to fund those winnings. 
Absent sufficient sales of goods and services, the profits in such a 
system hinge on nothing more than recruitment of new fee-paying 
participants into the system.
---------------------------------------------------------------------------

    \136\See PSA, at 2; CAI, Red Flags at 5; Primerica at 26.
    \137\See Staff Advisory Opinion--Pyramid Scheme Analysis, 
January 14, 2004.
---------------------------------------------------------------------------

    As the Commission's cases demonstrate, the sale of goods and 
services alone does not necessarily render a multi-level system 
legitimate. Modern pyramid schemes display endless ingenuity in finding 
ways to disguise payment of participation fees to appear as if they are 
for the sale of goods or services. The source of the income typically 
is not easy to discern from a facial examination of a company's 
compensation structure and the safeguards it purportedly has in place. 
Economic analysis of the MLM business model suggests a continuum with 
clearly legitimate MLMs at one end and clearly fraudulent pyramid 
schemes at the other. With some basic company information, a company 
residing at one pole or the other can be identified. Nevertheless, in 
the middle is a substantial gray area where differentiating the two is 
much more difficult because the source of income is both sales of 
products or services and participation fees.\138\ Indeed, the question 
of whether a purportedly legitimate MLM is, in reality, only a pyramid 
scheme in masquerade is a highly fact-intensive inquiry. That being the 
case, the issue is a particularly difficult one to address via 
industry-wide rulemaking, as opposed to case-by-case enforcement.
---------------------------------------------------------------------------

    \138\ Vander Nat and Keep, at 149.
---------------------------------------------------------------------------

    Commenters have advanced three main alternatives to the specific 
elements of the IPBOR: (1) granting a safe-harbor to companies that 
implement certain safeguards; (2) requiring detailed earnings 
information; and (3) defining what constitutes a pyramid scheme. As 
explained in more detail below, at this time, the Commission is not 
persuaded that any of these proposals would likely lead to a rule that 
would not unfairly burden legitimate companies while rooting out 
pernicious frauds dressed in the garb of legitimacy.
i. MLM comments advocating a safe harbor to exempt legitimate companies 
would not adequately distinguish between pyramids and legitimate 
companies
    MLM industry commenters suggest limitations on the rule so that it 
would exclude firms that require very low registration fees;\139\ firms 
that offer refunds on inventory purchases;\140\ firms that are 
publicly-traded;\141\ firms that have been in business for a

[[Page 16120]]

significant number of years;\142\ or firms that are members of a self-
regulatory body, such as the DSA.\143\ However, none of these factors 
is determinative of whether a company is, in fact, a pyramid scheme or 
otherwise engaged in deceptive conduct. Furthermore, the effort to 
craft a workable rule using these criteria could undermine law 
enforcement efforts if pyramid schemes masquerading as MLMs were able 
to manipulate their corporate structure--as Equinox did--to meet safe 
harbor provisions while continuing, in fact, to operate illegally.
---------------------------------------------------------------------------

    \139\ Avon, at 10 (advocating that the Commission impose a 
monetary threshold for required payments and that the rule not apply 
to transactions below that threshold); Pre-Paid Legal, at 1 
(advocating a monetary threshold of $250).
    \140\ Quixtar, at 5; Melaleuca, at 7.
    \141\ Pre-Paid Legal, at 1; Avon, at 10; Herbalife, at 16.
    \142\ Primerica, at 41.
    \143\ DSA, at 42.
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ii. Imposing the earnings disclosures that consumer groups suggest on 
MLMs is fraught with problems and complexity
    Consumer advocates advanced a requirement to disclose the retail-
based earnings of active and inactive participants, deducting the costs 
distributors paid.\144\ There are several problems with this approach. 
Given the complexities of each MLM's compensation schedule, developing 
a standard, useful, understandable, and straightforward earnings 
disclosure that would serve industry-wide is elusive. Further 
complicating the problem are the practical considerations of whether 
MLMs could, using an industry-wide format, gather reliable information 
on retail earnings.
---------------------------------------------------------------------------

    \144\ PSA, at 2; CAI, at 7.
---------------------------------------------------------------------------

    More broadly, a number of issues would make it difficult to craft 
an industry-wide rule on a proper earnings disclosure, as proposed 
above. A meaningful earnings claim disclosure likely would require 
different disclosures for different levels of participation in the 
company. For example, how should such a disclosure treat inactive 
participants who have joined merely to purchase product for their own 
use as opposed to active participants in the earnings figure? How would 
one identify participants who are inactive because they only wanted to 
obtain access to the product at wholesale prices rather than those who 
are inactive because they concluded that the business was not suitable 
for them?\145\ How long after a participant's last sale should he or 
she be considered ``inactive''?\146\ MLM companies often have 
complicated compensation schedules that offer greater compensation for 
greater sales volume. Moreover, because there likely is an earnings 
disparity between new MLM recruits and distributors who have well-
established down-lines, an additional issue arises as to whether a 
disclosure of participants' median income rather than average income is 
most appropriate. In pyramids, a disclosure of average income would 
suggest that all participants have the ability to make the claimed 
earnings, when in reality, the earnings figure is skewed to reflect the 
lavish profits reaped by those at the top of the pyramid. New recruits 
to the pyramid scheme would not have any possibility of reaping such 
profits. Median income, by contrast, would eliminate the outliers, thus 
providing a more realistic picture of what the majority of participants 
earn in a pyramid. Whether that is the most appropriate measuring stick 
for a legitimate MLM company where earnings are based on retail sales 
is unclear.
---------------------------------------------------------------------------

    \145\ The issue of inactive participants who are only interested 
in obtaining product at wholesale prices appears to be unique to 
MLMs. As far as the Commission is aware, this complication does not 
arise in other forms of business opportunities. In the MLM context, 
the record does not reveal the extent to which individuals join MLMs 
to buy products at wholesale.
    \146\E.g., Primerica Rebuttal at 34-35.
---------------------------------------------------------------------------

    Second, it may be difficult to determine retail income. While an 
MLM firm may provide distributors with products, the MLM may not be 
able to verify the extent to which a distributor has resold the product 
at retail, is warehousing the product, or bought the product for his or 
her own personal consumption. Even where an MLM has policies in place 
purportedly to ensure that a portion of its distributors' income comes 
from retail sales--as opposed to inventory loading--the company may 
still lack accurate figures on the true amount of its distributors' 
retail income.\147\ For example, such policies could go unenforced, or 
even if they were ostensibly enforced, could be circumvented by 
distributors, who may have an incentive to ``certify'' their sales in 
order to qualify for higher level of commissions.\148\ Indeed, the 
potential collusion between MLM companies and distributors to fake the 
true level of retail sales would undermine the utility of an earnings 
disclosure based on retail income.
---------------------------------------------------------------------------

    \147\Webster v. Omnitrition International, Inc., 79 F.3d 776, 
783 (9th Cir. 1996) (stating that Omnitrition produced no evidence 
that it enforced its rule ostensibly requiring its distributors to 
sell at wholesale or at retail 70% of the products they bought).
    \148\ In the Omnitrition case, the Ninth Circuit commented on 
the requirement that distributors certify their sale of the product, 
stating: ``There is no evidence that this `certification' 
requirement actually serves to deter inventory loading.'' 79 F.3d at 
783. Similarly, in the Commission case against Equinox, it was 
alleged that the MLM looked away when distributors wrote their own 
receipts to fake retail sales to consumers.
---------------------------------------------------------------------------

    The deduction of costs also is problematic. Primerica argued that 
the proposal to deduct a distributor's costs, in particular, is 
``administratively impossible'' because it ``require(s) information 
that companies do not routinely possess and cannot easily 
obtain.''\149\ For example, business-related expenses could include 
independent costs that an MLM could not track, such as costs for 
computers, office equipment, leasing office space and other 
facilities.\150\ In addition, many commenters point out that MLM 
participants use their membership to purchase products at a discount 
for their own personal consumption.\151\ Deducting ``costs'' that 
members pay to the MLM would be too broad insofar as it would include 
inventory that distributors choose to purchase for themselves.\152\
---------------------------------------------------------------------------

    \149\ Primerica Rebuttal, at 34.
    \150\ Primerica Rebuttal, at 35.
    \151\See supra, note 75.
    \152\ Primerica Rebuttal, at 6 (``Moreover, these commenters 
allege losses based in part on counting as costs what the record 
makes plain is a benefit for many participants--the ability to 
purchase for personal consumption products they like at a 
significant discount.'').
---------------------------------------------------------------------------

    In view of these difficulties, the Commission at this time believes 
it is more cost-effective to challenge deceptive MLM practices through 
targeted law enforcement under Section 5.\153\
---------------------------------------------------------------------------

    \153\ Regardless of whether it is covered by the proposed rule, 
if a business makes earnings claims, including through the use of 
testimonials, such claims must be truthful and must be 
substantiated, under Section 5 of the FTC Act.
---------------------------------------------------------------------------

iii. Crafting a definition of ``pyramid scheme'' would be counter-
productive
    Some commenters advocated crafting a definition of ``pyramid 
scheme'' that would avoid the problems of overbreadth in the IPBOR by 
excluding legitimate MLMs from coverage while keeping pyramid schemes 
covered.\154\ There are two practical difficulties with this approach. 
First, as noted above, there is no bright-line, universal test for the 
particular quantity of retail sales that in every case would suffice to 
fund the payment of commissions for every MLM company. While economic 
analysis can reveal if an individual company clearly is operating 
legitimately or if it clearly is a pyramid scheme, it is difficult to 
draw an appropriate line in the gray area.\155\

[[Page 16121]]

Second, any definition of ``pyramid scheme'' would provide bad actors 
with a road map for restructuring their businesses to skirt the 
definition, at least facially, and thereby providing them with a safe 
harbor that could undercut law enforcement efforts.
---------------------------------------------------------------------------

    \154\E.g., Craig, at 7-8 (former Assistant Attorney General with 
the State of Wisconsin); Primerica, at 38.
    \155\See VanderNat and Keep, Marketing Fraud: An Approach to 
Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. of 
Pub. Pol'y & Marketing, at 149. See also Primerica Rebuttal, at 35 
(``As the extensive analysis contained in [consumer group] comments 
demonstrates, identifying a pyramid scheme (or, at least, one that 
attempts to disguise itself as a legitimate business opportunity) 
entails an in-depth examination of the compensation structure and 
the actual manner in which compensation flows within an 
organization.'').
---------------------------------------------------------------------------

    The benefit of using Section 5 to prosecute pyramid schemes is that 
it is a flexible instrument that allows the Commission to pursue bad 
actors no matter how they choose to manipulate their corporate 
structure. At this time, and on the basis of evidence in the record, 
the Commission declines to define ``pyramid scheme'' through rulemaking 
but will continue to use Section 5 to attack such schemes.
c. Benefits and Burdens of the IPBOR
    As set forth above in greater detail, MLM industry commenters 
contend that the burdens of making the IPBOR's disclosures would be 
devastating. Some of these concerns are overblown and clearly 
misunderstand the intent of the IPBOR, which would not require 
individual MLM distributors to disclose their personal litigation 
histories, for example, to prospective purchasers.\156\ However, 
numerous commenters made valid points about the direct cost of 
complying and the indirect cost of loss recruitment. As one commenter 
noted, with a dwindled sales force, there would be a consequent drop in 
the sale of product, and the cost to one MLM, Primerica, would be $1 
billion over ten years.\157\ Even if this figure grossly overestimates 
the cost to individual MLM companies, millions of MLM distributors, 
according to distributors and groups representing MLM distributors, 
would individually bear the cost of lost recruitment and would find 
their home businesses adversely affected.
---------------------------------------------------------------------------

    \156\E.g., Mary Kay, at 8, 9; MLMIA, at 9-10 (estimating that 
there are 10 million business opportunity sellers in the 
marketplace, and further stating: ``The Proposed Rule may actually 
cause a recession in the United States if fully enforced.'').
    \157\ Primerica, at 3, 4; Primerica Rebuttal, at 11.
---------------------------------------------------------------------------

    Commenters also argued that the burdens are unjustified because the 
disclosure requirements are ill-suited to the MLM industry and would 
fail to help consumers identify a risky opportunity. For example, the 
requirement that business opportunity sellers disclose a list of prior 
purchasers would be costly for covered companies but would not help 
consumers analyze the possibility of loss because every prior purchaser 
has an incentive to sell the opportunity in order to recruit additional 
distributors into their ``down lines.'' Thus, they might not provide a 
very reliable assessment of participating in the opportunity offered. 
Similarly, to the extent individuals join MLMs only to purchase 
products at wholesale, the waiting period would be an unnecessary 
obstacle. And, as noted above, the earnings claim disclosure 
requirement would itself be incomplete and possibly misleading because 
it would be unlikely to capture and accurately portray the actual 
source of compensation.

d. Conclusion

    The deceptive practices of some companies using the MLM business 
model, which operate as pyramids or disseminate false earnings claims, 
remain a troubling consumer hazard. On the question of whether such 
practices are prevalent, however, it is difficult to gauge the 
incidence of such practices among MLMs. Even if the troubling practices 
were established to be prevalent, the Commission is not persuaded at 
this time that the proposed remedies would significantly redress 
consumer harm in a cost-effective manner. The Commission believes that 
the burdens that would be imposed upon legitimate business operations 
would not appear to be justified by possible benefits to consumers. To 
fashion a proper approach to combat fraud in the MLM industry, the 
Commission will continue to examine the MLM industry and individual 
companies, particularly the degree to which product sales fund the 
compensation that distributors earn. At this time, however, the 
Commission believes that the proposed rule is too blunt of an 
instrument to cure fraud in the MLM industry. The Commission has 
determined that it will use the flexibility inherent in Section 5 of 
the FTC Act to address particular frauds in the MLM industry.

Section D. The Proposed Rule

    To limit the proposed rule's scope, as discussed above, the 
Commission now proposes a significantly revised Section 437.1, 
redefining ``business opportunity.'' In addition, the Commission 
proposes three changes to Section 437.3, which prescribes the content 
of the basic disclosure document. Finally, the Commission also proposes 
minor changes to Section 437.5, which addresses deceptive claims and 
practices in connection with business opportunity sales. Each of these 
proposals is discussed in detail below. In addition, this section 
discusses commenters' recommendations for specific changes and the 
Commission's reasons for adopting or not adopting them. As noted below, 
the Commission continues to solicit commentary on all aspects of the 
RPBOR.

1. Proposed Section 437.1: Definitions

    As with the IPBOR, the RPBOR begins with a ``definitions'' section. 
With the exception of the terms discussed specifically below, the 
definitions in the RPBOR are the same as in the IPBOR. As noted, the 
Commission proposes to narrow the scope of the proposed rule by 
redefining the term ``business opportunity.'' The RPBOR eliminates the 
previously defined term ``business assistance'' and adds a new term, 
``required payment.'' In addition, the RPBOR slightly modifies the 
definition of ``designated person'' and of ``providing locations.''
a. Proposed Section 437.1(c): ``Business opportunity''
    The definition of ``business opportunity'' establishes the 
parameters of the Rule's coverage. In the RPBOR, the Commission 
proposes a tailored definition of ``business opportunity'' that will 
reach those business opportunities that have, in the Commission's law 
enforcement experience, persistently caused substantial consumer 
injury. These include business opportunities promoting vending machine, 
rack-display, work-at-home, medical billing, and 900-number schemes, 
among others.
    The three definitional elements of the term ``business 
opportunity'' in the RPBOR are: (1) a solicitation to enter into a new 
business; (2) a ``required payment'' made to the seller; and (3) a 
representation that the seller will provide assistance in the form of 
securing locations, securing accounts, or buying back goods produced by 
the business. The RPBOR incorporates and builds on the definition of 
``business opportunity'' used in the original Franchise Rule and the 
interim Business Opportunity Rule\158\ to cover these particular types 
of schemes.\159\
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    \158\ As noted previously, the interim Business Opportunity 
Rule, found at 16 CFR 437, is the portion of the original Franchise 
Rule that applied to business opportunities. It will remain 
effective until the current rulemaking proceedings conclude.
    \159\See Primerica, at 39 (suggesting that the Commission should 
``[r]etain the existing definition from the Franchise Rule that 
covers business opportunities and expand [it] based on demonstrated 
problems.''); DSA, at 39-40.
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    The changes to the IPBOR's definition of ``business opportunity'' 
are three-fold. First, the RPBOR definition includes a prong limiting 
coverage to opportunities for which ``the

[[Page 16122]]

prospective purchaser makes a required payment'' for the purchase of 
the business opportunity. This change will exclude from the definition 
business relationships in which the only required payment is for 
inventory at bona fide wholesale prices. Second, the RPBOR definition 
eliminates two types of ``business assistance'' that formerly would 
have triggered the Rule's strictures and disclosure obligations, namely 
tracking payments and providing training. Third, the RPBOR no longer 
links the definition of ``business opportunity'' to the making of an 
earnings claim. Each of these changes is discussed in detail below.
1. Required payment
i. Inventory exemption
    The RPBOR definition reaches only those opportunities where the 
prospective purchaser of a business opportunity makes a required 
payment to the seller. Proposed section 437.1(o) specifies that a 
``required payment'' includes ``all consideration that the purchaser 
must pay to the seller or an affiliate, either by contract or practical 
necessity, as a condition of obtaining or commencing operation of the 
business opportunity. Such payment may be made directly or indirectly 
through a third party. A required payment does not include payments for 
the purchase of reasonable amounts of inventory at bona fide wholesale 
prices for resale or lease.''
    The exclusion from the definition of inventory purchases at bona 
fide wholesale prices of ``required payment'' effectuates the 
Commission's determination that traditional product distribution 
arrangements should not be covered by the Business Opportunity 
Rule.\160\ Accordingly, the definition of ``required payment'' is 
substantially similar to that employed in the recently amended 
Franchise Rule,\161\ but also incorporates language from the IPBOR that 
reaches situations where a payment is made either directly to the 
seller or indirectly through a third party.\162\
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    \160\See supra C.1.
    \161\See 16 CFR 436.1(s).
    \162\ As noted in the NPR, 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 which the seller has a formal or informal 
business relationship. While this concept appeared in the IPBOR's 
definition of ``business opportunity,'' it is now incorporated into 
the definition of ``required payment.''
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    The inventory exemption was originally set forth by the Commission 
in its 1979 Final Interpretative Guide to the Franchise Rule.\163\ The 
point of excluding payments for inventory was to exclude ``agency 
relationships in which independent agents, compensated by commission, 
sell goods or services (e.g., insurance salespersons).''\164\ Indeed, 
as numerous commenters point out, manufacturers, suppliers, and other 
traditional distribution firms ``have relied solely on the bona fide 
wholesale price exclusion to avoid coverage as a franchise.''\165\
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    \163\See Franchise Rule Final Interpretive Guides, 44 FR at 
49967 (``the Commission will not construe as `required payments' any 
payments made by a person at a bona fide wholesale price for 
reasonable amounts of merchandise to be used for resale. The 
Commission will construe `reasonable amounts' to mean amounts not in 
excess of those which a reasonable businessman normally would 
purchase by way of a starting inventory or supply or to maintain a 
going inventory or supply.'').
    \164\Id. at 49967-68.
    \165\ Sonnenschein, at 1-2. See also NAA, at 1-3; Timberland, at 
1 (noting that numerous manufacturers structure their retail 
distribution in this manner); CTFA, at 4.
---------------------------------------------------------------------------

    The IPBOR had eliminated this concept in an attempt to bring 
pyramid schemes that engaged in ``inventory loading'' within the ambit 
of the Rule. As discussed above, however, the Commission has determined 
that challenging such practices in targeted law enforcement actions 
under Section 5 of the FTC Act is a more cost-effective approach than 
attempting to address pyramid schemes as proposed in the IPBOR.
ii. Monetary threshold
    Only business opportunities costing the purchaser at least $500 are 
covered by the interim Business Opportunity Rule. The RPBOR, however, 
would eliminate any monetary threshold for the required payment. Many 
commenters, including MLM industry members as well as non-MLM product 
distributers, urged the Commission to establish a minimum 
threshold.\166\ A common theme in many comments submitted by the MLM 
industry is that mandatory disclosures are not necessary or appropriate 
for small investments.\167\ On the other hand, some commenters, such as 
the National Consumers League (``NCL'') strongly support the proposal 
to drop the financial threshold to zero, as a means of closing gaps 
that would allow perpetrators of fraud room to avoid making 
disclosures.\168\
---------------------------------------------------------------------------

    \166\E.g., DSA, at 37; Avon, at 10; Pre-Paid Legal, at 1; 
Sonnenschein, at 5; Herbalife, at 15; IBOAI, at 4-5; IBA, at 9.
    \167\E.g., Xango, at 4; Avon, at 12; Herbalife, at 3; Shure, at 
1-2; Symmetry, at 1.
    \168\ NCL, at 1, 2 (``[F]or many work-at-home victims, even 
losses of less than $100 can have significant impacts. Some mention 
living on fixed disability or retirement incomes, others are 
desperately trying to supplement their wages in order to make ends 
meet.''). See also ASTA, at 2.
---------------------------------------------------------------------------

    Many pernicious frauds, including typical work-at-home schemes, 
have fallen outside the ambit of the original Franchise Rule's 
disclosure obligations because it covered only a franchise or business 
opportunity costing at least $500.\169\ These frauds have often 
targeted vulnerable populations, such as the disabled, elderly, and 
immigrant populations.\170\ Some commenters asserted that a monetary 
threshold simply provides scam operators a means to circumvent the 
Rule, noting that business opportunities sometimes charge $495 to skirt 
the original Franchise Rule's disclosure requirements. For example, NCL 
stated that the:
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    \169\See e.g., FTC v. Med. Billers Network, Inc., No. 05 CIV 
2014 (RJH) (S.D.N.Y. 2005) ($200-295 fee); FTC v. Sun Ray Trading, 
No. Civ. 05-20402-CIV-Seitz/Bandstra (S.D. Fla. 2005) ($160 fee); 
FTC v. Wholesale Marketing Group, LLC, No. 05 CV 6485 (N.D. Ill. 
2005) ($65 to $175 registration fees); FTC v. Vinyard Enterprises, 
Inc., No. 03-23291-CIV-ALTONAGA (S.D. Fla. 2003) ($139 fee); FTC v. 
Leading Edge Processing, Inc., 6:02-CV-681-ORL-19 DAB (M.D. Fla. 
2002) ($150 fee); FTC v. Healthcare Claims Network, Inc., 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. Kamaco Int'l, No. CV 02-04566 LGB (RNBx) (C.D. Cal. 
2002) ($42 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); FTC v. Para-Link Int'l, No. 8:00-CV-2114-T-
27E (M.D. Fla. 2000) ($395 to $495 fee).
    \170\E.g., FTC v. Juan Matos, No. 06-161429 CIV-Altonaga (S.D. 
Fla. 2006) ($110 fee); FTC v. USS Elder Enterprises, Inc., No. SACV-
04-1039 AHS (Anx) (C.D. Cal. 2004) ($50 to $180 fees); FTC v. Castle 
Publishing, Inc., No. AO3CA 905SS (W.D. Tex. 2003) ($59 to $149 
fees); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex. 2003) 
($79 to $149 fees).
---------------------------------------------------------------------------

 $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.\171\
---------------------------------------------------------------------------

    \171\ NCL, ANPR 35, at 11. See also SBA Advocacy, ANPR 36, at 6 
(``[T]hreshold 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.''); M. Garceau, 20Nov97 Tr at 53 (``[I]t should be one 
dollar''); D'Imperio, Sept95 Tr at 130 (``I don't care if it's $10, 
fraud is fraud.''); Purvin, id. at 280 (``[C]ompanies 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.'').
---------------------------------------------------------------------------

    Based upon this record and its law enforcement experience, the 
Commission concludes that the scope of

[[Page 16123]]

the RPBOR should be broad enough to reach business opportunities that 
our anti-fraud law enforcement history and consumer complaints show are 
a widespread and persistent problem. To make the Rule sufficiently 
broad to reach persistent frauds, such as work-at-home schemes and 
envelope stuffing schemes, the RPBOR eliminates the monetary threshold. 
Expansion of the Rule's coverage to reach these particular types of 
fraud is balanced by significantly streamlined disclosure obligations, 
which result in drastically reduced compliance costs. At the same time, 
the RPBOR's more limited definition of the types of business assistance 
that trigger coverage of the Rule, see infra, D.1.a.2., will avoid 
blanket coverage of commercial arrangements for the purchase of a 
business venture costing less than $500.
2. Limiting the type of business assistance that would trigger coverage 
of the Rule
    ``Business assistance'' was a key definitional element of the term 
``business opportunity'' in the IPBOR, and remains so in the RPBOR, but 
with certain modifications intended to correct the IPBOR's overbreadth. 
The IPBOR defined the term ``business opportunity,'' in relevant part, 
as ``a commercial arrangement in which . . . the seller . . . either 
makes an earnings claim or represents that the seller or one or more 
designated persons will provide the purchaser with business 
assistance.''\172\ In turn, the IPBOR defined ``business assistance'' 
as ``the offer of material advice, information, or support to a 
prospective purchaser in connection with the establishment or operation 
of a new business,'' and included five illustrative examples of the 
kinds of activities considered to be ``business assistance'': securing 
locations; securing accounts; buying back goods produced by the 
business; tracking or paying commissions or other compensation for 
recruitment or sales; and training or advising for the business.
---------------------------------------------------------------------------

    \172\ IPBOR, Sec.  437.1(d), 71 FR 19054 at 19087 (Apr. 12, 
2006). (Emphasis supplied.)
---------------------------------------------------------------------------

    The RPBOR streamlines and narrows the scope of the definition of 
``business opportunity'' by, among other things, incorporating the 
concept of ``assistance'' into the ``business opportunity'' definition 
itself, rather than cross referencing a separate ``business 
assistance'' definition. Also, to cure the overbreadth of the IPBOR, 
activities specified as fulfilling the ``assistance'' prong of the 
``business opportunity'' definition of the RPBOR do not include: 
tracking or paying commissions or other compensation for recruitment or 
sales; or generalized training or advising.
    The RPBOR retains the scope of the original Franchise Rule (as 
currently set forth in the interim Business Opportunity Rule), in that 
it includes location and account assistance in the definition of 
``business opportunity.'' 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,\173\ while account assistance is typical of medical 
billing schemes.\174\
---------------------------------------------------------------------------

    \173\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).
    \174\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 alsoFTC v. AMP Publ'n, Inc., No. SACV-00-112-AHS-ANx (C.D. Cal. 
2000).
---------------------------------------------------------------------------

    Similarly, the RPBOR retains the example of ``buy back'' assistance 
in the proposed definition of ``business opportunity'' because it is a 
characteristic feature of work-at-home schemes promoting product 
assembly and envelope stuffing schemes.\175\ The term, however, would 
be broadened slightly to make explicit that any payments or promise of 
payments for home-based envelope stuffing schemes come within the 
parameters of the Rule. As such, the definition of ``business 
opportunity'' is modified expressly to include: ``providing payment for 
such services as, for example, stuffing envelopes from the purchaser's 
home.''\176\ This is necessary because hucksters who offer envelope 
stuffing opportunities commonly represent them as employment or quasi-
employment opportunities in which they will compensate participants 
according to the number of envelopes they stuff.\177\
---------------------------------------------------------------------------

    \175\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).
    \176\ RPBOR, Section 437.1(c)(3)(iii).
    \177\E.g., FTC v. Group C Marketing, Inc., No. CV-06-06019 (C.D. 
Cal. 2006) (defendants represented they would pay $7 for every 
envelope consumers stuffed); FTC v. Gregory Bryant, No. 3:04-CV-897-
J-32MMH (M.D. Fla. 2004) (defendants represented they would pay $4 
for every envelope consumers stuffed and mailed); FTC v. America's 
Shopping Network, Inc., No. 02-80540-CIV-Hurley (S.D. Fla. 2002) 
(promising to pay $635 per week for processing mail); FTC v. Darrell 
Richmond, No. 3:02-3972-22 (D.S.C. 2002) (offering to pay $2 per 
envelope stuffed); FTC v. Financial Resources Unlimited, No. 03-C-
8864 (N.D. Ill. 2003) (offering to pay $10 per envelope).
---------------------------------------------------------------------------

    The RPBOR would exclude from its scope those commercial 
arrangements where the only assistance the seller provides is tracking 
payments. By so doing, the Commission takes MLM companies out of the 
ambit of the Rule. Likewise, the RPBOR would exclude those sellers that 
offer assistance only in: ``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.''\178\ While the 
Commission's law enforcement experience shows that the promise of such 
assistance is a feature of many fraudulent business opportunity 
ventures, such as vending opportunities, rack display schemes, and 
medical billing work-at-home schemes,\179\ these schemes are captured 
adequately within the scope of the RPBOR. Defining ``business 
assistance'' to include such advising or training would incorporate 
such a broad array of traditional activities in legitimate commercial 
relationships that the costs would outweigh the benefits that would be 
generated as a result of including these

[[Page 16124]]

types of business assistance. For example, it could introduce the 
unintended and unappealing specter of regulating certain educational 
offerings.\180\ It also could include manufacturers who provide product 
and sales training to third-party retailers.\181\ Therefore, the RPBOR 
excludes ``advising or training'' as a form of assistance that would 
trigger application of the Rule.
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    \178\See IPBOR, 437.1(c)(5). Similarly, the RPBOR also 
eliminates the term ``training'' from the IPBOR's definition of the 
term ``providing locations, outlets, accounts, or customers.'' See 
IPBOR, 437.1(n). In the RPBOR, ``providing locations'' remains a 
form of business assistance that would trigger the coverage of the 
rule. See RPBOR, 437.1(c)(3)(ii) and 437.1(l). This change avoids 
the possibility that the use of the term ``training'' in the 
definition of ``providing locations,'' at Section 437.1(l), could be 
interpreted as a ``catch-all'' inadvertently sweeping into the ambit 
of the rule such businesses as manufacturers that provide sales 
training or educational institutions. However, the elimination of 
the word ``training'' from the definition of ``providing locations'' 
does nothing to erode the long-standing interpretation of ``location 
assistance'' in the original Franchise Rule to reach, potentially, 
circumstances where a seller ``instructs investors on how to find 
their own profitable locations.'' Staff Advisory Opinion 95-10, Bus. 
Franchise Guide (CC) ] 6475 (1995) (noting that assistance must be 
more than nominal). The Commission solicits comment on whether the 
revision to Section 437.1(l) cures potential over-breadth without 
sacrificing the full extent of coverage of the original rule, as 
described in Staff Advisory Opinion 95-10.
    \179\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.'').
    \180\See supra note 45.
    \181\See Timberland, at 1.
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3. Earnings claims
    One major revision to the IPBOR is that the making of an earnings 
claim no longer is sufficient to bring a commercial arrangement within 
the definition of ``business opportunity.'' This revision addresses the 
concerns that numerous commenters articulated, namely, that because the 
definition of ``earnings claim'' is very broad, the IPBOR's definition 
of business opportunity would transform common commercial transactions 
into ``business opportunities.''\182\
---------------------------------------------------------------------------

    \182\E.g., IBA, at 4; PMI, at 2; MMS, at 2; Venable, at 1-2.
---------------------------------------------------------------------------

    The Commission considered but does not believe that narrowing the 
definition of ``earnings claims'' effectively addresses concerns with 
over breadth. Moreover, narrowing the definition of ``earnings claims'' 
could weaken protections on the most salient feature of the sales 
presentation by allowing sellers to avoid disclosing the numbers of 
people who, for example, earned enough money to ``buy a Porsche,'' or 
earned the top level of compensation on an earnings matrix.\183\ 
Earnings claims lie at the heart of business opportunity fraud, and are 
typically the enticement that persuades consumers to invest their 
money. The disclosure obligations in the RPBOR, as in the Franchise 
Rule, are designed to help a consumer identify and evaluate an earnings 
claim, if one is made, or to arouse suspicion if an earnings claim is 
made orally but is disclaimed in writing. If the RPBOR were to create 
opportunity for a potential loophole on this critically important 
issue, certainly unscrupulous business opportunity sellers would be 
very quick to exploit it, to the great detriment of consumers.
---------------------------------------------------------------------------

    \183\See RPBOR, 437.1(f).
---------------------------------------------------------------------------

    Therefore, the Commission believes a better approach is to tailor 
the substantive scope of the Rule rather than to narrow or restrict the 
definition of ``earnings claims.'' The RPBOR is intended to cover all 
variations of earnings representations that the Commission's law 
enforcement experience shows are associated with business opportunity 
fraud. Indeed, the definition of earnings claims is long-standing, as 
it is taken from the description of earnings claim in the original 
Franchise Rule, and incorporates examples taken from the UFOC 
Guidelines as well as the Interpretive Guides to the Franchise 
Rule.\184\
---------------------------------------------------------------------------

    \184\See UFOC Guidelines, Item 19; Staff Advisory Opinion, Handy 
Hardware Centers, Bus. Franchise Guide (CCH) ] 6426 (1980); 
Interpretive Guides, 44 FR at 49982.
---------------------------------------------------------------------------

    The Commission does not believe that this change undermines the 
utility of the RPBOR in addressing fraud in connection with earnings 
claims. It simply unlinks the definition of ``business opportunity'' 
from the making of an earnings claim.
b. Proposed Section 437.1(d): ``Designated person''
    The RPBOR makes a minor modification to the IPBOR's definition of 
``designated person.'' The IPBOR's definition ended with an example of 
the type of person who could be considered a ``designated person,'' 
which included, without limitation, ``any person who finds or purports 
to find locations for equipment.'' The RPBOR eliminates this concluding 
language because the definition of ``business opportunity'' lists the 
types of assistance a ``designated person'' might render or purport to 
render. To avoid any possibility of confusion by including one example 
but not all three in the definition of ``designated person,'' the 
Commission deletes the example. A ``designated person'' is defined in 
the RPBOR as ``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.''
c. Proposed Section 437.1(l): ``Providing locations''
    Section 437.1(l) of the RPBOR differs in some respects from the 
analogous provision in the IBPOR. It would define ``providing 
locations, outlets, accounts, or customers'' as:
 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; providing 
a list of locator or lead generating companies; collecting a fee on 
behalf of one or more locators or lead generating companies; offering 
to furnish a list of locations; or otherwise assisting the prospective 
purchaser in obtaining his or her own locations, outlets, accounts, or 
customers.
    The RPBOR would alter the definition of ``providing locations, 
outlets, accounts, or customers,'' slightly by adding the phrases 
``providing a list of locator companies'' and ``offering to furnish a 
list of locations.'' In its comment, the United States Department of 
Justice, Office of Consumer Litigation (``DOJ''), which has a long 
history of cooperating with the Commission to enforce the Franchise 
Rule,\185\ pointed out that many fraudulent business opportunities 
simply provide lists of locators or locations. DOJ noted that while the 
definition included in the IPBOR could be read to include such 
scenarios, it would be useful to make the rule cover such practices 
explicitly. Indeed, DOJ's concerns resonate with the Commission's law 
enforcement experience, and the Commission agrees that the rule text 
should explicitly address this specific practice. Further, the 
definition is also modified to incorporate the term ``lead generator'' 
into the third clause, thus adding symmetry to the definition, which 
refers to ``lead generators'' in all other clauses. Thus, the third 
clause in Section 437.1(l) now includes: ``providing a list of locator 
or lead generator companies.''
---------------------------------------------------------------------------

    \185\ As it points out in its comment, between 1995 and July of 
2006, DOJ filed 61 lawsuits alleging Franchise Rule violations by 
145 defendants. DOJ, at 1 n. 1.
---------------------------------------------------------------------------

    Finally, the words ``or training'' are deleted from the last clause 
of Section 437.1(l) to avoid the possibility that it could be 
interpreted as a ``catch-all'' capturing any business offering to 
provide training. The revision leaves intact the phrase ``or otherwise 
assisting the prospective purchaser in obtaining his or her own 
locations, outlets, accounts, or customers.'' To determine whether a 
seller provides the requisite assistance in providing locations, 
outlets, accounts or customers, the Commission will continue to apply 
its longstanding analysis, which considers the kinds of assistance the 
seller offers and the significance of that assistance to the 
prospective purchaser (e.g. whether the assistance is likely to induce 
reliance on the part of the prospective purchaser).\186\
---------------------------------------------------------------------------

    \186\See Staff Advisory Opinion 95-10, Bus. Franchise Guide (CC) 
] 6475 (1995). See also supra note 178.
---------------------------------------------------------------------------

2. 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 explained in 
the NPR, the seller of the business opportunity is the

[[Page 16125]]

party responsible for providing the basic disclosure document to 
prospective purchasers, and the seller must present the required 
information in ``a single written document in the form and using the 
language set forth in Appendix A to part 437.'' The Commission has 
retained an expert to assess the basic disclosure document as proposed, 
with the objective of achieving a format and content that communicates 
the material information to consumers. The Commission welcomes comments 
on all aspects of the RPBOR; commentary on the proposed form, however, 
would be most useful if accompanied by quantitative or qualitative 
studies on the effectiveness of the form, with specific suggestions for 
potential improvement.
    The RPBOR makes three modifications\187\ to the IBPOR with respect 
to the information that must be presented on this document: (1) a 
citation to the Rule would be added to the title of the form; (2) the 
disclosure of legal actions pertaining to a seller's sales 
representatives would be deleted from the form; and (3) the disclosure 
of the number of cancellations and refund requests would be deleted 
from the form. These changes are discussed below.
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    \187\ Additionally, the ``earnings'' section of the disclosure 
document is modified slightly to include a disclosure of earnings 
claims the seller ``has stated or implied.'' The use of the past 
tense makes clear to a seller completing the form that it must 
identify earnings claims made over the course of marketing the 
business opportunity to the consumer, and not just those claims made 
at the moment of providing the disclosure document.
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a. Proposed Section 437.3(a): Form of the basic disclosure document
    The form and language of the basic disclosure document is set forth 
in Appendix A to the RPBOR. While the Commission received a plethora of 
commentary on the substantive disclosures to be included in the basic 
disclosure document, it received hardly any commentary on the language 
used in the proposed form. The Commission received a persuasive comment 
by DOJ, advising the Commission to add to the title a citation to the 
legal authority requiring the seller to provide the basic disclosure 
document. The Commission has decided to adopt this suggestion.
    As discussed above, DOJ has substantial expertise in enforcing the 
Franchise Rule, and has the authority to seek civil penalties for 
violations of trade regulation rules issued pursuant to the FTC 
Act.\188\ To obtain civil penalties for infractions of an FTC rule, 
however, the government must prove ``actual knowledge or knowledge 
fairly implied on the basis of objective circumstances that such act is 
unfair or deceptive and is prohibited by such rule.''\189\ According to 
DOJ, its experience is that individuals who market business 
opportunities sometimes claim that they simply copied their disclosure 
documents from a previous employer, suggesting that they did not know 
their disclosure documents were in violation of any rule. Including a 
short reference to the rule would ``eliminate[ ] any significant 
question as to whether the defendant had actual or implied knowledge as 
required by the statute.''\190\
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    \188\ 15 U.S.C. Sec.  56(a)(1); Sec.  45(m)(1)(A) .
    \189\ 15 U.S.C. Sec.  45(m)(1)(A).
    \190\ DOJ at 2.
---------------------------------------------------------------------------

    The Commission agrees with DOJ. As numerous commenters have noted, 
law enforcement is critical to eliminating malfeasance from the 
marketplace.\191\ DOJ's suggested minor modification to the form 
promises to advance the government's ability to enforce the law through 
the use of civil penalties. Therefore, the title of the proposed form 
on Appendix A has been modified to add the language ``Required by 
Federal Trade Commission, 16 C.F.R. Part 437.''
---------------------------------------------------------------------------

    \191\E.g., Haynesboone, at 5 (urging the Commission to focus 
more resources on enforcement); DRA, at 2.
---------------------------------------------------------------------------

b. 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\192\ involving the 
company, its directors, and certain sales employees. This requirement 
is based on analogous provisions of the original Franchise Rule.\193\ 
Commenters raised two distinct issues regarding the disclosure of prior 
legal actions. First, some commenters, primarily members of the MLM 
industry, argued that this disclosure obligation would not result in 
consumers receiving meaningful information, and could unfairly tarnish 
the image of a seller who has been sued but has not been found 
liable.\194\ Second, some commenters argued that state laws conflict 
with the requirement in the IPBOR that sellers report the litigation 
histories of their sales employees.\195\
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    \192\ The Commission notes that the definition of ``actions'' in 
the RPBOR is different from that employed in the amended Franchise 
Rule. The reason for that and other differences is that the two 
rules were crafted to achieve different objectives and to govern 
different types of business transactions. To provide one example, a 
major objective of the amended Franchise Rule was to harmonize it 
with various state law requirements and, thus, maximize uniformity 
of laws at the federal and state level governing business-format 
franchises. That objective is not present in the effort to amend the 
interim Business Opportunity Rule. Therefore, there should be no 
negative inferences drawn from the inclusion in or exclusion from 
the RPBOR of any particular terms used in the amended Franchise 
Rule.
    \193\ The Commission stated in the original Franchise Rule's SBP 
that litigation history is material because it bears on the 
``integrity and financial standing of the [seller].'' 43 FR at 
59649. A disclosure of litigation history is also incorporated into 
the interim Business Opportunity Rule. 16 CFR 437.1(a)(4).
    \194\E.g., Melaleuca, at 6; Quixtar, at 35; Amsoil, at 2; 
Babener, at 2.
    \195\ Venable, at 11; Chadbourne, at 20; Shaklee, at 10, 12.
---------------------------------------------------------------------------

    With respect to the first point, the Commission disagrees that the 
disclosure of prior legal actions does not impart meaningful 
information to consumers. This and other proposed material disclosures 
on the form are intended to help consumers understand and assess the 
risks of their prospective investment. The Commission believes that 
information about litigation history in the areas of 
``misrepresentation, fraud, securities law violations, or unfair or 
deceptive practices,'' is material to assessing that risk. Indeed, 
discovering that a seller has a history of violating laws and 
regulations is perhaps the best indication that a particular business 
opportunity is a high-risk investment. In the Commission's law 
enforcement experience, business opportunity promoters have failed to 
disclose such material information to prospective purchasers, to the 
detriment of those purchasers.\196\ Regarding the concern that 
businesses will be unfairly tarnished, nothing in the RPBOR prevents 
the seller from speaking with the consumer to explain the nature or 
outcome of any legal action disclosed on the form.\197\
---------------------------------------------------------------------------

    \196\E.g., FTC v. Success Vending Group, Inc., No. CV-S-05-0160-
RCJ-PAL (D. Nev. 2005) (failure to disclose guilty plea for mail 
fraud and previous injunction); FTC v. Netfran Development Corp., 
No. 1:05-cv-22223-UU (S.D. Fla. 2005) (failure to disclose FTC 
injunction against principal); FTC v. American Entm't Distribs., 
Inc., No. 04-22431-Civ-Martinez (S.D. Fla. 2004) (failure to 
disclose prior FTC injunction); United States v. We The People Forms 
and Serv. Centers USA, Inc., No. CV 04 10075 GHK FMOx (C.D. Cal. 
2004) (failure to disclose prior lawsuits); FTC v. Joseph Hayes, No. 
Civ. 4:96CV02162SNL (E.D. Mo 1996) (failure to disclose prior state 
fines and injunctive actions); FTC v. WhiteHead, Ltd, Bus. Franchise 
Guide (CCH) ] 10062 (D. Conn. 1992) (failure to disclose fraud 
action); FTC v. Inv. Dev. Inc., Bus Franchise Guide (CCH) ] 9326 
(E.D. La. 1989) (failure to disclose insurance fraud convictions).
    \197\ As noted above, some members of the MLM industry voiced 
concern about making extensive litigation disclosures because they 
are affiliated with numerous other companies. In the context of such 
an MLM, it could be impractical for a consumer to ask about every 
legal action listed on the disclosure form, and thus, the form 
itself may be unduly prejudicial to the MLM. Given the RPBOR as now 
tailored, such concerns are unlikely to be raised in the context of 
typical business opportunity schemes.

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[[Page 16126]]

    With respect to the second issue concerning the disclosure of legal 
actions pertaining to sales employees, IPBOR, 437.3(a)(3)(D), the 
Commission believes it would be appropriate to exclude these employees 
from the disclosure requirement. Some commenters suggested that this 
provision would be inconsistent with state employment laws, but they 
did not cite to specific statutes in which a conflict would necessarily 
arise.\198\ The IPBOR's requirement to disclose the litigation history 
of sales employees was intended to enable a prospective purchaser to 
evaluate the representations made by a sales person. The Commission now 
believes that the burden of collecting litigation histories for every 
sales person is not outweighed by the corresponding benefit to 
prospective purchasers. In the Commission's law enforcement experience, 
sales representatives often work from sales scripts that someone with 
supervisory authority has developed. A problem emerges when companies 
conceal the litigation history of the person with supervisory authority 
by claiming that individual is just a sales person. The Commission 
believes that it is sufficient to require business opportunity sellers 
to disclose the litigation histories of their principals, officers, 
directors, and sales managers, as well as any individual who occupies 
``a position or performs a function similar to an officer, director, or 
sales manager of the seller.'' In this way, the RPBOR is sufficient to 
enable prospective purchasers to ferret out situations where 
recidivists, ostensibly employed as sales personnel, in fact function 
as de facto officers or directors. Therefore, in the RPBOR, the 
Commission deletes paragraph (D) from section 437.3(a)(3) of the IPBOR.
---------------------------------------------------------------------------

    \198\ Venable, at 11; Chadbourne, at 20; Shaklee, at 10, 12. A 
California statute forbids employers from inquiring into histories 
of arrests that did not result in convictions. Cal. Lab. Code Ann. 
Sec.  432.7(a) (Deering 2007). It is not clear how this would 
conflict with the RPBOR, which would not require disclosure of 
arrest records.
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c. Proposed Section 437.3(a)(4): Cancellation or refund history
    Section 437.3(a)(4) of the IPBOR would have required a seller both 
to state on the basic disclosure document whether it has a cancellation 
or refund policy, and to disclose the number of purchasers who had 
asked to cancel or who had sought a refund in the two previous 
years.\199\ This second disclosure was included as a remedy against 
false representations about the success of prior purchasers. This is a 
misrepresentation the Commission has observed in many of its law 
enforcement actions against fraudulent business opportunity 
sellers.\200\ In the NPR, the Commission specifically sought comment on 
the proposed disclosure of the seller's refund history, particularly on 
the likely effect this disclosure might have on the willingness of 
sellers to offer refunds.\201\ Based upon the arguments articulated in 
the comments to the NPR, the Commission no longer believes this second 
disclosure is useful, and revises 437.3(a)(4) accordingly.
---------------------------------------------------------------------------

    \199\ IPBOR, 437.3(a)(5).
    \200\E.g., FTC v. National Vending Consultants, Inc.,CV-S-05-
0160-RCJ (PAL) (D. Nev. 2005); FTC v. Fidelity ATM, Inc., No. 06-
CIV-81101 (S.D. Fla. 2006).
    \201\ 71 FR at 19070.
---------------------------------------------------------------------------

    Some commenters persuasively argued that requiring disclosure of a 
seller's refund history would have the perverse effect of discouraging 
legitimate businesses from offering refunds.\202\ Commenters argued 
that legitimate businesses often have liberal refund policies so they 
can provide a low-risk opportunity. If they were required to track and 
disclose the number of purchasers who took advantage of the refund 
policy, however, the disclosure of such information might create a 
misleading impression of general dissatisfaction. It might cause 
prospective purchasers to misinterpret risk, and therefore eschew a 
safe opportunity.
---------------------------------------------------------------------------

    \202\See supra note 72. The comments on this issue came from 
members of the MLM industry. While the RPBOR has been pared back to 
exclude MLMs, the Commission is persuaded that their commentary on 
this issue can be applied to business opportunities that remain 
within the scope of the Rule.
---------------------------------------------------------------------------

    The Commission is persuaded that the disclosure of refund history 
could be unduly prejudicial to business opportunities that offer and 
liberally provide refunds to prior purchasers. Indeed, a prospective 
purchaser might compare the refund requests of a fraudulent seller with 
no refund policy against a legitimate seller with a liberal refund 
policy and inappropriately conclude that the legitimate seller offers a 
riskier business venture. Thus, the disclosure would not reliably 
remedy deception on this issue. Furthermore, the most important piece 
of information for consumers is not how many individuals sought 
refunds, but what are the particular requirements of the refund or 
cancellation policy. This information is not likely to create perverse 
results or mistaken impressions. Therefore, Section 437.3(a)(4) of the 
RPBOR requires disclosure of the refund policy, but eliminates section 
437.3(a)(5) of the IPBOR, which would have required disclosure of the 
seller's refund history.\203\
---------------------------------------------------------------------------

    \203\ This change reverts back to the requirements of the 
original Franchise Rule which did not require a business to tally 
the number of refund or cancellation requests but did require 
disclosure of refund policies. See 16 CFR 437.1(a)(7) (interim 
Business Opportunity Rule).
---------------------------------------------------------------------------

d. Proposed Section 437.3(a)(6): References
    After analyzing commentary to Section 437.3(a)(6) of the RPBOR, the 
Commission leaves intact the IPBOR's language requiring the disclosure 
of a limited number of prior purchasers as references.\204\ The 
Commission believes that the disclosure of prior purchasers is very 
important to prevent fraud because it enables prospects to evaluate the 
seller's claims based on information from an independent source with 
relevant experience. The Commission had solicited comment and 
suggestions on balancing the need to enable prospective purchasers to 
verify sellers' claims with privacy concerns.\205\ In addition to 
seeking comment on possible alternatives, the Commission sought comment 
on whether the Rule should permit purchasers the opportunity to opt-out 
of the disclosure of their contact information.\206\
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    \204\ The requirement to disclose prior purchasers was in 
original Franchise Rule, and is now in the interim Business 
Opportunity Rule. See 16 CFR 437.1(a)(16)(iii).
    \205\ NPR, 71 FR at 19071.
    \206\Id.
---------------------------------------------------------------------------

    The MLM industry articulated concerns peculiar to its business 
model, but these provisions would no longer apply to MLM companies 
inasmuch as these companies, and their representatives, are excluded 
from the ambit of the RPBOR.
    The MLM comments also suggested, more broadly, that the reference 
disclosure requirement raised privacy and security concerns.\207\ The 
Commission believes that the very limited proposed reference disclosure 
does not raise security concerns because the required disclosures 
include no sensitive personal information whatsoever, no social 
security numbers, birth dates, or financial account numbers. The 
disclosure requirement of nothing more than name, city, state, and 
telephone number--covers less information than may be commonly 
available in public telephone books.
---------------------------------------------------------------------------

    \207\E.g., Quixtar, at 33; Babener, at 2; Pre-Paid Legal, 
Rebuttal, at 8; DRA, at 6.
---------------------------------------------------------------------------

    On the topic of privacy concerns, the Commission received a few 
comments in support of allowing individual business opportunity 
purchasers to opt

[[Page 16127]]

out of having their contact information disclosed.\208\ DOJ, however, 
urged the Commission to reject any opt-out: ``The Rule should not 
permit such an opt-out. It would be an easy matter for telemarketers to 
talk consumers into opting out, describing to them what a hassle it 
becomes for those who do not opt-out because of all the demand that 
arises for their time and attention.''\209\ The Commission agrees with 
DOJ that it is critical to provide prospective purchasers with a true 
list of prior purchasers. By investing in a business opportunity, these 
purchasers are entering the world of commerce and embarking upon the 
establishment of a business. Businesses generally hold themselves out 
as offering goods and services to the public.\210\ Therefore, the 
Commission believes that the value to prospects of information about 
prior purchasers outweighs any potential detriment to prior purchasers 
of the disclosure of their contact information. The RPBOR leaves intact 
section 437.3(a)(6).
---------------------------------------------------------------------------

    \208\E.g., Scarlet Leverton (affiliated with Lia Sophia); Kay 
Gidley (affiliated with Universa Life Sciences); Joseph McGarry 
(affiliated with Quixtar). These comments express generalized 
privacy concerns.
    \209\ DOJ, at 3.
    \210\ Notably, federal law often focuses on privacy concerns 
affecting individuals, not businesses. For example, Congress 
specifically focused on the need to respect ``the consumer's right 
to privacy,'' in enacting the Fair Credit Reporting Act (``FCRA''). 
15 U.S.C. 1681(a)(4). The FCRA requires various protections for 
consumer information, including provisions addressing identity 
theft, but there is no comparable statute that protects business 
information. Similarly, Congress enacted the Graham-Leach-Bliley Act 
to protect personal financial information of individual consumers 
but excluded from the ambit of the law the protection of information 
pertaining to businesses. Graham-Leach-Bliley Act, 15 U.S.C. 6809 
(9) (defining ``consumer'' to include individuals who obtain 
financial products or services for personal, family or household 
purposes). See also Privacy of Consumer Financial Information, 16 
CFR 313.1(b) (expressly stating that it ``does not apply to 
information about companies or about individuals who obtain 
financial products or services for business, commercial, or 
agricultural purposes.''); Standards for Safeguarding Customer 
Information, 16 CFR 314.2(b) (defining ``customer'' by reference to 
Part 313).
---------------------------------------------------------------------------

3. Proposed Section 437.4: The Earnings Claim Document
    Apart from the comments submitted by the MLM industry, the 
Commission received little comment on the provisions in the proposed 
earnings claim document. The one aspect of these provisions that drew 
the most scrutiny from commenters was section 437.4(a)(vi), which 
requires sellers who make earnings claims to disclose ``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.'' Here, commenters--primarily from the MLM 
industry--argued that it would be extremely costly to undertake an 
analysis of the various characteristics that successful purchasers had 
in common.\211\ MLM companies peculiar concerns are no longer relevant 
inasmuch as they are excluded from the scope of the RPBOR.
---------------------------------------------------------------------------

    \211\E.g., MLMIA, at 41 (``No one can hope to substantiate 
accurately an earnings claim in a way that would take into account 
and disclose every factor material to each person's earnings and to 
contrast that with the characteristics of each prospective purchaser 
without the expert advice of a person trained in marketing and 
economics at the graduate level who in addition has experience in 
making these kinds of assessments.... Legal and marketing 
consultants are expensive.'').
---------------------------------------------------------------------------

    The Commission has decided to retain this provision in the RPBOR 
because the information disclosed is material; it is intended to enable 
the prospect to determine whether the claimed earnings of prior 
purchasers are typical in the prospect's market. Furthermore, the 
business opportunity seller is in the best position to know what set of 
characteristics, such as location in densely-populated areas, tend to 
make their purchasers successful. The amended Franchise Rule imposes an 
analogous obligation,\212\ and indeed, the RPBOR's earnings disclosure 
obligation is similar to what the interim Business Opportunity Rule 
already requires.\213\ The Commission continues to seek comment on this 
topic, particularly on the question of the burdens upon business 
against the benefit to prospective purchasers.\214\
---------------------------------------------------------------------------

    \212\ 16 CFR 436.5(s)(3)(ii)(A).
    \213\ The interim Business Opportunity Rule requires earnings 
claims be presented with a statement of the material bases and 
assumptions upon which the claim is made. 16 CFR 437.1(b)(3); 
437.1(c)(3).
    \214\ As noted earlier, even without the RPBOR, any seller who 
makes an earnings claim must be truthful in that assertion and must 
substantiate the claim. If a seller makes an earnings claim that is 
only relevant to a narrow subset of purchasers and the seller fails 
to disclose that fact, the claim would violate Section 5 of the FTC 
Act.
---------------------------------------------------------------------------

    On its own initiative, the Commission has decided to modify 
slightly another provision of the IPBOR, section 437.4(a)(4)(v). 
Section 437.4(a)(4)(iv) requires sellers who make earnings claims to 
disclose the ``beginning and ending dates when the represented earnings 
were achieved,'' and section 437.4(a)(4)(v) of the IPBOR further 
required disclosure of the ``number and percentage of all purchasers 
during the stated time period who achieved at least the stated level of 
earnings.'' The revision clarifies a potential ambiguity: the 
purchasers who must be counted are all those who purchased the business 
opportunity before the ending date when the represented earnings were 
achieved, not just individuals who purchased the business opportunity 
during the stated time period. Thus, under the RPBOR's section 
437.4(a)(4)(v), the seller must disclose: ``The number and percentage 
of all persons who purchased the business opportunity prior to the 
ending date in (iv) above who achieved at least the stated level of 
earnings.''
4. Proposed Section 437.5: Other Prohibited Practices
    In addition to mandating disclosures to prospective purchasers, the 
IPBOR would have prohibited sellers from engaging in a number of 
deceptive practices. The RPBOR retains these prohibitions, and would 
add: (1) a substantive prohibition to section 437.5(e), and (2) 
clarifying language to section 437.5(r). Each of these changes is 
discussed immediately below.
a. Proposed Section 437.5(e): Misrepresenting the Law
    The IPBOR would have prohibited sellers from ``[m]isrepresenting 
that any governmental entity, law, or regulation prohibits a seller 
from furnishing earnings information to a prospective purchaser.'' The 
RPBOR would add a second numbered clause, further prohibiting 
misrepresentations that any governmental entity, law or regulation 
prohibits a seller from ``disclosing to prospective purchasers the 
identity of other purchasers of the business opportunity.'' DOJ 
suggests the above modification because, in its law enforcement 
experience, it has encountered ``numerous fraudulent business 
opportunity sellers who deflect consumer requests for current 
distributors by falsely claiming that the law forbids disclosing their 
identity, which of course, is exactly the opposite of the truth.''\215\ 
The Commission agrees that such a prohibition is appropriate, and will 
help consumers understand that if the seller supplies no references, it 
is because none exists or because the seller chooses not to make such 
information available, which would contravene the RPBOR. Furthermore, 
the prohibition on making false statements imposes no costs on 
legitimate companies, and as such, serves simply to confer a 
significant benefit to consumers.
---------------------------------------------------------------------------

    \215\ DOJ, at 2.

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[[Page 16128]]

b. Proposed Section 437.5(r): Failure to Disclose Payment of References
    The RPBOR is intended to prohibit sellers from failing to disclose 
payments to individuals identified as references or personal 
relationships with such individuals. However, the language of the 
second clause of this paragraph in the IPBOR does not state that what 
must be disclosed is the relationship between the seller and the 
reference.\216\ Therefore, the RPBOR adds clarifying language to the 
opening clause of section 437.5(r), so that it prohibits a failure to 
disclose, ``with respect to any person identified as a purchaser or 
operator of a business opportunity offered by the seller,'' any 
consideration paid, any personal relationship, or other unrelated 
business relationship.
---------------------------------------------------------------------------

    \216\ This omission was noted in DOJ's comment, at 2.
---------------------------------------------------------------------------

c. Proposed Section 437.5(c): Extraneous Materials
    Like the IPBOR, the RPBOR's 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. The point of the 
prohibition is to preserve the clarity, coherence, readability, and 
utility of the disclosures by ensuring that the seller does not clutter 
the disclosure document. The Commission sought comment on whether it is 
appropriate to prohibit sellers from including in their disclosure 
documents additional disclosures required by state business opportunity 
laws.
    DOJ urged the Commission to exclude state disclosures from the 
proposed form. In DOJ's experience, ``[p]urveyors of fraudulent 
business opportunities will seek every opportunity to water down this 
document with extraneous information to hide any negative information 
it may contain.''\217\
---------------------------------------------------------------------------

    \217\ DOJ, at 3.
---------------------------------------------------------------------------

    The original Franchise Rule permitted the inclusion of state 
mandated disclosures in the federal disclosure document, where the 
state disclosures provided equal or greater protection to prospective 
purchasers.\218\ However, the original Franchise Rule required a very 
lengthy disclosure, which included more than 20 categories of 
information. Any additional state disclosures that afforded greater 
protections to prospective purchasers were generally minor additions 
that could be easily accommodated.\219\
---------------------------------------------------------------------------

    \218\ Original Franchise Rule, 16 CFR 436.1(a)(21).
    \219\See Informal Staff Advisory Opinion, Bus. Franchise Guide 
(CCH), Paragraph 6410 (April 15, 1980) (noting that there were only 
three additional disclosures that Florida required affording greater 
protection than the Franchise Rule).
---------------------------------------------------------------------------

    The Commission agrees with DOJ that state disclosures should not be 
bundled in to the same document with the proposed federal disclosure, 
and therefore, the RPBOR retains Section 437.5(c) of the IPBOR. One 
important goal of revising and tailoring the disclosure requirements of 
the Franchise Rule for business opportunity promoters is to simplify 
and streamline the disclosures into a single page document. Allowing 
business opportunity promoters to mix federal and state disclosures 
into one document would be an invitation to sellers to present lengthy 
and confusing information to prospective purchasers. Such a result 
would be contrary to the Commission's goal of providing a simple, 
clear, and concise disclosure document.
5. Proposed Section 437.7: Exemptions
    Section 437.7 of the IPBOR identifies entities that would be exempt 
from complying with the Business Opportunity Rule. The exemption 
applies to business opportunities that constitute franchises, and it 
was designed to eliminate the possibility that a business would face 
duplicative compliance burdens under the Business Opportunity Rule and 
the amended Franchise Rule. However, it was also designed to ensure 
that certain franchises exempt from the requirements of the Franchise 
Rule --namely, those falling under the minimum payment exemption or the 
oral agreement exemption\220\--would be covered by the Business 
Opportunity Rule. To add precision and clarity to this provision, the 
RPBOR revises Section 437.7 to adopt the language of the amended 
Franchise Rule describing the relevant exemptions and to add specific 
citations to the relevant provisions of Part 436.
---------------------------------------------------------------------------

    \220\ Amended Franchise Rule, 16 CFR 436.8(a)(1) & (a)(7).
---------------------------------------------------------------------------

    Many commenters argued for additional changes to the IPBOR, 
including changing the definition of ``new business,'' exempting 
purchasers of sufficient net worth, excluding transactions above a 
monetary threshold, such as $50,000.\221\ These commenters essentially 
argued that the Rule's application should encompass only those 
transactions involving the vulnerable or unsophisticated purchasers 
that they posited the Rule seeks to protect, and that exemptions should 
be written into the Rule for sophisticated businesses that do not need 
its burdens or protections.\222\
---------------------------------------------------------------------------

    \221\ Sonnenschein, at 2, 5,6; Snell, at 2, 4.
    \222\Id.
---------------------------------------------------------------------------

    Having narrowed the scope of the proposed Rule considerably, the 
Commission believes it has tailored the Rule's application to cover 
only those business opportunities where fraud is most likely to occur. 
In the Commission's law enforcement experience, these business 
opportunities can cost tens of thousands of dollars, and seldom, if 
ever, involve seasoned purchasers with sufficient expertise to 
negotiate the terms of the transaction. There is an insufficient basis 
at this time to conclude that further exemptions are necessary to avoid 
covering transactions between sophisticated business people. However, 
the Commission continues to solicit comment on whether the proposed 
modifications to the scope of the Rule adequately capture the 
marketplace in which fraud is prevalent or whether it is needlessly 
over-inclusive.

Section E 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 Revised Notice of Proposed 
Rulemaking. The comment period will be open until May 27, 2008, 
followed by a rebuttal period until June 16, 2008. Interested parties 
are invited to submit written comments. Written comments must be 
received on or before May 27, 2008. Rebuttal comments must be received 
on or before June 16, 2008. 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. In view of the 
substantial revisions to the NPR, the Commission has held in abeyance 
the hearing requests submitted in response to the NPR. Individuals who 
continue to be interested in a hearing should, therefore, renew and 
resubmit their requests in comments responding to this Revised NPR. 
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

[[Page 16129]]

cross-examine witnesses must also file a request by the 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 may 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 F 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 oral communications are permitted only if advance notice is 
published in the Weekly Calendar and Notice of ``Sunshine'' 
Meetings.\223\
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    \223\See 15 U.S.C. 57a(i)(2)(A); 45 FR 50814 (1980); 45 FR 78626 
(1980).
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Section G Paperwork Reduction Act

    The Commission is submitting 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. 3501-3521. In this notice, the 
Commission proposes to amend a trade regulation rule governing business 
opportunity sales. The proposed Rule would cover those business 
opportunities currently covered by the interim Business Opportunity 
Rule (and formerly covered by the original Franchise Rule, as explained 
above), as well as certain others not covered by the interim Business 
Opportunity Rule, including work-at-home programs. The proposed Rule 
would require business opportunity sellers to disclose specified 
information and to maintain certain records relating to business 
opportunity sales transactions.
    The currently approved estimates for disclosure and recordkeeping 
burden under the interim Business Opportunity Rule, Part 437, includes 
16,750 hours for business opportunity sellers. That estimate was based 
on an estimated 2,500 non-exempt business opportunity sellers.\224\ As 
discussed below, the proposed Rule would reduce the burden on business 
opportunity sellers by streamlining disclosure requirements to minimize 
compliance costs.\225\
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    \224\ 71 FR at 19,081; 70 FR 51,818, 51,819 (August 31, 2005).
    \225\ If the Commission ultimately amends the interim Business 
Opportunity Rule, FTC staff will seek all necessary PRA clearances 
and/or adjustments. The amended Franchise Rule and interim Business 
Opportunity Rule have OMB clearance through October 31, 2008.
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    The proposed Rule is designed to streamline and reduce 
substantially the quantity of information business opportunity sellers 
would be required to disclose. The proposals would impact such sellers 
differently, depending upon whether they are currently covered by the 
interim Business Opportunity Rule. The Commission staff estimates that 
there are approximately 3,050 business opportunity sellers, comprised 
of some 2,500 vending machine, rack display, and related opportunity 
sellers, and 550 work-at-home opportunity sellers.
    For the 2,500 vending machine, rack display, and related 
opportunity sellers presently covered by the interim Business 
Opportunity Rule, the proposed Rule would reduce the number of 
disclosures from 20 categories of information to four mandatory 
disclosures pertaining to earnings claims, lawsuits, refund policy, and 
references. For the 550 business opportunity sellers presently exempted 
from the interim Business Opportunity Rule, the disclosures, as noted 
below, are streamlined to minimize compliance costs.
1. Reduced Mandatory Disclosures
    The RPBOR contains four mandatory disclosures pertaining to 
earnings claims, lawsuits, refund policy, 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 interim Business 
Opportunity Rule requirements, the required disclosure of lawsuits is 
reduced from the interim Business Opportunity Rule.
    As noted above, the interim Business Opportunity 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. Business opportunity sellers also must disclose 
suits filed against them involving the business opportunity 
relationship. 16 CFR at 437.1(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.
2. Incorporation of existing materials
    The RPBOR also reduces collection and dissemination costs by 
permitting sellers to reference in their disclosure documents materials 
already in the possession of the seller. For example, a seller need not 
repeat its refund policy in the text of the disclosure document, but 
may attach its contract or brochures, or other materials that already 
provide the necessary details.
3. Use of electronic dissemination of information
    The RPBOR defines the term ``written'' to include electronic media. 
Accordingly, all business opportunities covered by the RPBOR are 
permitted to use the Internet and other electronic media to furnish 
disclosure 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 anticipates that the costs of collecting 
information and recordkeeping requirements imposed by the RPBOR 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 disclosure requirement (at 
least 10 prior purchasers in the last

[[Page 16130]]

three years who are located nearest the prospective purchaser, or, if 
there are not 10 prior purchasers, then all prior purchasers). In the 
alternative, the RPBOR permits a seller to maintain a national list of 
purchasers.
    As a result of these proposals, the Commission estimates that the 
3,050 business opportunity sellers will require between three hours and 
five hours each to develop a Rule-compliant disclosure document.\226\ 
On the lower end, the staff estimates that for existing businesses that 
have not been covered by the interim Business Opportunity Rule but will 
be covered by the RPBOR, such as work-at-home schemes, the time 
required for making a new disclosure document is approximately 5 hours. 
By contrast, businesses that have been covered by the interim Business 
Opportunity Rule will already have a disclosure document which will 
just need updating to meet the requirements of the RPBOR. The staff 
estimates that these 2,500 businesses will likely need only 3 hours to 
perform the necessary updating to the disclosure document. Therefore, 
the hours required to develop a disclosure document in the first year 
would be approximately 10,250 ((550 x 5 hours) + (2,500 x 3 hours)). In 
addition, staff estimates these entities will require between one and 
two hours to file and store records per year, for a total of 6,100 
hours (3,050 x 2 hours). Staff assumes that in many instances an 
attorney likely would prepare or update the disclosure document, at an 
estimated hourly rate of $250. The Commission estimates that the total 
number of hours initially to comply with the Rule would be 
approximately 16,350 (10,250 disclosure-related hours + 6,100 
recordkeeping hours), at a total cost of $4,087,500 (16,350 x $250).
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    \226\ While commenters from the MLM industry argue that the 
costs of complying would be significantly higher, see supra Section 
C.2.a., their estimates are based on assumptions that would not 
apply to more narrow field of the business opportunities that are 
within the scope of the proposed Rule.
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    FTC staff expects that the annual burden will diminish after the 
first year to two hours to prepare disclosures and between one and two 
hours of recordkeeping, resulting in approximately 12,200 hours per 
year (3,050 x 4 hours) or fewer, for a total cost of $3,050,000 (12,200 
hours x $250). To the extent that disclosure or recordkeeping 
obligations are performed by clerical staff, the labor costs initially 
and thereafter would be significantly 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 H 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 
I 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.). The Commission has determined that the proposed amendments to the 
Business Opportunity Rule will not have such an annual 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 
3,050 businesses will spend not more than $1,750 (7 hours x $250 each) 
to comply with the proposed Rule and not more than $1000 (4 hours x 
$250 each) to update the four required disclosures on an annual basis. 
These figures reflect a change in the estimated number of affected 
businesses, since the estimate now excludes MLM companies. As explained 
above, the RPBOR no longer sweeps in MLM companies or their networks of 
distributors. To ensure that the Commission has considered all relevant 
facts, however, it requests additional comment on these issues.

Section I 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 RPBOR will have a 
significant economic impact on a substantial number of small entities. 
The abbreviated disclosure and recordkeeping requirements of the RPBOR 
are the minimum necessary to give consumers the information they need 
to protect themselves and permit effective enforcement of the rule. 
Companies previously covered by the original Franchise Rule and now 
covered by the interim Business Opportunity Rule, will experience a 
reduction in their compliance burden,

[[Page 16131]]

while companies not previously covered will have minimal new disclosure 
obligations. As such, the economic impact of the RPBOR 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 Commission has prepared the following analysis, based on 
the IRFA set forth in the Commission's earlier notice of proposed 
rulemaking, after a review of the public comments submitted in response 
to that notice and additional information and analysis by Commission 
staff.
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. Yet, the Commission believes that the current 
requirements of the interim Business Opportunity Rule are more 
extensive than necessary to protect prospective purchasers of business 
opportunities from deception. The pre-sale disclosures provided by the 
RPBOR will give consumers the 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 RPBOR 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, while minimizing the compliance burdens on 
sellers. 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 RPBOR primarily applies to ``sellers'' of business 
opportunities, including vending, rack display, medical billing, and 
work-at-home (e.g., craft assembly, envelope stuffing) opportunities. 
The Commission believes that many of these sellers fall into the 
category of small entities. Determining the precise number of small 
entities affected by the RPBOR, however, is difficult due to the wide 
range of businesses engaged in business opportunity sales. The staff 
estimates that there are approximately 3,050 business opportunity 
sellers, including some 2,500 vending machine, rack display, and 
related opportunity sellers and 550 work-at-home opportunity sellers. 
The previous IRFA estimated a total of 3,200 business opportunity 
sellers, including 150 multilevel companies, which are no longer 
covered by the proposed rule. Most established and some start-up 
business opportunities would likely be considered small businesses 
according to the applicable SBA size standards.\227\ 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.
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    \227\ 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 $6.5 million or less. 
See http://www.sba.gov/size/indexguide.html. Thus, the size standard 
for vending machine operators is $6.5 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).
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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 RPBOR imposes disclosure and recordkeeping requirements, within 
the meaning of the Paperwork Reduction Act, on the ``sellers'' of 
business opportunities and their principals. These requirements are 
fewer in number and lesser in extent than requirements currently 
applicable to such entities now covered by the interim Business 
Opportunity Rule and formerly covered by the original Franchise Rule. 
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 RPBOR 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 types of documents: (1) each 
materially different version of all documents required by the Rule; (2) 
each purchaser's disclosure receipt; (3) each executed written contract 
with a purchaser; and (4) all substantiation upon which the seller 
relies for each earnings claim made. The RPBOR 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 Rule would be 16,350, at a 
total cost of $4,087,500 (16,350 x $250), or less. FTC staff expects 
that the annual burden of complying with the rule will diminish after 
the first year, however, to approximately 12,200 hours, at a total cost 
of $3,050,000 (12,200 hours x $250). To the extent that disclosure or 
recordkeeping obligations are performed by clerical staff, the total 
labor costs would be substantially less. The change in these estimates 
from the previous IRFA reflect that the total estimated number of 
sellers no longer includes multilevel companies.
5. Other Duplicative, Overlapping, or Conflicting Federal Rules
    There are no other federal statutes, rules, or policies that would 
conflict with the RPBOR, which would amend

[[Page 16132]]

the Commission's interim Business Opportunity Rule, 16 CFR Part 437.1.
    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 RPBOR.
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 RPBOR's disclosure and recordkeeping requirements are designed 
to impose the minimum burden on all affected business opportunity 
sellers, regardless of size. In formulating the RPBOR, the Commission 
has taken a number of significant steps to minimize the burdens it 
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 the majority of 
sellers covered by the RPBOR are already required to comply with the 
Commission's interim Business Opportunity Rule and the business 
opportunity laws in 22 states, FTC staff anticipates that the RPBOR 
will drastically reduce their current compliance costs, while imposing 
exceedingly modest ongoing compliance costs on all covered sellers. 
Consequently, the Commission believes that the RPBOR will not have a 
significant economic impact upon small businesses.
    The RPBOR would require business opportunity sellers to provide 
only four affirmative disclosures in a one-page disclosure document. 
This is a significant reduction from the 20 disclosures now required by 
the Commission's interim Business Opportunity Rule, with which many 
business opportunity sellers are now obligated to comply. The RPBOR 
limits required disclosures to information about the sellers' 
litigation history, refund policy, prior purchaser references, and a 
statement about whether the seller makes an earnings claim. Because the 
RPBOR 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 RPBOR'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 RPBOR will impose a 
significant economic impact on a substantial number of small 
businesses. Nonetheless, the Commission specifically requests comment 
on the question whether the RPBOR 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 RPBOR's flexible standard and 
modest compliance costs, the Commission believes that small entities 
should feasibly be able to come into compliance with the RPBOR 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 
RPBOR that it should consider exempting from the Rule's application 
pursuant to Section 18(g). However, the Commission notes that the 
RPBOR'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 RPBOR. Include in your comment the 
number of small entities that will be required to comply with the 
RPBOR's disclosure and recordkeeping requirements.
    b. Please provide comment on any or all of the provisions in the 
RPBOR with regard to: (a) the impact of the provision(s) (including 
benefits and costs to implement and comply with the RPBOR or any of its 
provisions), 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 RPBOR 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 RPBOR set forth in sections 437.2, 
437.3, 437.4, and 437.6, and describe any ways in which the RPBOR could 
be modified to reduce any costs or burdens for small entities 
consistent with the RPBOR's purpose, and costs to implement and comply 
with provisions of the RPBOR, including 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 RPBOR 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 RPBOR for small entities.
    d. Please provide any information quantifying the economic costs 
and benefits of the RPBOR 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 RPBOR.

Section J Request for Comments

    The Commission invites members of the public to comment on any 
issues or concerns they believe are relevant or

[[Page 16133]]

appropriate to the Commission's consideration of the RPBOR. 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 will continue to accept public comment on the specific 
questions identified in the Notice of Proposed Rulemaking.\228\
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    \228\ 71 FR at 19083 - 87.
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    Furthermore, the Commission solicits comment on the following 
specific questions.
    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.
    1. Proposed section 437.1(c) limits the scope of coverage to 
sellers who offer to provide location assistance, account assistance, 
or buy-back assistance. Do the enumerated categories of assistance that 
are necessary to trigger coverage of the rule adequately cover the 
field of business opportunity promoters who are most likely to engage 
in fraud? Why or why not? What alternatives, if any, should the 
Commission consider? What would be the costs and benefits of each 
alternative? The RPBOR covers all business arrangements currently 
covered by the interim Business Opportunity Rule, as well as certain 
others currently not covered, such as work-at-home offerings (e.g., 
envelope stuffing or craft assembly schemes), and offerings costing 
less than $500. Are there other types of offerings not covered by the 
interim Business Opportunity Rule that inadvertently may be covered 
under the RPBOR? In particular, are the limitations to the RPBOR's 
coverage sufficient to keep the rule from covering traditional 
distributor relationships? Why or why not? Are there industries where 
there are significant numbers of people who work at home and are paid 
on a piece-work basis? Would firms that employ such workers become 
subject to the provisions of the RPBOR? Why or why not? What 
alternatives should the Commission consider to avoid covering 
arrangements that should not be covered by the RPBOR?
    2. The definition of ``providing locations, outlets, accounts, or 
customers'' includes ``otherwise assisting the prospective purchaser in 
obtaining his or her own locations, outlets, accounts, or customers.'' 
Does this language adequately cover all of the business opportunity 
arrangements that should be within the scope of the rule? Why or why 
not? Will the inclusion of ``otherwise assisting'' in the definition 
cause traditional product distribution arrangements, educational 
institutions, or how-to books to be subject to the proposed Rule? Will 
it result in the inclusion of multi-level marketing relationships that 
would otherwise not be covered? Why or why not? How could the language 
be refined to achieve the proper scope?
    3. 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. The Commission has 
retained an expert to evaluate the proposed form to ensure that it 
appropriately conveys to the consumer information that is material to 
the transaction. Can the overall presentation of the information in the 
one-page disclosure document be improved to make it more useful and 
understandable? 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? Please submit 
quantitative or qualitative analysis to support specific 
recommendations.
    4. 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, and sales 
managers, but not of sales employees. Does this provision adequately 
capture the types of individuals whose litigation should be disclosed? 
Why or why not? What alternative language, if any, should the 
Commission consider? What would be the costs and benefits of each 
alternative?
    5. 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? Why or why not? Under what circumstances should 
the Rule permit a seller to post a national list of purchasers on its 
website? 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?
    6. Proposed Sections 437.4(a)(4)(v) and 437.4(b)(3)(ii) would 
require business opportunity sellers who make earnings claims to 
disclose ``the number and percentage of all persons who purchased the 
business opportunity prior to the ending date [of the period when the 
represented earnings were achieved] who achieved at least the stated 
level of earnings. Does this requirement create difficulties for a 
business opportunity seller who is attempting to inform consumers 
accurately of their likely experience if they purchase the business 
opportunity being offered? Is such a disclosure going to be useful to 
consumers who are considering the purchase of the business opportunity? 
Why or why not? Are there alternative approaches--for example, limiting 
the set of purchasers to be included in the percentage calculation--
that would limit the difficulties? How would any such proposals affect 
the usefulness of the resulting information to prospective purchasers?
    7. Proposed section 437.4(a)(4)(vi) would require sellers who make 
earnings claims to disclose ``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.'' Does 
this provision adequately capture the relevant earnings information 
that should be disclosed? Why? What alternative language, if any, 
should the Commission consider? What would be the costs and benefits of 
each alternative?
    8. Proposed section 437.7 identifies two categories of franchises 
that are exempt from the requirements of the RPBOR. Is the exemption 
overly broad or overly narrow? Why? What alternative language, if any, 
should the Commission consider?

List of Subjects in 16 CFR Part 437

    Reporting and recordkeeping requirements, Trade practices.

Section K Text of Proposed Rule

    For the reasons set forth in the preamble, the Federal Trade 
Commission proposes to amend 16 C.F.R. chapter I by adding part 437 to 
read as follows:

[[Page 16134]]

PART 437--BUSINESS OPPORTUNITY RULE

Sec.
437.1 Definitions.
437.2 The obligation to furnish written documents.
437.3 Disclosure document.
437.4 Earnings claims.
437.5 Other prohibited practices.
437.6 Record retention.
437.7 Franchise exemption.
437.8 Outstanding orders; preemption.
437.9 Severability.

Appendix A to Part 437: Business Opportunity Disclosure 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 opportunity means:
    (1) A commercial arrangement in which the seller solicits a 
prospective purchaser to enter into a new business; and
    (2) The prospective purchaser makes a required payment; and
    (3) The seller, expressly or by implication, orally or in writing, 
represents that the seller or one or more designated persons will:
    (i) Provide locations for the use or operation of equipment, 
displays, vending machines, or similar devices, on premises neither 
owned nor leased by the purchaser; or
    (ii) Provide outlets, accounts, or customers, including, but not 
limited to, Internet outlets, accounts, or customers, for the 
purchaser's goods or services; or
    (iii) Buy back any or all of the goods or services that the 
purchaser makes, produces, fabricates, grows, breeds, modifies, or 
provides, including but not limited to providing payment for such 
services as, for example, stuffing envelopes from the purchaser's home.
    (d) 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.
    (e) Disclose or state means to give information in writing that is 
clear and conspicuous, accurate, concise, and legible.
    (f) 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'').
    (g) 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.
    (h) General media means any instrumentality through which a person 
may communicate with the public, including, but not limited to, 
television, radio, print, Internet, billboard, website, and commercial 
bulk email.
    (i) New business means a business in which the prospective 
purchaser is not currently engaged, or a new line or type of business.
    (j) Person means an individual, group, association, limited or 
general partnership, corporation, or any other entity.
    (k) 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 position or 
performs a function similar to that of an officer, director, or sales 
manager of the seller.
    (l) 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; providing 
a list of locator or lead generating companies; collecting a fee on 
behalf of one or more locators or lead generating companies; offering 
to furnish a list of locations; or otherwise assisting the prospective 
purchaser in obtaining his or her own locations, outlets, accounts, or 
customers.
    (m) Purchaser means a person who buys a business opportunity.
    (n) Quarterly means as of January 1, April 1, July 1, and October 
1.
    (o) Required payment means all consideration that the purchaser 
must pay to the seller or an affiliate, either by contract or by 
practical necessity, as a condition of obtaining or commencing 
operation of the business opportunity. Such payment may be made 
directly or indirectly through a third-party. A required payment does 
not include payments for the purchase of reasonable amounts of 
inventory at bona fide wholesale prices for resale or lease.
    (p) Seller means a person who offers for sale or sells a business 
opportunity.
    (q) 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 email; 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 part 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  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 this part:
    (1) Identifying information. State the name, business address, and 
telephone number of the seller, the name of the salesperson offering 
the opportunity,

[[Page 16135]]

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 Sec.  
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; or
    (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.
    (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) 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.''
    (6) 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, 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;
    (iii) The earnings claim;
    (iv) The beginning and ending dates when the represented earnings 
were achieved;
    (v) The number and percentage of all persons who purchased the 
business opportunity prior to the ending date in paragraph (a)(4)(iv) 
of this section 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 all persons who purchased the 
business opportunity prior to the ending date in paragraph (b)(3)(i) of 
this section who achieved at least the stated level of 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 part 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

[[Page 16136]]

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:
    (1) furnishing earnings information to a prospective purchaser; or
    (2) disclosing to prospective purchasers the identity of other 
purchasers of the business opportunity;
    (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, with respect to any person identified as a 
purchaser or operator of a business opportunity offered by the seller:
    (1) Any consideration promised or paid to such person. 
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; or
    (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 Rule, 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; and
    (d) 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 Rule shall not apply to any business 
opportunity that constitutes a ``franchise,'' as defined in the 
Franchise Rule, 16 CFR Part 436, provided however, that the provisions 
of this Rule shall apply to any such franchise if it is exempted from 
the provisions of Part 436 because, either
    (a) Under Sec.  436.8(a)(1), the total of the required payments or 
commitments to make a required payment, to the franchisor or an 
affiliate that are made any time from before to within six months after 
commencing operation of the franchisee's business is less than $500, or
    (b) Under Sec.  436.8(a)(7), there is no written document 
describing any material term or aspect of the relationship or 
arrangement.


Sec.  437.8  Outstanding orders; 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 this part.
    (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 this part. 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 part 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-S

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[GRAPHIC] [TIFF OMITTED] TP26MR08.000

BILLING CODE 6750-01-C

[[Page 16138]]

    By direction of the Commission.

Donald S. Clark
Secretary

Attachment A

Cited NPR Commenters

    Avon Products, Inc. (``Avon'')
    American Society of Travel Agents, Inc. (``ASTA'')
    Amsoil, Inc (``Amsoil'')
    Babener and Associates (``Babener'')
    Carico International (``Carico'')
    Chadbourne & Parke LLP, (``Chadbourne'')
    Chamber of Commerce of the United States of America (``CC USA'')
    Consumer Awareness Institute (``CAI'')
    The Cosmetic, Toiletry and Fragrance Association (``CTFA'')
    Direct Selling Association (``DSA'')
    Freelife International (``Freelife'')
    Venable, LLP (``Venable'')
    Haynes & Boone, LLP (``Haynesboone'') Herbalife International of 
America (``Herbalife'')
    Home Interiors & Gifts Inc. (``HIG'')
    Independent Bakers Association (``IBA'')
    International Business Owners Ass'n Int'l, (``IBOAI'')
    Larkin Hoffman Daly & Lindgren Ltd. (``LHD&L'')
    Maclay Murray and Spens LLP (``MMS'')
    Mary Kay, Inc. (``Mary Kay'')
    Melaleuca, Inc. (``Melaleuca'')
    MLM Distributor Rights Ass'n (MLM DRA)
    Multilevel Marketing International Association (``MLMIA'')
    National Association of Consumer Agency Administrators (``NACAA'')
    National Black Chamber of Commerce (``NBCC'')
    National Consumers League (``NCL'')
    Newspaper Association of America (``NAA'')
    Pampered Chef, Ltd. (``Pampered Chef'')
    Pre-Paid Legal Services, Inc. (``Pre-Paid Legal'')
    Primerica Financial Services, Inc., (``Primerica'')
    Plumbing Manufacturers Institute (``PMI'')
    Professional Association for Network Marketing (``PANM'')
    Pyramid Scheme Alert (``PSA'')
    Quixtar, Inc. (``Quixtar'')
    Shaklee Corporation (``Shaklee'')
    Snell & Wilmer (``Snell'')
    Sonnenschein Nath & Rosenthal LLP (``Sonnenschein'')
    Southern Progress Corporation (``SPC'')
    Success In Action (``SIA'')
    Shure Pets (``Shure'')
    Symmetry Corporation (``Symmetry'')
    Synergy Worldwide (``Synergy'')
    The Timberland Co. (``Timberland'')
    United States Department of Justice, Office of Consumer Litigation 
(``DOJ'')
    Venable LLP (``Venable'')
    World Association of Persons with disAbilities, Inc. (``WAPAI'')
    Xango, LLC (``Xango'')
[FR Doc. E8-6059 Filed 3-25-08: 8:45 am]
BILLING CODE 6750-01-S