[Federal Register Volume 76, Number 236 (Thursday, December 8, 2011)]
[Rules and Regulations]
[Pages 76816-76865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30597]



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Vol. 76

Thursday,

No. 236

December 8, 2011

Part II





Federal Trade Commission





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16 CFR Part 437





Business Opportunity Rule; Final Rule

  Federal Register / Vol. 76 , No. 236 / Thursday, December 8, 2011 / 
Rules and Regulations  

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FEDERAL TRADE COMMISSION

16 CFR Part 437

RIN 3084-AB04


Business Opportunity Rule

AGENCY: Federal Trade Commission (FTC or Commission).

ACTION: Final rule.

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SUMMARY: The Commission is adopting final amendments to its Trade 
Regulation Rule entitled ``Disclosure Requirements and Prohibitions 
Concerning Business Opportunities'' (``Business Opportunity Rule'' or 
``Rule''). Among other things, the Business Opportunity Rule has been 
amended to broaden its scope to cover business opportunity sellers not 
covered by the interim Business Opportunity Rule, such as sellers of 
work-at-home opportunities, and to streamline and simplify the 
disclosures that sellers must provide to prospective purchasers. The 
final Rule is based upon the comments received in response to an 
Advance Notice of Proposed Rulemaking (``ANPR''), an Initial Notice of 
Proposed Rulemaking (``INPR''), a Revised Notice of Proposed Rulemaking 
(``RNPR''), a public workshop, a Staff Report, and other information 
discussed herein. This document also contains the text of the final 
Rule and the Rule's Statement of Basis and Purpose (``SBP''), including 
a Regulatory Analysis.

DATES: The provisions of the final Rule will become effective on March 
1, 2012.

ADDRESSES: Requests for copies of the final Rule and the SBP should be 
sent to Public Reference Branch, Room 130, Federal Trade Commission, 
600 Pennsylvania Avenue NW., Washington, DC 20580. The complete record 
of this proceeding is also available at that address. Relevant portions 
of the proceeding, including the final Rule and SBP, are available at 
http://www.ftc.gov.

FOR FURTHER INFORMATION CONTACT: Christine M. Todaro, (202) 326-3711, 
Division of Marketing Practices, Room H-286, Bureau of Consumer 
Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW., 
Washington, DC 20580.

SUPPLEMENTARY INFORMATION: The final Rule modifies the interim Business 
Opportunity Rule in two significant ways. First, the final Rule 
contains an expanded definition of ``business opportunity'' aimed at 
extending the scope of the Rule to business opportunities previously 
not covered, such as work-at-home programs. Second, although the final 
Rule's scope is broader than the interim Business Opportunity Rule, the 
compliance burden is reduced. Specifically, in contrast to the 
extensive disclosures previously required, the final Rule now requires 
that business opportunity sellers provide prospective customers with a 
substantially simplified and streamlined one-page disclosure document. 
The final Rule also adds affirmative prohibitions on misrepresentations 
and omissions, as well as disclosure requirements for sales conducted 
in Spanish and other languages besides English.

Statement of Basis and Purpose

Key Terms and Abbreviations Used Throughout This Statement of Basis and 
Purpose

``Amended Franchise Rule'' refers to the amended Franchise Rule 
published at 72 FR 15444 (Mar. 30, 2007) and codified at 16 CFR 436.
``ANPR'' refers to the Trade Regulation Rule on Franchising and 
Business Opportunity Ventures: Advanced Notice of Proposed 
Rulemaking, 62 FR 9115 (Feb. 28, 1997).
``Initial Proposed Disclosure Document'' refers to the original 
version of the Disclosure Document that was proposed in the INPR in 
2006.
``INPR'' refers to the Initial Notice of Proposed Rulemaking for the 
Business Opportunity Rule, 71 FR 9054 (Apr. 12, 2006).
``Interim Business Opportunity Rule'' refers to the Business 
Opportunity Rule, codified at 16 CFR 437 that is currently in effect 
and is the subject of these amendment proceedings.
``IPBOR'' refers to the Initial Proposed Business Opportunity Rule, 
which was proposed in the INPR in 2006.
``Macro Report'' refers to Macro International, Inc.'s report to the 
FTC on the Disclosure Form, available at http://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.
``Original Franchise Rule'' refers to the original Franchise Rule 
published at 43 FR 59614 (Dec. 21, 1978).
``RNPR'' refers to the Revised Notice of Proposed Rulemaking for the 
Business Opportunity Rule, 73 FR 16110 (Mar. 26, 2008).
``RPBOR'' refers to the Revised Proposed Business Opportunity Rule, 
which was proposed in the RNPR in 2008.
``Staff Report'' refers to FTC staff's Staff Report to the Federal 
Trade Commission and Proposed Revised Trade Regulation Rule (16 CFR 
Part 437). The Staff Report is available at http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf.
``Workshop'' refers to the June 1, 2009, public workshop held in 
Washington, DC, to discuss the proposed Disclosure Document and 
other aspects of the Business Opportunity Rule.
``Workshop Notice'' refers to the Federal Register Notice announcing 
the Workshop, 74 FR 18712 (Apr. 24, 2009).

I. Introduction

A. Overview of the Franchise Rule and the Evolution of the Interim 
Business Opportunity Rule

1. The Franchise Rule
    On December 21, 1978, the Commission promulgated a Trade Regulation 
Rule entitled ``Disclosure Requirements and Prohibitions Concerning 
Franchising and Business Opportunity Ventures'' (the ``Original 
Franchise Rule''), to address deceptive and unfair practices in the 
sale of franchises and business opportunity ventures.\1\ The Original 
Franchise Rule covered, in a single Code of Federal Regulations part, 
both franchises and certain business opportunity ventures. With 
franchises, the franchisee sells goods or services that are associated 
with the franchisor's trademark, and the franchisee is subject to 
significant control by, or receives significant assistance from, the 
franchisor. The franchisee typically distributes goods or services 
supplied by the seller or an affiliate and receives accounts or 
locations in which to conduct the business. By contrast, business 
opportunities often do not involve a trademark. Vending machines or 
rack display routes are typical examples of business opportunities. 
Based upon the original rulemaking record, the Commission found that 
unfair and deceptive practices were widespread in the sale of 
franchises and business opportunities, causing serious economic harm to 
consumers.
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    \1\ 43 FR 59614 (Dec. 21, 1978).
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    The Commission adopted the Original Franchise Rule to prevent 
unfair and deceptive practices in the sale of franchises and business 
opportunities through pre-sale disclosure of specified items of 
material information. The purpose of the Original Franchise Rule was 
neither to regulate the substantive terms of a franchise or business 
opportunity agreement nor to regulate the relationship between the 
seller and the buyer. Rather, it was to ensure that sellers disclose 
material information to prospective buyers. The Original Franchise Rule 
was posited on the notion that a fully informed prospective buyer can 
determine whether a particular offering is in his or her best interest.
    The Original Franchise Rule required extensive disclosures on a 
score of specified topics, such as, information about the seller; the 
business background of the seller's principals and their litigation and 
bankruptcy histories; the terms and conditions of

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the offer; statistical analyses of existing franchised and company-
owned outlets; information about prior purchasers, including the names 
and addresses of at least 10 purchasers nearest the prospective buyer; 
and audited financial statements.
    The Commission recognized that requiring these extensive 
disclosures would likely impose significant compliance costs on 
businesses covered by the Original Franchise Rule. It therefore sought 
to strike the proper balance between prospective purchasers' need for 
pre-sale disclosure and the burden imposed on those selling business 
ventures covered by the Rule. To achieve this balance, the Commission 
limited the scope of the Original Franchise Rule's coverage in three 
significant ways.
    First, the Original Franchise Rule covered only those opportunities 
that required a purchaser to make a payment of at least $500 within the 
first six months of operation. In transactions where a purchaser may 
incur high financial losses if the seller withholds material 
information, the benefit for prospective purchasers of the Original 
Franchise Rule's pre-sale disclosure requirements outweighs the 
sellers' cost to make those disclosures. By contrast, when the 
investment required to purchase a business opportunity is comparatively 
small, prospective purchasers face a relatively small financial risk. 
In such circumstances, compliance costs may outweigh the benefits of 
pre-sale disclosure. Therefore, the Original Franchise Rule did not 
reach opportunities that charged lower fees.
    Second, the ``inventory exemption'' excluded certain types of 
payments from the Original Franchise Rule's $500 minimum cost 
threshold. The ``inventory exemption'' is the franchise industry's 
shorthand term for the Commission's determination that, as a matter of 
policy, voluntary purchases of reasonable amounts of inventory at bona 
fide wholesale prices for resale do not count toward the required 
threshold payment. An important consequence of this policy 
determination was to eliminate from Original Franchise Rule coverage 
many pyramid marketing plans because purchasers of such plans typically 
do not make a required payment of or exceeding $500, but instead make 
voluntary purchases of inventory in reasonable amounts and at bona fide 
wholesale prices for resale.
    Third, in addition to franchise opportunities, the Commission 
focused the Original Franchise Rule on the types of business 
opportunities that the record showed were likely to result in 
significant consumer injury, such as vending machines, rack displays, 
and similar opportunities, which frequently were sold through deceptive 
conduct. A feature common to these types of opportunities was the 
promise of assistance in securing locations or accounts. Thus, the 
Commission incorporated this characteristic into the Original Franchise 
Rule's definitional elements to ensure coverage of demonstrably 
injurious schemes. Other forms of assistance that business opportunity 
sellers frequently offer--such as training and the buy-back and resale 
of goods assembled by the purchaser (an element of many craft assembly 
opportunities) did not bring a business opportunity within the scope of 
the Original Franchise Rule's coverage.
    In addition to these limits on the scope of the Original Franchise 
Rule's coverage--driven by balancing prospective purchasers' need for 
pre-sale disclosure against the burden imposed on business opportunity 
sellers--another aspect of the Original Franchise Rule's language 
further limited the scope of coverage. Specifically, the Original 
Franchise Rule provided that a business opportunity was covered only if 
the purchaser of the opportunity sells goods or services directly to 
end-users other than the business opportunity seller. The effect of 
this limitation was to exclude many work-at-home opportunities--such as 
envelope stuffing and craft assembly ventures--from Original Franchise 
Rule coverage. In those opportunities, the purchaser typically performs 
work for the seller or produces various goods for the seller, who then 
purportedly distributes them to end-users.
    In 1995, as part of its systematic review of FTC rules, the 
Commission published in the Federal Register a request for comment on 
the Original Franchise Rule to determine its continued effectiveness 
and impact.\2\ Based upon the comments received during the rule review, 
the Commission tentatively determined to retain the Original Franchise 
Rule, but sought additional comment on possible amendments. To that 
end, in February 1997, the Commission published an ANPR, seeking 
comment on various issues, including whether the Commission should 
separate the disclosure requirements for business opportunities from 
those for franchises.\3\
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    \2\ 60 FR 17656 (Apr. 7, 1995).
    \3\ 62 FR 9115 (Feb. 28, 1997).
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    Based upon comments responding to the ANPR, the Commission found 
that the Original Franchise Rule continued to serve a vital purpose and 
that pre-sale disclosure was necessary to protect purchasers of 
franchises and business opportunities from fraudulent and deceptive 
sales practices. At the same time, however, the Commission agreed with 
the overwhelming view of the commenters who suggested that there are 
material differences between franchises and business opportunities and 
that these two types of distinct business arrangements require separate 
disclosure approaches. For example, many of the Original Franchise 
Rule's pre-sale disclosures, in particular those pertaining to the 
structure of the parties' relationship, do not apply to the sale of 
most business opportunities because those sales typically involve 
comparatively simple contracts. In addition, the Commission recognized 
that the Original Franchise Rule's detailed disclosure obligations may 
create barriers to entry for legitimate business opportunity 
sellers.\4\ Accordingly, in 1999, the Commission announced its 
intention to conduct a separate rulemaking proceeding for business 
opportunity sales.\5\
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    \4\ 64 FR 57296 (Oct. 22, 1999).
    \5\ Id.
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2. The Interim Business Opportunity Rule
    Much of the information revealed by the Commission's regulatory 
review of the Original Franchise Rule highlighted the differences 
between franchises and business opportunity ventures, and the distinct 
regulatory challenges presented by these two types of offerings--that 
franchises typically are expensive and involve complex contractual 
licensing relationships, while business opportunity sales are generally 
less costly and involve comparatively simple purchase agreements that 
pose less of a financial risk to purchasers. Based on the record 
amassed during the review proceeding, the Commission concluded that the 
Original Franchise Rule's extensive disclosure requirements imposed 
unnecessary compliance costs on both business opportunity sellers and 
buyers, and determined to bifurcate the Original Franchise Rule into 
two separate parts--one covering the sale of business format franchises 
\6\ and one to govern the sale of business opportunities. Accordingly, 
in the ANPR, the Commission solicited

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comment on several proposed regulatory modifications, including the 
creation of a separate trade regulation rule governing the sale of 
business opportunities.\7\
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    \6\ The industry term ``business format franchise'' specifically 
refers to franchises in which franchisees operate under a common 
trademark or other commercial symbol and are required to adhere to 
the specific business format or method of doing business prescribed 
by the franchisor. Business format franchises are commonly called 
``franchises'' by the general public, and the two terms are used 
interchangeably here.
    \7\ 62 FR at 9115. In response to the ANPR, the Commission 
received 166 written comments. The staff also held six public 
workshops on the issues raised in the comments, three of which 
specifically addressed business opportunities.
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    Subsequently, the Commission completed all procedural steps 
prescribed by Section 18 of the FTC Act to finalize the Amended 
Franchise Rule, along with a Statement of Basis and Purpose, in March 
2007.\8\ At that time, the Amended Franchise Rule--no longer covering 
business opportunities--was codified at Part 436 in Title 16 of the 
CFR. The Original Franchise Rule with all definitional elements and 
references regarding business format franchising deleted, was retained 
and redesignated as Part 437. Part 437 was titled the ``interim 
Business Opportunity Rule.'' \9\ The interim Business Opportunity Rule 
contained no new substantive disclosure requirements or prohibitions, 
and in all material respects was substantially identical to the 
Original Franchise Rule. Until the final Rule becomes effective, Part 
437 governs sales of non-franchise business opportunities.\10\
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    \8\ 72 FR 15444 (Mar. 30, 2007).
    \9\ For example, references to ``franchisor'' and ``franchisee'' 
used in the Original Franchise Rule were changed in the interim 
Business Opportunity Rule to ``business opportunity seller'' and 
``business opportunity purchaser,'' and the Original Franchise 
Rule's definition of ``franchise'' was changed to ``business 
opportunity.'' See id.
    \10\ 73 FR 16111, 16112 (Mar. 26, 2008).
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B. Rule Amendment Proceedings

1. Initial Notice of Proposed Rulemaking and Initial Proposed Business 
Opportunity Rule
    In 2006, having determined that a separate business opportunity 
rule was necessary, the Commission published an Initial Notice of 
Proposed Rulemaking (``INPR''), announcing its intention to proceed 
with its proposal for a separate Business Opportunity Rule (the 
``initial proposed Business Opportunity Rule'' or ``IPBOR'').\11\ The 
INPR proposed to amend the interim Business Opportunity Rule by 
updating it, streamlining it, and expanding its scope of coverage.\12\ 
The IPBOR contained an expansive definition of ``business opportunity'' 
that encompassed business opportunities previously covered by the 
Original Franchise Rule as well as work-at home, medical billing, and 
multi-level marketing (MLM) \13\ operations. It also eliminated the 
$500 threshold for Rule coverage.\14\
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    \11\ 71 FR 19054 (Apr. 12, 2006).
    \12\ The INPR also specified the process the Commission would 
follow in amending the Business Opportunity Rule. Pursuant to the 
Commission's Rules of Practice, 16 CFR 1.20, the Commission 
determined to use a modified version of the rulemaking process set 
forth in section 1.13 of those Rules. Specifically, the Commission 
announced that it would publish a Notice of Proposed Rulemaking, 
with a 60-day comment period, followed by a 40-day rebuttal period. 
In addition, pursuant to Section 18(c) of the FTC Act, the 
Commission announced that it would hold hearings with cross-
examination and rebuttal submissions only if an interested party 
requested a hearing. The Commission also stated that, if requested 
to do so, it would contemplate holding one or more informal public 
workshops in lieu of hearings. Finally, pursuant to 16 CFR 1.13(f), 
the Commission announced that staff would issue a Report on the 
Business Opportunity Rule (``Staff Report''), which would be subject 
to additional public comment. 71 FR at 19079-80.
    \13\ 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 & 
William W. Keep, Marketing Fraud: An Approach to Differentiating 
Multilevel Marketing from Pyramid Schemes, 21 J. Pub. Pol'y & 
Marketing 140 (Spring 2002).
    \14\ Promoters of business opportunities were able to evade 
coverage under the Original Franchise Rule and the interim Business 
Opportunity Rule by pricing their offerings opportunities below 
$500, the monetary threshold of coverage.
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    Streamlining the interim Business Opportunity Rule and tailoring it 
to fit business opportunities (as opposed to business format 
franchises) has been a primary focus of this proceeding. Both the 
Original Franchise Rule and the interim Business Opportunity Rule 
require extensive disclosures covering over twenty specified topics. In 
the INPR, the Commission recognized that these extensive disclosure 
requirements entail disproportionate compliance costs for sellers of 
comparatively low-cost business opportunity ventures.\15\ Therefore, 
the Commission proposed to mitigate the compliance burden by 
simplifying and streamlining the disclosure requirements.\16\
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    \15\ 71 FR at 19057.
    \16\ Id.
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    Specifically, the INPR proposed a one-page business opportunity 
pre-sale disclosure document (the ``initial proposed disclosure 
document'') with only six required material disclosures.\17\ The 
initial proposed disclosure document was intended to provide 
prospective purchasers with essential material information they could 
use in making a purchase decision. The INPR proposed to require sellers 
to use the exact form and language set forth by the Commission and to 
include information regarding (1) the seller; (2) earnings claims; (3) 
legal actions involving the offered business and its key personnel; (4) 
the existence of cancellation or refund policies; (5) the number of 
cancellation or refund requests; and (6) references.\18\
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    \17\ 71 FR at 19091.
    \18\ 71 FR at 19068.
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    In response to the INPR, the Commission received more than 17,000 
comments, the overwhelming majority of which came from individuals 
active in the MLM industry.\19\ MLM companies, their representatives 
and trade associations, as well as individual participants in various 
MLM plans, expressed grave concern about the burdens the IPBOR would 
impose on them and urged the Commission to exclude them from the scope 
of the IPBOR, to implement various safe harbor provisions, and to 
reduce the required disclosures.\20\ The Commission also received 
approximately 187 comments, primarily from individual consumers or 
consumer groups, in favor of the IPBOR.\21\ Only a handful of comments 
came from non-MLM companies and industry groups, expressing various 
concerns about obligations that the IPBOR would impose upon them.\22\ 
None of the comments addressed the form of the initial proposed 
disclosure document.
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    \19\ Comments responding to the INPR are available at http://www.ftc.gov/os/comments/businessopprule/index.shtm. References to 
INPR comments are cited herein as: Name of the commenter-INPR (e.g., 
Avon-INPR).
    \20\ Thousands of comments were form letters submitted by 
participants in various MLM programs. 73 FR at 16113.
    \21\ Numerous letters came from individuals having negative 
experiences with various MLMs. 73 FR at 16113 n.37.
    \22\ 73 FR at 16113.
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2. The Revised Notice of Proposed Rulemaking and Revised Proposed 
Business Opportunity Rule
    Based on an extensive review of the comments received in response 
to the INPR and the Commission's law enforcement history, the 
Commission issued a revised Notice of Proposed Rulemaking (``RNPR'') on 
March 28, 2008, that set forth a revised proposed Rule (the ``Revised 
Proposed Business Opportunity Rule'' or ``RPBOR'') that was more 
narrowly tailored than the IPBOR.\23\
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    \23\ Id. at 16110.
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    In the RNPR, the Commission recognized that there were two main 
problems with the IPBOR's breadth of coverage. First, the IPBOR would 
have unintentionally swept in numerous commercial arrangements, 
including

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retail product distribution, training and/or educational organizations, 
where there was little or no evidence that fraud was occurring.\24\ 
Recognizing this legitimate concern, the Commission, in the RNPR, 
proposed to narrow the definition of ``business opportunity.'' 
Specifically, the RPBOR provided that the ``required payment'' prong of 
the business opportunity definition would not include payments for the 
purchase of reasonable amounts of inventory at bona fide wholesale 
prices; \25\ eliminated as an element of the business opportunity 
definition the making of an earnings claim; \26\ and narrowed the types 
of ``business assistance'' that would trigger the business opportunity 
definition to just those types of assistance that are the hallmark of 
business opportunity fraud: Location, account, and ``buy-back'' 
assistance.\27\
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    \24\ Id. 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.'' IBA-INPR at 5; see also Timberland-INPR (noting that 
numerous manufacturers structure their retail distribution in this 
manner).
    \25\ This amendment was based on concerns raised by some 
commenters that if a ``required payment'' did not exclude the 
purchase of inventory, many traditional product distribution 
arrangements could be brought within the scope of the Rule. 73 FR at 
16113.
    \26\ This amendment was based on concerns raised by some 
commenters that a broad range of commercial arrangements easily 
would fall under the business opportunity definition if the company 
made some representation about sales or profits sufficient to 
constitute an earnings claim. Id. at 16114; see also infra Section 
III.A.3.
    \27\ Id. at 16123. The Commission eliminated two additional 
types of assistance that would have triggered the Rule's strictures 
and disclosure obligations--tracking payments and providing 
training.
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    Second, the Commission determined that the IPBOR was unworkable 
with respect to MLMs and would have imposed greater burdens on the MLM 
industry than other types of business opportunity sellers without 
sufficient countervailing benefits to consumers. After careful 
consideration of the record, the Commission decided to narrow the scope 
of the RPBOR to avoid broadly sweeping in all sellers of MLM 
opportunities. This decision was based on the overwhelming majority of 
the approximately 17,000 comments that argued that the IPBOR failed to 
differentiate between unlawful pyramid schemes--which the Commission 
intended to cover--and legitimate companies using an MLM model.
    Finally, the RPBOR eliminated two disclosures that would have been 
required by the IPBOR--information about legal actions pertaining to a 
business opportunity seller's sales personnel, and the number of 
cancellation or refund requests the seller received.\28\ Eliminating 
the disclosure of legal actions involving sales employees was based on 
the Commission's recognition that the burden of collecting litigation 
histories for every sales person was not outweighed by the 
corresponding benefit to prospective purchasers.\29\ With respect to 
the disclosure of the number of cancellation or refund requests 
received, the Commission determined that such disclosure was not 
useful, and further, may have had the perverse effect of discouraging 
legitimate businesses from offering refunds.\30\
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    \28\ Id. at 16125.
    \29\ Id.
    \30\ Id.
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    The RNPR sought public comment on issues relevant to the 
Commission's consideration of the RPBOR, including whether the RPBOR 
would adequately accomplish the Commission's stated purpose of 
protecting consumers against fraud and, if it did not, what 
alternatives the Commission could consider.\31\ In contrast to the 
INPR, which generated more than 17,000 comments, the Commission 
received fewer than 125 comments and rebuttal comments in response to 
the RNPR.\32\ Again, however, the vast majority of commenters were from 
the MLM industry, but this time they supported the Commission's 
proposal to narrow the scope of the Business Opportunity Rule, albeit 
with suggestions for fine-tuning.\33\ It is noteworthy that only one 
comment came from a business opportunity seller.\34\ The Commission 
also received comments from two consumer groups \35\ and approximately 
twelve individuals \36\ who expressed their disappointment that the 
FTC's proposed rule would exclude MLMs from coverage.
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    \31\ Id. at 16133.
    \32\ Comments responding to the RNPR are available at http://www.ftc.gov/os/comments/bizoprevised/index.shtm. References to RNPR 
comments are cited herein as: Name of commenter-RNPR.
    \33\ Some commenters suggested changes to the language of 
certain definitions proposed in the RNPR to ensure that the multi-
level marketing industry was not inadvertently swept into the ambit 
of the rule. See, e.g., DSA-RNPR; Babener-RNPR; IBA-RNPR.
    \34\ Planet Antares-RNPR.
    \35\ The two consumer groups are the Consumer Awareness 
Institute (``CAI'') and Pyramid Scheme Alert (``PSA'').
    \36\ Some letters came from individuals having negative 
experiences with MLMs.
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3. Consumer Testing of Disclosure Document and Public Workshop
    In the RNPR, the Commission announced that it had retained a 
consultant to assess the proposed disclosure document, with the 
objective of achieving the proper format and content for communicating 
material information to consumers. Following publication of the RNPR, 
Macro International, Inc. (``Macro''), the FTC's consultant, conducted 
extensive consumer testing of the initial proposed disclosure document 
that resulted in substantial improvement to both the layout and the 
wording of the form.\37\ The Commission made Macro's report as well as 
the revised proposed Business Opportunity Disclosure Document 
(``revised proposed disclosure document'') \38\ public in a Federal 
Register Notice (``Workshop Notice'') that also announced a one-day 
public workshop in Washington, DC.\39\ The Workshop Notice focused on 
whether the revised proposed disclosure document was an effective means 
of conveying material information to prospective purchasers of business 
opportunities. The Workshop Notice also sought comment to further 
develop the public record on issues that had been raised in the 
comments received in response to the RNPR. Five individuals who 
represented a range of interests in the proposed Rule were chosen to 
participate as panelists, including a federal law enforcer, a state law 
enforcer, a consumer advocate, the general counsel of a national multi-
level marketing company, and a former director of the FTC's Bureau of 
Consumer Protection.\40\ Staff convened the public workshop with these 
five panelists in Washington, DC, on June 1, 2009. At the conclusion of 
the workshop discussion of the revised proposed disclosure document, 
panelists and audience members were invited to express their views 
about other issues related to the RPBOR.\41\ Following

[[Page 76820]]

robust discussion on various topics, the Commission received follow-up 
written comment from six individuals and entities.\42\
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    \37\ A copy of the expert's report to the FTC, ``Design and 
Testing of Business Opportunity Disclosures,'' (``Macro Report'') is 
available at http://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.
    \38\ The version of the revised proposed disclosure document 
that was tested by Macro inadvertently omitted the phrase ``or pay 
any money'' from the conclusion of the penultimate sentence of the 
revised proposed disclosure document. Macro determined that this 
omission had no effect on the results of its testing. See Macro 
Report at 2.
    \39\ See 74 FR 18712 (Apr. 24, 2009).
    \40\ Commission staff selected individuals as panelists based 
upon their comments, backgrounds, and interest in the subject 
matter.
    \41\ A copy of the transcript of the June 1, 2009 workshop is 
available at http://www.ftc.gov/bcp/workshops/bizopps/index.shtml. 
References to the transcript from the June 2009 Business Opportunity 
Rule public workshop are cited herein as: Name of commenter, June 09 
Tr at page no. (e.g., Jost, June 09 Tr at 12).
    \42\ Comments received in response to the Workshop Notice are 
available at http://www.ftc.gov/os/comments/bizoprulerevwrkshp/index.shtm. References to workshop comments are cited herein as: 
Name of commenter-Workshop.
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4. Staff Report
    Pursuant to the Rule amendment process announced in the INPR, the 
Commission's Bureau of Consumer Protection issued a Staff Report on the 
Business Opportunity Rule in November 2010.\43\ The Staff Report 
explained in detail the history of the Rule amendment proceeding and 
summarized the issues raised during the various notice and comment 
periods, particularly those raised in response to the RNPR. It also 
addressed the public workshop discussion and subsequent comments, as 
well as additional issues that the staff raised on its own initiative, 
based on the Commission's law enforcement experience.
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    \43\ See Bureau of Consumer Protection, Staff Report to the 
Federal Trade Commission and Proposed Revised Trade Regulation Rule 
(16 CFR Part 437) (Nov. 2010) (``Staff Report''). The Staff Report 
is available at http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf. In November, the 
Commission published a notice in the Federal Register announcing the 
availability of, and seeking comment on, the Staff Report. See 75 FR 
68559 (Nov. 8, 2010).
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    Twenty-seven comments were submitted in response to the Staff 
Report,\44\ including eleven comments submitted by consumer group 
Consumer Awareness Institute (``CAI''). The Commission also received 
comments from the Department of Justice (``DOJ''), the Direct Selling 
Association (``DSA''), MLM companies,\45\ one franchise lead generator, 
a consumer group named Pyramid Scheme Alert (``PSA''), and ten 
individuals. A few commenters suggested changes to some of the Rule's 
definitions and the scope of coverage,\46\ while others encouraged the 
Commission to adopt the Rule as recommended in the Staff Report.\47\ 
The majority of comments submitted by individuals, and the comments 
submitted by CAI and PSA, opposed the Commission's decision to narrow 
the scope of the Rule to avoid broadly sweeping in MLMs.\48\ In 
crafting the final Rule, the Commission has carefully considered the 
comments received in response to the Staff Report and throughout the 
Rule amendment proceeding.\49\
---------------------------------------------------------------------------

    \44\ Comments received in response to the Staff Report are 
available at http://www.ftc.gov/os/comments/bizoppstaffreport/index.shtm. References to Staff Report comments are cited herein as: 
Name of commenter--Staff Report.
    \45\ Comments on behalf of the MLM industry were submitted by 
Tupperware and Primerica.
    \46\ E.g., Dub-Staff Report; Tupperware-Staff Report.
    \47\ DOJ-Staff Report; Primerica-Staff Report; DSA-Staff Report.
    \48\ E.g., CAI-Staff Report; PSA-Staff-Report; O'Handley-Staff 
Report; Brooks-Staff Report; Johnson-Staff Report.
    \49\ The Staff Report comments addressing specific provisions of 
the Rule are discussed within the substantive discussions on the 
relevant provisions. The comments regarding MLMs are discussed in 
Subsection C.1.c below, addressing the Commission's decision to 
exclude MLMs from coverage.
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C. Overview of the Final Rule

    The final Rule significantly modifies the scope, disclosure 
requirements, and prohibitions of the interim Business Opportunity 
Rule. This proceeding was, in major part, prompted by the recognition 
that the interim Business Opportunity Rule's extensive disclosure 
requirements are ill-suited to many business opportunities and place 
unnecessary compliance costs on both business opportunity sellers and 
buyers. Similarly, commenters have observed that business opportunities 
and business format franchises are distinct business arrangements that 
pose very different regulatory challenges. To account for these 
differences, to avoid unnecessary compliance burdens, and to ensure 
that consumers are best protected against deceptive practices in the 
sale of business opportunities, the Commission has amended the interim 
Rule to:
    (1) Expand its scope to cover many business opportunities that were 
not covered under the interim Business Opportunity Rule;
    (2) Streamline pre-sale disclosures;
    (3) Prohibit various specific misrepresentations and other 
misleading practices often engaged in by fraudulent business 
opportunity sellers; and
    (4) Require that for offers conducted in Spanish or other languages 
besides English, that the disclosures be provided in the same language 
as the offer is made. The sections that follow describe these four 
aspects of the final Rule.
1. Scope of the Final Rule
    The definition of ``business opportunity'' dictates the scope of 
coverage under the final Rule. To ensure appropriate coverage, this 
definition has been crafted to capture the sale of business 
opportunities that historically have been associated with deceptive 
practices. As discussed below, the final Rule (1) extends coverage to 
those types of opportunities that previously were not covered under the 
Original Franchise Rule and the interim Business Opportunity Rule; (2) 
continues to cover business opportunities that previously were covered 
under the Original Franchise Rule and interim Business Opportunity 
Rule; and (3) avoids broadly sweeping in MLMs and certain other types 
of arrangements that are not characterized by the deceptive and unfair 
practices the final Rule aims to prevent.
a. The Final Rule Covers Many Business Opportunities That Previously 
Escaped Coverage
    The final Rule includes an expansive definition of ``business 
opportunity'' aimed at extending the scope of the Rule to certain 
business opportunities--namely work-at-home opportunities such as 
envelope-stuffing, product assembly, and medical billing--that often 
were not covered by the interim Business Opportunity Rule. The 
Commission's law enforcement experience and complaint data show that 
these types of business opportunities are sources of prevalent and 
persistent problems. These opportunities, however, often escaped 
coverage of the Original Franchise Rule and the interim Business 
Opportunity Rule due to the following two limitations: (1) A minimum 
payment threshold set at $500; and (2) coverage was limited to business 
opportunities in which products were sold directly to third party end-
users, rather than back to the business opportunity seller.\50\ Each 
limitation is discussed below.
---------------------------------------------------------------------------

    \50\ 73 FR at 16112.
---------------------------------------------------------------------------

    First, the Original Franchise Rule and the interim Business 
Opportunity Rule covered only business opportunity ventures costing 
$500 or more. Ventures such as product assembly, medical billing, and 
envelope stuffing, however, often require payments of less than $500 
and thus were not covered by the interim Business Opportunity Rule.\51\

[[Page 76821]]

Some commenters asserted that setting the threshold for coverage at a 
specific dollar amount simply provides scam operators a means to 
circumvent the Rule, noting that sellers of business opportunities may 
charge less than $500 to skirt the interim Business Opportunity Rule's 
disclosure requirements.\52\ The Commission has concluded that the 
scope of the final Rule should be broad enough to reach business 
opportunities that the Commission's law enforcement history and 
consumer complaints show are a widespread and persistent problem, 
regardless of the price at which they are offered. Accordingly, the 
final Rule eliminates the monetary threshold.
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    \51\ 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 Mktg. Group, LLC, No. 05 CV 6485 (N.D. Ill. 2005) 
($65 to $175 registration fees); FTC v. Vinyard Enters., 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); see also Consumer Fraud in the United States: The Second 
FTC Survey (October 2007) at 48, available at http://www.ftc.gov/opa/2007/10/fraud.pdf (indicating a median payment for work-at-home 
schemes of $200).
    \52\ See 71 FR at 19079 (citing comments submitted in earlier 
proceedings by NCL, SBA Advocacy, Finnigan, and Purvin).
---------------------------------------------------------------------------

    A second limitation to the Original Franchise Rule and the interim 
Business Opportunity Rule's scope of coverage was the requirement that 
the purchaser of the opportunity had to sell goods or services directly 
to third party end-users--someone other than the business opportunity 
seller. The effect of this limitation was to exclude most work-at-home 
opportunities--such as envelope stuffing and craft assembly ventures--
from coverage. Promoters of these types of opportunities often tell 
prospective purchasers that they (1) will work directly for the seller 
or a third party the seller identifies or (2) will produce various 
goods for the seller, who will then purportedly distribute the goods to 
end-users or retail markets.\53\ In order to reach these types of 
business opportunities, coverage of the final Rule is not limited to 
transactions where the purchaser of the opportunity sells goods or 
services directly to individuals other than the business opportunity 
seller.
---------------------------------------------------------------------------

    \53\ E.g., FTC v. Darling Angel Pin Creations, Inc., No. 8:10-
cv-00335-JSM-TGW (M.D. Fla. Feb. 2010); FTC v. Indep. Mktg. Exch. 
Inc., No. 1:10-cv-00568-NLH-KMW (D.N.J. Feb. 2010); FTC v. Preferred 
Platinum Svcs. Network LLC, No. 3:10-cv-00538-MLC-LHG (D.N.J. Feb. 
2010).
---------------------------------------------------------------------------

b. The Final Rule Continues To Cover Those Types of Opportunities 
Covered Under the Original Franchise Rule and the Interim Business 
Opportunity Rule
    In addition to those types of business opportunities that often 
evaded coverage under the Original Franchise Rule and Interim Business 
Opportunity Rule, the final Rule continues to cover the types of 
business opportunities that previously had been covered, such as 
vending machine opportunities, rack display opportunities, and similar 
arrangements. The Commission's law enforcement experience demonstrates 
that sales of these types of opportunities are fraught with unfair and 
deceptive practices, in particular, false or unsubstantiated earnings 
claims. Indeed, such practices are widespread in promotion and sale of 
such business opportunities. Since 1995, the Commission has brought 
over 80 law enforcement actions \54\ in connection with more than ten 
law enforcement sweeps \55\ that targeted business opportunity scams 
involving the sale of vending machines,\56\ rack displays,\57\ public 
telephones,\58\ Internet kiosks,\59\ and 900-number ventures,\60\ among 
others. These persistent scams will continue to be covered under the 
final Rule.
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    \54\ In bringing these FTC law enforcement actions, the FTC 
partnered with sister federal agencies--such as the DOJ and the 
United States Postal Inspection Service--and with the various state 
attorneys general, including the District of Columbia. Thus, these 
``sweeps'' entailed many more actions besides those brought by the 
FTC.
    \55\ E.g., Project Fal$e Hope$, see FTC News Release: Federal, 
State Law Enforcers Complete Bogus Business Opportunity Sweep (Dec. 
12, 2006), available at http://www.ftc.gov/os/caselist/projectfalsehopes.shtm; Project Biz Opp Flop, see FTC News Release: 
Criminal and Civil Enforcement Agencies Launch Major Assault Against 
Promoters of Business Opportunity and Work-at-Home Schemes (Feb. 22, 
2005), available at http://www.ftc.gov/opa/2005/02/bizoppflop.htm; 
Project Busted Opportunity, see FTC News Release: State, Federal Law 
Enforcers Launch Sting on Business Opportunity, Work-at-Home Scams 
(June 20, 2002), available at http://www.ftc.gov/opa/2002/06/bizopswe.shtm; Project Biz-illion$, see FTC News Release: State-
Federal Crackdown on Phony Business Opportunities Intensifies (March 
6, 2000), available at http://www.ftc.gov/opa/2000/03/biz.shtm; 
Operation Money Pit, see FTC News Release: ``Operation Money Pit'' 
Targets Fraudulent Business Opportunity Schemes (Feb. 20, 1998), 
available at http://www.ftc.gov/opa/1998/02/moneypit.shtm; Project 
Vend Up Broke, see FTC News Release: FTC Announces ``Operation Vend 
Up Broke'' (Sept. 3, 1998), available at http://www.ftc.gov/opa/1998/09/vendup2.shtm; Project Trade Name Games, see FTC News 
Release: Display Racks for Trade-Named Toys and Trinkets rre Lastest 
in Business Opportunity Fraud Schemes (Aug. 5, 1997), available at 
http://www.ftc.gov/opa/1997/08/tradenam.shtm; Operation Missed 
Fortune FTC News Release: Operation Missed Fortune (Nov. 13, 1996), 
available at http://www.ftc.gov/opa/1996/11/misdfort.shtm; Project 
Telesweep, see FTC News Release: Major State-Fed Crackdown Targets 
Business Opportunity Scam ``Epidemic'' (July 18, 1995), available at 
http://www.ftc.gov/opa/1995/07/scam.shtm. Recent law enforcement 
sweeps ``Operation Bottom Dollar'' and ``Operation Short Change,'' 
challenged, among other things, ``work-at-home'' opportunities. See 
FTC News Release: FTC Cracks Down on Scammers Trying to Take 
Advantage of the Economic Downturn (Feb. 17, 2010), available at 
http://www.ftc.gov/opa/2010/02/bottomdollar.shtm; FTC News Release: 
FTC Targets Scams Spawned by Economic Downturn (July 1, 2009), 
available at http://www.ftc.gov/opa/2009/07/shortchange.shtm.
    \56\ See, e.g., United States v. Lifestyle Vending, Inc., No. 
CV-06-6421 (E.D.N.Y. 2006); FTC v. Am. Entm't Distribs., Inc., No. 
04-22431-CIV-Huck (2004); FTC v. Inspired Ventures, Inc., No. 02-
21760-CIV-Jordan (S.D. Fla. 2002); FTC v. Essex Mktg. Group, Inc., 
No. 2:02-cv-03415-TCP-AKT (E.D.N.Y 2002); United States v. Univend, 
LLC, No. 02-0433-P-L (S.D. Ala. 2002); FTC v. Pathway Merch., Inc., 
No. 01-CIV-8987 (S.D.N.Y. 2001); United States 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.shtm (FTC and 10 
states announce 40 enforcement actions against fraudulent vending 
business opportunities).
    \57\ See, e.g., United States v. Elite Designs, Inc., No. CA 05 
058 (D.R.I. 2005); United States. 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 filed 
18 enforcement actions against sellers of bogus display 
opportunities that use trademarks of well-known companies).
    \58\ See, e.g., FTC v. Advanced Pub. Commc'ns Corp., No. 00-
00515-CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Ameritel Payphone 
Distribs., Inc., No. 00-0514-CIV-Gold (S.D. Fla. 2000); FTC v. 
ComTel Commc'ns Global Network, Inc., No. 96- 3134-CIV-Highsmith 
(S.D. Fla. 1996); FTC v. Intellipay, Inc., No. H92 2325 (S.D. Tex. 
1992).
    \59\ See, e.g., FTC v. Bikini Vending Corp., No. CV- S-05-0439-
LDG-RJJ (D. Nev. 2005); FTC v. Network Serv. Depot, Inc., No. CV-S0-
05-0440- LDG-LRL (D. Nev. 2005); United States v. Am. Merch. Tech., 
No. 05-20443-CIV-Huck (S.D. Fla. 2005); FTC v. Hart Mktg. Enter. 
Ltd., Inc., No. 98-222-CIV-T-23 E (M.D. Fla. 1998); see also FTC v. 
FutureNet, Inc., No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998); FTC v. 
TouchNet, Inc., No. C98-0176 (W.D. Wash. 1998).
    \60\ See, e.g., FTC v. Bureau 2000 Int'l, Inc., No. 2:96-cv-
01473-WMB-RC (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).
---------------------------------------------------------------------------

c. The Final Rule Avoids Broadly Sweeping in MLMs
    The final Rule's definition of business opportunity avoids broadly 
sweeping in all sellers of MLM opportunities.\61\ The decision in the 
RPBOR to exclude MLMs from the scope of the Rule's coverage was based 
on the overwhelming majority of the approximately 17,000 comments that 
argued that the IPBOR failed to differentiate between unlawful pyramid

[[Page 76822]]

schemes--which the Commission intended to cover--and legitimate 
companies using an MLM model.
---------------------------------------------------------------------------

    \61\ See 73 FR at 16120.
---------------------------------------------------------------------------

    As detailed more fully in the RNPR, several common themes emerged 
from the numerous comments submitted by the MLM industry. Many 
commenters suggested 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.\62\ These commenters focused on 
the low fees--often less than $100--that top MLM companies charge 
prospective distributors for the right to sell their products, and on 
the relatively low risk that consumers would lose money on large 
purchases of inventory.\63\ In addition, industry commenters contended 
that the various disclosure requirements were ill-suited for the MLM 
business model and that many of the disclosure obligations would show 
direct selling companies in a distorting negative light.\64\ For 
example, according to one commenter, the requirement to disclose prior 
legal actions would cast successful and long-established companies in a 
worse light than fly-by-night frauds simply because larger companies 
with more sales representatives and more years of operation are likely 
to get involved in a larger number of lawsuits.\65\ Moreover, industry 
commenters uniformly asserted that the cost of compliance with the 
IPBOR would be extremely high for them--first, from the burden of 
developing, providing and keeping records of proposed disclosures, and 
second, from the impaired ability to recruit prospective 
distributors.\66\ Finally, industry commenters argued that unlike 
traditional business opportunities, the MLM industry is not permeated 
with fraud.\67\
---------------------------------------------------------------------------

    \62\ Id. at 16114.
    \63\ Id.
    \64\ Id. at 16115.
    \65\ Id.
    \66\ Id. at 16116.
    \67\ Id. at 16114.
---------------------------------------------------------------------------

    In contrast to the overwhelming majority of comments that opposed 
regulating MLMs through the Business Opportunity Rule, only a small 
minority of commenters were in favor of a rule that would cover MLMs. 
These commenters included two consumer groups, CAI and PSA, a few 
consumer advocates, individuals who regretted becoming involved in 
MLMs, and other MLM participants.\68\ Many of the consumer advocates 
contended that the MLM industry is comprised primarily of pyramid 
schemes masquerading as legitimate companies.\69\ The commenters also 
asserted that MLMs deceptively market their distributorships as a low-
risk opportunity with high earnings potential, when in fact, the costs 
of participating in an MLM can be high and the earnings comparatively 
small.\70\
---------------------------------------------------------------------------

    \68\ Id. at 16116.
    \69\ CAI-INPR at 2 (``I can certify that MLM (sic) are not 
direct selling programs, but chain selling programs''); CAI-INPR 
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-INPR at 2 (``In my opinion, most MLM 
firms operate in a deceptive or fraudulent manner'').
    \70\ PSA-INPR at 3-4; Brooks-INPR at 4; Johnson-INPR at 1.
---------------------------------------------------------------------------

    In the RNPR, the Commission concluded that although there is 
significant concern that some pyramid schemes may masquerade as 
legitimate MLMs, assessing the incidence of such practices is difficult 
and indeed, determining whether an MLM is a pyramid scheme requires a 
fact-intensive, case-by-case analysis. Further, the record developed 
was insufficient as a basis for crafting MLM disclosures that would 
effectively help consumers make an informed decision about the risks of 
joining a particular MLM.
    Based on the record and the Commission's law enforcement 
experience, the RNPR announced the Commission's determination that it 
would not be practicable to apply the requirements of the proposed Rule 
to MLM companies. Drawing on its law enforcement experience, the 
Commission acknowledged that some MLMs do engage in unfair or deceptive 
acts or practices, including operating pyramid schemes or making 
unsubstantiated earnings claims that cause consumer harm. The 
Commission, however, was not persuaded that workable, meaningful 
disclosures could be devised that would help consumers identify a 
fraudulent pyramid scheme. This being the case, the Commission decided 
that the proposed Rule was too blunt an instrument to alleviate fraud 
in the sale of MLMs. The Commission therefore determined to continue to 
challenge unfair or deceptive practices in the MLM industry through law 
enforcement actions alleging violations of Section 5 of the FTC Act and 
not through the Business Opportunity Rule. The Staff Report's 
recommendations were consistent with this decision.\71\
---------------------------------------------------------------------------

    \71\ Staff Report at 20.
---------------------------------------------------------------------------

    In response to the Staff Report, the Commission received 24 
comments addressing the Commission's decision to narrow the scope of 
the Rule to avoid broadly sweeping in MLMs. Specifically, 19 comments 
opposed the Commission's decision,\72\ one commenter agreed with the 
decision to narrow the scope of the Rule, but suggested modifying the 
Rule to contain bright line exemptions and to clarify the definition of 
``required payment,'' \73\ and two commenters advocated that the 
Commission adopt the Rule as recommended.\74\
---------------------------------------------------------------------------

    \72\ These included eleven comments submitted by consumer group 
CAI, as well as comments submitted by PSA and seven individuals. In 
addition, two individuals submitted comments supporting the 
statistical analysis provided by CAI President, Jon Taylor. See 
McKee-Staff Report; Ashby-Staff Report.
    \73\ Tupperware-Staff Report.
    \74\ DSA-Staff Report; Primerica-Staff Report.
---------------------------------------------------------------------------

    Commenters opposing the decision to avoid sweeping MLMs within the 
scope of the Rule's coverage set forth the same basic premise--that 
MLMs frequently misrepresent the level of earnings achieved by their 
distributors and therefore, should be subject to regulation.\75\ More 
specifically, many of the commenters advocated that the MLM industry 
should be required to disclose the average income of their 
participants.\76\ The Commission has carefully considered the comments 
submitted in response to the Staff Report on the issue of MLMs. While 
some of the commenters provided an analysis of the MLM industry with 
concrete examples of the types of problems that exist within that 
industry,\77\ many did not. Instead, many commenters expressed in 
general terms their low opinion of MLMs and their general opinion that 
MLMs should be regulated.\78\ More to the point, none of the commenters 
provided persuasive arguments for why the Business Opportunity Rule is 
the proper vehicle to address the problems they identified within the 
MLM industry.
---------------------------------------------------------------------------

    \75\ See, e.g., O'Handley-Staff Report (``I personally believe 
that this industry is a borderline scam at best and needs MORE 
oversight than everyone else-NOT LESS.''); Welling-Staff Report (``I 
find it amazing that * * * the MLM industry has little or no 
regulations.'').
    \76\ See, e.g., Barrett-Staff Report (FTC should ``demand 
truthful disclosure of income potentials for MLM''); Brooks-Staff 
Report (MLMs should produce ``actual, verifiable data concerning the 
earnings and losses of their distributors''); CAI-Staff Report at 7-
3 (advocating for the disclosure of ``information supporting 
earnings claims'').
    \77\ See, e.g., CAI-Staff Report (reporting research on the MLM 
industry and quoting representations made by various MLMs).
    \78\ See, e.g., Craig-Staff Report (there is ``ample evidence of 
problems with MLM to warrant inclusion in the rule''); Afoa-Staff 
Report (commenting on personal experience with one MLM).
---------------------------------------------------------------------------

    Before discussing the comments in further detail, however, one 
point in the rulemaking record requires clarification. Several comments 
focused on the

[[Page 76823]]

following language contained in the Staff Report: ``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.'' \79\ The 
commenters suggest, incorrectly, that the quoted language reveals a 
finding by the Commission that there is little or no evidence of fraud 
occurring within the MLM industry.\80\ This language, however, referred 
to a passage from the RNPR that addressed traditional product 
distribution arrangements, not MLMs.\81\ The Commission has not made a 
finding that there is little or no evidence of fraud within the MLM 
industry; to the contrary, it has specifically recognized, through its 
own law enforcement experience, that some MLMs may be pyramid schemes 
in masquerade and may make false and unsubstantiated earnings 
claims.\82\
---------------------------------------------------------------------------

    \79\ See, e.g., CAI-Staff Report at 1, 10-41; PSA-Staff Report.
    \80\ CAI-Staff Report at 10-41; PSA-Staff Report (``The basis of 
the exclusion appears to be the extraordinary claim that there is 
insufficient evidence of widespread fraud in the multi-level 
marketing field.'').
    \81\ Indeed, the language quoted by CAI and PSA contains a 
footnote referencing the section of the RNPR that discussed 
traditional product distribution arrangements. See Staff Report at 
30 (citing 73 FR at 16113).
    \82\ See 73 FR at 16119; see also Staff Report at 20.
---------------------------------------------------------------------------

    In any event, the comments submitted in response to the Staff 
Report do not persuade the Commission that the Business Opportunity 
Rule is the proper tool to address these problems.\83\ Two of the 
affirmative disclosure requirements illustrate the difficulty in 
applying the Rule to MLMs: (1) The disclosure of substantiation for 
earnings claims; and (2) the disclosure of references.
---------------------------------------------------------------------------

    \83\ Indeed, one commenter recommended a completely separate set 
of disclosures for MLM opportunities, further suggesting that the 
Business Opportunity Rule is a poor fit for the MLM industry. See 
Johnson-Staff Report (recommending that the FTC convert its consumer 
education on investing with an MLM into a series of disclosures that 
would be MLM-specific).
---------------------------------------------------------------------------

    First, as the Commission has acknowledged, the varied and complex 
structure of MLMs makes it exceedingly difficult to make an accurate 
earnings disclosure and likely would require different disclosures for 
different levels of participation in the company. For instance, it 
would be difficult to craft an accurate earnings disclosure that would 
account for ``inactive'' participants that use their distributorship as 
a ``buyers club'' and are interested only in purchasing goods at a 
wholesale price for their own use.\84\ This problem appears to be 
unique to MLMs and, so far as the Commission is aware, does not arise 
in other forms of business opportunities.
---------------------------------------------------------------------------

    \84\ See 73 FR at 16120.
---------------------------------------------------------------------------

    Furthermore, it may be difficult to determine retail income if the 
MLM is not in a position 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 the MLM 
has policies in place purportedly to ensure that a portion of its 
distributors' income is derived from retail sales, these policies could 
go unenforced, or even where ostensibly enforced, could be circumvented 
by distributors who may have an incentive to ``inflate'' their retail 
sales by ``certifying'' that such sales occurred in order to qualify 
for higher levels of commissions. In light of these difficulties, and 
because the comments submitted in response to the Staff Report did not 
refute these findings, the Commission continues to believe that 
developing a standard, useful, and understandable earnings disclosure 
that would apply to both the MLM industry and the other business 
opportunities covered by the Rule remains elusive.\85\
---------------------------------------------------------------------------

    \85\ While CAI presented its proposal for an earnings 
disclosure, it is clear that the disclosure would be specific to 
MLMs and would have no application to the other types of business 
opportunities addressed by the Rule. See CAI-Staff Report at 7-33.
---------------------------------------------------------------------------

    Second, the reference disclosure required under the final Rule 
would make little sense in the MLM context. As the Commission has 
previously recognized, those prior purchasers appearing on the 
reference list likely would stand to receive a financial benefit if 
they could convince a prospect to enroll into their downline.\86\ Under 
these circumstances, information provided by such a reference might not 
be a reliable indicator of the potential risk and rewards of enrollment 
in the MLM.
---------------------------------------------------------------------------

    \86\ See 73 FR at 16121.
---------------------------------------------------------------------------

    In response to the Staff Report, the Commission received one 
comment attempting to refute this reasoning. The commenter argued that, 
contrary to the Commission's view, prior purchasers would have little 
incentive to misrepresent the success of the MLM because that incentive 
would exist only if the prospective purchaser would become part of the 
prior purchaser's downline, which the commenter implies would not 
always be the case.\87\ The commenter further argued that the fact that 
the prospective purchaser had received the disclosure document would 
indicate that the prospective purchaser had already been recruited, and 
therefore would be unlikely to face further recruitment by the prior 
purchaser.\88\
---------------------------------------------------------------------------

    \87\ Brooks-Staff Report at 8.
    \88\ Id.
---------------------------------------------------------------------------

    The Commission finds these arguments unpersuasive. To the extent 
there is any financial incentive for a reference to puff or exaggerate 
the benefits of buying into a business, that reference obviously cannot 
provide a disinterested opinion to the prospect. The MLM model is 
inherently structured to create financial incentives for distributors 
to recruit prospects into their downlines.\89\ Thus, those financial 
incentives are present whenever a potential recruit enquires into the 
business. To illustrate the point, even dissatisfied distributors have 
an incentive to refrain from disparaging the MLM because any losses 
they have suffered could potentially be recouped by the recruitment of 
the prospect into their downline. Whether they are ultimately 
successful in their attempt to woo a recruit from another distributor 
is immaterial; they have every incentive to try.\90\
---------------------------------------------------------------------------

    \89\ Multi-level marketing is 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 Vander Nat & Keep, supra note 13.
    \90\ Comments submitted in response to the Staff Report did not 
refute these arguments, but actually bolstered them. For instance, 
one commenter noted that MLM recruiters will often pretend they are 
wealthy when they are not, simply to entice others to join the MLM. 
See O'Handley-Staff Report at 2; see also CAI-Staff Report at 5 
(noting that in MLMs, ``every major victim is of necessity a 
perpetrator (recruiter) because to have any hope of recouping their 
ongoing investments * * * they must recruit others to do what they 
have done'').
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    Thus, the Commission continues to believe that the final Rule's 
reference disclosure would not provide prospective MLM participants 
with an accurate account of the MLM experience or with information 
necessary to make an informed purchasing decision. Moreover, these 
challenges appear to be unique to MLMs, and as far as the Commission is 
aware, are not inherent in the other types of business opportunities 
addressed by the final Rule.
    Accordingly, while the Commission recognizes that problems may 
exist within the MLM industry, it continues to find that the Business 
Opportunity Rule is not the appropriate vehicle through which to 
address them. Rather, the Commission will continue to challenge unfair 
or deceptive practices in the MLM industry through Section 5 of the FTC 
Act. Thus, the final Rule has

[[Page 76824]]

been crafted to avoid broadly sweeping in MLMs.\91\
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    \91\ The final Rule, however, does not explicitly exempt MLMs 
from coverage, but instead contains a narrow definition of 
``business opportunity.'' As discussed in Section III.A.3 infra, the 
final Rule's definition of ``business opportunity'' eliminates two 
types of business assistance that previously would have triggered 
the Rule's coverage of MLMs: (1) Tracking or paying commissions or 
other compensation for recruitment or sales; and (2) providing 
generalized training or advice for the business. The final Rule is 
thus more narrowly tailored to those types of deceptive business 
assistance representations that are the hallmark of fraudulent 
business opportunity schemes: location, account, and ``buy back'' 
assistance. 73 FR at 16123.
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2. Streamlined Disclosure Requirements
    Although the scope of coverage is broader, the compliance burden is 
lighter under the final Rule than under the interim Business 
Opportunity Rule. In contrast to the voluminous disclosures that 
business opportunity sellers are required to make under the interim 
Business Opportunity Rule, the final Rule has significantly streamlined 
the disclosures to focus on the types of information most material to 
business opportunity purchasers: (1) The seller's identifying 
information; (2) whether the seller makes an earnings claim; \92\ (3) 
whether the seller, its affiliates, or key personnel, have been 
involved in any legal actions; \93\ (4) whether the seller has a 
cancellation or refund policy; and (5) a list of purchasers who have 
bought the business opportunity within the previous three years. The 
final Rule also requires the disclosure of supplementary information 
that substantiates earnings claims, identifies legal actions, and 
states the material terms of the seller's cancellation or refund 
policy. These disclosures are consistent with the Commission's 
experience concerning common practices in the sale of business 
opportunities, and the types of information most meaningful to 
prospective purchasers.\94\ For example, the Commission's experience 
demonstrates that earnings claims are highly relevant to consumers in 
making their investment decisions and are often the single most 
decisive factor in such decisions. Furthermore, the presence of a legal 
action against the seller or its key personnel may warn the purchaser 
of potential risk associated with the business opportunity. Information 
about the seller's cancellation or refund policy is relevant to 
consumers when weighing their investment risks. Finally, providing the 
contact information for prior purchasers will allow prospective 
purchasers to discuss the business opportunity with other purchasers 
prior to committing themselves to the business opportunity venture.
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    \92\ If the business opportunity seller indicates that it does 
make earnings claims, then it must complete a separate earnings 
claim statement setting forth the earnings claim, the number and 
percentage of purchasers who achieved the represented level of 
earnings, the date range during which the represented earnings were 
achieved, and additional information.
    \93\ If the business opportunity seller indicates that it or its 
affiliates or key personnel have been subject to legal actions, then 
it must complete a separate attachment setting forth the full 
caption of each action, and may choose to include a brief 100-word 
description of the action.
    \94\ To fully develop the rulemaking record on business 
opportunities, in the ANPR, the Commission solicited comment about 
what pre-sale disclosures would ensure that business opportunity 
purchasers receive material information necessary to make an 
investment decision and prevent fraud in the sale of business 
opportunities. 62 FR at 9121, Questions 15 & 16.
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    These streamlined disclosure requirements strike the appropriate 
balance by providing consumers with material information in a 
straightforward and focused document that will allow them to make 
informed purchasing decisions. At the same time, the streamlined form 
eases the compliance burden currently imposed on business opportunity 
sellers. Like the Original Franchise Rule and the interim Business 
Opportunity Rule, the final Rule is posited on the notion that a fully 
informed consumer is in a better position to determine whether a 
particular offering is in his or her best interest when sellers are 
required to disclose to them material information. Consumers should be 
protected against receiving inaccurate information and self-serving 
unsubstantiated statements from business opportunity sellers. 
Accordingly, the final Rule requires that business opportunity sellers 
disclose just the types of information that the Commission has 
determined are most material to potential purchasers in making a 
purchasing decision: The seller's identifying information; whether the 
seller makes an earnings claim, and if so, the substantiation for that 
claim; whether the seller offers a refund or cancellation policy, and 
if so, the material terms of that policy; whether the seller or its 
affiliates and key personnel have been the subject of prior legal 
actions; and the names and business telephone numbers of prior 
purchasers to contact. The Commission has determined that these 
streamlined disclosure requirements will provide potential purchasers 
with the tools they need to protect themselves from false claims, while 
at the same time minimizing compliance costs for legitimate business 
opportunity sellers.
3. Express Prohibitions
    In addition to mandating disclosures to prospective purchasers, the 
final Rule includes prohibitions on sellers from engaging in a number 
of deceptive practices, which were absent from the interim Business 
Opportunity Rule. In drafting the final Rule, the Commission relied 
heavily on its experience in addressing a wide array of deceptive and 
unfair business opportunity practices through law enforcement actions 
under the Original Franchise Rule, the interim Business Opportunity 
Rule, and Section 5 of the FTC Act. The Commission also relied on the 
staff's analysis of consumer complaints submitted to the FTC. By far, 
the most frequent allegations in Commission business opportunity cases 
pertain to false or unsubstantiated earnings claims.\95\ False 
testimonials or fictitious references and misrepresentations concerning 
the profitability of locations, availability of support and assistance, 
nature of the products or services sold, prior success of the seller or 
locator, full extent of investment costs, and refund policies are also 
prevalent in Commission business opportunity cases.\96\ These alleged 
material misrepresentations or omissions also were frequently mentioned 
in complaints to the Commission submitted by business opportunity 
purchasers.\97\
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    \95\ See, e.g., FTC v. Darling Angel Pin Creations, Inc., No. 
8:10-cv-00335-JSM-TGW (M.D. Fla. Feb. 2010) (representing likely 
earnings of $500 per week); FTC v. Route Wizard, Inc., No. 1:06-cv-
00815-KD-B (S.D. Ala. 2006) (representing that purchasers could earn 
$3,000 a month); FTC v. Bus. Card Experts, Inc., No. 06-CV-4671 
(PJS/RLE) (D. Minn. 2006) (claiming likely earnings of $150,000 in 
first year); FTC v. Richardson d/b/a Mid-South Distribs., No. CV-06-
S-4754-NW (N.D. Ala. 2006) (representing likely earnings of over 
$2,000 a month or $65,000 a year); FTC v. Accent Mktg., Inc., et 
al., No. 02-405-CB-M (S.D. Ala. 2002) (representing likely earnings 
of $3,200 per month to $16,000 per month).
    \96\ See, e.g., FTC v. Bus. Card Experts, Inc., No. 06-CV-4671 
(PJS/RLE) (D. Minn. 2006) (used paid references); FTC v. Route 
Wizard, Inc., No. 1:06-cv-00815-KD-B (S.D. Ala. 2006) 
(misrepresented location assistance); FTC v. Richardson d/b/a Mid-
South Distribs., No. CV-06-S-4754-NW (N.D. Ala. 2006) (promised 
high-traffic, high-profit locations); FTC v. Am. Entm't Distribs., 
Inc., No. 04-22431-Civ-Martinez (S.D. Fla. 2004) (used fictitious 
references, misrepesented locations); FTC v. Fidelity ATM, Inc., No. 
06-81101-Civ-Hurley/Hopkins (S.D. Fla. 2004) (misrepresented level 
of support or assistance); FTC v. Accent Mktg., Inc., et al., No. 
02-405-CB-M (S.D. Ala. 2002) (misrepresented that references 
purchased the business venture or would provide reliable 
descriptions of their experience); FTC v. Associated Record 
Distribs., Inc., No. 02-21754-CIV-Graham/Garber (S.D. Fla. 2002) 
(misrepresented business assistance and that references either 
purchased the business venture or would provide reliable 
descriptions of their experience).
    \97\ In 2010, the Commission logged over 12,000 complaints 
against franchises, business opportunities, and work-at-home 
schemes. See Consumer Sentinel Network Databook (March 2011) at 76, 
available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf.

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[[Page 76825]]

    Therefore, among other things, under the final Rule, business 
opportunity sellers are prohibited from misrepresenting: (1) Earnings; 
(2) the cost, efficacy, nature, or central characteristics of the 
business opportunity or the goods or services sold to the purchaser as 
part of the business opportunity; (3) their cancellation or refund 
policies; (4) promised assistance; (5) the calculation and distribution 
of commissions, bonuses, incentives, premiums, or other payments from 
the seller; (6) the likelihood of finding locations for equipment or 
accounts for services; (7) that the business opportunity is an offer of 
employment; (8) territorial exclusivity or more limited territorial 
protections; (9) endorsements; and (10) references. The final Rule also 
prohibits business opportunity sellers from failing to make promised 
refunds, and from assigning to any purchaser a purported exclusive 
territory that has been sold to another purchaser.
    The final Rule prohibits entities covered by the Rule from engaging 
in the specific acts or practices identified as deceptive or unfair 
through the Commission's law enforcement experience, as well as the 
rulemaking record. Engaging in any of those acts or practices is a 
violation of both the final Rule and Section 5 of the FTC Act.\98\ Of 
course, the Commission, under Section 5, also may challenge any conduct 
that is not enumerated in the final Rule if the Commission determines 
that such conduct constitutes an unfair or deceptive act or practice.
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    \98\ 15 U.S.C. 57a(d)(3).
---------------------------------------------------------------------------

4. Disclosures in Spanish or Other Languages Besides English
    The Commission's law enforcement history demonstrates that some 
business opportunities are marketed primarily to Spanish speaking 
consumers.\99\ Based on this experience, the Staff Report discussed the 
limited utility of English-language disclosures for business 
opportunities marketed in Spanish. Specifically, the staff questioned 
whether the disclosure document could be made more effective by 
translating it into Spanish and requiring that when a business 
opportunity is marketed in Spanish, the disclosure document and any 
disclosures required by the Rule be provided in Spanish. The Staff 
Report further suggested that when a business opportunity seller 
purposefully reaches out to a particular population by marketing in the 
foreign language spoken by members of that community, all of the 
disclosures required by the Rule should be accessible and 
comprehensible to each of those potential purchasers. The Staff Report 
recommended, therefore, that because the Commission has specific law 
enforcement experience with business opportunities marketed in Spanish, 
a Spanish translation of the disclosure document was necessary to 
attach as an appendix to the final Rule. It further recommended that 
where the business opportunity is marketed in a language other than 
Spanish, the business opportunity seller should be required to 
translate the disclosure document into the language of the sale and 
provide all the disclosures required by the Rule in that language.
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    \99\ E.g., FTC v. Zoilo Cruz, No. 3:08-cv-01877-JP (D. P.R. 
2008) (envelope stuffing scheme marketed in Spanish-language 
newspapers and on a Web site available in Spanish and English); FTC 
v. Integrity Mktg. Team, Inc., No. 07-cv-61152 (S.D. Fla. 2007) 
(envelope stuffing scheme marketed in Spanish-language classified 
advertisements); FTC v. Hispanexo, Inc., No. 1:06-cv-00424-JCC-TRJ 
(E.D. Va. 2006) (assistance in starting a construction, gardening, 
or cleaning business marketed through Spanish-language television 
and radio stations); FTC v. Juan Matos, No. 06-61429-CIV-Altonaga 
(S.D. Fla. 2006) (craft assembly business marketed through Spanish-
language advertisements); FTC v. Nat'l Vending Consultants, Inc., 
CV-S-05-0160-RCJ (PAL) (D. Nev. 2005) (deceptively marketed vending 
machine business opportunities--with many marketing efforts 
specifically targeting Spanish-speaking consumers); FTC v. Amada 
Guerra, No. 6:04-CV-1395 (M.D. Fla. 2004) (product assembly scheme 
telemarketed to Spanish-speaking consumers); FTC v. USS Elder 
Enter., Inc., No. SACV-04-1039 AHS (Anx) (C.D. Cal. 2004) (work at 
home assembly scheme offered through Spanish-language newspapers and 
magazines); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex. 
2004) (deceptive product assembly opportunity marketed through 
Spanish-language newspaper and magazine advertisements).
---------------------------------------------------------------------------

    It is the long-held policy of the Commission that disclosures 
required by Commission orders, rules, or guides should be made in the 
predominant language used in the related advertisement or sales 
material.\100\ Upon consideration of this policy, the staff's 
recommendation, and the rationale for the staff's recommendation, the 
Commission agrees with the staff's recommendation. Accordingly, the 
final Rule contains a new provision, Sec.  437.5, which specifies the 
disclosure requirements for sales conducted in Spanish or other 
languages besides English.
---------------------------------------------------------------------------

    \100\ FTC Enforcement Policy Statement Concerning Clear and 
Conspicuous Disclosures in Foreign Language Advertising and Sales 
Materials, 16 CFR 14.9.
---------------------------------------------------------------------------

II. The Legal Standard for Amending the Rule

    The Commission is amending 16 CFR Part 437 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.\101\ 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).
---------------------------------------------------------------------------

    \101\ 16 CFR 1.7, 5 U.S.C. 551 et seq.
---------------------------------------------------------------------------

    The Commission's Rules of Practice further provide that if the 
Commission determines to promulgate a rule, it shall adopt a Statement 
of Basis and Purpose (``SBP''), which must address four factors: (1) 
The prevalence of the acts or practices addressed by the rule; (2) the 
manner and context in which the acts or practices are unfair or 
deceptive; (3) the economic effect of the rule, taking into account the 
effect on small businesses and consumers; and (4) the effect of the 
rule on state and local laws.\102\ In this section, the Commission 
summarizes its findings regarding each of these factors.\103\
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    \102\ Rules of Practice, 16 CFR 1.14(a)(1)(i)-(iv). In addition, 
in accordance with 16 CFR 1.14(a)(1)(v), the regulatory analysis is 
provided at Section V of this Statement of Basis and Purpose.
    \103\ Support in the record for each factor is set forth in the 
substantive discussion of each provision of the final Rule.
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A. Prevalence of Acts or Practices Addressed by the Rule

    The Commission promulgated the Original Franchise Rule in 1978 
based upon its finding of prevalent deception in the offer and sale of 
franchises and business opportunity ventures, leading to significant 
consumer injury. Since 1995, when the Commission commenced a regulatory 
review of the Original Franchise Rule to ensure that the Original 
Franchise Rule continued to serve a useful purpose, the Commission has 
sought comment several times to ascertain the need for a separate trade 
regulation rule to address widespread fraud in the sale of business 
opportunities.\104\
---------------------------------------------------------------------------

    \104\ See 60 FR at 17657; 62 FR at 9117; 71 FR at 19084; 73 FR 
at 16133; 74 FR at 18172; 75 FR at 68559.
---------------------------------------------------------------------------

    Throughout the Rule amendment proceedings, the Commission has 
described its experience in combating a wide array of business 
opportunity fraud through law enforcement actions. Indeed, the 
Commission's law enforcement experience in conducting numerous sweeps 
of the business opportunity industry demonstrates that deceptive and 
unfair practices in the sale of business opportunities are not only 
prevalent but persistent.\105\
---------------------------------------------------------------------------

    \105\ Since 1995, the Commission has conducted more than 18 law 
enforcement sweeps to combat deceptive business opportunity 
programs, many with other law enforcement partners. E.g., Operation 
Bottom Dollar (2010); Operation Short Change (2009); Project Fal$e 
Hope$ (2006); Project Biz Opp Flop (2005); Project Busted 
Opportunity (2002); Project Telesweep (1995); Project Biz-illion$ 
(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, the Commission 
also targeted specific business opportunity ventures such as 
envelope stuffing (Operation Pushing the Envelope, see FTC News 
Release: Agencies ``Pushing the Envelope'' to Protect Consumers 
(Dec. 16, 2003), available at http://www.ftc.gov/opa/2003/12/pushenvelope.shtm); medical billing (Operation Dialing for 
Deception, see FTC News Release: FTC Sweep Protects Consumers from 
``Dialing for Deception'' (Apr. 15, 2002), available at http://www.ftc.gov/opa/2002/04/dialing.shtm and Project Housecall, see FTC 
News Release: Bogus Business Opportunity Scams Targeted by FTC (Jan. 
28, 1998), available at http://www.ftc.gov/opa/1998/01/housecal.shtm); seminars (Operation Showtime, see Operation ``Show 
Time'' Targets Seminars Selling Fraudulent Business Opportunities 
and Investments (May 5, 1998), available at http://www.ftc.gov/opa/1998/05/showtime.shtm); Internet-related services (Net Opportunities 
1998); vending machines (Operation Yankee Trader, see FTC News 
Release: Operation ``Yankee Trader'' Targets Bogus Vending Machine 
Business Opportunities (Sept. 11, 1997), available at http://www.ftc.gov/opa/1997/09/still.shtm); and 900 numbers (Project 
Buylines, see FTC News Release: Newest Business Opportunity Fraud Is 
For 900-Number Lines, Warns Federal Trade Commission (March 7, 
1996), available at http://www.ftc.gov/opa/1996/03/buyline.shtm).

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[[Page 76826]]

    The Commission has amended the interim Rule to address the sale of 
deceptive work-at-home schemes, where unfair and deceptive practices 
have been both prevalent and persistent. These schemes prey upon stay-
at-home parents, the physically disabled, those who do not speak 
English, and others who cannot obtain employment outside of the home. 
Sellers of fraudulent work-at-home opportunities deceive their victims 
with promises of an ongoing relationship in which the seller will buy 
the output that business opportunity purchasers produce, often 
misrepresenting to purchasers that there is a market for the 
purchasers' goods and services. In addition, the Commission's law 
enforcement experience demonstrates that fraudulent work-at-home 
opportunity sellers frequently invent undisclosed conditions and 
limitations for rejecting the work performed by purchasers and refusing 
to buy back the goods the purchasers produce. Similarly, these sellers' 
promises of continuing support and assistance frequently prove empty, 
leaving work-at-home opportunity purchasers with no help in figuring 
out how to assemble misshapen components into finished products. 
Finally, as the Commission's cases and complaint data demonstrate, con 
artists who promote fraudulent work-at-home schemes frequently dupe 
consumers with false earnings claims.
    Since 1990 the Commission has brought over 75 work-at-home 
cases.\106\ These actions have targeted a variety of schemes, ranging 
from envelope stuffing and craft assembly programs, to technology-
driven opportunities and medical billing plans.\107\
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    \106\ Many of these cases were brought in connection with law 
enforcement sweeps of fraudulent work-at-home and related employment 
opportunities, including Operation Bottom Dollar (2010); Operation 
Short Change (2009); Project Fal$e Hope$ (2006); Project Biz Opp 
Flop (2005); Project Homework (2001); Operation Top Ten Dot Con, see 
FTC News Release: Law Enforcers Target ``Top 10'' Online Scams (Oct. 
31, 2000), available at http://www.ftc.gov/opa/2000/10/topten.shtm; 
and Operation Missed Fortune, see FTC News Release: FTC, State 
Enforcers Target Get-Rich-Quick Self-Employment Schemes (Nov. 13, 
1996), available at http://www.ftc.gov/opa/1996/11/misdfort.shtm.
    \107\ See, e.g., FTC v. Real Wealth, Inc., 10-CV-0060-W-FJG 
(W.D. Mo. 2010) (envelope stuffing); FTC v. Darling Angel Pin 
Creations, Inc., No. 8:10-cv-00335-JSM-TGW (M.D. Fla. 2010) (craft 
assembly); FTC v. The Results Group L.L.C, No. CV 06 2843 PHX JAT 
(D. Ariz. 2006) (work-at-home involving becoming a Web-based 
affiliate); FTC v. Mazzoni & Son, Inc., No.1:06CV2385 (N.D. Ohio 
2006) (medical billing).
---------------------------------------------------------------------------

    Data compiled by the Commission demonstrate the prevalence of work-
at-home opportunities that do not deliver the represented level of 
earnings. Indeed, the Commission's 2005 consumer fraud survey revealed 
that work-at-home plans from which the respondents who had purchased 
them did not earn at least half the level of promised earnings ranked 
fifth in terms of the estimated number of victims and third in terms of 
estimated number of incidents reported during the year.\108\ According 
to the survey, an estimated 2.4 million individuals experienced work-
at-home fraud, and there were an estimated 3.8 million incidents during 
the one year period surveyed.\109\
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    \108\ See Consumer Fraud in the United States: The Second FTC 
Survey (October 2007) at 22, available at http://www.ftc.gov/opa/2007/10/fraud.pdf (studying consumer experience with a variety of 
products and services, including weight-loss products, foreign 
lotteries, and prize promotions, among others).
    \109\ Id.
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    Consumer complaints, survey data, and the Commission's law 
enforcement experience convince the Commission that deception is 
prevalent in work-at-home offers. The final Rule's disclosure 
requirements and prohibitions provide potential work-at-home purchasers 
with the tools they need to protect themselves from false claims.
    In addition to work-at-home opportunities, the final Rule also 
covers the same types of business opportunities that previously were 
covered under the Original Franchise Rule and the interim Business 
Opportunity Rule, such as opportunities involving vending machines, 
rack displays, Internet kiosks, and the like, which, as the 
Commission's experience demonstrates, have been a persistently fertile 
ground for fraud and deception.\110\ The Commission has conducted 
numerous law enforcement sweeps that targeted a wide variety of 
business opportunity scams involving the sale of vending machines, rack 
displays, and other opportunities covered by the Original Franchise 
Rule and the interim Business Opportunity Rule.\111\ Consumer complaint 
data indicates that these types of business opportunities continue to 
be a significant source of consumer injury.\112\
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    \110\ See id. at 16 (reporting that an estimated 800,000 
individuals were victims of business opportunity fraud during the 
year surveyed).
    \111\ E.g., Project Fal$e Hope$ (2006) (vending machine and rack 
display opportunities); Project Biz Opp Flop (2005) (vending machine 
opportunities); Project Busted Opportunity (2002) (vending machine 
and rack display opportunities); Project Biz-illion$ (1999); 
Operation Money Pit (1998) (rack display opportunities); Project 
Vend Up Broke (1998) (vending machine opportunities); Project Trade 
Name Games (1997) (rack display opportunities); Operation Missed 
Fortune (1996); Project Telesweep (1995) (vending machine and rack 
display opportunities); see also supra note 55.
    \112\ See Consumer Sentinel Network Databook (March 2011) at p. 
76, available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf (reporting that in 2010, over 12,000 
complaints were filed against franchises, business opportunities, 
and work-at-home schemes).
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B. Manner and Context in Which the Acts or Practices Are Deceptive or 
Unfair

    The final Rule has been carefully crafted to address common 
deceptive or unfair practices engaged in by fraudulent business 
opportunity sellers.\113\ By far, the most frequent allegations in the 
Commission's business opportunity cases pertain to inducing consumers 
to pay significant amounts of money by means of false or 
unsubstantiated earnings claims.\114\ This is followed by inducement 
through false testimonials or fictitious references and by 
misrepresentations concerning: The profitability of locations; the 
availability of assistance; the nature of the products or services 
being sold; the prior success of third-party entities in finding 
successful locations; the full extent of

[[Page 76827]]

the investment costs; and refund policies.\115\ The numerous business 
opportunity complaints that consumers submit to the Commission each 
year consistently reference these same concerns. The disclosure 
requirements under the final Rule address each of these deceptive or 
unfair practices.
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    \113\ An act or practice is deceptive under Section 5(a) if it 
involves a material representation or omission that is likely to 
mislead consumers, acting reasonably under the circumstances, to 
their detriment. See FTC Policy Statement on Deception, appended to 
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984). An act or 
practice is unfair under Section 5 if: (1) It causes or is likely to 
cause substantial injury to consumers; (2) the harm to consumers is 
not outweighed by any countervailing benefits; and (3) the harm is 
not reasonably avoidable by consumers. See FTC Policy Statement on 
Unfairness, appended to In re International Harvester, 104 F.T.C. 
949, 1062 (1984). See 15 U.S.C. 45(n).
    \114\ See supra note 95.
    \115\ See supra note 96.
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1. Earnings Claims
    In the Commission's experience, earnings claims are highly material 
to consumers in making their investment decisions and typically are the 
single most decisive factor in such decisions. Earnings claims lie at 
the heart of business opportunity fraud, and are typically the 
enticement that persuades consumers to invest their money. In the 
overwhelming majority of the Commission's more than 245 cases against 
business opportunity sellers, the business opportunity seller has lured 
unsuspecting consumers through false or deceptive earnings 
representations. These claims have taken the form of purported 
historical earnings statistics (e.g., ``Our operators have earned 
$100,000 a year''), as well as wild and unsupported earnings 
projections (e.g., ``You will earn $100,000 in your first year''). 
Promoters of work-at-home opportunities frequently dupe consumers with 
false earnings claims. For example, in one recent envelope-stuffing 
case brought under Section 5 of the FTC Act, the defendants promised 
purchasers weekly earnings ranging from $1,200 to $4,400.\116\ In 
another case targeting Spanish-speaking consumers, the defendants 
promised that purchasers could earn $1,400 per week stuffing envelopes 
from home.\117\ Often earnings claims are express, but may be implied. 
Sellers often convey these false and unsubstantiated earnings claims 
orally, although it is not unusual for such claims to be in writing. 
Nor is it unusual for these false earnings claims to contradict 
inconspicuous disclaimers the seller has hidden in contracts or other 
printed materials. At any rate, false or unsubstantiated earnings 
claims are inherently likely to mislead consumers. Certainly, no aspect 
of the sales transaction is more material than the level of earnings a 
purchaser can reasonably expect. Moreover, prospective purchasers 
reasonably interpret earnings claims at face value. Thus, false or 
unsubstantiated earnings claims are deceptive and unlawful under 
Section 5 of the FTC Act.\118\
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    \116\ FTC v. Global U.S. Resources, No. 10-CV-1457 (RNC) (D. 
Conn. 2010).
    \117\ FTC v. Zoilo Cruz, No. 3:08-cv-01877-JP (D.P.R. 2008).
    \118\ See FTC Policy Statement on Deception, appended to 
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
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    Under the Original Franchise Rule and the interim Business 
Opportunity Rule, the Commission sought to ensure the accuracy and 
reliability of earnings claims, both written and oral, express or 
implied, by prohibiting sellers from making an earnings claim, unless 
the seller possessed a reasonable basis for the claim, along with 
written substantiation for the claim, at the time the claim was made. 
Sellers were also required to provide prospective purchasers with a 
separate earnings claims statement that set forth the claim and the 
substantiation for that claim. The final Rule continues to address 
false and deceptive earnings claims by requiring business opportunity 
sellers to disclose whether they make an earnings claim. Sellers who 
make earnings claims must attach to the required disclosure document an 
earnings claim statement setting forth the earnings claim, the number 
and percentage of purchasers who achieved the represented level of 
earnings, the date range during which the represented earnings were 
achieved, and other information. These disclosure requirements are 
designed to help consumers 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. The final Rule, in Sec.  437.6(d), also 
prohibits misrepresenting ``the amount of sales, or gross or net income 
or profits a prospective purchaser may earn, or that prior purchasers 
have earned.''
2. References
    The use of paid references or ``shills'' is a common practice in 
the sale of fraudulent business opportunities. In many of the 
Commission's cases against fraudulent business opportunity sellers, the 
defendants had offered to provide prospective purchasers with 
purportedly independent references, who in reality were nothing more 
than paid shills--individuals who were compensated by the defendants to 
claim that they were successful operators of defendants' business 
ventures.\119\ The business opportunity sellers, however, had not 
disclosed to prospective purchasers that the references were paid or 
otherwise received a benefit for providing a favorable account of the 
opportunity. The use of fictitious references is an objectionable, but 
very effective means of misleading consumers about a highly material 
fact--whether other purchasers have actually achieved earnings as the 
seller represents, and whether those purchasers' overall experience of 
operating the business has been positive. When the information a 
reference provides on these questions is fictitious, a prospective 
purchaser has no way of knowing the information is false and 
unreliable. Thus, the use of fictitious references--shills--is a 
deceptive practice.\120\
---------------------------------------------------------------------------

    \119\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); U.S. v. Vaughn, No. 01-20077-01-KHV (D. 
Kan. 2001); FTC v. Hart Mktg. Enter. Ltd., Inc., No. 98-222-CIV-T-23 
E (M.D. Fla. 1998); FTC v. Inetintl.com, No. 98-2140 (C.D. Cal. 
1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez 
(S.D. Fla. 1996); FTC v. Allstate Bus. Consultants Group, Inc., No. 
95-6634-CIV-Ryskamp (S.D. Fla. 1995).
    \120\ See FTC Policy Statement on Deception, appended to 
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
---------------------------------------------------------------------------

    The Original Franchise Rule and the interim Business Opportunity 
Rule sought to remedy this deceptive practice by requiring business 
opportunity sellers to provide prospective purchasers with the names 
and contact information for at least 10 current purchasers of the 
opportunity. The final Rule continues to remedy this deceptive practice 
by requiring a business opportunity seller to disclose a list of all 
prior purchasers of the business opportunity during the previous three 
years. The disclosure of prior purchasers is instrumental in preventing 
fraud because it enables prospective purchasers to independently verify 
the seller's claims. The final Rule also, in Sec.  437.6(q), prohibits 
misrepresenting that any person has purchased a business opportunity, 
or that any person can provide an independent assessment of the 
offering, when such is not the case.
3. Refund Policies
    Fraudulent business opportunity sellers often offer prospective 
purchasers the right to cancel or to seek a whole or partial refund, 
but when a purchaser seeks to cancel, he finds there are hidden 
limitations or conditions on the refund policy. More often, the seller 
simply ignores the purchaser's request. Thus, refund offers are 
frequently just illusory, and misleading. Cancellation or refund offers 
are material to prospective purchasers because they purport to reflect 
the potential risk of the proposed transaction, and may create the 
impression that the business opportunity offer is either risk free or a 
low financial risk. Purchasers reasonably interpret a refund policy to 
be, in fact, as stated. Thus, representing

[[Page 76828]]

an illusory refund policy is deceptive under Section 5 of the FTC Act.
    Moreover, the failure to honor refund promises is an unfair 
practice in violation of Section 5(n) of the FTC Act.\121\ It often 
results in substantial injury to business opportunity purchasers that 
they cannot reasonably avoid.\122\ Moreover, the record is devoid of 
any evidence suggesting that this harm is outweighed by any 
countervailing benefits.
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    \121\ An act or practice is unfair if it ``causes or is likely 
to cause substantial injury to consumers which is not reasonably 
avoidable by consumers themselves and not outweighed by 
countervailing benefits to consumers or to competition.'' 15 U.S.C. 
5(n).
    \122\ See, e.g., In re Orkin Exterminating Co., 108 F.T.C. 263 
(1986), aff'd, Orkin Exterminating Co. v. FTC, 849 F.2d 1354 (11 
Cir. 1988).
---------------------------------------------------------------------------

    To remedy this practice, under the Original Franchise Rule and the 
interim Business Opportunity Rule, it was a violation for a seller to 
fail to refund a purchaser's funds, in certain instances. The final 
Rule continues to address this practice. Under Sec.  437.3(a)(4) of the 
final Rule, a seller is not required to have a refund or cancellation 
policy. The seller, however, is required to disclose whether it has 
either a refund or cancellation policy, and if so, the seller must 
disclose, in an attachment to the disclosure document, the material 
terms of the policy. Moreover, Sec.  437.6(k) prohibits any 
misrepresentation of a seller's refund or cancellation policies, and 
Sec.  437.6(l) prohibits failure to provide a refund or cancellation 
when the purchaser has satisfied the terms and conditions disclosed.
4. Legal Actions
    The Commission's law enforcement experience amply demonstrates that 
fraudulent business opportunity sellers often operate through multiple 
related affiliates, or use, sequentially or simultaneously, a variety 
of corporate identities in order to obscure their negative reputation 
or to avoid alerting consumers of the potential for fraud. This 
subterfuge is designed to mislead, and actually does mislead 
prospective business opportunity purchasers about a crucially material 
fact: The reliability and trustworthiness of the seller with whom the 
consumer is transacting. It is not unreasonable for a consumer to 
believe that a seller is as represented; the consumer is not obliged to 
suspect an apparently legitimate seller has a history of fraud hidden 
behind multiple defunct or impossible to trace corporate entities. 
Thus, it is a deceptive practice and a violation of Section 5 for a 
seller to obfuscate past activities that would alert a prospective 
purchaser of a likelihood of fraud.\123\
---------------------------------------------------------------------------

    \123\ See FTC Policy Statement on Deception, appended to 
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
---------------------------------------------------------------------------

    One of the key indicia of a seller's reliability and 
trustworthiness is whether there have been law enforcement actions or 
lawsuits for fraud and similar infractions targeting that seller. 
Accordingly, under the Original Franchise Rule and the interim Business 
Opportunity Rule, the Commission required sellers to disclose certain 
legal actions in which they or their principals have been involved. 
Similarly, the final Rule requires a business opportunity seller to 
disclose any legal actions that the seller, its affiliates, and certain 
key personnel have been involved in during the previous ten years 
involving misrepresentation, fraud, securities law violations, or 
unfair or deceptive practices, including violations of any FTC Rule. 
Knowledge of such legal actions against the seller and other key 
persons associated with the seller is material to a prospective 
purchaser's decision to go forward with the transaction.
    These disclosure requirements are tailored to address common 
deceptive or unfair practices in the sale of business opportunities, as 
demonstrated by the Commission's extensive law enforcement experience 
with business opportunity fraud. In addition to these disclosures, the 
final Rule requires sellers to disclose certain identifying information 
about themselves and expressly prohibits a variety of material 
misrepresentations and omissions that the Commission's experience 
demonstrates to be most commonly associated with deceptive and unfair 
practices in the sale of business opportunities.

C. The Economic Effect of the Rule

    At every stage of the Rule amendment proceeding, the Commission 
solicited comment on the economic impact of the Rule, as well as the 
costs and benefits of each proposed Rule amendment. In issuing the 
final Rule, the Commission has carefully considered the comments 
received and the costs and benefits of each amendment. As discussed 
throughout this SBP, the final Rule's disclosure requirements and 
specific prohibitions will provide a substantial benefit to consumers 
weighing the risks of investing their money in specific business 
opportunity offers. In particular, the mandated disclosures will help 
consumers evaluate the earnings claims made by a seller, investigate 
the litigation history of the seller, identify the seller's refund or 
cancellation policy, and check on the experiences of other purchasers. 
By providing consumers with access to this information before money 
changes hands, the final Rule will substantially reduce economic harm 
caused by misleading sales practices.
    The Commission has attempted to reduce sellers' compliance costs 
wherever possible. In general, compliance with the final Rule's 
disclosure requirements is significantly less burdensome than with the 
Original Franchise Rule or the interim Business Opportunity Rule. Most 
notably, the final Rule streamlines the more than 20 separate 
categories of disclosures required by the interim Business Opportunity 
Rule to just five. The final Rule also employs specific prohibitions in 
place of affirmative disclosures wherever possible in an attempt to 
further reduce compliance costs.
    A variety of other amendments have been made in an attempt to 
reduce compliance costs for business opportunity sellers. For example, 
in the RNPR, the Commission eliminated the requirement that sellers 
disclose the litigation histories of their sales personnel, recognizing 
that such disclosure would place a burden on business opportunity 
sellers that would not be outweighed by countervailing benefits to 
prospective purchasers.\124\ The final Rule also does not require 
sellers with prior legal actions against them to detail the nature of 
the legal action, but rather, permits sellers to provide a brief 100-
word description of the case if they so choose. Also, in an attempt to 
reduce compliance costs, the final Rule permits sellers to comply with 
the cancellation or refund disclosure requirement by attaching to the 
disclosure document a copy of a pre-existing document--such as a 
company brochure--that details the seller's cancellation or refund 
policy. The final Rule also provides sellers with a less burdensome 
means of complying with the reference disclosure requirement: In lieu 
of a list of the 10 prior purchasers nearest the prospect, a seller may 
provide a prospect with a national list of all purchasers. For example, 
a seller making disclosures online could simply maintain an electronic 
list of purchasers that it updates periodically. This would enable the 
seller to avoid having to tailor the disclosure to each prospective

[[Page 76829]]

purchaser, thereby further reducing compliance costs.
---------------------------------------------------------------------------

    \124\ 73 FR at 16126. The Commission's decision to narrow the 
Rule so that MLMs would not be burdened with unworkable disclosure 
requirements was similarly prompted by concern that any potential 
benefits would be outweighed by compliance costs. Id. at 16119-21.
---------------------------------------------------------------------------

D. The Effect of the Rule on State and Local Laws

    Section 437.9(b) of the final Rule provides that the Commission 
does not intend to preempt state or local business opportunity laws, 
except to the extent that they conflict with the Rule. A law does not 
conflict with the Rule if it affords prospective purchasers equal or 
greater protection, such as a requirement for registration of 
disclosure documents or more extensive disclosures.
    Although state laws offering equal or greater protections are not 
preempted, Sec.  437.6(c) of the final Rule, which addresses extraneous 
materials, prohibits sellers from providing disclosures required under 
state law in the same document with the disclosures required under the 
final Rule. One of the main goals of revising and tailoring the 
disclosure requirements for business opportunity sellers is to simplify 
and streamline the disclosures into a single-page document. The 
Commission has determined, therefore, that allowing business 
opportunity sellers to mix federal and state disclosures into one 
document would be a means for sellers to present lengthy and confusing 
information to prospective purchasers, and would be contrary to the 
Commission's goal of requiring sellers to provide a simple, clear, and 
concise disclosure document.\125\
---------------------------------------------------------------------------

    \125\ 73 FR at 16128.
---------------------------------------------------------------------------

III. Section-by-Section Analysis of Part 437

    The final Rule is divided into ten sections. Section 437.1 defines 
19 key terms employed in the Rule's text. Section 437.2 establishes the 
business opportunity seller's obligation to furnish prospective 
purchasers with material information in the form of a written basic 
disclosure document. Section 437.3 specifies the content and form of 
the disclosure document. Section 437.4 sets forth the requirements that 
business opportunity sellers must follow if they elect to make 
representations regarding earnings. Section 437.5 addresses sales 
conducted in Spanish or other languages besides English, and the 
disclosure requirements for those sales. Section 437.6 prohibits a 
number of specific deceptive claims and other deceptive practices in 
connection with business opportunity sales. Section 437.7 sets forth 
the Rule's recordkeeping provisions. Section 437.8 expressly exempts 
from the Rule those business arrangements that are covered by the 
Amended Franchise Rule. Finally, two administrative sections--437.9 and 
437.10--address other laws, rules, and orders, and severability. The 
sections that follow discuss each of these rule provisions in turn.

A. Section 437.1: Definitions

    The final Rule begins with a list of defined terms in alphabetical 
order. In several instances, the final Rule's definitions closely track 
those contained in the interim Business Opportunity Rule or the 
Commission's interpretations of the Original Franchise Rule.\126\ These 
include the definitions for the terms ``action,'' ``affiliate,'' 
``disclose or state,'' ``earnings claim,'' ``person,'' and ``written or 
in writing.'' In addition, the final Rule includes definitions for the 
terms ``business opportunity,'' ``designated person,'' ``exclusive 
territory,'' ``general media,'' ``new business,'' ``prior business,'' 
``providing locations, outlets, accounts, or customers,'' 
``purchaser,'' ``quarterly,'' ``required payment,'' and ``seller,'' 
each of which was proposed in the IPBOR and, in certain circumstances, 
modified in the RPBOR and the proposed Final Rule attached to the Staff 
Report. Finally, the final Rule includes two new definitions that were 
recommended in the Staff Report: (1) ``Material'' and (2) ``signature 
or signed.'' \127\ Each definition, including the record support for 
the definition and the Commission's analysis, is addressed below.
---------------------------------------------------------------------------

    \126\ See 16 CFR 437.1; Final Interpretive Guides 
(``Interpretive Guides'') accompanying the Original Franchise Rule, 
44 FR 49966 (Aug. 24, 1978).
    \127\ At the same time, the final Rule eliminates nine of the 
interim Business Opportunity Rule's terms and their definitions, 
which are no longer necessary: ``prospective business opportunity 
purchaser,'' ``business day,'' ``time for making of disclosures,'' 
``fractional business opportunity,'' ``business opportunity 
broker,'' ``sale of a business opportunity,'' ``cooperative 
association,'' ``fiscal year,'' and ``personal meeting.''
---------------------------------------------------------------------------

1. Section 437.1(a): Action
    The term ``action'' appears in Sec.  437.3(a)(3), which requires 
business opportunity sellers to disclose material information about the 
business opportunity seller's litigation history.\128\ Specifically, 
Sec.  437.3(a)(3) of the final Rule requires the disclosure of material 
information about certain civil or criminal actions within the previous 
ten years involving the business opportunity seller, its directors, and 
certain key employees,\129\ as well as its affiliates or prior 
businesses. Information about litigation history based on allegations 
of misrepresentation, fraud, securities law violations, or unfair or 
deceptive practices is highly material to assessing investment risk. 
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.
---------------------------------------------------------------------------

    \128\ Section 437.3(a)(3) requires disclosure of ``any civil or 
criminal action for misrepresentation, fraud, securities law 
violations, or unfair or deceptive practices, including violations 
of any FTC Rule.''
    \129\ The final Rule covers ``any sales managers, or any 
individual who occupies a position or performs a function similar to 
an officer, director, or sales manager of the seller.'' See Sec.  
437.3(a)(3)(i)(c).
---------------------------------------------------------------------------

    The definition of ``action'' is intended to make clear that 
disclosures involving prior litigation include not only civil actions 
brought before a court but also matters before arbitrators.\130\ It 
also is intended to make clear that an ``action'' includes all 
government actions, including criminal matters and actions brought to 
enforce FTC Rules, as well as administrative law enforcement actions, 
such as cease and desist orders or assurances of voluntary 
compliance.\131\
---------------------------------------------------------------------------

    \130\ 71 FR at 19061.
    \131\ Id.
---------------------------------------------------------------------------

    During the Business Opportunity workshop, a panelist representing 
the DOJ suggested that bankruptcy is another type of legal action that 
should be disclosed to potential purchasers because a bankruptcy filing 
could be a red flag warning of potential risk associated with a 
business opportunity.\132\ A panelist from the Maryland Attorney 
General's Office disagreed, arguing that this additional disclosure 
would not benefit potential business opportunity purchasers because, in 
his experience, fraudulent business opportunities do not typically file 
for bankruptcy protection.\133\ Instead, in that panelist's experience, 
fraudulent business opportunity promoters shutter their premises and 
reopen as an entirely new fraudulent entity. Another panelist posited 
that disclosure of the existence of a bankruptcy by the business 
opportunity or its key personnel was not likely to identify fraudulent 
or problematic business opportunities that would not already be 
identified through the existing proposed categories of legal 
actions.\134\
---------------------------------------------------------------------------

    \132\ Jost, June 09 Tr at 32. A second panelist (Taylor, June 09 
Tr at 35), and a commenter (Brooks-Workshop comment) agreed that 
existence of a bankruptcy might be relevant to a potential 
purchaser.
    \133\ Cantone, June 09 Tr at 37.
    \134\ MacLeod, June 09 Tr at 33.
---------------------------------------------------------------------------

    The Commission has determined not to include bankruptcy as a type 
of legal action that a business opportunity seller must disclose. The 
Commission's law enforcement experience indicates that when targeted by 
law enforcement,

[[Page 76830]]

rather than file for bankruptcy, fraudulent business opportunity 
sellers tend to vanish and then simply reopen under new company 
names.\135\ Thus, there is little meaningful correlation between filing 
for bankruptcy and promoting a fraudulent business opportunity. Yet, 
many legitimate businesses have been forced by circumstances to seek 
the protection of bankruptcy courts. Therefore, bankruptcy filing would 
not seem to be a reliable marker for potential fraud, and would not 
likely help business opportunity purchasers avoid being defrauded. 
Therefore, the final Rule's definition of action does not contain 
reference to bankruptcy.\136\
---------------------------------------------------------------------------

    \135\ See, e.g., FTC v. Nat'l Vending Consultants, Inc., CV-S-
05-0160-RCJ-PAL (D. Nev. 2005); FTC v. USA Beverages, Inc., CV-05-
61682 (S.D. Fla. 2004); FTC v. Allstate Bus. Distribution Ctr., 
Inc., CV-00-10335AHM (C.D. Cal. 2001); FTC v. O'Rourke, No. 93-6511-
Civ-Gonzalez (S.D. Fla. 1993); FTC v. Inv. Dev., Inc., 1989 U.S. 
Dist. LEXIS 6502 (E.D. La. June 7, 1989).
    \136\ Similarly, the scope of 437.3(c)(3)(i) has remained 
unchanged and does not require the disclosure of bankruptcy filings.
---------------------------------------------------------------------------

    Finally, the Staff Report noted that some state administrative 
proceedings result in parties entering into assurances of voluntary 
compliance, while other states refer to such orders as assurances of 
discontinuance. The staff recommended, therefore, adding ``assurance of 
discontinuance'' to the categories of legal actions enumerated in the 
proposed definition. The Commission agrees with the staff's 
recommendation and the final Rule's definition of ``action'' now 
includes that phrase. Accordingly, Sec.  437.1(a) of the final Rule 
defines ``action'' as follows: ``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, an assurance of 
voluntary compliance, and an assurance of discontinuance.''
    The definition of ``action,'' as recommended in the Staff Report, 
received no comment, and the final Rule adopts this definition of 
``action'' as recommended.
2. Section 437.1(b): Affiliate
    The term ``affiliate'' appears in several sections of the final 
Rule, most notably in Sec.  437.3(a)(3), which requires a business 
opportunity seller to disclose not only litigation in which the seller 
was named as a party, but any litigation naming any of the seller's 
``affiliates'' or prior businesses. Section 437.1(b) of the final Rule 
defines the term ``affiliate'' to mean: ``An entity controlled by, 
controlling, or under common control with a business opportunity 
seller.'' This definition also covers litigation involving a parent or 
subsidiary of the business opportunity seller.
    The definition of ``affiliate,'' as proposed in the INPR and RNPR, 
and recommended in the Staff Report, received no comment, and the final 
Rule adopts this definition of ``affiliate'' as recommended.
3. Section 437.1(c): Business Opportunity
    The definition of ``business opportunity'' delineates the scope of 
the Rule's coverage. Under the final Rule, a ``business opportunity'' 
is a commercial arrangement that possesses three required elements. 
First, a seller must solicit a prospective purchaser to enter into a 
new business.\137\ Second, the prospective purchaser of the business 
opportunity must make a ``required payment.'' \138\ And third, the 
seller must represent that the seller or one or more designated persons 
will provide any of three types of business assistance: (1) Providing 
locations for the purchaser's use or operation of equipment, displays, 
vending machines, or similar devices; (2) providing outlets, accounts, 
or customers to the prospective purchaser; or (3) buying back any or 
all of the goods or services that the purchaser makes, including 
providing payment for such services as, for example, stuffing envelopes 
from the purchaser's home.
---------------------------------------------------------------------------

    \137\ Section 437.1(j) defines ``new business'' as ``a business 
in which the prospective purchaser is not currently engaged, or a 
new line or type of business.''
    \138\ See Sec.  437.1(p) (defining ``required payment'').
---------------------------------------------------------------------------

    Because this section triggers the strictures and requirements of 
the Rule, the definition of ``business opportunity,'' and in 
particular, its specification of the types of ``business assistance'' 
that characterize a covered business, has generated substantial comment 
throughout this proceeding. After careful consideration of the amassed 
record, the Commission has crafted the final Rule's business 
opportunity definition to ensure that it is broad enough to encompass 
many business opportunities that historically were not covered under 
the Original Franchise Rule or the interim Business Opportunity Rule, 
but which have routinely been shown to be associated with unfair or 
deceptive practices.\139\ At the same time, the definition of 
``business opportunity'' has been narrowly tailored to avoid 
inadvertently sweeping in other business arrangements, such as 
traditional product distribution. This has been accomplished primarily 
through narrowing the types of business assistance that will trigger 
the Rule's coverage from the five categories originally proposed in the 
IPBOR to the three categories described above.
---------------------------------------------------------------------------

    \139\ As discussed supra in Section I.C, the definition of 
business opportunity no longer excludes transactions falling below a 
minimum monetary payment threshold nor does it require that the 
purchaser of the opportunity sell goods or services directly to end-
users other than the business opportunity seller. These changes 
extend the scope of coverage to many business opportunities that 
previously escaped coverage.
---------------------------------------------------------------------------

    Consistent with the approach proposed in the RPBOR, the final 
Rule's definition of business opportunity eliminates two types of 
business assistance that under the IPBOR would have triggered the 
Rule's strictures and disclosure obligations: (1) Tracking or paying, 
or purporting to track or pay, commissions or other compensation; and 
(2) providing other advice or training assistance. The sections below 
describe the evolution of the business opportunity definition, 
including the rationale for eliminating these types of assistance from 
the definition of business opportunity.
    In the IPBOR, the proposed definition of ``business opportunity'' 
was designed to be broad enough to cover the sale of virtually any type 
of business opportunity, including two types in particular that 
historically had fallen outside the scope of the Original Franchise 
Rule--work-at-home and pyramid marketing opportunities.\140\ As 
explained more fully in the INPR, the Commission's law enforcement 
experience and consumer complaints demonstrate that these two types of 
opportunities are sources of prevalent and persistent problems,\141\ 
which the Commission has traditionally challenged under Section 5 of 
the FTC Act.\142\
---------------------------------------------------------------------------

    \140\ 71 FR at 19059.
    \141\ In 2010, pyramid schemes generated approximately 2,000 
consumer complaints, while work-at-home schemes generated over 8,000 
complaints. See Consumer Sentinel Network Databook (March 2011) at 
76, 79, available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf.
    \142\ Many of these schemes fell outside the ambit of the 
Original Franchise Rule because: (1) The purchase price was less 
than $500, the minimum payment necessary to trigger coverage; (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. See 71 FR at 19055, 19059.
---------------------------------------------------------------------------

    In order to reach these two types of opportunities, the INPR 
proposed a broad definition of ``business opportunity'' comprised of 
three

[[Page 76831]]

elements: (1) A solicitation to enter into a new business; (2) payment 
of consideration, directly or indirectly through a third party; and (3) 
the making of either an ``earnings claim'' or an offer to provide 
``business assistance.'' \143\ The IPBOR's definition of ``business 
assistance'' included assistance in the form of ``tracking or paying, 
or purporting to track or pay, commissions or other compensation based 
upon the purchaser's sale of goods or services or recruitment of other 
persons to sell goods or services.'' \144\ The Commission noted that 
many pyramid schemes offer this type of assistance, purporting to 
compensate participants not only for their own product sales but also 
for sales made by their participants' downline recruits.\145\ Under the 
IPBOR, ``business assistance'' also included providing other advice or 
training assistance.\146\
---------------------------------------------------------------------------

    \143\ See 71 FR at 19087.
    \144\ Id.
    \145\ Id. at 19063 & n.106.
    \146\ Id. at 19087 (IPBOR Sec.  437.1(c)(v)).
---------------------------------------------------------------------------

    In response to the INPR, many commenters argued that the IPBOR 
would have unintentionally swept in numerous commercial arrangements 
where there is little or no evidence that fraud is occurring.\147\ 
Several commenters contended that the IPBOR would have regulated a wide 
range of legitimate and traditional product distribution arrangements 
that were not associated with the types of fraud that business 
opportunity laws are designed to remedy. For example, one commenter 
suggested that the IPBOR could be read to cover product distribution 
through retail stores simply because the retailer pays for inventory 
and the manufacturer provides sales training to its retail 
accounts.\148\ The commenter suggested that its business operations 
would meet the IPBOR's definition of business opportunity because: (1) 
The ``payment'' prong of the definition did not exempt voluntary 
purchases of inventory; and (2) providing retail staff with sales 
training would have satisfied the ``business assistance'' prong of the 
definition.\149\ Other commenters noted that even if a company provided 
no ``business assistance,'' it easily could have fallen under the 
``business opportunity'' definition if the company made some 
representation about sales or profits sufficient to constitute an 
earnings claim.\150\
---------------------------------------------------------------------------

    \147\ See 73 FR at 16113-14.
    \148\ Timberland-INPR at 2.
    \149\ Id.
    \150\ IBA-INPR at 4; see also PMI-INPR at 3.
---------------------------------------------------------------------------

    Other commenters in response to the INPR argued that the IPBOR 
would have been broad enough to cover other types of commercial 
arrangements, such as bona fide educational programs offered by 
colleges and universities, the sale of certain books by publishers or 
book stores, and even the relationship between newspapers and 
independent carriers who distribute the newspapers to homes and 
businesses.\151\ Recognizing the unintended overbreadth of the Rule to 
sweep in these types of commercial arrangements as well as the 
unworkability of applying the Rule to MLMs, the Commission proposed the 
RPBOR with a narrower definition of ``business opportunity.'' The RPBOR 
``business opportunity'' definition narrowed the types of ``business 
assistance'' that would trigger Rule coverage by deleting from the Rule 
text: (1) Tracking payments or commissions and (2) providing other 
advice or training assistance.\152\ The RPBOR definition also 
eliminated the ``earnings claim'' element from the definition.\153\ But 
for this modification, any business or commercial arrangement that made 
an earnings claim could have been a ``business opportunity,'' as 
defined by the Rule. To avoid transforming common commercial 
transactions into ``business opportunities,'' some commenters suggested 
narrowing the definition of ``earnings claim.'' \154\ In the RNPR, 
however, the Commission determined that the better approach to address 
concerns about overbreadth was to tailor the substantive scope of the 
Rule, in part, by unlinking the definition of ``business opportunity'' 
from the making of an earnings claim.\155\ The Staff Report recommended 
that the Commission adopt this modification in the final Rule. No 
comments received in response to the Staff Report addressed this 
change.
---------------------------------------------------------------------------

    \151\ Venable-INPR at 2-3; NAA-INPR at 1-3.
    \152\ In addition, the RPBOR clarified that a ``required 
payment'' does not include payments for the purchase of reasonable 
amounts of inventory at bona fide prices. The final Rule 
incorporates this clarification.
    \153\ 73 FR at 16124.
    \154\ Id.
    \155\ Id.
---------------------------------------------------------------------------

    In the RNPR, the Commission solicited comment as to whether the 
narrowed Rule would adequately reach the field of business opportunity 
promoters who are likely to engage in unfair or deceptive practices, 
and conversely, queried whether the newly-proposed narrowing of the 
definition, and, hence, the scope of the RPBOR's coverage, was 
sufficient to exclude from the rule traditional distributor 
relationships \156\ that had been inadvertently swept into the 
IPBOR.\157\
---------------------------------------------------------------------------

    \156\ For example, commenters to the INPR noted that the IPBOR 
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. Sonnenschein-INPR at 
1-2. The Cosmetic, Toiletry and Fragrance Association posited 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-INPR; see also LHD&L-INPR at 2 
(noting that the IPBOR could cover the relationship between a 
manufacturer and a regional distributor of products).
    \157\ 73 FR at 16133.
---------------------------------------------------------------------------

    The majority of comments in response to the RNPR focused on whether 
the revisions to the proposed Rule would capture MLMs.\158\ The 
majority of commenters applauded the Commission's decision to narrow 
the scope of the rule, while others expressed concern that the MLM 
industry would continue to be subject to the RPBOR despite the more 
narrowed definition of ``business opportunity.'' \159\ For example, 
some commenters expressed concern that the buy-back provision, set 
forth in Sec.  437.1(c)(3)(iii), would sweep in MLM companies that 
offer to buy back their distributors' unused inventory.\160\ These 
commenters suggested amending this provision to strike the word 
``provides'' from Sec.  437.1(c)(3)(iii), so that the definition of 
``business opportunity'' would clearly not encompass a return of unused 
materials or merchandise.\161\
---------------------------------------------------------------------------

    \158\ DSA-RNPR. In addition, the Commission received more than 
40 comments from various MLMs that expressed support and concurrence 
with DSA's comments. See, e.g., Big Ear-RNPR; Jafra Cosmetics-RNPR; 
Lia Sophia-RNPR; Longaberger-RNPR; Princess House-RNPR; Shaklee-
RNPR. Some commenters expressed disappointment that the Commission 
proposed to exclude MLMs from coverage by the Rule. See, e.g., CAI-
RNPR; Durand-RNPR; PSA-RNPR; Aird-RNPR (Rebuttal); Parrington-RNPR. 
As previously noted, the Commission decided to narrow the scope of 
the Rule to avoid broadly sweeping in MLMs.
    \159\ See, e.g., DSA-RNPR; Avon-RNPR; Bates-RNPR; IBA-RNPR; MMS-
RNPR; Mary Kay-RNPR; Melaleuca-RNPR; Primerica-RNPR; Pre-Paid Legal-
RNPR; IDS-RNPR; Tupperware-RNPR; Venable-RNPR.
    \160\ DSA requires that its members offer to buy back, at 90% of 
the salesperson's cost, all resalable inventory and other sales 
materials. DSA-INPR at 35.
    \161\ DSA-RNPR at 6 n.14 (noting that ``the buy-back provision 
is the cornerstone of the DSA's self regulatory regime and a 
valuable protection for individual direct sellers''); Mary Kay-RNPR 
at 6; Babener-RNPR; Melaleuca-RNPR.
---------------------------------------------------------------------------

    The Commission is not persuaded that such a change is necessary. In 
the RNPR, the Commission made clear that Sec.  437.1(c)(3)(iii) was 
intended to capture work-at-home business opportunities in which the 
seller provides the purchaser with some supplies and the purchaser 
converts those supplies into a product

[[Page 76832]]

or other ``good'' for repurchase by the seller or other person.\162\ As 
the Staff Report noted, it would require a labored reading of this 
section to suggest that the word ``provides'' means ``to return unused 
inventory the purchaser bought from the seller but was not able to 
sell.'' \163\ Moreover, the Commission has explicitly stated that this 
provision ``would not include the offer to buy back inventory or 
equipment needed to start a business.'' \164\
---------------------------------------------------------------------------

    \162\ See 73 FR at 16123.
    \163\ Staff Report at 34.
    \164\ See 71 FR at 19062.
---------------------------------------------------------------------------

    In addition, some commenters argued that Sec.  437.1(c)(3)(i) would 
inadvertently cover entities that offer, at no cost to purchasers, the 
use of office space and equipment for the operation of the purchasers' 
business.\165\ These commenters were concerned that such offers could 
be construed under Sec.  437.1(c)(3)(i) to be providing ``locations for 
the use or operation of equipment * * * on premises neither owned nor 
leased by the purchaser.'' In the RNPR, the Commission stated that this 
provision was intended to capture fraudulent vending machine and rack 
display schemes,\166\ as well as schemes where a purchaser is forced to 
lease office space, telephones and other equipment for operation of his 
or her business.\167\ Noting that the Commission did not intend to 
capture the incidental use of office space and equipment that the 
purchaser does not own, lease, or control, and for which the purchaser 
makes no payment, the Staff Report recommended a slight modification to 
Sec.  437.1(c)(3)(i), amending it to state: ``provide locations for the 
use or operation of equipment, displays, vending machines, or similar 
devices, owned, leased, controlled, or paid for by the purchaser.'' 
\168\
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    \165\ For example, Primerica, an MLM that sells insurance 
products and services, requires that its regional managers provide 
at no cost to ``downline'' sales agents the use of office space, 
supplies, and equipment (such as computers and printers) for the 
operation of his or her business. Primerica noted that, as a 
practical matter, it must require this assistance, as the regulatory 
structure in which Primerica operates necessitates that regional 
managers exercise compliance oversight functions with respect to the 
agents in their downlines. Primerica-RNPR; see also Avon-RNPR; 
Tupperware-RNPR.
    \166\ 73 FR at 16123 (citing FTC v. Am. Entm't Distribs., No. 
04-22431-CIV-Martinez (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)).
    \167\ FTC v. Equinox, Int'l, No. CV-S-99-0969-JAR-RLH (D. Nev. 
1999).
    \168\ The Staff Report recommended that the Commission strike 
the final clause of this provision of the RPBOR--``on premises 
neither owned or leased by the purchaser''--noting that the clause 
is superfluous, as a buyer would never need a seller's assistance in 
identifying locations that the buyer already owns or leases. The 
Commission agrees, and the final Rule does not include this 
language.
---------------------------------------------------------------------------

    No comments responding to the Staff Report addressed this proposal. 
The Commission adopts the change recommended in the Staff Report. This 
change clarifies that the third prong of the ``business opportunity'' 
definition is triggered only when the seller offers to provide the 
purchaser, directly or through an intermediary, with locations in which 
to place equipment, displays, vending machines, or similar devices that 
the purchaser controls. This change will not compromise the long-
standing coverage of the Rule, and will allow legitimate sellers to 
offer beneficial assistance to purchasers, at no cost to those 
purchasers.\169\
---------------------------------------------------------------------------

    \169\ In the final Rule, a non-substantive change was made to 
the definition of ``business opportunity'' proposed in the Staff 
Report--the colon and number signaling the first element of the 
definition was moved. This change simply makes the sentence 
structure parallel.
---------------------------------------------------------------------------

4. Section 437.1(d): Designated Person
    The term ``designated person'' appears in the definition of 
``business opportunity'' to ensure coverage over those transactions in 
which a seller refers a purchaser to a third party for the provision of 
business locations, accounts, or assistance such as buy-back services, 
as specified in Sec.  437.1(c)(3). That section makes clear that in 
order to fall within the scope of the business opportunity definition, 
the business assistance being offered need not be provided to the 
purchaser by the seller directly. Rather, a seller who represents that 
business assistance may or will be provided by a third party, such as a 
locator or a supplier, will still be covered by the Rule. Section 
437.1(c)(3) uses the term ``designated person'' to refer to any third 
parties who would provide business assistance to a business opportunity 
purchaser and to close a potential loophole. For example, a fraudulent 
vending machine route seller would not be able to circumvent the final 
Rule by representing to a prospective purchaser that a specific locator 
will place machines for the purchaser.\170\ The referral to a third 
party would be sufficient to bring the transaction within the ambit of 
the Rule.\171\ Section 437.1(d) of the final Rule defines the term 
``designated person'' to mean ``any person, other than the seller, 
whose goods or services the seller suggests, recommends, or requires 
that the purchaser use in establishing or operating a new business.'' 
\172\
---------------------------------------------------------------------------

    \170\ The Commission's law enforcement experience demonstrates 
that closing this potential loophole is necessary. For example, in 
FTC v. Greeting Cards of Am., Inc., No. 03-60746-CIV-Gold (S.D. Fla. 
2003), the FTC alleged that the business opportunity seller 
represented that a third party locator would secure locations for 
the prospective purchaser, and the locator failed to do so.
    \171\ See 71 FR at 19064.
    \172\ This approach is consistent with the Amended Franchise 
Rule's analogous definitional elements, extending the scope of that 
rule's coverage to reach transactions in which the franchisor 
provides to the franchisee the services of a person able to secure 
the retail outlets, accounts, sites, or locations. See 16 CFR 
436.1(j).
---------------------------------------------------------------------------

    One commenter argued that the proposed definition of ``designated 
person'' was overbroad and that its application would result in many 
multi-level marketing opportunities being swept into the Rule.\173\ For 
instance, if an MLM company requires its managers to provide the use of 
office space, equipment and supplies, and general business advice to 
new agents (and presumably to describe these types of assistance to 
prospective purchasers as part of a sales pitch),\174\ one could argue 
that the company would be covered by the Rule.\175\ The commenter 
offered several suggested revisions to resolve this problem, one of 
which was to specify that ``designated person'' does not include 
entities that receive no payment from the purchaser in order to receive 
the services provided.\176\ The Staff Report noted that alternate 
resolutions were more appropriate--namely the modification to the 
definitions of ``business opportunity'' and ``providing locations, 
outlets, accounts, or customers,'' and recommended, therefore, that the 
definition of ``designated person'' be adopted in the form proposed in 
the RNPR. No comments in response to the Staff Report addressed this 
definition, and the final Rule adopts the definition as recommended.
---------------------------------------------------------------------------

    \173\ Primerica-RNPR at 11.
    \174\ The MLM company compensates managers for this service; 
there is no cost to down-line agents. Primerica-RNPR at 11.
    \175\ Id.
    \176\ Id. at 13.
---------------------------------------------------------------------------

5. Section 437.1(e): Disclose or State
    Section 437.1(e) of the final Rule defines ``disclose or state'' to 
mean ``to give information in writing that is clear and conspicuous, 
accurate, concise, and legible.'' \177\ The purpose of this definition 
is to ensure that a prospective purchaser will receive complete 
information in a form that a prospective purchaser easily can read. For 
example, the furnishing of a disclosure document without punctuation or 
appropriate

[[Page 76833]]

spacing between words would not be ``clear.'' Similarly, required 
information such as the number and percentage of prior purchasers who 
obtained a represented level of earnings would not be ``conspicuous'' 
if set in small type, printed in a low-contrast ink, or buried amid 
extraneous information.
---------------------------------------------------------------------------

    \177\ See FTC Policy Statement on Deception, appended to 
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984) (discussing 
the standard for clear and conspicuous disclosures).
---------------------------------------------------------------------------

    The proposed definition of ``disclose or state'' received no 
comment. The final definition, therefore, is adopted as proposed.
6. Section 437.1(f): Earnings Claim
    The final Rule's key feature is the disclosure document, which 
provides a potential purchaser of a business opportunity with five 
items of material information, including written disclosure of all 
``earnings claims'' made by the seller, before the purchaser pays any 
money or executes a contract. This will allow a potential purchaser to 
compare a seller's written representations with any oral 
representations made. The term ``earnings claim'' is defined in the 
final Rule as ``any oral, written, or visual representation to a 
prospective purchaser that conveys, expressly or by implication, a 
specific level or range of actual or potential sales, or gross or net 
income or profits.'' \178\ This intentionally broad definition will 
cover all variations of earnings representations that the Commission's 
law enforcement experience shows are associated with business 
opportunity fraud.\179\
---------------------------------------------------------------------------

    \178\ This definition is substantially similar to the Amended 
Franchise Rule's definition of ``financial performance 
representation,'' which is the Amended Franchise Rule's equivalent 
of an earnings claim. See 16 CFR 436.1(e).
    \179\ 71 FR at 19065.
---------------------------------------------------------------------------

    For illustrative purposes, the definition includes two examples of 
communications that constitute earnings claims. The first of these 
examples describes common types of potentially fraudulent earnings 
claims: ``A chart, table, or mathematical calculation that demonstrates 
possible results based upon a combination of variables.'' This example 
is intended to clarify that sales matrices that purport to show income 
from an array of ``vends'' per day from a vending machine, for example, 
would constitute an ``earnings claim'' under the final Rule.\180\
---------------------------------------------------------------------------

    \180\ Id.
---------------------------------------------------------------------------

    The second example incorporates the principle, as expressed in the 
Interpretive Guides to the Original Franchise Rule, that ``any 
statements from which a prospective purchaser can reasonably infer that 
he or she will earn a minimum level of income'' constitute an earnings 
claim.\181\ Given the prevalence of earnings claims in business 
opportunity sales, the Commission believes that a broad earnings 
disclosure requirement is necessary to prevent fraud. Therefore, the 
final Rule is not limited to express earnings claims, but also includes 
implied claims. Indeed, such implied claims are at least as likely to 
mislead prospective purchasers as express claims.\182\ The final Rule's 
definition includes three specific examples illustrative of this type 
of earnings claim, as follows: ``Earn enough to buy a Porsche,'' ``earn 
a six-figure income,'' and ``earn your investment back within one 
year.'' Each of these three illustrative examples implies a minimum 
value--the cost of the lowest priced Porsche in the first example; at 
least $100,000 in the second; and an amount equal to the purchaser's 
initial investment in the third. Accordingly, this language makes clear 
that these types of representations are indistinguishable from direct, 
express earnings claims.
---------------------------------------------------------------------------

    \181\ 44 FR at 49982.
    \182\ Interpretive Guides, 44 FR 49966.
---------------------------------------------------------------------------

    Some commenters have argued that the definition of ``earnings 
claim'' is overly broad and that the Commission should narrow the 
definition.\183\ Earnings claims, however, lie at the heart of business 
opportunity fraud and typically entice consumers into investing their 
money. The Commission has determined that narrowing the definition of 
``earnings claim'' could allow business opportunity sellers to avoid 
disclosing critical information to prospective purchasers. Accordingly, 
the definition of ``earnings claim,'' as proposed in the RPBOR and 
recommended in the Staff Report, is adopted without change.
---------------------------------------------------------------------------

    \183\ 73 FR at 16124.
---------------------------------------------------------------------------

7. Section 437.1(g): Exclusive Territory
    This term is defined because it is referenced in Sec.  437.6(n), 
which prohibits misrepresentations concerning territory exclusivity. 
Representations about exclusive territories are material because they 
purport to assure a potential purchaser that he or she will not face 
competition from other purchasers of the same business opportunity in 
his or her chosen location, or from the seller offering the same goods 
or services through alternative channels of distribution.\184\ 
Exclusive territory promises go to the viability of the business 
opportunity and to the level of risk entailed in the purchase.\185\ 
Indeed, misrepresentations about territories have commonly been made by 
business opportunity sellers to lure consumers into believing that a 
purchase poses little financial risk.\186\
---------------------------------------------------------------------------

    \184\ See 71 FR at 19065.
    \185\ Id.
    \186\ E.g., FTC v. Vendors Fin. Serv., Inc., No. 98-1832 (D. 
Colo. 1998); FTC v. Int'l Computer Concepts, Inc., No. 1:94CV1678 
(N.D. Ohio 1994); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D. 
Fla. 1993); FTC v. Am. Safe Mktg., No. 1:89-CV-462-RLV (N.D. Ga. 
1989).
---------------------------------------------------------------------------

    Section 437.1(g) of the final Rule defines the term ``exclusive 
territory'' as ``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.'' This 
definition reflects the common industry practice of establishing 
geographically delimited territories--such as a city, county, or state 
borders--as well as other marketing areas, such as those delineated by 
population.\187\ The definition includes both representations that 
other business opportunity purchasers will not be allowed to compete 
with a new purchaser within the territory, as well as representations 
that the business opportunity seller itself or other purchasers will 
not compete with the new purchaser through alternative means of 
distribution, such as through Internet sales.
---------------------------------------------------------------------------

    \187\ 71 FR at 19065.
---------------------------------------------------------------------------

    The definition also covers implied marketing areas, such as 
representations that the seller or other operators will not compete 
with the purchaser, without delineating a specific territory, or 
stating a vague or undefined territory, such as ``in the metropolitan 
area'' or ``in this region.'' If untrue, any of these kinds of 
representations can mislead a prospect about the likelihood of his or 
her success.\188\
---------------------------------------------------------------------------

    \188\ Id.
---------------------------------------------------------------------------

    The definition of ``exclusive territory'' received no comment. 
Accordingly, the definition of ``exclusive territory,'' as proposed in 
the RNPR and recommended in the Staff Report, is adopted without 
change.
8. Section 437.1(h): General Media
    The term ``general media'' appears in Sec.  437.4(b), which 
prohibits business opportunity sellers from making unsubstantiated 
earnings claims in the ``general media.'' \189\ Section 437.1(h) of

[[Page 76834]]

the final Rule defines ``general media'' to mean: ``Any instrumentality 
through which a person may communicate with the public, including, but 
not limited to, television, radio, print, Internet, billboard, Web 
site, commercial bulk email, and mobile communications.'' \190\ Due to 
the explosive growth of advertising through mobile devices, the Staff 
Report recommended adding the phrase ``mobile communications'' to the 
list of instrumentalities enumerated in the definition.\191\
---------------------------------------------------------------------------

    \189\ This provision is based on an analogous provision in the 
Amended Franchise Rule, 16 CFR 436.1(e). The Commission has 
challenged allegedly unsubstantiated earnings claims made through 
the general media in numerous cases, e.g., FTC v. Wealth Sys., Inc., 
No. CV 05 0394 PHX JAT (D. Ariz. 2005); United States v. Am. Coin-Op 
Servs., Inc., No. 00-0125 (N.D.N.Y. 2000); United States v. Cigar 
Factory Outlet, Inc., No. 00-6209-CIV-Graham-Turnoff (S.D. Fla. 
2000); United States v. Emily Water & Beverage Co., Inc., No. 4-00-
00131 (W.D. Mo. 2000); and United States v. Greeting Card Depot, 
Inc., No. 00-6212-CIV-Gold (S.D. Fla. 2000).
    \190\ See Interpretive Guides, 44 FR at 49984-85 (earnings 
claims made ``for general dissemination'' include ``claims made in 
advertising (radio, television, magazines, newspapers, billboards, 
etc.) as well as those contained in speeches or press releases''). 
The Commission notes that the Interpretive Guides recognize several 
exemptions to the general media claim, such as claims made to the 
press in connection with bona fide news stories, as well as claims 
made directly to lending institutions. Id. The Commission has 
proposed that future Compliance Guides to the new Business 
Opportunity Rule retain these standard general media claims 
exemptions. See 71 FR at 19065.
    \191\ Staff Report at 42-43.
---------------------------------------------------------------------------

    The definition of general media recommended in the Staff Report 
received no comment. The Commission has determined to adopt the staff's 
recommendation and has therefore modified the definition of general 
media to include mobile communications. Moreover, the definition of 
general media is not intended to contain an exhaustive list of 
instrumentalities, and other current (and future) types of mass 
communication could also fall within the general media definition.
9. Section 437.1(i): Material
    The term ``material'' is used in several sections of the final 
Rule.\192\ Section 437.3(a)(4) of the final Rule requires sellers that 
offer refunds and cancellations to ``state all material terms and 
conditions of the refund or cancellation policy in an attachment to the 
disclosure document.'' The term ``material'' is also used in other 
provisions of the Rule. For example, under Sec.  437.2 (the obligation 
to furnish written documents), it is a violation of the Rule for the 
seller to fail to disclose the ``material'' information specified in 
Sec.  437.3. Section 437.3, in turn, specifies the items of 
``material'' information that must be disclosed. The definition of 
``material'' at Sec.  437.1(i) was added to the final Rule because some 
workshop participants expressed concern that Sec.  437.3(a)(4) as 
originally proposed would not provide sellers with sufficient guidance 
about the types of information that should be disclosed.\193\ In the 
Staff Report, the staff recommended that ``material'' be defined to 
mean as ``likely to affect a person's choice of, or conduct regarding, 
goods or services.'' \194\ This definition is consistent with the 
definition of ``material'' used in the Telemarketing Sales Rule 
(``TSR'').\195\
---------------------------------------------------------------------------

    \192\ See Sec. Sec.  437.1, 437.2, 437.3, 437.4, 437.6, 437.7, 
and 437.8.
    \193\ Morrissey, June 09 Tr at 41; Taylor, June 09 Tr at 43; 
Cantone, June 09 Tr at 47.
    \194\ Under the TSR, the Commission requires sellers to disclose 
all material terms and conditions of the seller's refund policy if 
the seller makes a representation about the refund policy. See 16 
CFR 310.3(a)(1)(iii).
    \195\ See 16 CFR 310.2(q) (defining ``material'' to mean 
``likely to affect a person's choice of, or conduct regarding, goods 
or services or a charitable contribution''); see also FTC Policy 
Statement on Deception, appended to Cliffdale Associates, Inc., 103 
F.T.C. 110, 174 (1984) (defining ``material'' misrepresentation or 
practice to mean ``one which is likely to affect a consumer's choice 
of or conduct regarding a product'').
---------------------------------------------------------------------------

    The definition of ``material'' recommended in the Staff Report 
received one comment.\196\ The commenter expressed concern that the 
definition could be used by sellers as a potential loophole. The 
commenter suggested that the definition effectively would permit a 
seller to avoid disclosing the information required by the Rule by 
arguing that such information is not likely to affect a buyer's 
decision.\197\ The commenter further stated that if the Commission 
retained the recommended definition, the Rule should contain the 
following language: ``Even though this Rule imposes various 
requirements for specific disclosures, sellers are permitted to 
dispense with any disclosures which would not be likely to affect a 
buyer's choice of, or conduct regarding goods or services.'' \198\
---------------------------------------------------------------------------

    \196\ Dub-Staff Report.
    \197\ Id. at 2-3.
    \198\ Id. at 2.
---------------------------------------------------------------------------

    The Commission disagrees with the commenter. The final Rule 
mandates the disclosure of certain types of information, which the 
Commission has determined are material to a purchaser's investment 
decision.\199\ The language the commenter proposes does nothing to 
close any perceived loophole. The Commission is not persuaded that the 
commenter's suggested change will improve clarity. In fact, it may 
obscure the definition. The Commission is persuaded by the Staff Report 
that a definition of ``material'' is necessary and adopts the 
definition as recommended.
---------------------------------------------------------------------------

    \199\ See supra Section I.C.2 discussing the five substantive 
disclosure items and why they are material to consumers.
---------------------------------------------------------------------------

10. Section 437.1(j): New Business
    The term ``new business'' appears in the first of three 
definitional elements of the term ``business opportunity.'' \200\ 
Section 437.1(j) of the final Rule defines ``new business'' as a 
``business in which the prospective purchaser is not currently engaged, 
or a new line or type of business.'' Because it is reasonable to assume 
that a veteran businessperson may need the final Rule's protections as 
much as a novice,\201\ the latter language of the definition covers the 
sale of business opportunities to persons who may already be involved 
in some type of business other than that which is being offered by the 
seller.\202\
---------------------------------------------------------------------------

    \200\ The first of the three definitional elements of a 
``business opportunity'' is a ``solicitation to enter into a ``new 
business.'' Section 437.1(c)(1). This element distinguishes the sale 
of a business opportunity from the ordinary sale or products and 
services. 71 FR at 19066.
    \201\ 71 FR at 19066.
    \202\ For example, an existing tire business owner could 
purchase a vending machine route, or a beverage vending machine 
route owner could purchase an envelope stuffing opportunity.
---------------------------------------------------------------------------

    The proposed definition of ``new business'' received no comment. 
Accordingly, the Commission adopts the definition of ``new business,'' 
as proposed in the RNPR and recommended in the Staff Report.
11. Section 437.1(k): Person
    Section 437.1(k) of the final Rule defines the term ``person,'' a 
term used in many of the final Rule's definitional or substantive 
provisions.\203\ The Staff Report recommended that the term be defined 
as ``an individual, group, association, limited or general partnership, 
corporation, or any other entity.'' \204\
---------------------------------------------------------------------------

    \203\ E.g., Sec. Sec.  437.1; 437.6(q).
    \204\ This definition is consistent with the definition of the 
term ``person'' in both the interim Business Opportunity Rule and 
the Amended Franchise Rule. See 16 CFR 436.1(n); interim Business 
Opportunity Rule 437.2(b).
---------------------------------------------------------------------------

    The Commission received no comments related to the proposed 
definition of ``person.'' The Commission adopts the definition of 
``person'' as recommended in the Staff Report, with one slight 
modification. To clarify that the term encompasses entities that are 
businesses, the Commission added the word ``business'' to the last 
clause of the definition. Accordingly, the final Rule defines the term 
as ``an individual, group, association, limited or general partnership, 
corporation, or any other business entity.'' \205\ The term ``person'' 
is to be read broadly to refer to natural persons, businesses, 
associations, and other business entities. Where the Rule refers to a 
natural person only, it uses the term ``individual.'' \206\
---------------------------------------------------------------------------

    \205\ This definition is consistent with the definition of the 
term ``person'' in the TSR. See 16 CFR 310.2(v).
    \206\ 71 FR at 19066.

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

[[Page 76835]]

12. Section 437.1(l): Prior Business
    The final Rule requires sellers to disclose certain civil and 
criminal actions against them, including actions against a ``prior 
business of the seller.'' \207\ Section 437.1(l) of the final Rule 
defines ``prior business'' to mean:
---------------------------------------------------------------------------

    \207\ Sec.  437.3(a)(3).
---------------------------------------------------------------------------

    (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.
    This definition is intended to include not only an entity from 
which a seller acquired the major portion of the seller's assets, but 
also businesses that the seller previously owned or operated.\208\ A 
broad definition of ``prior business'' is necessary to capture all of a 
seller's prior operations.\209\ The Commission's law enforcement 
experience shows that sellers of fraudulent business opportunities 
frequently ply their trade through multiple companies simultaneously or 
sequentially, disappearing in order to avoid detection, and then 
reemerging in some new form or in a different part of the country under 
new names.\210\ The definition thus requires a more complete disclosure 
of the seller's business history.
---------------------------------------------------------------------------

    \208\ The definition of prior business is broader than the 
definition of ``predecessor'' found in the Amended Franchise Rule, 
which covers only an entity from which a seller acquired the major 
portion of the seller's assets. See 16 CFR 436.1(p).
    \209\ 71 FR at 19066.
    \210\ E.g., FTC v. Nat'l Vending Consultants, Inc., No. 05-0160 
(D. Nev. 2005); FTC v. Joseph Hayes, No. 4:96CV06126 SNL (E.D. Mo. 
1996); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D. Fla. 1993); 
FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. La. 1989).
---------------------------------------------------------------------------

    The final definition of ``prior business'' differs from the 
definition included in the RPBOR.\211\ The Staff Report recommended 
that the definition eliminate a reference to the prior businesses of 
the seller's key personnel. Namely, the second prong of the original 
definition defined prior business to include businesses owned or 
operated by both the seller and the seller's key personnel.\212\ The 
Commission agrees that this change is necessary for two reasons. First, 
Sec.  437.3(a)(3)(i)(B) requires disclosure of legal actions pertaining 
to a prior business ``of the seller,'' and so including the seller's 
key personnel in the definition of ``prior business'' is confusing. 
Second, Sec.  437.3(a)(3)(i)(C) separately requires disclosure of legal 
actions pertaining to the seller's key personnel, namely, ``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.'' The 
change, therefore, does not affect the scope of the required disclosure 
of legal actions, but rather clarifies a term that is otherwise 
confusing and somewhat redundant. Accordingly, the Commission adopts 
the definition of ``prior business'' with the modification recommended 
by the staff.
---------------------------------------------------------------------------

    \211\ Proposed Sec.  437.1(k) of the RPBOR would have defined 
``prior business'' to mean:
    (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.
    \212\ Id.
---------------------------------------------------------------------------

13. Section 437.1(m): Providing Locations, Outlets, Accounts, or 
Customers
    The definition of ``providing locations, outlets, accounts, or 
customers'' relates to the third prong of the ``business opportunity'' 
definition, which sets forth the types of assistance the seller 
represents it will provide to the purchasers of its business 
opportunity.\213\ The Commission's law enforcement history shows that 
fraudulent business opportunity sellers often falsely promise to assist 
purchasers in obtaining key elements necessary for the success of the 
proposed business: A source of customers, locations, outlets, or 
accounts. For example, deceptive representations concerning location 
assistance are the hallmark of fraudulent vending machine and rack 
display opportunities,\214\ while deceptive representations concerning 
the provision of accounts or customers are typical of medical billing 
schemes.\215\ In such schemes, the seller itself may purport to secure 
locations, outlets, accounts, or customers, or may represent that third 
parties will do so. Therefore, the final Rule defines ``providing 
locations, outlets, accounts, or customers'' as:
---------------------------------------------------------------------------

    \213\ See Sec.  437.1(c)(3).
    \214\ E.g., FTC v. Am. Entm't Distribs., No. 04-22431-CIV-
Martinez (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).
    \215\ E.g., FTC v. Mediworks, Inc., No. 00-01079 (C.D. Cal. 
2000); FTC v. Home Professions, Inc., No. 00-111 (C.D. Cal. 2000); 
FTC v. Data Med. Capital, Inc., No. SACV-99-1266 (C.D. Cal. 1999); 
see also FTC v. AMP Publ'ns, Inc., No. SACV-00-112-AHS-ANx (C.D. 
Cal. 2000).

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, provided, however, that 
advertising and general advice about business development and 
training shall not be considered as ``providing locations, outlets, 
accounts, or customers.'' \216\
---------------------------------------------------------------------------

    \216\ The proposed definition was intended to capture offers to 
provide locations that have already been found, as well as offers to 
furnish a list of potential locations; and includes not only 
directly furnishing locations, but also ``recommending to 
prospective purchaser specific locators, providing lists of locators 
who will furnish the locations, and training or otherwise assisting 
prospects in finding their own locations.'' 71 FR at 19066.

    The proviso, underscored above, has been added to the definition 
put forth in the RNPR. As originally proposed in the INPR, the 
definition ended immediately after the clause ``otherwise assisting the 
prospective purchaser in obtaining his or her own locations, outlets, 
accounts, or customers.'' In the RNPR, however, the Commission stated 
that in interpreting this unqualified clause, it would ``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).'' \217\ In 
the RNPR, the Commission solicited comment on three issues related to 
the ``otherwise assisting'' clause of the definition: (1) Whether the 
``otherwise assisting'' clause adequately covered all of the business 
opportunity arrangements that should be within the scope of the rule; 
(2) whether inclusion of the ``otherwise assisting'' clause in the 
definition would cause traditional product distribution arrangements, 
educational institutions, or how-to books to be subject to the Rule; 
and (3) whether the clause would result in the inclusion of multi-level 
marketing relationships that otherwise would not be covered by the 
Rule.\218\
---------------------------------------------------------------------------

    \217\ 73 FR at 16124.
    \218\ Id. at 16133.
---------------------------------------------------------------------------

    The majority of commenters who addressed this definition in 
response to the RNPR focused on when the ``otherwise assisting'' clause 
of the definition would be triggered. Commenters from the MLM industry

[[Page 76836]]

were concerned that various types of optional or no-cost assistance 
that MLM companies frequently offer their sales representatives could 
be considered to be ``otherwise assisting.'' \219\ These include such 
things as general advice and training about how to succeed in a new 
business venture,\220\ general advertising for the purpose of promoting 
the MLM's products or services,\221\ occasional ad hoc referrals from 
consumers who contact the company directly,\222\ and optional business 
tools, such as web templates and links to corporate Web sites that some 
MLM companies offer for sale to its sales representatives. 
Additionally, one commenter expressed concern that because of this 
open-ended clause, sellers of general training services, such as 
training on how to start a new business and advice about how to obtain 
customers, would be covered by the Rule.\223\
---------------------------------------------------------------------------

    \219\ E.g., DSA-RNPR at 5 (tools are intended to maintain brand 
uniformity and promote effective customer service).
    \220\ E.g., Primerica-RNPR at 5 (provides advice and training 
about how to identify potential customers and how to make effective 
sales presentations); Tupperware-RNPR at 4 (provides training about 
how new representatives can develop own customer bases); Venable-
RNPR.
    \221\ DSA-RNPR at 4 (5/27/2008); Primerica-RNPR at 6.
    \222\ E.g., Avon-RNPR at 3 (noting that this practice is 
designed to help potential customers find a sales representative, 
not to help sales representatives find potential customers); Mary 
Kay-RNPR at 7 (suggesting that merely providing the ability to 
search for a sales associate on the company's Web site should not 
trigger the ``providing locations'' factor of the ``business 
opportunity'' definition); DSA-RNPR at 5; Melaleuca-RNPR at 2.
    \223\ Venable-RNPR at 2.
---------------------------------------------------------------------------

    Commenters made a number of suggestions to cure what they perceived 
to be the overbreadth of this provision. Some commenters suggested 
omitting the word ``customers'' from the ``otherwise assisting'' 
provision and the corresponding provisions of the ``business 
opportunity'' definition.\224\ Other commenters recommended that the 
definition distinguish customers from ``near customers'' so as to 
exclude the provision of potential customers or businesses that the 
seller obtains from publicly available records.\225\ Others suggested 
adding a statement that no-cost general business advice is not 
``providing customers.'' \226\ Another commenter suggested adding a new 
clause to the definition of business opportunity that would create an 
exception when the assistance offered by the seller is limited to 
advice or training.\227\ Some commenters suggested eliminating the 
concept of ``potential customers'' from the scope of the ``otherwise 
assisting'' language.\228\ Finally, one commenter suggested revising 
the definition of ``business opportunity'' to require that the seller's 
assistance in providing outlets, accounts or customers be a ``material 
inducement'' to the purchaser.\229\
---------------------------------------------------------------------------

    \224\ DSA-RNPR at 5; Venable Rebuttal-RNPR at 3; Primerica-RNPR 
at 5.
    \225\ Venable-RNPR.
    \226\ Primerica-RNPR at 8; Tupperware-RNPR at 6; Avon-RNPR; Mary 
Kay-RNPR.
    \227\ Pre-Paid Legal-RNPR.
    \228\ Mary Kay-RNPR at 7 (as an alternative Mary Kay suggests 
that in the commentary to the Final Rule, the Commission make clear 
that passing on ad hoc referrals of customers who contact the 
company directly would not trigger this provision).
    \229\ Melaleuca-RNPR.
---------------------------------------------------------------------------

    The Staff Report noted a concern with narrowing the definition in 
the ways the commenters suggested, because it would allow promoters of 
fraudulent schemes to craft their sales pitches carefully to evade the 
Rule. The staff disagreed with commenters who recommended excising the 
word ``customers'' from the definition or diluting it in some fashion. 
Instead, the Staff Report recommended that the Commission continue its 
long-standing policy of analyzing the significance of assistance in the 
context of the of the specific business opportunity, focusing on 
whether the seller's offer is ``reasonably likely to have the effect of 
inducing reliance on [the seller] to provide a prepackaged business.'' 
\230\
---------------------------------------------------------------------------

    \230\ Staff Advisory Opinion 95-10, Business Franchise Guide 
(CCH) ] 6475 (1995).
---------------------------------------------------------------------------

    While urging that the word ``customers'' remain in the definition, 
the Staff Report did recommend new qualifying language to address the 
concern that the definition could be read more broadly than intended. 
Specifically, the Staff Report recommended adding a short proviso to 
the ``otherwise assisting'' clause as follows: ``provided, however, 
that advertising and general advice about business development and 
training shall not be considered as `providing locations, outlets, 
accounts, or customers.' '' \231\
---------------------------------------------------------------------------

    \231\ For example, this new proviso was designed to make clear 
that giving advice about how to demonstrate products, complete 
product order forms and how to process returns (Tupperware-RNPR); or 
providing product advertising in the general media and training in 
customer and business development (Primerica-RNPR), would not be 
considered as ``providing locations, outlets, accounts, and 
customers.''
---------------------------------------------------------------------------

    The language recommended in the Staff Report received two comments. 
DOJ strongly agreed that ``customers'' should remain in the definition, 
noting that the allure of a business opportunity is the purported ready 
cash flow to the purchaser, which can come either from locations or 
customers, depending on the nature of the opportunity being 
offered.\232\ DOJ also agreed with the staff's recommendation to 
include the proviso, but objected to further narrowing of coverage, 
arguing that any loophole would be vigorously exploited by fraudulent 
business opportunity sellers.\233\ Tupperware similarly encouraged the 
Commission to adopt the proviso as recommended, stating that the 
proviso will allow businesses to continue to provide general business 
advice and training without the risk of inadvertently falling under the 
aegis of the Rule.\234\
---------------------------------------------------------------------------

    \232\ DOJ-Staff Report at 1-2.
    \233\ Id. at 2.
    \234\ Tupperware-Staff Report at 2.
---------------------------------------------------------------------------

    The Commission is persuaded by the Staff Report's recommendation 
not to eliminate the word ``customers'' from the ``otherwise 
assisting'' clause of the definition, and to add qualifying language to 
the definition to tailor coverage more appropriately. Providing the 
prospective purchaser with assistance in obtaining customers is a 
feature common to many business opportunities and should be included in 
the definition. For instance, in the cases the Commission has brought 
against medical billing opportunities, it is typical for sellers to 
offer to provide assistance to the potential purchaser in finding 
customers for the medical billing service.\235\ Although the RNPR made 
clear that the ``otherwise assisting'' provision of the definition was 
not intended to apply to advertising, no-cost offers of general 
business advice, and training described by the various commenters,\236\ 
the qualifying language is necessary to prevent the definition from a 
broader reading than the Commission intends. The final Rule, therefore, 
contains the proviso recommended in the Staff Report.
---------------------------------------------------------------------------

    \235\ See, e.g., FTC v. Med. Billers Network, Inc., No. 05-CV-
2014 (S.D.N.Y. 2005); FTC v. Med.-Billing.com, Inc., No. 3-
02CV0702CP (N.D. Tex. 2002); FTC v. Electronic Med. Billing, Inc., 
No. SACV02-368 AHS (C.D. Cal. 2002); see also FTC v. Star Publ'g 
Group, Inc., No. 00cv-023D (D. Wyo. 2000) (offering to everything 
necessary to earn money processing HUD refunds); FTC v. AMP Publ'ns, 
Inc., SACV-00-112-AHS-Anx (C.D. Cal. 2000) (offering to provide list 
of companies in need of consumer's home-based computer services).
    \236\ 73 FR at 16123.
---------------------------------------------------------------------------

14. Section 437.1(n): Purchaser
    The final Rule defines the term ``purchaser'' to mean ``a person 
who buys a business opportunity.'' By operation of the definition of 
``person,'' \237\ a natural person, as well as any other entity, would 
qualify as a business opportunity purchaser. The definition of 
``purchaser'' received no

[[Page 76837]]

comment, and the final Rule includes the definition as proposed.
---------------------------------------------------------------------------

    \237\ Section 437.1(k).
---------------------------------------------------------------------------

15. Section 437.1(o): Quarterly
    To ensure accuracy and reliability of disclosures, Sec.  437.3 
(instructions for completing the disclosure document) requires sellers 
to revise their disclosures at least ``quarterly.'' \238\ The 
definition of ``quarterly'' sets forth a bright line rule that is easy 
to follow and that ensures uniformity of disclosures: ``Quarterly'' 
means ``as of January 1, April 1, July 1, and October 1.'' Thus, the 
final Rule requires sellers to update their disclosure by those 
specific dates each year. The definition of ``quarterly'' received no 
comment, and the final Rule includes the definition as proposed.
---------------------------------------------------------------------------

    \238\ Section 437.3(b) requires that until a seller has at least 
10 purchasers, the list of references must be updated monthly.
---------------------------------------------------------------------------

16. Section 437.1(p): Required Payment
    Under the final Rule's definition of ``business opportunity,'' the 
Rule reaches only those opportunities where the prospective purchaser 
of a business opportunity makes a ``required payment'' to the seller. 
Section 437.1(p) of the final Rule defines a ``required payment'' to 
mean:
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.

The final definition of ``required payment'' is the same as proposed in 
the RNPR and is substantially similar to that employed in the Amended 
Franchise Rule. It differs in that it includes language that reaches 
situations where a payment is made directly to a seller or indirectly 
through a third party. The RPBOR included this definition because 
without such a modification, 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.\239\
---------------------------------------------------------------------------

    \239\ 73 FR at 16122.
---------------------------------------------------------------------------

    The last sentence of the definition excludes payments for 
reasonable amounts of inventory at bona fide wholesale prices.\240\ 
This effectuates the Commission's determination articulated in the 
RNPR, that traditional product distribution arrangements should not be 
covered by the Business Opportunity Rule.\241\ Manufacturers, 
suppliers, and other traditional distribution firms ``have relied 
solely on the bona fide wholesale price exclusion to avoid coverage as 
a franchise.'' \242\
---------------------------------------------------------------------------

    \240\ The inventory exemption was originally set forth by the 
Commission in its 1979 Final Interpretative Guide to the Franchise 
Rule. 44 FR at 49967. The rationale for excluding payments for 
inventory was to exclude ``[a]gency relationships in which 
independent agents, compensated by commission, sell goods or 
services'' (e.g., insurance salespersons). Id at 49967-68.
    \241\ 73 FR at 16122.
    \242\ Id.
---------------------------------------------------------------------------

    The IPBOR had eliminated this inventory exemption in an attempt to 
bring pyramid schemes that engaged in ``inventory loading'' within the 
ambit of the Rule.\243\ Several commenters contended that the IPBOR 
would have regulated a wide range of legitimate and traditional product 
distribution arrangements that were not associated with the types of 
fraud that business opportunity laws are designed to remedy. For 
example, one commenter suggested that the IPBOR could be read to cover 
product distribution through retail stores simply because the retailer 
pays for inventory.\244\ This commenter suggested that its business 
operations would meet the IPBOR's definition of business opportunity 
because, among other reasons, the ``payment'' prong of the definition 
did not exempt voluntary purchases of inventory.\245\
---------------------------------------------------------------------------

    \243\ 71 FR at 19055. Inventory loading occurs when a company's 
incentive program forces recruits to buy more products than they 
could ever sell, often at inflated prices. If this occurs throughout 
the company's distribution system, the people at the top of the 
pyramid reap substantial profits, even though little or no product 
moves to market.
    \244\ 73 FR at 16113-14.
    \245\ Id.
---------------------------------------------------------------------------

    Because the application of the IPBOR to these types of arrangements 
was unintended, the RPBOR narrowed the definition of ``business 
opportunity'' by clarifying that a ``required payment'' does not 
include payments for the purchase of reasonable amounts of inventory at 
bona fide wholesale prices.\246\ Moreover, in the RNPR, the Commission 
determined that challenging deceptive pyramid schemes in targeted law 
enforcement actions brought under Section 5 of the FTC Act is a more 
cost-effective approach than attempting to address pyramid schemes 
through the elimination of the inventory exemption as proposed in the 
IPBOR.\247\
---------------------------------------------------------------------------

    \246\ Id. at 16114.
    \247\ 73 FR at 16122.
---------------------------------------------------------------------------

    In response to the RNPR, MLM industry commenters urged the 
Commission to expand the inventory exemption additionally to exempt 
sales of business materials, supplies, and equipment to purchasers on a 
not-for-profit basis.\248\ Commenters stated that the MLM business 
model often requires that new sales representatives purchase materials, 
supplies, or equipment to facilitate his or her sales to 
consumers.\249\ At least one commenter also noted that individuals 
sometimes pay to become sales consultants solely to obtain the products 
that are part of the company's sales kit for personal use at less than 
retail cost.\250\ These commenters argued that without expanding the 
exemption, MLMs would be swept within the scope of the Rule.\251\
---------------------------------------------------------------------------

    \248\ Commenters suggested various ways to expand the exemption. 
See DSA-RNPR at 4 (recommending that the exemption include 
``business materials, supplies, and equipment sold on a not-for-
profit basis''); Mary Kay-RNPR at 2 (same); Avon-RNPR at 2 
(exemption should extend to ``sales aid or kits at cost''); 
Tupperware-RNPR at 4 (required payment should not include payments 
for the purchase of reasonable amounts of inventory at bona fide 
wholesale prices, which may be used for resale, lease or display, or 
payments for products for personal use). Also, one commenter 
expressed concern that under the proposed definition, voluntary 
payments made to third parties unaffiliated with the seller for 
items or equipment to be used in a purchaser's business could be 
considered a ``required payment.'' See IBA-RNPR at 4. The Commission 
disagrees. By its very words, the definition is not intended to 
capture payments of the type described by the commenter, as such 
payments are not made directly or indirectly to the seller.
    \249\ DSA-RNPR at 4; Tupperware-RNPR at 2 (explaining that it 
requires purchase of a starter Business Kit that contains a 
selection of Tupperware products sold below retail value for 
demonstration at parties); Mary Kay-RNPR at 4 (initial sales kit, 
sold to consultant at below cost, is used to demonstrate products to 
customers); Avon-RNPR at 2 (sales kits, which explain business 
fundamentals and provide necessary equipment such as sales 
brochures, sales receipts, a tote bag, and product samples, are sold 
to independent sales representatives without a profit).
    \250\ Tupperware-RNPR at 2 (products in starter Business Kit 
sold to sales consultants for $79 or $129 have retail value of $350 
and $550 respectively).
    \251\ DSA-RNPR; Mary Kay-RNPR; Tupperware-RNPR; Pre-Paid Legal-
RNPR.
---------------------------------------------------------------------------

    The Staff Report noted these concerns, but opined that they were 
misplaced and that the suggested changes to the definition of 
``required payment'' were unnecessary.\252\ The staff recognized, 
however, that without making the changes suggested by the commenters, 
some MLM companies could indeed meet the ``required payment'' prong of 
the business opportunity definition.\253\ But, as noted previously, in 
order to be covered by the Rule, an entity must meet each of the three 
definitional components of the term ``business opportunity.'' \254\ 
Meeting one prong is insufficient to come within the scope of the Rule.

[[Page 76838]]

Furthermore, the other clarifications and changes to the definitions of 
``business opportunity'' and ``providing locations, outlets, accounts, 
or customers'' under the final Rule tailor coverage appropriately, and 
make the additional suggested changes to the ``required payment'' 
definition unnecessary. Accordingly, the Staff Report recommended that 
the definition of ``required payment'' be adopted in the form proposed 
in the RNPR.\255\
---------------------------------------------------------------------------

    \252\ Staff Report at 58.
    \253\ Id. at 57.
    \254\ Id. Those components 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. Id. at n.186.
    \255\ Id.
---------------------------------------------------------------------------

    Moreover, the Commission is concerned that expanding the exemption 
as the commenters suggested would create enforcement problems. For 
example, when a ``required payment'' includes both an inventory and 
non-inventory component, it would be difficult to determine whether 
non-inventory products--such as sales kits or display-related 
materials--were, in fact, being sold to purchasers at less than the 
seller's cost. Finally, the suggested changes could have the unintended 
effect of allowing some fraudulent business operators to be excluded 
from the Rule's coverage.\256\
---------------------------------------------------------------------------

    \256\ For example, in United States v. Universal Adver., Inc., 
No. 1:06-cv-152-DAK (D. Utah 2006), the fraudulent business 
opportunity seller told purchasers they could earn significant money 
by signing up business owners to pay monthly fees to display their 
business cards in rack display ``profit centers.'' In that case, the 
entire purchase cost went towards the rack display profit centers, 
which could be characterized as ``display-related materials.''
---------------------------------------------------------------------------

    In response to the Staff Report, the Commission received one 
comment addressing the ``required payment'' definition. The commenter 
set forth the same suggestion it had provided in response to the RNPR--
that a ``required payment'' should not include situations where the 
seller agrees to buy back from the purchaser any unused inventory 
within 12 months of purchase for at least 90 percent of the purchaser's 
cost.\257\ The commenter, a large MLM company, continued to argue that 
incorporating this change into the definition of ``required payment'' 
would assist in creating regulatory certainty that the Rule would not 
cover this situation. The commenter disagreed with one of the 
justifications given in the Staff Report for urging no modification of 
the definition--namely, that satisfying the ``required payment'' 
definition, by itself, is insufficient to bring an entity within the 
scope of the Rule. The commenter argued that legitimate companies that 
might satisfy the ``required payment'' prong have too much at stake to 
rely on one of the other two prongs of the ``business opportunity'' 
definition to avoid coverage under the Rule.\258\
---------------------------------------------------------------------------

    \257\ Tupperware-Staff Report at 3.
    \258\ Id.
---------------------------------------------------------------------------

    This argument is not persuasive. The definition of ``required 
payment'' already excludes payments for the purchase of inventory at 
bona fide wholesale prices. To the extent that the business opportunity 
seller offers inventory at prices above wholesale, such a payment would 
generate profit to the seller. If the Rule were modified to exempt 
payments for inventory not just at wholesale but also retail prices, 
such a change would give sellers an incentive to structure their 
payment schemes to require only payment for inventory, in order to 
avoid coverage by the Rule. Moreover, granting an exemption to sellers 
that offer to buy back some percentage of unused inventory within 12 
months is problematic in light of the Commission's experience that 
fraudulent business opportunity sellers could go out of business, 
change names, or disappear during that time.\259\ Accordingly, the 
final Rule incorporates the definition of ``required payment'' as 
recommended in the Staff Report.
---------------------------------------------------------------------------

    \259\ See DOJ-Staff Report at 2 (noting that many business 
opportunities begin and end within a short period of time).
---------------------------------------------------------------------------

17. Section 437.1(q): Seller
    The final Rule defines the term ``seller'' to mean: ``A person who 
offers for sale or sells a business opportunity.'' Like the 
``purchaser'' definition, it contemplates that both natural persons and 
entities may be business opportunity sellers.\260\ The definition of 
``seller'' is unchanged from the INPR, received no comment, either in 
response to the RNPR or the Staff Report, and the final Rule adopts the 
definition as recommended in the Staff Report.
---------------------------------------------------------------------------

    \260\ 71 FR at 19067.
---------------------------------------------------------------------------

18. Section 437.1(r): Signature or Signed
    Under Sec.  437.3(a)(6) of the final Rule, business opportunity 
sellers are required to attach a duplicate copy of the disclosure 
document, which is to be signed and dated by the purchaser. A 
designation for the signature and date is included at the bottom of the 
disclosure document. The Staff Report recommended adding a definition 
of ``signature'' to the Rule to clarify that a signature may include 
any electronic or digital form of signature to the extent that such 
signatures are valid under applicable law.\261\ The recommended 
definition of ``signature'' received no comment.
---------------------------------------------------------------------------

    \261\ Staff Report at 59.
---------------------------------------------------------------------------

    As recommended in the Staff Report, Sec.  437.1(r) of the final 
Rule states: ``Signature or signed'' means ``a person's affirmative 
steps to authenticate his or her identity.'' It includes a person's 
handwritten signature, as well as an electronic or digital form of 
signature to the extent that such signature is recognized as a valid 
signature under applicable federal law or state contract law.'' \262\ 
This definition effectively permits business opportunity sellers to 
comply with the Rule electronically, consistent with the Electronic 
Signatures in Global and National Commerce Act, 15 U.S.C. 7001,\263\ 
and is consistent with other rules enforced by the FTC.\264\ For 
example, a seller could obtain the digital signature of a purchaser by 
providing the disclosure document to the purchaser as a word processing 
document and require the purchaser to type his or her name into the 
form in the space provided for the signature. Alternatively, the seller 
could direct the purchaser to a web page that contains an electronic 
version of the disclosure document and require the purchaser to input 
his or her name before submitting the web-based form electronically.
---------------------------------------------------------------------------

    \262\ This definition is consistent with the definition of 
signature in the TSR. See 16 CFR 310.3(a)(3).
    \263\ See 71 FR at 19067 n.142.
    \264\ See TSR, 16 CFR 310.3(a)(3)(i); Amended Franchise Rule, 16 
CFR 436.3(u) (containing similar definitions).
---------------------------------------------------------------------------

19. Section 437.1(s): Written or In Writing
    The final Rule, like the version proposed in the INPR, defines the 
terms ``written'' or ``in writing,'' which are used throughout the Rule 
\265\ as ``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.'' This definition is designed to 
capture information stored on computer disks, CD-ROMs, or through new 
or emerging technologies, as well as information sent via email or 
posted on the Internet. Nevertheless, the definition seeks a balance, 
attempting to minimize compliance costs while at the same time 
preventing fraud. To that end, the definition would make clear that all 
electronic media must be in a form ``capable of being downloaded, 
printed, or otherwise preserved in tangible form and read,'' thus 
ensuring that a prospective purchaser who receives disclosures 
electronically can

[[Page 76839]]

read them, share them with an advisor, and retain them for future 
use.\266\
---------------------------------------------------------------------------

    \265\ E.g., Sec. Sec.  437.2, 437.3(a), 437.4(a).
    \266\ 71 FR at 19067.
---------------------------------------------------------------------------

    In response to the Staff Report, one commenter expressed concern 
that the Rule would be overly burdensome if electronic compliance were 
not permitted.\267\ As discussed above, however, the definition of 
``written'' or ``in writing'' and the definition of ``signature'' or 
``signed'' each makes clear that sellers can comply with the Rule 
electronically.\268\ Thus, the Commission adopts the definition as 
recommended in the Staff Report.
---------------------------------------------------------------------------

    \267\ NG Franchise-Staff Report.
    \268\ See also supra note 261.
---------------------------------------------------------------------------

B. Section 437.2: The Obligation To Furnish Written Documents

    The next section of the Rule, Sec.  437.2, imposes a core 
requirement of the Rule--the obligation of sellers to furnish 
prospective purchasers with a single-page disclosure document before 
purchasers execute a contract or pay any money. As noted previously, 
the disclosure document required under the Original Franchise Rule and 
interim Business Opportunity Rule was often extremely lengthy, 
cumbersome, and in some ways ill-suited to business opportunity 
transactions. Through the INPR and the RNPR, the Commission sought to 
simplify and streamline this document in order to make the disclosures 
more meaningful to consumers.
    The disclosure document mandated by Sec.  437.2 must be furnished 
at least seven calendar days before one of two events: Either (1) the 
execution of any contract in connection with the business opportunity 
sale; or (2) the payment of any consideration to the seller.\269\ This 
provision is intended to ensure a uniform standard for determining when 
sellers must furnish disclosures before potential purchasers must put 
their money at risk. Section 437.2 clarifies that ``payment to the 
seller'' refers to payments made either directly to the seller, or 
indirectly through a third party, such as a broker, lead generator, or 
locator.
---------------------------------------------------------------------------

    \269\ Section 437.1(s) allows the disclosure document to be 
provided to purchasers electronically, such as by posting in on the 
Internet, sending it via email, etc. Providing the disclosure 
document through one of these alternative methods does not, however, 
relieve the seller of the obligation to obtain and maintain copies 
of signed and dated disclosure documents provided to purchasers.
---------------------------------------------------------------------------

    The seven calendar-day period was modeled on the Original Franchise 
Rule's requirement that sellers furnish prospective purchasers with a 
completed copy of the disclosure document at least ten business days 
before a potential purchaser pays any fee or executes any agreement in 
connection with the sale.\270\ In the INPR, the Commission proposed 
shortening the period of time business opportunity sellers would be 
required to provide the disclosures to potential purchasers.\271\ The 
Commission determined that seven calendar days is sufficient time to 
enable a prospective purchaser to review the information contained on 
the simplified and streamlined basic disclosure document and any 
earnings claims statements, as well as to conduct a due diligence 
review of the offering, including contacting references.\272\ The seven 
day time period was proposed in the RNPR.\273\
---------------------------------------------------------------------------

    \270\ See 71 FR at 19067. When the Original Franchise Rule was 
amended, the time period was extended to 14 calendar days. The 
interim Business Opportunity Rule maintained the 10 business-day 
period. See 72 FR at 15468, 15570.
    \271\ See 71 FR at 19067.
    \272\ Id.
    \273\ See 73 FR at 16134.
---------------------------------------------------------------------------

    Only one comment received in response to the RNPR addressed this 
provision. The commenter argued, without providing any evidence, that 
imposing a ``waiting period'' of any length before a prospective 
purchaser signs a binding agreement or makes a payment to a seller 
would chill the sale of legitimate business opportunities.\274\ The 
Commission is not persuaded by this assertion, as both the Original 
Franchise Rule and interim Business Opportunity Rule have waiting 
periods in excess of seven days.\275\ Furthermore, a waiting period is 
particularly necessary in the sale of business opportunities, where 
consumers are often rushed into making investment decisions.\276\ No 
Staff Report comments addressed this provision. The Commission 
concludes that seven calendar days is sufficient time for purchasers to 
review the disclosure information and to conduct due diligence, and 
adopts Sec.  437.2 as recommended in the Staff Report.
---------------------------------------------------------------------------

    \274\ Planet Antares-RNPR at 13-14.
    \275\ See 16 CFR 436.2(a) (fourteen calendar days); Sec.  
437.2(g) of the interim Business Opportunity Rule (ten business 
days).
    \276\ See, e.g., FTC v. Bus. Card Experts, Inc., No. 06-CV-4671 
(PJS/RLE) (D. Minn. 2006) (representatives told consumers they must 
invest within one or two weeks in order to take advantage of special 
``promotional'' rate).
---------------------------------------------------------------------------

C. Section 437.3: Disclosure Document

    Section 437.3(a) of the final Rule instructs business opportunity 
sellers how to prepare the basic disclosure document, identifies the 
categories of required disclosure, and specifies what information must 
be included in each of these categories. Section 437.3(a) requires that 
sellers provide prospective purchasers with information about the 
seller, the seller's litigation history, any cancellation and refund 
policy, any earnings claims, and references ``in the form and using the 
language set forth in Appendix A'' to the Rule. In addition, the final 
Rule adds a clause to Sec.  437.3(a) requiring that if the offer for 
sale, sale, or promotion of a business opportunity is conducted in 
Spanish, the seller must provide the Spanish version of the disclosure 
document (Appendix B to the Rule) and provide any required disclosures 
in Spanish. For sales conducted in a language other than English or 
Spanish, the seller must use the form and an accurate translation of 
the language set forth in Appendix A.
    All disclosures, regardless of the language they are in, must be 
presented in a ``single written document.'' The Commission concludes 
that the single written document requirement is necessary to ensure 
that disclosures are not furnished in piecemeal fashion that easily 
could be overlooked or lost.\277\ In addition, requiring that the 
disclosure information be presented in the specified format will 
prevent sellers from circumventing the Rule by presenting damaging 
information in a format that is not sufficiently prominent to be 
noticed or understood, or that is not readily accessible.\278\ Failure 
to follow the form and language of the appropriate disclosure document 
would constitute a violation of Section 5 of the FTC Act.\279\
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    \277\ 71 FR at 19067.
    \278\ See id.
    \279\ See Sec.  437.3(a).
---------------------------------------------------------------------------

    Section 437.3(a)(6) requires that a seller provide the potential 
purchaser with two copies of the disclosure document, one of which is 
for the prospective purchaser to sign, date, and return to the seller 
to maintain in accordance with Sec.  437.7. Section 437.3(b) specifies 
that it is an unfair or deceptive practice and a violation of Section 5 
of the FTC Act for a seller to fail to update the required disclosures 
at least quarterly to reflect changes in the five required categories 
of information, provided, however, that the list of references must be 
updated monthly, until the seller has 10 purchasers, after which 
quarterly updates are required.
    The sections that follow discuss the evolution of the disclosure 
document's format and substance, the commentary received about the 
disclosure document, further revisions to the document recommended in 
Staff Report, and the Commission's analysis of the comments and 
recommendations.

[[Page 76840]]

1. The Format of the Disclosure Document
a. Background
    As noted above, a major goal of this rulemaking has been to 
streamline the lengthy disclosure document that was appropriate in the 
sale of business format franchises, but ill-suited to the sale of 
traditional business opportunities. The interim Business Opportunity 
Rule, modeled on the Original Franchise Rule, required sellers to make 
more than 20 separate disclosures to potential purchasers.\280\ 
Requiring sellers to make these extensive disclosures imposes 
significant compliance costs on covered businesses, and many of the 
disclosures, which are material in the context of franchise sales are 
not well-suited to business opportunity sales. The final Rule aims to 
strike the proper balance between prospective purchasers' need for pre-
sale disclosure and the burden imposed on those selling business 
opportunities.\281\
---------------------------------------------------------------------------

    \280\ These include but are not limited to information about the 
seller; the business background of its principals and their 
litigation and bankruptcy histories; the terms and conditions of the 
offer; statistical analyses of existing franchised and company-owned 
outlets; prior purchasers, including the names and addresses of at 
least 10 purchasers nearest the prospective buyer; and audited 
financial statements. Additional disclosure and substantiation 
provisions apply if the seller chooses to make any financial 
performance representations.
    \281\ 73 FR at 16130-32.
---------------------------------------------------------------------------

    Thus, the Commission proposed a single-page disclosure document 
both in the INPR and the RNPR. The Commission invited public comment 
about the form, including whether the overall presentation of 
information could be improved to make it more useful and 
understandable, and whether the substantive disclosure sections would 
capture the information that would most benefit potential 
purchasers.\282\ The Commission received no comments in response to 
this request.
---------------------------------------------------------------------------

    \282\ Id. at 16132-33.
---------------------------------------------------------------------------

    The Commission engaged a consultant with expertise in document 
design and comprehension to evaluate the proposed disclosure document 
to ensure that it adequately conveyed to consumers information material 
to the prospective business opportunity, and to determine whether the 
overall presentation of the information in the proposed document could 
be improved to make it more useful and understandable.\283\ Following 
publication of the initial proposed disclosure document, the consultant 
conducted extensive consumer testing that resulted in the revised 
proposed disclosure document that the Commission concluded 
substantially improved both the layout and the wording of the 
form.\284\
---------------------------------------------------------------------------

    \283\ See generally Macro Report.
    \284\ 74 FR at 18714-15.
---------------------------------------------------------------------------

    Some of the changes suggested by the consultant included: Changing 
the title of the form from ``Business Opportunity Disclosures'' to 
``Disclosure of Important Information about Business Opportunity''; 
revising the preamble of the disclosure to make it more readable; 
adding a description of the Federal Trade Commission for consumers who 
may not be familiar with the agency; clarifying that the information on 
the form relates specifically to the business opportunity the reader is 
being offered; reformatting the sections that address earnings, legal 
actions, and cancellation or refund policies, to make those sections 
easier to understand; and adding a note below the signature line 
stating that the FTC requires that the business opportunity seller give 
potential buyers at least seven calendar days before asking him or her 
to sign a purchase contract.\285\ A copy of the revised proposed 
disclosure document, which incorporated the consultant's suggested 
revisions, was included in the Workshop Notice announcing that the FTC 
would hold a public workshop on June 1, 2009.\286\
---------------------------------------------------------------------------

    \285\ See generally Macro Report.
    \286\ 74 FR at 18714.
---------------------------------------------------------------------------

b. Public Workshop
    On June 1, 2009, the staff held a one-day public workshop in 
Washington, DC to get public input about the revised proposed 
disclosure document.\287\ The Workshop Notice invited interested 
parties to submit a request to participate as a panelist.\288\ 
Ultimately, the workshop featured five panelists who represented a 
range of interests in the proposed Rule, including a federal law 
enforcer,\289\ a state law enforcer,\290\ a consumer advocate,\291\ the 
general counsel of a national multilevel-marketing company,\292\ and a 
former director of the FTC's Bureau of Consumer Protection.\293\
---------------------------------------------------------------------------

    \287\ Id. In response to the RNPR, three commenters (DRA, Planet 
Antares, and Johnson) had originally requested a hearing as 
permitted in the RNPR (see 73 FR at 16110), but later agreed that a 
public workshop would address their issues and concerns more 
efficiently.
    \288\ The staff received requests to serve as panelists from 
eight persons. It extended offers to serve as panelists to each of 
these individuals, three of whom declined.
    \289\ Kenneth Jost (``Jost''), DOJ, Office of Consumer 
Litigation.
    \290\ Dale Cantone (``Cantone''), Maryland Attorney General's 
Office.
    \291\ Jon Taylor (``Taylor''), Consumer Awareness Institute.
    \292\ Maureen Morrissey (``Morrissey''), Tupperware.
    \293\ William MacLeod (``MacLeod''). Although at the workshop 
Mr. MacLeod represented only his own views, he had previously filed 
comment to the INPR and RNPR on behalf of Planet Antares, which 
markets vending machine businesses.
---------------------------------------------------------------------------

    Workshop panelists uniformly approved the revised proposed 
disclosure document, and applauded the Commission's goal of 
streamlining and simplifying the form.\294\ All workshop panelists 
believed that the disclosure document generally accomplished the 
Commission's stated purposes of streamlining and simplifying the form 
to make it more useful to prospective business opportunity purchasers, 
although they did have some minor suggestions related both to the 
proposed disclosure document and some of the substantive disclosure 
requirements, which are discussed below.
---------------------------------------------------------------------------

    \294\ See, e.g., Jost, June 09 Tr at 12-15 (noting that the 
simplicity of the form is the key to it being successful. ``Having a 
one page document that focuses on the key issues such as legal 
actions, earnings claims, and references will put the most important 
information in the hands of the prospective purchaser.''); MacLeod, 
June 09 Tr at 18 (same, and commending the staff for engaging a 
consumer research expert to copy test the disclosure document); 
Cantone, June 09 Tr at 20 (stating that the disclosure document 
captures the major components of business opportunity fraud, 
including fraudulent earnings claims and false refund offers); 
Taylor, June 09 Tr at 23 (noting that the disclosure document is 
``easy to understand and short and accomplishes its purposes.'').
---------------------------------------------------------------------------

2. Section 437.3(a): Disclosure Requirements
    Section 437.3 requires that business opportunity sellers give 
prospective purchasers five items of material information, in a basic 
disclosure document.\295\ Each required disclosure is intended to help 
prospective purchasers make informed investment decisions. First, 
sellers must state their name, business address, and telephone number, 
the name of the salesperson offering the opportunity, and the date when 
the disclosure document is furnished to the prospective purchaser. 
Second, sellers must disclose whether or not they make earnings claims 
and, if so, must state the claim or claims in a separate earnings 
claims statement attached to the basic disclosure

[[Page 76841]]

document.\296\ Third, sellers must disclose prior civil or criminal 
litigation involving claims of misrepresentation, fraud, securities law 
violations, or unfair or deceptive business practices that involve the 
business opportunity or its key personnel.\297\ Fourth, sellers must 
disclose any cancellation or refund policy.\298\ Finally, sellers must 
provide contact information for at least 10 of their purchasers nearest 
to the prospective purchaser's location.\299\ A discussion of the 
record pertaining to each of the required substantive disclosures 
follows, along with changes made in the final Rule and consistent 
amendments made to the disclosure document.\300\ The final disclosure 
document is Appendix A to this Notice. The Spanish translation of the 
disclosure document is Appendix B to this Notice.
---------------------------------------------------------------------------

    \295\ Like the Franchise Rule and the interim Business 
Opportunity Rule, the final Rule specifies that only sellers of 
business opportunities have an obligation to prepare and furnish a 
basic disclosure document. Other persons involved in the sale of a 
business opportunity--such as brokers, locators, or suppliers--have 
no obligation to prepare basic disclosure documents or to furnish 
such documents. The ultimate responsibility to ensure that 
disclosures are accurately prepared and disseminated rests with the 
seller. See 71 FR at 19067.
    \296\ Section 437.3(a)(2).
    \297\ Section 437.3(a)(3). Key personnel include any of the 
business opportunity seller's 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.''
    \298\ Section 437.3(a)(4). The IPBOR would have required 
disclosure of the business opportunity seller's cancellation or 
refund request history. Some commenters argued that requiring 
disclosure of the seller's refund history would have had the wayward 
effect of discouraging legitimate businesses from offering refunds. 
Because companies with liberal refund policies were more likely to 
have refund requests than those offering no refunds, disclosure of 
refund requests could mislead consumers into thinking that a company 
offering liberal refunds is less reputable than the company offering 
no refunds. The Commission was persuaded by these commenters and 
omitted this required disclosure from the RPBOR. See 73 FR at 16126.
    \299\ Section 437.3(a)(5).
    \300\ In response to the Staff Report, one commenter suggested a 
myriad of additional changes to the disclosure document such as 
fields for the buyer's contact information and additional fields for 
information related to the salesperson. NG Franchise-Staff Report at 
4-5. The Commission finds the suggested changes unnecessary.
---------------------------------------------------------------------------

a. Section 437.3(a)(1): Identifying Information
    The first required disclosure under the final Rule is the seller's 
identifying information. Specifically, Sec.  437.3(a)(1) requires that 
the seller disclose the name, business address, and telephone number of 
the seller, the name of the salesperson offering the opportunity, and 
the date when the disclosure document is furnished to the prospective 
purchaser.\301\ The Commission has long recognized the materiality of a 
business opportunity seller's identifying information. For example, 
when the Original Franchise Rule was promulgated, the Commission 
concluded that:
---------------------------------------------------------------------------

    \301\ Other Commission trade regulation rules similarly require 
disclosure of identifying information. E.g., Wool Products Labeling 
Rule, 16 CFR 300.14; Fur Products Labeling Rule, 16 CFR 301.43.

    The failure to disclose such material information * * * may 
mislead the [prospect] as to the business experience of the parties 
with whom he or she is dealing and * * * could easily result in 
economic injury to the [prospect] because of the * * * dependence 
upon the business experience and expertise of the [business 
opportunity seller].\302\
---------------------------------------------------------------------------

    \302\ 43 FR at 59642.

    This identifying information is material because it enables a 
prospective purchaser to contact the seller and any salesperson for 
additional information. This information also enables a prospective 
purchaser to perform additional, independent research on the seller and 
salesperson. At the same time, for law enforcement purposes, this 
disclosure provides a written record of who provided the required 
disclosures and when they did so.\303\
---------------------------------------------------------------------------

    \303\ The Workshop panelists did not discuss this required 
disclosure.
---------------------------------------------------------------------------

b. Section 437.3(a)(2): Earnings Claims
    The final Rule permits sellers to make an earnings claim, provided 
there is a reasonable basis for the claim and that the seller can 
substantiate the claim at the time it is made.\304\ If the seller makes 
no earnings claim, Sec.  437.3(a)(2) directs the seller simply to check 
the ``no'' box on the disclosure document.\305\ Moreover, Sec.  
437.3(1)(4) specifies items of information necessary to substantiate an 
earnings claim. If the seller does make an earnings claim, the Rule 
requires the seller to check the ``yes'' box and attach to the basic 
disclosure document a second document, the earnings claim statement. 
The disclosure document advises the prospective purchaser of this 
requirement: ``If the statement is yes, [the seller] must attach an 
Earnings Claim Statement to this form.'' \306\
---------------------------------------------------------------------------

    \304\ This is consistent with analogous provisions in the 
Amended Franchise Rule, 16 CFR 436.9, and the interim Business 
Opportunity Rule, 437.1(c).
    \305\ One workshop panelist commented that an earnings claim is 
the most important selling feature of any business opportunity, and 
for that reason, sellers should not be permitted to state they make 
no earnings claim. Taylor, June 09 Tr at 68. The Commission agrees 
that the earnings claim is important to purchasers' investment 
decisions, but recognizes that there is an important distinction 
between forcing sellers to make an earnings claims and requiring 
them to substantiate any claims they choose to make.
    \306\ Business opportunity sellers must also make the following 
prescribed cautionary statement in close proximity to the ``yes'' or 
``no'' check boxes: ``Read this statement carefully. You may wish to 
show this information to an advisor or accountant.''
---------------------------------------------------------------------------

    At the June 1, 2009 workshop, the DOJ representative spoke 
approvingly of the form and language of this disclosure, noting that if 
a seller had checked the ``no'' box, but had, in fact, made an earnings 
claim, the misrepresentation would be in violation of Section 5 of the 
FTC Act, and the seller would be subject to civil penalties.\307\ A 
couple of workshop panelists, however, found the language confusing and 
believed that a potential purchaser reading this disclosure might not 
know who should be completing this section of the form--the purchaser, 
or the seller.\308\ Two of the panelists had some suggestions for 
improving the language of the disclosure.\309\
---------------------------------------------------------------------------

    \307\ Jost, June 09 Tr at 56.
    \308\ Cantone, June 09 Tr at 55; Taylor, June 09 Tr at 56.
    \309\ E.g., Taylor, June 09 Tr at 57; Cantone, June 09 Tr at 57.
---------------------------------------------------------------------------

    The Staff Report concluded that revisions to the language of the 
earnings disclosure were unnecessary. The Commission agrees. The 
initial proposed disclosure document, including the earnings 
disclosure, underwent substantial revision based upon consumer testing. 
Testing of the format and language of the earnings disclosure revealed 
that, contrary to the panelists' concerns, consumers did understand the 
meaning of the earnings disclosure, and realized that ``a check in the 
`No' box would contradict any previous earnings claim that a 
salesperson had made.'' \310\ Indeed, the ultimate test for the 
effectiveness of the disclosure document is whether, in practice, the 
written form helps consumers detect a contradictory oral statement made 
by the seller. On that point, the revised proposed disclosure document 
proved effective--9 out of 10 participants in the FTC study who heard a 
hypothetical oral sales presentation understood that it had included an 
earnings claim, and when they subsequently reviewed the disclosure 
document, correctly identified a written contradiction of the oral 
presentation.\311\ Based on the results of the consumer testing, the 
Commission is not persuaded that the workshop panelists' suggestions 
would improve the comprehension of the earnings claim disclosure, and 
therefore has not adopted any changes to it.
---------------------------------------------------------------------------

    \310\ Macro Report at 15.
    \311\ Id.
---------------------------------------------------------------------------

c. Section 437.3(a)(3): Legal Actions
    Section 437.3(a)(3) addresses deceptive practices in the sale of 
business opportunities by requiring sellers to disclose material 
information about certain prior legal actions. Specifically, Sec.  
437.3(a)(3)(i) requires business opportunity sellers to provide 
prospective purchasers with

[[Page 76842]]

information about legal actions of or against the seller, the seller's 
affiliates or prior businesses, and certain key personnel that involve 
``misrepresentation, fraud, securities law violations, or unfair or 
deceptive practices, including violations of any FTC rule.'' Key 
personnel include ``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.'' \312\ If the seller has such information to disclose, it must 
check the ``yes'' box on the disclosure document. If there are no 
actions to disclose, the seller must check the ``no'' box.
---------------------------------------------------------------------------

    \312\ In the RNPR, the Commission solicited comment on whether 
this provision adequately captures the types of individuals whose 
litigation history should be disclosed. It received no comments 
responsive to that request. In addition, in the RNPR, the Commission 
determined that it would not be appropriate to require the 
disclosure of legal actions involving the seller's sales employees, 
which would have been required under the IPBOR. The Commission 
reasoned that the burden of collecting the litigation histories for 
every sales person was not outweighed by the corresponding benefit 
to prospective purchasers. 73 FR at 16126.
---------------------------------------------------------------------------

    Comments on this section centered on two main issues.\313\ First, 
some expressed concern that the legal action disclosure might unfairly 
tarnish the image of a seller who had meritless lawsuits filed against 
it. Second, the DOJ focused on enhancing the government's ability to 
prosecute violations of the Rule, and to that end, made recommendations 
to revise the form of the disclosure.\314\ In addition, DOJ submitted a 
comment in response to the INPR advising the Commission to add to the 
title of the disclosure document a citation to the legal authority 
requiring the seller to provide the basic disclosure document.\315\ The 
final Rule incorporates this suggestion.
---------------------------------------------------------------------------

    \313\ In addition, discussion at the workshop focused on whether 
a seller's bankruptcy history should be considered a legal action 
and required to be disclosed. As noted in Section III.A.1, 
discussing the definition of ``action,'' the Commission has 
determined not to require the disclosure of bankruptcy actions.
    \314\ See 73 FR at 16125.
    \315\ Id.
---------------------------------------------------------------------------

(1) Legal Action Disclosure Permits a Brief Description
    Section 437.3(a)(3)(ii) requires that if the seller has litigation 
to disclose pursuant to Sec.  437.3(a)(3)(i), it must provide an 
attachment to the disclosure document with the full caption of each 
legal matter (names of the principal parties, case number, full name of 
court, and filing date). The RPBOR would have prohibited a seller from 
including any additional information about the legal action including 
truthful statements about the nature of the litigation or its ultimate 
outcome.\316\ One commenter stated that in some instances, litigation 
may be meritless and disposed of by means of short of formal 
adjudication--for example through dismissal or settlement of nuisance 
lawsuits--and sellers should have the opportunity to provide an 
explanation of any disclosed legal actions.\317\ A panelist at the 
workshop agreed and also noted that the FTC's expert report on the 
consumer testing of the disclosure document revealed that consumers had 
very negative reactions to the existence of legal actions against the 
seller.\318\ The DOJ panelist, on the other hand, expressed concern 
that, if allowed to provide a description of disclosed legal actions, 
sellers might craft misleading descriptions.\319\ He stated that he has 
seen such abuse in the context of the Franchise Rule,\320\ although he 
did acknowledge that it might be unfair to prohibit sellers from 
providing an explanation when they have been sued.\321\
---------------------------------------------------------------------------

    \316\ 73 FR at 16125-26.
    \317\ Gary Hailey (``Hailey''), Venable LLP, June 09 Tr at 122.
    \318\ MacLeod, June 09 Tr at 124. The panelist also argued that 
lawsuits are often overpled and that there may be instances where 
some claims (such as constitutional claims) are not really of 
particular materiality to a prospective purchaser.
    \319\ Jost, June 09 Tr at 125.
    \320\ The Amended Franchise Rule requires that legal actions 
against franchise sellers be disclosed to potential purchasers. 16 
CFR 436.5(c)(3) requires that franchisors summarize, ``the legal and 
factual nature of each claim in the action, the relief sought or 
obtained, and any conclusion of law and fact,'' and provide 
information about damages or settlement terms, terms of injunctive 
orders, dates of any convictions or pleas, and the sentence or 
penalty imposed. The interim Business Opportunity Rule requires that 
sellers disclose only: the identity and location of the court or 
agency; the date of conviction, judgment, or decision; the penalty 
imposed; the damages assessed; the terms of the settlement or the 
terms of the order; and the date, nature, and issuer of each such 
ruling. A seller may also include a summary opinion of counsel as to 
any pending litigation, but only if counsel's consent to the use of 
such opinion is included in the disclosure statement. Interim 
Business Opportunity Rule Sec.  437.1(a)(4)(ii).
    \321\ Jost, June 09 Tr at 125.
---------------------------------------------------------------------------

    The Commission's initial decision not to allow inclusions of 
details regarding the nature of each legal action, as is provided in 
the Amended Franchise Rule, was prompted by an attempt to minimize 
compliance costs to sellers.\322\ Furthermore, the Commission reasoned 
that if ``armed with the full caption, a prospective purchaser can seek 
additional information if he or she so chooses,'' as ``the public's 
ability to review complaints in legal proceedings has become 
significantly easier since the advent of the Internet * * * [because] 
[m]any legal documents are now routinely posted on court or related Web 
sites.'' \323\ The Commission noted that since the disclosure document 
itself instructs potential purchasers that the legal actions disclosed 
pertain to misrepresentation, fraud, securities law violation, or 
unfair or deceptive practices, potential purchasers would have a basic 
understanding of the subject matter of the action.\324\
---------------------------------------------------------------------------

    \322\ 71 FR at 19069.
    \323\ Id. at n.165.
    \324\ Id. at 19068.
---------------------------------------------------------------------------

    The existence of legal actions against the seller is not 
necessarily proof of fraud and that some legal actions may be without 
merit. The Commission concludes, however, that the existence of legal 
actions of the type enumerated--misrepresentation, fraud, securities 
law violations, or unfair or deceptive practices--against the business 
opportunity seller or its key personnel is critical to assessing the 
financial risk of the proposed investment.\325\ This is highly material 
information. 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 fact, in 
the Commission's law enforcement experience, business opportunity 
promoters routinely have hidden such material information from 
prospective purchasers, to the detriment of those purchasers.\326\
---------------------------------------------------------------------------

    \325\ See supra Section III.A.1.
    \326\ E.g., FTC v. Nat'l Vending Consultants, Inc., No. CV-S-05-
0160-RCJ-PAL (D. Nev. 2005) (failure to disclose guilty plea for 
mail fraud of de facto corporate officer); FTC v. Netfran Dev. 
Corp., No. 1:05-cv-22223-UU (S.D. Fla. 2005) (failure to disclose 
FTC injunction against principal); FTC v. Am. 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. Ctrs. USA, Inc., No. CV 04 10075 GHK FMOx (C.D. Cal. 2004) 
(failure to disclose prior lawsuits); FTC v. 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).
---------------------------------------------------------------------------

    The Staff Report cautioned that if the Rule allowed sellers to 
provide a description of the legal action, it would provide an 
opportunity for dishonest sellers to misrepresent or mischaracterize 
such actions, including their ultimate outcomes.\327\ Nevertheless, the 
Staff Report acknowledged that legitimate sellers potentially could be 
harmed if not afforded the opportunity to address in writing the legal 
action they are

[[Page 76843]]

required to disclose.\328\ The staff recommended, therefore, that Sec.  
437.3(a)(3)(ii) be revised to add the following sentence: ``For each 
action, the seller may also provide a brief accurate statement not to 
exceed 100 words that describes the action.'' No comments to the Staff 
Report addressed this revision.
---------------------------------------------------------------------------

    \327\ Staff Report at 75.
    \328\ As the Commission previously noted in the RNPR, however, 
nothing in the Rule would prevent the seller from speaking with the 
consumer to explain the nature or outcome of any legal action 
disclosed on the form. 73 FR at 16125.
---------------------------------------------------------------------------

    Upon consideration of the record, the staff's recommendation, and 
the rationale for that recommendation, the Commission adopts Sec.  
437.3(a)(3)(ii) as recommended in the Staff Report. Non-compliance with 
the restriction of this provision (i.e., statements that exceed the 
word limitation or that mischaracterize the action or its outcome) is a 
violation of the Rule.
(2) Amendment to the Disclosure Document
    The DOJ panelist advocated for a small amendment to the ``Legal 
Actions'' section of the proposed disclosure document published prior 
to the Workshop. Specifically, the DOJ panelist recommended adding the 
phrase ``including violation of an FTC Rule'' after the phrase ``or 
unfair or deceptive act or practice * * *,'' to make clear to business 
opportunity sellers that a violation of an FTC Rule is an unfair or 
deceptive practice.\329\
---------------------------------------------------------------------------

    \329\ Jost, June 09 Tr at 36.
---------------------------------------------------------------------------

    The Staff Report agreed that this recommended addition to the 
``Legal Actions'' section of the disclosure document would assist 
enforcement efforts by eliminating any significant question as to 
whether the defendant had actual or implied knowledge that violation of 
an FTC rule is an unfair and deceptive practice, and recommended that 
the disclosure document include this language.\330\ No comments to the 
Staff Report addressed this addition.
---------------------------------------------------------------------------

    \330\ The DOJ, upon request of the FTC, has the authority to 
seek civil penalties for violations of trade regulation rules issued 
pursuant to the FTC Act, but to obtain such penalties, 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.'' See 15 U.S.C. 56(a)(1); 
45(m)(1)(A).
---------------------------------------------------------------------------

    Upon consideration of the record and the rationale for the 
recommendation, the Commission adopts the staff's recommendation. 
Accordingly, Sec.  437.3(a)(3)(i) of the final Rule requires disclosure 
of any civil or criminal action for misrepresentation, fraud, 
securities law violations, or unfair or deceptive practices, 
``including violations of any FTC Rule.'' The disclosure documents 
provided as Appendix A and Appendix B have also been revised to include 
this language.
d. Section 437.3(a)(4): Cancellation or Refund Policy
    Section 437.3(a)(4) pertains to a common practice among fraudulent 
business opportunity sellers: offering prospective purchasers an 
illusory right to cancel or to seek a whole or partial refund.\331\ The 
Rule does not require any seller to offer cancellation or a refund; 
however, if the seller does offer a refund or the right to cancel the 
purchase, it must ``state the material terms of the refund or 
cancellation policy in an attachment to the disclosure document.'' 
\332\ The disclosure requirement is complemented by a prohibition, at 
Sec.  437.6(l), against failing ``to provide a refund or cancellation 
when the purchaser has satisfied the terms and conditions pursuant to 
Sec.  437.3(a)(4).'' The disclosure requirement is also complemented by 
prohibitions on other misrepresentations.\333\
---------------------------------------------------------------------------

    \331\ See, e.g., FTC v. AMP Publ'n., Inc., No. SACV-00-112-AHS-
ANx (C.D. Cal. 2001); FTC v. Home Professions, Inc., No. SACV 00-111 
AHS (Eex) (C.D. Cal. 2001); FTC v. Innovative Prods., No. 3:00-CV-
0312-D (N.D. Tex. 2000); FTC v. Encore Networking Servs., No. 00-
1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. Mediworks, Inc., No. 00-
01079 (C.D. Cal. 2000). Indeed, allegations that business 
opportunity sellers misrepresented their refund policies rank among 
the top 10 complaint allegations in Commission business opportunity 
cases brought under Section 5. See 71 FR 19069.
    \332\ The Commission adopted a similar approach in the TSR. 16 
CFR 310.3(a)(1)(iii) (if a seller makes a representation about a 
refund policy, it must disclose ``a statement of all material terms 
and conditions of such policy'').
    \333\ See Sec.  437.6.
---------------------------------------------------------------------------

    As discussed below, the Commission adopts the staff's 
recommendation that sellers be required to state the ``material'' terms 
of the refund or cancellation policy, and the term ``material'' is now 
included in the final Rule provision. Under the final Rule, a seller 
that offers a cancellation or refund policy must check the ``yes'' box 
on the disclosure document and also must attach to the disclosure 
document a written description of its policy. To minimize compliance 
costs, the seller may comply with this requirement by attaching to the 
disclosure document a copy of a pre-existing document that details the 
seller's cancellation or refund policy. For example, a seller may 
detail its refund policy in a company brochure. If it does, the seller 
need only attach to the disclosure document the particular page setting 
forth the refund policy. As in the other examples, if no cancellation 
or refund is offered, then the seller need only check the ``no'' box.
    Workshop panelists raised two issues related to the disclosure of 
refund and cancellation policies. First, panelists questioned whether 
information about the percentage of purchasers requesting and obtaining 
refunds should be part of the disclosure, and second, whether Sec.  
437.3(a)(4) should specify particular terms of a refund policy that 
must be disclosed to potential purchasers. The sections that follow 
address each of these concerns.
(1) Percentage of Purchasers Requesting and Obtaining Refunds
    One panelist stated that information concerning the percentage of 
purchasers requesting and obtaining refunds would be relevant 
information to potential purchasers.\334\ Another panelist disagreed, 
arguing that requiring disclosure of this information might have the 
unintended consequence of harming purchasers by discouraging sellers 
from offering refunds.\335\ The Commission previously considered this 
issue. The IPBOR would have required a seller that had a cancellation 
or refund policy to disclose the number of purchasers who had asked to 
cancel or who had sought a refund in the two previous years.\336\ In 
the INPR, 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.\337\ Based upon arguments articulated in the comments to 
the INPR, the Commission concluded that this disclosure would not be 
useful to consumers, and that disclosure of refund history could be 
unduly prejudicial to business opportunities that offer and liberally 
provide refunds to prior purchasers.\338\ 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 inaccurately conclude that the legitimate seller offers a 
riskier business venture. The requirement, therefore, could create a 
perverse incentive to discontinue refund policies.\339\ The Commission 
concluded that disclosure of refund history would not reliably remedy 
deception on this issue, and it was eliminated in the RPBOR.\340\
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    \334\ Taylor, June 09 Tr at 48. One commenter agreed. Brooks-
Workshop comment.
    \335\ MacLeod, June 09 Tr at 50.
    \336\ 71 FR at 19088 (IPBOR Sec.  437.3(a)(5)).
    \337\ Id. at 19070.
    \338\ 73 FR at 16126.
    \339\ Id. at 16115.
    \340\ Id. at 16126.

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[[Page 76844]]

    Panelists in favor of requiring the disclosure of seller's refund 
histories presented no arguments other than those previously considered 
by the Commission. Accordingly, the final Rule does not require this 
disclosure.
(2) Information To Be Disclosed About Refund and Cancellation Policies
    Although workshop participants agreed that information about a 
seller's cancellation and refund policies is an important component of 
a potential purchaser's evaluation of a business opportunity, they were 
universally concerned that Sec.  437.3(a)(4) did not contain enough 
specificity about what information must be disclosed to potential 
purchasers and suggested that additional guidance from the Commission 
was necessary.\341\ The panelist from the Maryland Attorney General's 
Office thought the Rule should specify that all material terms of a 
refund policy must be disclosed, because in the context of business 
opportunity sales, it has been his experience that the requirements to 
obtain a refund are often so onerous that as a practical matter, no one 
is ever eligible.\342\ Some panelists felt the Rule should identify 
specific information to be disclosed. For example, one commenter noted 
that the period of time a seller has to exercise a right to 
cancellation or refund, or any conditions on return of unsold goods are 
material and should be required to be disclosed to potential 
purchasers.\343\ One panelist suggested that the DSA Code of Ethics' 
refund requirements might serve as a model to identify types of 
information that should be disclosed to potential purchasers.\344\
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    \341\ See June 09 Tr at 39-53.
    \342\ Cantone, June 09 Tr at 47 (providing as an example a 
company offering a 100% buy-back for vending machines and noting the 
company's failure to disclose that the cost of sending back the 
vending machine would be borne by the purchaser, and would often 
exceed any refund due, thereby rendering any potential refund 
worthless).
    \343\ Taylor, June 09 Tr at 43.
    \344\ Morrissey, June 09 Tr at 45. The Commission has reviewed 
applicable provisions of the DSA Code of Ethics, but does not find 
them applicable. DSA dictates the specific terms of its members' 
refund policies. The RPBOR, by contrast, did not specify the 
requirements of a seller's refund or cancellation policy, or even 
whether the seller must have such policies. Instead, it attempted to 
ensure that if such policies existed, potential purchasers were 
aware of how they can exercise their rights under those policies.
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    After considering these comments, the Staff Report recommended 
modifying Sec.  437.3(a)(4) to track closely a similar disclosure 
requirement in the TSR.\345\ The TSR requires that if the seller or 
telemarketer makes a representation about a refund, cancellation, 
exchange, or repurchase policy, it must provide the purchaser with a 
statement of all material terms and conditions of its policy.\346\ 
Requiring the disclosure of all material terms of a refund or 
cancellation policy most effectively accomplishes the Commission's 
stated purpose of ensuring that potential purchasers are provided with 
information that would assist them in assessing the financial risk 
associated with the offer. Indeed, the commentary to the IPBOR 
indicates that the Commission, in fact, intended to require sellers to 
disclose all material terms of refund and repayment policies to 
prospective purchasers.\347\
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    \345\ Specifically, in describing its approach regarding refund 
and cancellation policy disclosures, the Commission noted that it 
``adopted the same approach in the TSR.'' 71 FR at 19069 n.166 
(citing 16 CFR 310.3(a)(1)(iii) (if a seller makes a representation 
about a refund policy, it must disclose ``a statement of all 
material terms and conditions of such policy'')).
    \346\ 16 CFR 310.3(a)(1)(iii).
    \347\ See 71 FR 19069-70.
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    Therefore, upon consideration of the record, the Commission adopts 
the staff's recommendation. Accordingly, the penultimate sentence of 
Sec.  437.3(a)(4) of the final Rule has been clarified to read: ``If 
so, state all material terms and conditions of the refund or 
cancellation policy in an attachment to the disclosure document.'' As 
discussed in Section III.A.9., the final Rule includes a definition of 
``material'' similar to the definition used in the TSR. Specifically, 
Sec.  437.1(i) defines, in relevant part, ``material'' to mean ``likely 
to affect a person's choice of, or conduct regarding, goods or 
services.'' Examples of material terms and conditions may include, for 
example, the period of time the purchaser has to cancel a purchase or 
request a refund; the specific steps necessary to cancel a purchase or 
request a refund; any fees or penalties incurred for cancellation; and 
where unused inventory must be returned to and by what method. The 
Commission declines to enumerate in the final Rule what terms are 
material, as materiality may vary depending on the circumstances of the 
opportunity and the refund or cancellation policy.
e. Section 437.3(a)(5): References
(1) Background
    The interim Business Opportunity Rule required the disclosure of 
prior purchasers' name, street address, city, state, and telephone 
number.\348\ In the INPR, the Commission concluded that prospects could 
readily contact a prior purchaser if provided with the prior 
purchaser's name, city, state, and telephone number, and that this 
approach enables prospects to contact references while minimizing the 
intrusion into prior purchasers' privacy.\349\ Accordingly, neither the 
IPBOR, nor the RPBOR would have required sellers of business 
opportunities to disclose prior purchasers' street address to potential 
purchasers.\350\ As discussed below, the final Rule requires that 
sellers disclose only prior purchasers' name, state, and telephone 
number. Like the IPBOR and the RPBOR, the final Rule limits the 
disclosure of references to those who purchased the business 
opportunity within the three years prior to the date of the disclosure 
document. Moreover, the final Rule requires the seller to disclose this 
information by listing each prior purchaser (if fewer than 10), or 
listing at least the 10 prior purchasers nearest to the prospective 
purchaser's location. In order to minimize compliance costs, the final 
Rule also provides sellers with an alternative disclosure option--in 
lieu of a list of the 10 prior purchasers nearest the prospect, a 
seller may furnish a prospect with a national list of all 
purchasers.\351\ In the INPR, the Commission noted that this option 
would allow the seller to maintain a master list of purchasers that 
could be updated periodically, which would allow the seller to avoid 
having to tailor the disclosure to each prospective purchaser.\352\ A 
seller that chooses this option must insert into the reference section 
of the disclosure document the words ``See Attached List,'' and attach 
a list of the references to the disclosure document.\353\
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    \348\ 72 FR 15565.
    \349\ 71 FR at 19071 n.180.
    \350\ 71 FR at 19088; 73 FR at 16135.
    \351\ See Sec.  437.3(5)(i).
    \352\ 71 FR at 19071. In the RNPR, the Commission solicited 
comment on whether giving sellers the ability to provide prospective 
purchasers with a national list was a viable option. It received no 
comments responsive to that request.
    \353\ Sellers that provide the disclosure document 
electronically would be permitted to attach the national list of 
references in electronic form as well.
---------------------------------------------------------------------------

    Notwithstanding the fact that most of the information required by 
the reference disclosure is often available in the public domain, in 
crafting this section of the Rule, as discussed infra, the Commission 
considered potential privacy concerns raised by the use of prior 
purchaser information.\354\ To address these concerns, Sec.  
437.3(a)(5)(ii) requires that the disclosure document state the 
following language clearly and in immediate conjunction with the list 
of references: ``If you buy a business opportunity from the seller, 
your

[[Page 76845]]

contact information can be disclosed in the future to other buyers.''
---------------------------------------------------------------------------

    \354\ 71 FR at 19071.
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(2) Privacy Concerns Raised in the Record
    In response to the INPR, a number of commenters, primarily from the 
MLM industry, expressed concern that the reference disclosure 
requirement raised privacy and security concerns.\355\ The Commission, 
however, was and is not persuaded that privacy concerns outweigh the 
benefits of this disclosure. The Commission finds that disclosure of 
prior purchasers is important to prevent fraud because it enables 
prospects to evaluate the seller's claims based on information from an 
independent source with relevant experience.\356\ Furthermore, the 
required reference disclosures include no sensitive personal 
information whatsoever--no social security numbers, birth dates, 
financial account information, or even street addresses.\357\
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    \355\ See 73 FR at 16126.
    \356\ See id.
    \357\ See id.
---------------------------------------------------------------------------

    Following publication of the RNPR, one commenter continued to argue 
that the disclosures enumerated in Sec.  437.3(a)(5) would raise 
privacy and data security concerns.\358\ The commenter articulated 
three main concerns: (1) That requiring the seller to ``store 
purchasers' personal information in a single location or document 
creates a target ripe for theft and improper disclosure;'' (2) that 
requiring disclosure of information of prior purchasers conflicts with 
the FTC's Privacy of Consumer Information Rule (``Privacy Rule'' or 
``GLB Privacy Rule''),\359\ promulgated under the Gramm-Leach-Bliley 
Act (``GLB'') \360\ because it does not allow those prior purchasers of 
the business opportunity the right to opt out of having their contact 
information disclosed to potential purchasers;\361\ and (3) that the 
mandatory disclosure of references violates privacy obligations under 
the California Constitution.\362\ The Commission is not persuaded by 
any of these contentions.\363\
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    \358\ Planet Antares-RNPR at 18-21.
    \359\ 16 CFR Part 313.
    \360\ 15 U.S.C. 6801 et seq.
    \361\ The Commission received a few comments in response to the 
INPR in support of allowing individual business opportunity 
purchasers to opt out of having their contact information disclosed. 
The comment submitted by the DOJ however, urged the Commission to 
reject any opt-out believing it would be an easy matter for sellers 
to talk purchasers 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. The Commission agreed with 
DOJ and after analyzing all of the commentary to Sec.  437.3(a)(5), 
declined to make any changes to that section. See 73 FR at 16126-27.
    \362\ Planet Antares-RNPR at 20.
    \363\ This same commenter argues that the required reference 
information constitutes trade secrets that should be afforded 
special protections, but offers no support for this contention. Id. 
at 14.
---------------------------------------------------------------------------

    First, the Commission rejects the argument that the disclosure of 
references creates an unnecessary risk of theft or improper disclosure. 
As an initial matter, the Commission notes that a similar reference 
disclosure has been required for business opportunities and business 
format franchises covered by the Original Franchise Rule for more than 
25 years, and it is required under the interim Business Opportunity 
Rule as well.\364\ Moreover, the information to be collected and stored 
is not sensitive (e.g., no financial information, social security 
numbers, dates of birth, or street addresses). The commenter has not 
explained, nor does the Commission understand, why the information 
would be particularly attractive to thieves.
---------------------------------------------------------------------------

    \364\ 16 CFR 437.1(a)(16)(iii).
---------------------------------------------------------------------------

    Second, the Commission is not persuaded that Sec.  437.3(a)(5) 
creates potential conflicts with the GLB Privacy Rule, because the 
protections afforded by the Privacy Rule likely do not extend to the 
contact information of business opportunity purchasers. Congress 
enacted GLB to protect personal financial information of individual 
consumers, but excluded from the ambit of the law the protection of 
information pertaining to businesses. The Privacy Rule requires that a 
``financial institution'' provide, under specified circumstances, 
notice to its consumers and customers of its privacy policies and 
practices,\365\ including the consumers' right to opt out of having 
their personal information shared with third parties.\366\ For purposes 
of the Privacy Rule, a consumer is an individual who obtains financial 
products or services for personal, family or household purposes.\367\ 
The Commission need not consider the limited circumstances where a 
business opportunity seller might be considered a financial 
institution, because the Privacy Rule is aimed at protecting the non-
public personal financial information of consumers, not 
businesses.\368\
---------------------------------------------------------------------------

    \365\ 73 FR at 16127.
    \366\ 16 CFR 313.1(a)(3).
    \367\ 16 CFR 313.3(e). Similarly, a customer is a consumer with 
a continuing relationship with the financial institution. See 16 CFR 
313.3(h).
    \368\ See 16 CFR 313.1(b) (expressly stating that the Privacy 
Rule ``does not apply to information about companies or about 
individuals who obtain financial products or services for business, 
commercial, or agricultural purposes''). Indeed, federal law often 
focuses on privacy concerns affecting individuals, not businesses. 
See, e.g., the Fair Credit Reporting Act (``FCRA'') 15 U.S.C. 
1681(a)(4) (requiring various protections for consumer information, 
including provisions addressing identity theft). There is no 
comparable statute that protects business information.
---------------------------------------------------------------------------

    The commenter argues that business opportunity operators should be 
considered consumers for purposes of the Privacy Rule, and thus should 
have the right to opt out of having their contact information disclosed 
to potential purchasers.\369\ The commenter's interpretation is 
contrary to both prior Commission policy, and the plain meaning of the 
language of the Privacy Rule. As the Commission has previously stated, 
by investing in a business opportunity, purchasers are entering the 
world of commerce and embarking upon the establishment of a 
business.\370\ Financing a business venture is not ``primarily for 
personal, family, or household purposes.'' \371\ This interpretation is 
consistent with previous Commission guidance in an analogous 
situation,\372\ and with the Commission's interpretation of 
``consumer'' in the context of other rules it enforces.\373\
---------------------------------------------------------------------------

    \369\ The commenter argues that the purchase of a business 
opportunity might be intended to ``provide a revenue stream'' to a 
purchaser and ``not necessarily a source of employment.'' Planet 
Antares-RNPR at 18-21. The Commission finds this distinction 
immaterial to the analysis.
    \370\ 73 FR at 16127 & n.210.
    \371\ The Commission has not issued guidance about the meaning 
of ``personal, family, or household purposes'' because the plain 
meaning of the language seems abundantly clear. Courts' 
interpretations of this phrase when used in other consumer 
protection laws are instructive. See, e.g., In re Runski, 102 F.3d 
744, 747 (4th Cir. 1996) (noting in the bankruptcy context that 
courts have uniformly concluded that debt incurred for a business 
venture or with a profit motive does not fall into the category of 
debt incurred for ``personal, family, or household purposes'').
    \372\ See ``Frequently Asked Questions for the Privacy 
Regulation,'' Question B-2 (Dec. 2001), http://www.ftc.gov/privacy/glbact/glb-faq.htm (Privacy Rule does not apply when a financial 
institution makes a business loan to a sole proprietor; although an 
individual, a sole proprietor is not a ``consumer'' for purposes of 
the Privacy Rule where the financing is not for personal, family, or 
household purposes).
    \373\ See, e.g., Preservation of Consumer's Claims and Defenses, 
16 CFR 433.1(b); Credit Practices, 16 CFR 444.1(d).
---------------------------------------------------------------------------

    Similarly, the reference disclosure is not in conflict with the 
California Constitution. A cause of action for invasion of privacy 
under the California Constitution exists only when a person has a 
reasonable expectation of privacy, which cannot exist if the person has 
been expressly informed that his or her contact information will be 
shared with prospective purchasers.\374\
---------------------------------------------------------------------------

    \374\ When personal information has been released without 
consent, a cause of action for invasion of privacy exists under the 
California Constitution only if: (1) the individual had a reasonable 
expectation that the information would be kept private, and (2) 
disclosure of the information is serious in nature, scope, and or 
potential impact to cause an ``egregious breach of social norms.'' 
See Pioneer Elecs., Inc. v. Olmstead, 40 Cal. 4th 360, 370-71 
(2007). Even when these criteria are met, the individual's privacy 
interest must be weighed against legitimate and important competing 
interests. Id. When measured against this standard, disclosure of 
purchaser information pursuant to proposed Sec.  437.3(a)(5) would 
not give rise to a privacy action. First, the disclosure document 
plainly notifies potential purchasers that their reference 
information will be provided to subsequent purchasers, thus they 
have no reasonable expectation that their information will be kept 
private. Second, the reference disclosure includes no sensitive 
personal information whatsoever, and the value to potential 
purchasers of information about prior purchasers outweighs any 
potential detriment to those prior purchasers.

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[[Page 76846]]

    Privacy concerns relating to the reference disclosure were also 
articulated at the June 1, 2009 workshop. A panelist representing a 
large MLM company stated that at least some of its representatives 
expressed concern that under the proposed Rule, their addresses and 
home telephone numbers could be provided to persons they did not know. 
The panelist noted that representatives often use their home telephone 
number as their business number, and that the same telephone number is 
also used by other family members, including children. The panelist 
wondered if additional safeguards to protect purchasers' privacy could 
be taken and suggested requiring potential purchasers to contact a 
seller's references through a centralized telephone number to be 
administered by the seller.\375\ The DOJ panelist opposed this 
suggestion, arguing that communications with prior purchasers could be 
subject to manipulation by the seller.\376\
---------------------------------------------------------------------------

    \375\ Morrissey, June 09 Tr at 87.
    \376\ Jost, June 09 Tr at 88.
---------------------------------------------------------------------------

    The Commission does not believe that requiring sellers to provide 
and administer a centralized phone number to screen references is 
necessary or advisable. The Commission agrees with DOJ's comment that 
such a system may invite manipulation. It would also create an 
unjustified financial and administrative burden for sellers. As noted 
above, the Commission does not view the disclosure of a purchaser's 
name, state, and telephone number as creating privacy or security 
concerns, as this information is often available in the public domain. 
The required disclosure does not include street address information, 
and therefore, does not provide a ``road map'' to a purchaser's 
residence, as the commenter suggests. Moreover, potential purchasers 
are notified in writing, prior to the time of purchase that their 
reference information will be available to subsequent purchasers. 
Purchasers who have privacy concerns, therefore, can take steps to 
minimize personal exposure, such as, for example, designating a 
separate phone number for business purposes.
    Nonetheless, the Staff Report noted that the disclosure of 
information some may consider private must be weighed against the 
benefits of providing that information to potential purchasers. After 
considering the purpose of providing reference information, the Staff 
Report concluded that the disclosure of the city where the reference is 
located is not necessary. The staff recommended, therefore, that the 
city where previous purchasers reside be eliminated from Sec.  
437.3(a)(5)(i), and correspondingly, from the ``References'' section of 
the disclosure document.
    No comments in response to the Staff Report addressed this 
recommended modification. The Commission agrees with the staff's 
recommendation. Accordingly, both Sec.  437.3(a)(5)(i) of the final 
Rule and the related section of the disclosure document have been 
revised to eliminate references to the city where prior purchasers 
reside. The Commission reiterates, however, that this amendment is 
intended to alleviate privacy concerns, and it does not relieve a 
seller of its obligation to provide a list of the ten purchasers within 
the past three years that are nearest to the potential purchaser as an 
alternative to providing the full list of all prior purchasers.
f. Section 437.3(a)(6): Receipt
    Section 437.3(a)(6) sets forth a receipt requirement for the 
disclosure document. This requirement is designed to document proper 
disclosure by the seller. Specifically, the seller must attach a 
duplicate copy of the disclosure document, which is to be signed and 
dated by the purchaser. A designation for the signature and date is 
included at the bottom of the disclosure document.\377\ The Commission 
believes that the receipt requirement is especially important to prove 
proper disclosure with respect to electronic documents. A seller 
furnishing disclosures online, either through email or access to a Web 
site, has the burden of establishing that the prospect was actually 
able to access the electronic document.\378\ Completion and submission 
of the receipt serves that purpose. The final Rule does not impose any 
particular method of transmitting the receipt. In order to minimize 
compliance costs, sellers should have flexibility to determine the best 
method to comply with this provision of the Rule.\379\ Accordingly, 
Sec.  437.3(a)(6) would permit the seller to inform the prospective 
purchaser how to return the signed receipts, for example, by sending 
the receipt to a street address, to an email address, or by facsimile.
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    \377\ As noted previously, the Commission engaged a consultant 
with expertise in document design and comprehension to evaluate the 
initial proposed disclosure document. One of the changes suggested 
by the consultant included adding a note below the signature line of 
the disclosure document stating that the FTC requires that all 
business opportunity sellers give the prospective purchaser at least 
seven calendar days before asking him or her to sign a purchase 
contract. A copy of the revised proposed disclosure document, which 
incorporated this change, was attached as Appendix A to the Federal 
Register Notice announcing the June 1, 2009 workshop. See 74 FR at 
18715.
    \378\ 71 FR at 19072.
    \379\ Id.
---------------------------------------------------------------------------

    As noted above, the Staff Report recommended adding a new 
definition of ``signature'' or ``signed'' to make clear that the term 
``signature'' or ``signed'' includes not only a person's handwritten 
signature, but also an electronic or digital form of signature to the 
extent that such signature is recognized as a valid signature under 
applicable federal law or state contract law.\380\ The receipt 
requirement received one comment. The commenter noted that the 
requirement that a purchaser be provided with a second copy of the 
disclosure document appears inconsistent with the Rule's recognition 
that the disclosure document can be provided to potential purchasers 
through electronic media.\381\ The Commission disagrees with the 
commenter. Some sellers may post their disclosure document on their Web 
sites, and update it as needed. The requirement to provide a copy of 
the electronic disclosure ensures that the prospective purchaser will 
retain the document in a static format. This can be accomplished as 
easily through electronic means as it can through paper. In fact, 
allowing electronic distribution should greatly reduce sellers' 
compliance costs over the long run, especially costs associated with 
printing and distributing disclosure documents. Nevertheless, the final 
Rule enables sellers to determine for themselves whether it is most 
efficient and cost-effective to provide the disclosure document to 
prospective purchasers electronically or in printed form. Accordingly, 
the Commission adopts the receipt provision as recommended in the Staff 
Report, with one non-substantive modification: the reference to a 
``disclosure page'' has

[[Page 76847]]

been changed to ``disclosure document'' to conform it to the title of 
Sec.  437.3.
---------------------------------------------------------------------------

    \380\ See Sec.  437.1(r).
    \381\ Quixtar-INPR at 27.
---------------------------------------------------------------------------

3. Section 437.3(b): Updating the Disclosure Document
    To ensure that a seller's disclosures are current, Sec.  437.3(b) 
requires sellers to update their disclosures at least quarterly. 
Modeled on the Original Franchise Rule and interim Business Opportunity 
Rule,\382\ the provision states that it would be a violation of the 
Rule and Section 5 of the FTC Act for a seller to fail to update the 
disclosures to reflect any material changes in the information 
presented in the basic disclosure document on at least a quarterly 
basis. The Commission has concluded that quarterly updating strikes the 
right balance between the need for accurate disclosure and the costs 
and burdens more frequent updating would entail.\383\
---------------------------------------------------------------------------

    \382\ 16 CFR 436.7(b) and interim Business Opportunity Rule 
Sec.  437.1(a)(22).
    \383\ 71 FR at 19072.
---------------------------------------------------------------------------

    Section 437.3(b) includes a proviso that would require more 
frequent updating in one respect: the list of references. Specifically, 
a seller is required to update the list of references monthly until 
such time that it is able to include the full list of 10 references. 
This is particularly necessary for start-up opportunities that may have 
few or no prior references when they commence business opportunity 
sales. The Commission has concluded that prospective purchasers' 
ability to contact at least 10 references in their due diligence 
investigations of business opportunity offers outweighs any costs of 
more frequent updating until the list of 10 is compiled.\384\
---------------------------------------------------------------------------

    \384\ Id.
---------------------------------------------------------------------------

    No comments were directed to the requirement of updating the 
disclosures, and the final Rule contains Sec.  437.3(b) as recommended 
in the Staff Report.

D. Section 437.4: Earnings Claims

    Section 437.4 of the final Rule addresses earnings claims, and is 
similar to the parallel sections of the Amended Franchise Rule and the 
interim Business Opportunity Rule.\385\ Like both of those rules, the 
final Rule requires disclosure of earnings information only if a 
business opportunity seller chooses to make a claim about potential 
earnings to prospective purchasers.
---------------------------------------------------------------------------

    \385\ See 16 CFR 436.9 and interim Business Opportunity Rule 
Sec. Sec.  437.1(b), (c) and (e).
---------------------------------------------------------------------------

    Like the analogous provisions of the Amended Franchise Rule and the 
interim Business Opportunity Rule, Sec.  437.4(a) requires a seller 
making an earnings claim to: (1) Have a reasonable basis for the claim 
at the time the claim is made; (2) have in its possession written 
materials that substantiate the claim at the time the claim is made; 
(3) make the written material available to the prospect and the 
Commission upon request; and (4) furnish the prospect with an earnings 
claim statement. Section 437.4(b) sets forth disclosure and other 
requirements for sellers making earnings claims in the general media. 
In Sec.  437.4(c), the final Rule addresses the use of industry 
financial statistics or data to suggest or imply a likely level of 
earnings. Finally, Sec.  437.4(d) requires that sellers notify 
prospects in writing of any changes in earnings information before the 
prospect enters into a contract or provides any consideration to the 
seller, directly or indirectly through a third party.\386\ Each of 
these requirements is discussed in the following sections.
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    \386\ The Amended Franchise Rule contains similar requirements. 
See 16 CFR 436.1(d)(2) and 436.1(e)(6) (each prospective franchisee 
to whom the representation is made shall be notified of any material 
change in the information contained in the earnings claims 
document).
---------------------------------------------------------------------------

1. Section 437.4(a)(1)-(3): Substantiation for Earnings Claims
    As noted throughout this proceeding, the making of false or 
unsubstantiated earnings claims is the most prevalent problem in the 
offering of business opportunities. To address this problem, Sec.  
437.4(a)(1) of the final Rule permits sellers to make an earnings claim 
provided there is a reasonable basis for the claim at the time the 
claim is made.\387\ Further, Sec.  437.4(a)(2) requires sellers that 
make earnings claims to have in their possession written substantiation 
for their earnings claims, and Sec.  437.4(a)(3) requires sellers to 
make that written substantiation available to the prospective 
purchaser, or to the Commission, upon request. Requiring that a 
prospective purchaser can obtain and review, or have his or her own 
advisor review, substantiation for earnings claims increases the 
likelihood that sellers will make claims only for which they have a 
reasonable basis.
---------------------------------------------------------------------------

    \387\ As discussed in the INPR, the Commission did not propose a 
``geographic relevance'' requirement because that prerequisite is 
subsumed in the ``reasonable basis'' requirement. See 71 FR at 19072 
n.185.
---------------------------------------------------------------------------

2. Section 437.4(a)(4): Earnings Claim Statement
    Section 437.4(a)(4) prescribes the content of the earnings claim 
statement, which must be provided to a prospect if a seller elects to 
make a representation about potential earnings. To ensure ease of 
review, each earnings claim statement must be a single written 
document. The document must be titled ``EARNINGS CLAIM STATEMENT 
REQUIRED BY LAW'' in capital, bold type letters. This ensures that the 
prospective purchaser can readily determine from the face of the 
document the importance of its text. The title is followed by the name 
of the person making the claim, and the date of the claim. After the 
title and identifying information, the Rule requires the seller to 
state the specific earnings claim or claims. The final Rule does not 
specify any particular format or formula for an earnings claim. This is 
intended to allow flexibility in presenting earnings information in the 
manner that is appropriate for each opportunity, provided that any such 
claim has a reasonable basis and that there is written substantiation 
for the claim at the time it is made.\388\
---------------------------------------------------------------------------

    \388\ 71 FR at 19072.
---------------------------------------------------------------------------

    The final Rule also requires a seller making an earnings claim to 
disclose the beginning and ending dates when the represented earnings 
were achieved.\389\ This information is material because a prospective 
purchaser cannot begin to evaluate an earnings representation without 
knowing how recently the supporting data was collected. For example, a 
seller may have conducted a survey of purchasers of its business 
opportunity in 2009. The Rule would not necessarily prohibit the use of 
that survey information in 2010, but the prospect should be made aware 
of the applicable time period in order to assess the relevance of the 
claim to current market conditions. Similarly, a prospect may 
reasonably give greater weight to a survey of purchasers over an 
extended period of time (for example, over a three-year period), than a 
more limited survey (for example, over a three-month period).\390\
---------------------------------------------------------------------------

    \389\ Section 437.4(a)(4)(iv).
    \390\ 71 FR at 19072.
---------------------------------------------------------------------------

    Further, this section of the Rule requires the disclosure of the 
number and percentage of all purchasers who purchased the business 
opportunity prior to the end of the represented time period who have 
achieved at least the claimed earnings during that period. This 
information is material because it enables the prospect to determine 
whether the claimed earnings of prior purchasers are typical.\391\ For 
example, a seller may claim that purchasers have average earnings of 
$50,000 a year. Even if true, this statement may not reflect the 
experience of the typical purchaser because a few purchasers with 
unusually high earnings could skew the average. Thus, the number and

[[Page 76848]]

percentage of purchasers earning $50,000 a year might actually be very 
low.\392\
---------------------------------------------------------------------------

    \391\ Id.
    \392\ Id.
---------------------------------------------------------------------------

    In addition, this section of the final Rule requires a seller 
making an earnings claim to disclose any characteristics that 
distinguish purchasers who achieved at least the represented level of 
earnings from those characteristics of the prospective purchasers.\393\ 
For example, a survey of ice cream vending route purchasers operating 
only in the South may not be readily applicable to other regions, such 
as the North. Similarly, a survey limited to large urban areas may not 
be applicable to smaller, rural areas. Distinguishing characteristics 
of purchasers who achieved a represented level of earnings is material 
information because it enables a prospect to assess the relevance of an 
earnings claim to his or her particular market.\394\
---------------------------------------------------------------------------

    \393\ Section 437.4(a)(4)(vi).
    \394\ 71 FR at 17073.
---------------------------------------------------------------------------

    Finally, the Rule requires a seller making an earnings claim to 
disclose to the prospective purchaser that written substantiation for 
the claim will be made available upon request.\395\ As noted above, 
requiring that a prospective purchaser can obtain and review, or have 
his or her own advisor review, substantiation for earnings claims 
increases the likelihood that sellers will make claims only for which 
they have a reasonable basis.\396\ This requirement balances the 
prospective purchaser's need for material information with the 
necessity of minimizing the seller's compliance costs. Thus, a seller 
need only provide such substantiation upon request.
---------------------------------------------------------------------------

    \395\ Section 437.4(a)(4)(vii).
    \396\ See, e.g., 16 CFR 436.1(b)(2); 436.1(c)(2).
---------------------------------------------------------------------------

    In the RNPR, the Commission solicited comment on various aspects of 
the earnings claim statement including: (1) Whether the requirement 
that sellers disclose the number and percentage of prior purchasers 
that achieved at least the stated level of earnings would create 
difficulties for sellers, or whether there were alternative approaches 
that could limit any such difficulties; and (2) whether the requirement 
that sellers disclose any materially different characteristics of prior 
purchasers that attained at least the stated level of earnings 
adequately covered the relevant earnings information that should be 
disclosed.\397\
---------------------------------------------------------------------------

    \397\ 73 FR at 16133.
---------------------------------------------------------------------------

    No comments were received in response to the Commission's specific 
questions, nor were any comments directed to this provision. The Staff 
Report recommended that Sec.  437.4(a) be adopted in the form proposed 
in the RPBOR, but sought additional comment on Sec. Sec.  
437.4(a)(4)(iv) and (v), which require any business opportunity seller 
that makes an earnings claim to identify the beginning and ending dates 
of the time period when those earnings were achieved (Sec.  
437.4(a)(4)(iv)) and the number and percentage of all purchasers who 
purchased the opportunity before the ending date and who achieved those 
earnings in that time period (Sec.  437.4(a)(4)(v)).\398\ Section 
437.4(a)(4)(v) specifies that in calculating the number and percentage 
of purchasers who attained at least the represented level of earnings, 
the business opportunity seller must include all purchasers who 
purchased the opportunity prior to the ending date of the time period 
on which the representation is based. The Staff Report solicited 
comment on whether the results of such a calculation, which would 
include the experience of those who purchased the business opportunity 
toward the end of the stated time period, present consumers with a 
realistic picture of their likely earnings with the business 
opportunity. In addition, the Staff Report sought comment on whether 
this calculation would present prospective purchasers with information 
that would be useful in making an informed purchasing decision, and 
questioned whether there were alternative approaches that might be more 
useful.
---------------------------------------------------------------------------

    \398\ Section 437.4(b)(3) requires similar disclosures, 
calculated in the same way, in conjunction with any earnings claim 
made in the general media.
---------------------------------------------------------------------------

    Only one comment received in response to the Staff Report addressed 
these provisions. Specifically, DOJ agreed that any substantiation for 
earnings must be calculated using the number of all purchasers of the 
opportunity prior to the ending date of the time period for which the 
earnings representation is based, noting that:

    In reality, many business opportunities begin and end in a short 
period of time, constantly reinventing themselves to avoid 
association with previous failures. Requiring inclusion of all 
purchasers who purchased before the ending date in any statistics in 
an earning claims document is necessary to force the seller to have 
the document be at all representative of the business as a whole. 
Any wiggle room in this regard will be exploited to create a 
document based on non-representative sellers.\399\

    \399\ DOJ-Staff Report at 2.
---------------------------------------------------------------------------

The Commission agrees and the final Rule includes Sec.  437.4(a)(4) as 
recommended in the Staff Report.
3. Section 437.4(b): Earnings Claims in the General Media
    Section 437.4(b) addresses the making of earnings claims in the 
general media, such as on television, radio, the Internet, in 
newspapers, etc. Specifically, a seller can make an earnings claim in 
the general media provided the seller: (1) Has a reasonable basis for 
the claim at the time the claim is made; (2) has written material that 
substantiates the claim at the time the claim is made; and (3) states 
in immediate conjunction with the claim the beginning and ending date 
when the represented earnings were achieved and the number and 
percentage of those who have achieved the represented earnings in the 
given time period. These requirements are necessary to prevent 
deceptive and misleading earnings representations in advertisements, as 
well as to enable a prospect to assess the typicality of any advertised 
earnings claim.\400\
---------------------------------------------------------------------------

    \400\ E.g., FTC v. Inspired Ventures, Inc., No. 02-21760-CIV-
Jordan (S.D. Fla. 2002); FTC v. MegaKing, Inc., No. 00-00513-CIV-
Lenard (S.D. Fla. 2000).
---------------------------------------------------------------------------

    The Commission received no comments about this provision. Based on 
the record as a whole and its enforcement experience, the Commission 
concludes that the requirements of Sec.  437.4(b) are necessary to 
prevent misleading earnings representations, and the final Rule 
includes this provision as recommended in the Staff Report.
4. Section 437.4(c): Dissemination of Industry, Financial, Earnings, or 
Performance Information
    Section 437.4(c) is intended to address a prevalent practice among 
business opportunity sellers--the use of real or purported industry 
statistics in the marketing of business opportunity ventures. The 
Commission's law enforcement experience reveals that it is common for 
vending machine business opportunity promoters, for example, to tout 
what are purported to be industry-wide vending sales statistics. A 
matrix of potential earnings based upon an industry-average sliding 
scale of ``vends per day'' is typical.\401\ The use of such industry 
statistics in the promotion of a business opportunity creates the 
impression that the level of sales or earnings is typical in the 
industry, and

[[Page 76849]]

implies that the prospective purchaser will achieve similar 
results.\402\
---------------------------------------------------------------------------

    \401\ E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir. 2003); FTC 
v. Nat'l Vending Consultants, Inc., No. CV-S-05-0160-RCJ-PAL (D. 
Nev. 2005); 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).
    \402\ 71 FR at 19073.
---------------------------------------------------------------------------

    To prevent deceptive use of such earnings claims, Sec.  437.4(c), 
as proposed in the RNPR, prohibited the use of industry financial, 
earnings, or performance information ``unless the seller has written 
substantiation demonstrating that the information reflects the typical 
or ordinary financial, earnings, or performance experience of 
purchasers of the business opportunity being offered for sale.'' \403\
---------------------------------------------------------------------------

    \403\ 73 FR at 16135.
---------------------------------------------------------------------------

    In response to the RNPR, one commenter noted that this provision 
would prohibit sellers from using industry statistics in ways that 
could assist potential purchasers in making informed decisions.\404\ 
For example, hypothetically, the performance experience of prior 
purchasers of a business opportunity might contrast favorably against 
the industry average and, if so, that information might help a 
prospective purchaser assess the value of the investment against other 
proposed businesses.
---------------------------------------------------------------------------

    \404\ Planet Antares-RNPR at 25.
---------------------------------------------------------------------------

    The Staff Report noted that there may be a limited number of 
situations in which providing industry statistics may be beneficial to 
potential purchasers, but expressed concern that industry statistics 
can be, and have been, used to imply to potential purchasers that their 
likely earnings with the promoted business opportunity will match the 
industry averages.\405\
---------------------------------------------------------------------------

    \405\ Staff Report at 99.
---------------------------------------------------------------------------

    The Staff Report recommended a small change to Section 437.4(c) to 
state that it is an unfair or deceptive practice to ``disseminate 
industry financial, earnings, or performance information unless the 
seller has written substantiation demonstrating that such information 
reflects, or does not exceed, the typical or ordinary financial, 
earnings, or performance experience of purchasers of the business 
opportunity being offered for sale.'' The Commission received no 
comments on this provision.
    The Commission concludes that the recommended change is warranted. 
Section 437.4(c) of the final Rule thus includes the staff's 
recommended language. Accordingly, under the final Rule, a seller can 
use industry information only if it is able to measure the performance 
of existing purchasers of that seller's offered business opportunity 
and document that those existing purchasers' typical performance equals 
or exceeds the average performance of purchasers of other business 
opportunities available in the industry. A start-up business 
opportunity with no or very limited prior sales, therefore, probably 
would not be able to use industry statistics because it would lack a 
sufficient basis to demonstrate that the industry statistics reflect 
the typical or ordinary experience of the start-up's prior purchasers.
5. Section 437.4(d): Material Changes in Earnings Claim Statement
    Section 437.4(d) addresses post-disclosure changes in earnings 
information. It prohibits any seller making an earnings claim from 
failing to notify the prospective purchaser, before the prospect enters 
into a contract or pays any consideration, of any material change that 
has occurred and that calls into question the relevance or reliability 
of the information contained in its earnings claim statement. For 
example, ``[s]uch material changes include the issuance of a new survey 
or other facts that would lead the seller to conclude that a prior 
survey is no longer valid.'' \406\ In crafting Sec.  437.4(d), the 
Commission was cognizant of the high degree of materiality of earnings 
information for prospective purchasers, but attempted to minimize 
compliance costs during the time before the prospective purchaser 
enters into a contract or pays any consideration.\407\ In the RNPR, the 
Commission explained that ``[t]he proposal would not require a seller, 
for example, to prepare a revised earnings claim statement immediately, 
but would simply require written notification of the change.'' \408\ No 
comments in response to the RNPR or the Staff Report were directed at 
this provision. The Commission finds that Sec.  437.4(d) strikes the 
right balance between accurate disclosure to prevent deception and the 
compliance costs that would result from a more frequent than quarterly 
updating requirement of the full earnings claim document. The final 
Rule includes this provision as recommended in the Staff Report.
---------------------------------------------------------------------------

    \406\ Id. at 100.
    \407\ Id.
    \408\ 71 FR at 19073.
---------------------------------------------------------------------------

E. Section 437.5: Sales Conducted in Spanish or Other Languages Besides 
English

    On its own initiative, the staff recommended in the Staff Report 
adding a provision that would require sellers to provide the disclosure 
document and the disclosures required by the Rule to potential 
purchasers in the same language that the seller uses to market the 
business opportunity. This recommendation was based, in part, on a 
long-standing Commission enforcement policy, which advises that where a 
Commission order, rule, or guide requires the clear and conspicuous 
disclosure of certain information in an advertisement or sales material 
appearing in a non-English language publication, the disclosures should 
be made in the predominant language of the publication in which the 
advertisement or sales material appears.\409\ This policy is the result 
of the Commission's recognition that ``with increasing intensity, 
advertisers are making special efforts to reach foreign language-
speaking consumers.'' \410\ Under the policy, failure to provide the 
required disclosures either in the predominant language of the 
publication or of the target audience could result in a civil penalty 
or other law enforcement proceeding for violating the terms of any 
applicable Commission order or rule.\411\
---------------------------------------------------------------------------

    \409\ FTC Enforcement Policy Statement Concerning Clear and 
Conspicuous Disclosures in Foreign Language Advertising and Sales 
Materials, 16 CFR 14.9(a). In the case of any other advertisement or 
sales material, the Commission policy states that the disclosures 
should appear in the language of the target audience.
    \410\ Id.
    \411\ Id.
---------------------------------------------------------------------------

    The staff's recommendation to address foreign-language sales also 
is based on its belief that when a business opportunity seller 
purposefully reaches out to a particular population by marketing in the 
foreign language spoken by members of that community, all of the 
disclosures required by the Rule should be accessible and 
comprehensible to each of those potential purchasers.\412\ Accordingly, 
the Staff Report recommended that business opportunity sellers be 
required to provide the disclosure document to potential purchasers in 
the language the seller uses to conduct the offer for sale, sale, or 
promotion of the business opportunity.
---------------------------------------------------------------------------

    \412\ Staff Report at 101.
---------------------------------------------------------------------------

    The Staff Report sought public comment about whether this 
requirement adequately promotes the Commission's goal of ensuring that 
potential purchasers be provided with information necessary to make an 
informed purchasing decision. It also solicited comment on what 
alternatives, if any, the Commission should consider, and the costs and 
benefits of each alternative.
    In response to the Staff Report, the Commission received one 
comment addressing the disclosure requirements for foreign-language 
sales. Specifically, DOJ agreed with the staff's

[[Page 76850]]

recommendation that the required disclosures should be made in the same 
language as the sale, noting that the disclosures should be ``as 
comprehensible to would-be buyers as is the [seller's] sales pitch.'' 
\413\
---------------------------------------------------------------------------

    \413\ DOJ-Staff Report at 2.
---------------------------------------------------------------------------

    After consideration of the record, the Commission's long-standing 
policy, and the rationale behind the staff's recommendation, the 
Commission agrees that an English disclosure document for business 
opportunities marketed in Spanish and other foreign languages may have 
little utility for the targeted prospects. Accordingly, the final Rule 
contains disclosure requirements for sales conducted in Spanish or 
other languages besides English.
    Because the Commission's law enforcement history demonstrates that 
fraudulent business opportunities have specifically targeted Spanish-
speaking communities,\414\ the Staff Report recommended that the Rule 
contain a Spanish translation of the basic disclosure document as 
Appendix B. In the Staff Report, the staff solicited comment on whether 
the Spanish translation of the disclosure document was adequate to 
convey to Spanish-speaking potential purchasers the meaning of the 
required disclosures, or whether different word choices would make the 
disclosures more meaningful. No comments addressed these issues. Based 
on its law enforcement experience with business opportunity sellers 
specifically targeting Spanish-speaking consumers, the Commission 
agrees that a Spanish translation of the disclosure document is 
appropriate. Accordingly, a Spanish version of the disclosure document 
is included as Appendix B to the final Rule.
---------------------------------------------------------------------------

    \414\ See supra note 99 and accompanying text. DOJ also 
commented that in its experience, business opportunities have been 
pitched to the Spanish community. See DOJ-Staff Report at 2.
---------------------------------------------------------------------------

    Although business opportunities may be marketed in dozens of 
languages besides English and Spanish, the Commission's law enforcement 
experience does not suggest that there are other particular languages 
in which business opportunity sales are conducted. Moreover, the record 
is silent as to whether translations into other languages are 
necessary. Therefore, the Commission has determined not to provide 
translations of the disclosure document into other languages. Under 
Sec.  437.5(b), should a business opportunity seller use a language 
other than English or Spanish, the seller would be responsible for 
obtaining an accurate translation of the disclosure document.
    The Commission adopts the language proposed in the Staff Report, 
with one slight modification. Namely, Sec.  437.5 of the final Rule 
makes clear that all earnings disclosures required by Sec.  437.4--
rather than those identified only in Sec.  437.4(a)--must be made in 
the language in which the business opportunity sales are conducted. 
Section 437.5 of the final Rule, entitled ``Sales conducted in Spanish 
and other languages besides English'' requires:
    (a) If the seller conducts the offer for sale, sale, or promotion 
of a business opportunity in Spanish, the seller must provide the 
disclosure document required by Sec.  437.3(a) in the form and language 
set forth in Appendix B to this part, and the disclosures required by 
Sec. Sec.  437.3(a) and 437.4 must be made in Spanish; and
    (b) If the seller conducts the offer for sale, sale, or promotion 
of a business opportunity in a language other than English or Spanish, 
the seller must provide the disclosure document required by Sec.  
437.3(a) using the form and an accurate translation of the language set 
forth in Appendix A to this part, and the disclosures required by 
Sec. Sec.  437.3(a) and 437.4 must be made in that language.

Section 437.3(a) has been revised to conform with this 
requirement.\415\
---------------------------------------------------------------------------

    \415\ Section 437.3 of the final Rule makes it an unfair or 
deceptive act or practice for any seller to fail to disclose to a 
prospective purchaser material information required by Sec. Sec.  
437.3 and 437.4 in a single written document in the form and using 
the language set forth in Appendix A to the Rule; or if the offer 
for sale, sale, or promotion of a business opportunity is conducted 
in Spanish, in the form and using the language set forth in Appendix 
B to the Rule; or if the offer for sale, sale, or promotion of a 
business opportunity is conducted in a language other than English 
or Spanish, using the form and an accurate translation of the 
language set forth in Appendix A to the Rule.
---------------------------------------------------------------------------

F. Section 437.6: Other Prohibited Practices

    Section 437.6 of the final Rule prohibits sellers from engaging in 
a number of deceptive practices, whether directly or through a third 
party, that are common in the sale of fraudulent business opportunity 
ventures. Violation of any provision of this section would be a 
violation of the Rule and an unfair or deceptive act or practice in 
violation of Section 5 of the FTC Act. Each of these prohibitions is 
discussed below.
1. Section 437.6(a): Disclaiming Any Required Disclosure
    Section 437.6(a) prohibits a business opportunity seller from 
disclaiming, or requiring ``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.'' \416\ The purpose of 
this provision is to preserve the reliability and integrity of pre-sale 
disclosures. Otherwise, the Rule's very purpose would be undermined by 
signaling to prospects that they cannot trust or rely on the Rule's 
mandated disclosures.\417\
---------------------------------------------------------------------------

    \416\ This provision is parallel to the anti-disclaimer 
prohibition in the Amended Franchise Rule. See 16 CFR 436.9(h).
    \417\ 71 FR at 19073.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule includes Sec.  
437.6(a) as recommended in the Staff Report.
2. Section 437.6(b): Making Inconsistent or Contradictory Claims
    Section 437.6(b) prohibits sellers from making any representation, 
whether orally, visually, or in writing, that is inconsistent with or 
that contradicts any statement made in the basic disclosure document or 
in any earnings claim disclosures required by the Rule.\418\ Without 
this prohibition, a seller, for example, would be free to show a 
prospect a graph with earnings information, even though the seller's 
disclosure document states that it does not make an earnings 
claim.\419\ The Commission's law enforcement experience shows that this 
is a prevalent problem.\420\ This provision, like the anti-disclaimer 
provision, is necessary to preserve the reliability and integrity of 
the required disclosures.
---------------------------------------------------------------------------

    \418\ This provision is similar to the Amended Franchise Rule's 
prohibition against making statements that contradict any required 
disclosure. See 16 CFR 436.9(a).
    \419\ 71 FR at 19074.
    \420\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Inspired Ventures, Inc., No. 02-
21760-CIV-Jordan (S.D. Fla. 2002); FTC v. Mortgage Serv. Assocs., 
Inc., No. 395-CV-1362 (AVC) (D. Conn. 1995); FTC v. Tower Cleaning 
Sys., Inc., No. 965844 (E.D. Pa. 1996).
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule includes Sec.  
437.6(b) as recommended in the Staff Report.
3. Section 437.6(c): Including Extraneous Materials in Disclosure 
Document
    Section 437.6(c) prohibits the inclusion of any additional 
information in the disclosure document that is not explicitly required 
or permitted by the Rule. This prohibition is intended to preserve the 
clarity, coherence, readability, and utility of the disclosures by 
ensuring that the seller does not

[[Page 76851]]

clutter the disclosure document with extraneous materials that may 
overwhelm purchasers, distracting them from the required 
disclosures.\421\ To facilitate a prospective purchaser's ability to 
maneuver through an electronic version of the disclosure document, this 
provision expressly permits the use of common navigational tools, such 
as scroll bars and internal links that facilitate review of an 
electronic document. The provision prohibits, however, other electronic 
features--such as audio, video, animation, or pop-up screens--that may 
distract attention from the core disclosures.\422\
---------------------------------------------------------------------------

    \421\ Indeed, in response to the INPR, 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.'' 73 FR 
at 16128. The Commission's experience supports DOJ's conclusions.
    \422\ This is the same approach used in the Amended Franchise 
Rule. See 16 CFR 436.6(d).
---------------------------------------------------------------------------

    The prohibition on including extraneous materials extends to 
information required or permitted by state law. One important goal of 
revising and tailoring the disclosure requirements for business 
opportunity sellers is to simplify and streamline the disclosures into 
a single-page document. Accordingly, the Commission has concluded that 
allowing business opportunity sellers to mix federal and state 
disclosures into one document would be an invitation to sellers to 
present lengthy and confusing information to prospective 
purchasers.\423\ Such a result would be contrary to the Commission's 
goal of providing a simple, clear, and concise disclosure document. 
State laws offering equal or greater protections are not preempted by 
the final Rule. The final Rule only prohibits any sellers from 
providing any disclosures required under state law together with the 
disclosures required under the final Rule. No comments received in 
response to the RNPR or the Staff Report were directed to this 
provision, and the final Rule includes Sec.  437.6(c) as recommended in 
the Staff Report.
---------------------------------------------------------------------------

    \423\ See 73 FR at 16128.
---------------------------------------------------------------------------

4. Section 437.6(d): Making False Earnings Claims
    As previously noted, the making of deceptive earnings claims is the 
most prevalent problem in the offer and sale of business opportunities. 
Accordingly, Sec.  437.6(d) prohibits sellers from misrepresenting the 
amount of sales, or gross or net income or profits a prospective 
purchaser may earn or that prior purchasers have earned. This 
prohibition complements the final Rule's earnings substantiation 
requirements in Sec.  437.4. Thus, both unsubstantiated and false 
earnings claims are prohibited by the Rule.
    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule includes Sec.  437.6(d) as 
recommended in the Staff Report.
5. Section 437.6(e): Misrepresentations Regarding the Law as to 
Earnings Claims and the Identity of Other Business Opportunity 
Purchasers
    Section 437.6(e) prohibits sellers from stating that any law or 
regulation prohibits seller from furnishing earnings information. This 
provision is intended to address a recurring problem identified in the 
rulemaking record--that sellers often misrepresent that federal law or 
the FTC prohibits the making of earnings claims.\424\ In effect, 
prohibiting these types of misrepresentations ensures that prospective 
purchasers are not misled into believing that earnings information is 
unavailable to them as a matter of law.\425\ In addition, the RPBOR 
added a second proposed prohibition to Sec.  437.6(e) that would 
prevent sellers from misrepresenting that any law or regulation 
prohibits a seller from disclosing to prospective purchasers the 
identity of other purchasers of the business opportunity. The 
Commission proposed this change in response to a request from DOJ, 
which noted that in its experience, fraudulent business opportunity 
sellers frequently deflect potential purchasers' requests for the 
contact information of current distributors by falsely claiming that 
the law forbids disclosing those identities.\426\ The Commission is 
convinced that the prohibition is appropriate because it will help 
consumers understand that if the seller supplies no references, it is 
because none exist, or because the seller chooses not to make such 
information available in contravention of the Rule.\427\
---------------------------------------------------------------------------

    \424\ In the Amended Franchise Rule, the Commission addressed 
this problem in the context of sales of business format franchises 
through a new requirement that franchise sellers include a specific 
preamble in the financial performance section of their disclosures. 
Among other things, the preamble makes clear that franchisors can 
make financial performance information available, assuming they have 
a reasonable basis for their claims. See 16 CFR 436.5(s)(1). 
Although the same problem exists in the sale of business 
opportunities, the Commission, in an effort to streamline the 
business opportunity disclosure document and reduce compliance 
costs, proposed this different approach for the Business Opportunity 
Rule, believing it sufficient to address deceptive business 
opportunity sales. The Commission noted that ``whereas the Franchise 
Rule seeks to encourage franchisors to make earnings claims, no such 
encouragement is needed in the business opportunity field, where 
such claims are all too common.'' 71 FR at 19075 n.211.
    \425\ 71 FR at 19075.
    \426\ 73 FR at 16127.
    \427\ Id.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule contains Sec.  437.6(e) as 
recommended in the Staff Report.
6. Section 437.6(f): Failing To Provide Written Substantiation for 
Earnings Claims
    Section 437.6(f) prohibits a seller who makes an earnings claim 
from failing to provide written substantiation to prospective 
purchasers, and to the Commission, upon request.\428\ Rather than 
mandating that business opportunity sellers routinely include 
documentation for earnings claims--which could be voluminous--in the 
earnings claim statement itself, the final Rule's requirement is 
intended to reduce compliance costs by requiring only that such 
materials be provided when requested. Purchasers could then review the 
documentation if they so choose. Therefore, although substantiation for 
earnings claims must exist, in writing, at the time any such claims are 
made, that substantiation need be provided to potential purchasers (or 
to the Commission) only upon request.
---------------------------------------------------------------------------

    \428\ The Amended Franchise Rule and the interim Business 
Opportunity Rule have similar requirements. See 16 CFR 
436.5(r)(3)(v); 437.1(b)(2); and 437.1(c)(2).
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule contains Sec.  437.6(f) as 
recommended in the Staff Report.
7. Section 437.6(g): Misrepresenting Commissions or Other Payments From 
the Seller
    Section 437.6(g) prohibits sellers from misrepresenting how or when 
commissions, bonuses, incentives, premiums, or other payments from the 
seller to the purchaser will be calculated or distributed. The 
Commission's law enforcement experience shows that these kinds of 
misrepresentations underlie deceptive work-at-home opportunities, where 
prospective purchasers rely on the seller as the source of income, or 
where the seller manages the system's cash flow.\429\ The

[[Page 76852]]

Commission concluded that absent this prohibition, the Rule would not 
address false promises about the compensation sellers will provide 
post-sale.\430\
---------------------------------------------------------------------------

    \429\ E.g., FTC v. Indep. Mktg. Exch., Inc., No. 10-CV-00568-
NLH-KMW (D.N.J. 2010); FTC v. Preferred Platinum Servs. Network, 
Inc., No.10-CV-00538-MLC-LHG (D.N.J. 2010); FTC v. Sun Ray Traders, 
Inc., No. 05-20402-CIV-Seitz/Bandstra (S.D. Fla. 2005); FTC v. 
Castle Publ'g, No. A03CA 905 SS (W.D. Tex. 2003); FTC v. Trek 
Alliance, Inc., No. 02-9270 SJL (AJWx) (C.D. Cal. 2002); FTC v. 
Terrance Maurice Howard, No. SA02CA0344 (W.D. Tex. 2002); FTC v. 
Am.'s Shopping Network, Inc., No. 02-80540-CIV-Hurley (S.D. Fla. 
2002).
    \430\ 71 FR at 19075.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule contains Sec.  437.6(g) as 
recommended in the Staff Report.
8. Section 437.6(h): Misrepresenting Costs, Performance, Efficacy or 
Material Characteristics of Business Opportunity
    A common complaint of victims of business opportunity fraud arises 
from misrepresentations about the costs or the performance, efficacy, 
nature, or central characteristics of a business opportunity offered to 
a prospective purchaser, or the goods or services needed to operate the 
business opportunity. For example, a seller may misrepresent the total 
costs involved in purchasing or operating a business opportunity.\431\ 
In other instances, a seller may misrepresent the quality of goods 
offered by the business opportunity seller, either for use in operating 
the business (e.g., vending machines) or for ultimate resale to 
consumers (e.g., novelty items).\432\ Section 437.6(h) makes such 
deception actionable as a violation of the final Rule.
---------------------------------------------------------------------------

    \431\ E.g., FTC v. World Traders Ass'n, Inc., No. CV05 0591 AHM 
(CTx) (C.D. Cal. 2005); FTC v. Castle Publ'g, No. A03CA 905 SS (W.D. 
Tex. 2003); FTC v. End70 Corp., No. 3 03CV-0940N (N.D. Tex. 2003); 
FTC v. Darrell Richmond, No. 3:02-3972-22 (D.S.C. 2003); FTC v. 
Carousel of Toys USA, Inc., No. 97-8587 CIV-Ungaro-Benages (S.D. 
Fla. 1997); FTC v. Parade of Toys, Inc., No. 97-2367-GTV (D. Kan. 
1997); FTC v. Telecomm. of Am., Inc., No. 95-693-CIV-ORL-22 (M.D. 
Fla. 1995). Pre-sale disclosure of cost information is a remedial 
approach taken in many Commission trade regulation rules. E.g., 900 
Number Rule, 16 CFR 308.3(b); TSR, 16 CFR 310.3; Funeral Rule, 16 
CFR 453.2.
    \432\ E.g., FTC v. Kitco of Nev., 612 F. Supp. 1282 (D. Minn. 
1985); FTC v. Associated Record Distribs., Inc., No. 02-21754-CIV-
Graham/Garber (S.D. Fla. 2002); FTC v. Home Professions, Inc., No. 
00-111 (C.D. Cal. 2000); FTC v. Worldwide Mktg. & Distrib. Co., No. 
95-8422-CIV-Roettger (S.D. Fla. 1995); see also FTC v. Med. Billers 
Network, No. 05 CV 2014 (RJH) (S.D.N.Y. 2005).
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule contains Sec.  437.6(h) as 
recommended in the Staff Report.
9. Section 437.6(i): Misrepresenting Post-Sale Assistance
    Section 437.6(i) prohibits business opportunity sellers from 
misrepresenting any material aspect of assistance it represents it will 
provide to purchasers.\433\ The Commission's enforcement experience 
shows that misrepresentation of post-sale assistance offered to a 
prospective purchaser is an element common to many business opportunity 
frauds targeted in Commission cases.\434\ Also, consumer complaints 
about misrepresentations concerning the type and amount of assistance 
promised but not received are among the top categories of reported 
deceptive business opportunity practices.\435\ The Commission has 
concluded that the best way to address this deceptive practice is 
through a direct prohibition.\436\
---------------------------------------------------------------------------

    \433\ 71 FR at 19075 n.216.
    \434\ The Commission has recognized that promises of assistance 
made to induce prospects to purchase a franchise are material, 
especially to those prospects with ``little or no experience at 
running a business.'' 43 FR at 59676-77; see, e.g., FTC v. Am. 
Entm't Distribs., Inc., No. 04-22431-CIV-Martinez (S.D. Fla. 2004); 
FTC v. USS Elder Enter., Inc., No. SA CV-04-1039 AHS (ANx) (C.D. 
Cal. 2004); FTC v. Kitco of Nev., 612 F. Supp. 1282 (D. Minn. 1985); 
FTC v. Leading Edge Processing, Inc., No. 6:02-CV-681-ORL-19 DAB 
(M.D. Fla. 2003); FTC v. Darrell Richmond, No. 3:02-3972-22 (D.S.C. 
2003); FTC v. Elec. Med. Billing, Inc., No. SA02-368 AHS (ANX) (C.D. 
Cal. 2003); FTC v. Transworld Enters., Inc., No. 00 8126-CIV-Graham 
(S.D. Fla. 2000); FTC v. Advanced Pub. Commc'ns Corp., No. 00-00515-
CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Hi Tech Mint Sys., Inc., 
No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); United States v. QX Int'l, 
Inc., No. 398-CV-0453-D (N.D. Tex. 1998).
    \435\ 71 FR at 19075 n.218.
    \436\ 71 FR at 19075.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule contains Sec.  437.6(i) as 
recommended in the Staff Report.
10. Section 437.6(j): Misrepresenting Locations, Outlets, Accounts, or 
Customers
    Section 437.6(j) prohibits sellers from misrepresenting ``the 
likelihood that a seller, locator, or lead generator will find 
locations, outlets, accounts, or customers for the purchaser.'' 
Fraudulent business opportunity sellers often promise that the seller 
or some other third party will find locations or outlets for 
purchasers' equipment, or accounts or customers for the purchasers' 
services.\437\ Such representations include claims that a particular 
locator is successful in finding locations, as well as representations 
that the seller or other third party has already found and entered into 
contracts with location owners or customers.\438\ The Commission has 
found that these types of representations are material to a prospective 
purchaser, because they foster the expectation that a profitable market 
exists for the goods or services the purchaser will sell.\439\
---------------------------------------------------------------------------

    \437\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Int'l Trader, No. CV-02-02701 AHM 
(JTLx) (C.D. Cal. 2002); FTC v. Elec. Processing Servs., Inc., No. 
CV-S-02-0500-L.H.-R.S. (D. Nev. 2002); FTC v. Home Professions, 
Inc., No. SACV 00-111 AHS (Eex) (C.D. Cal. 2001); FTC v. Encore 
Networking Servs., No. 00-1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. 
AMP Publ'n, Inc., No. SACV-00-112-AHS-ANx (C.D. Cal. 2001); FTC v. 
Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez (S.D. Fla. 
1996).
    \438\ E.g., FTC v. Hart Mktg. Enters. Ltd., No. 98-222-CIV-T-23 
E (M.D. Fla. 1998); FTC v. Vendors Fin. Servs., Inc., No. 98-1832 
(D. Colo. 1998); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV 5881 
(S.D.N.Y. 1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-
Gonzalez (S.D. Fla. 1996).
    \439\ 71 FR at 19076.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
addressed this provision, and the final Rule contains Sec.  437.6(j) as 
recommended in the Staff Report.
11. Section 437.6(k): Misrepresenting Cancellation or Refund Policy
    Section 437.6(k) prohibits a seller from misrepresenting, directly 
or through a third party, the terms and conditions of any cancellation 
or refund policy. This prohibition does not compel any seller to offer 
a cancellation or a refund, nor does it dictate the terms and 
conditions under which a seller may offer such relief. Rather, it 
simply ensures that any cancellation or refund offer a seller makes 
before the sale is truthful and accurate. The Commission's law 
enforcement experience demonstrates that, in many instances, business 
opportunity sellers falsely claim that they permit a purchaser to 
cancel the purchase, guarantee a 100% refund, or promise to buy back 
some or all of the products sold to a purchaser.\440\ These 
representations have lured prospective purchasers into believing that 
the investment is either low-risk or even risk-free.\441\
---------------------------------------------------------------------------

    \440\ E.g., FTC v. Med. Billers Network, No. 05 CV 2014 (RJH) 
(S.D.N.Y. 2005); FTC v. Castle Publ'g, No. A03CA 905 SS (W.D. Tex. 
2003); FTC v. Am.'s Shopping Network, Inc., No. 02-80540-CIV-Hurley 
(S.D. Fla. 2002); FTC v. Home Professions, Inc., No. SACV 00-111 AHS 
(Eex) (C.D. Cal. 2001); FTC v. Encore Networking Servs., No. 00-1083 
WJR (AIJx) (C.D. Cal. 2000).
    \441\ 71 FR at 19076.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(k) as recommended in the Staff Report.
12. Section 437.6(l): Failing To Provide a Refund or Cancellation
    Section 437.6(l) prohibits a seller from failing to cancel a 
purchase or make a refund when the purchaser has qualified for such 
relief under the seller's

[[Page 76853]]

cancellation or refund policy.\442\ As noted above, Sec.  437.6(k) 
prohibits a seller from misrepresenting, pre-sale, the seller's 
cancellation or refund policy. Section 437.6(l) complements that 
section and is intended to address sellers' post-sale conduct, 
prohibiting the seller from failing to honor cancellation or refund 
requests when purchasers have satisfied all the terms and conditions 
disclosed in the seller's disclosure document for obtaining such 
relief.\443\ In the Commission's experience, the failure of business 
opportunity sellers to make promised refunds or to honor cancellation 
policies ranks high among issues raised by business opportunity 
purchasers.\444\
---------------------------------------------------------------------------

    \442\ This is consistent with the interim Business Opportunity 
Rule approach. See 16 CFR 437.1(h).
    \443\ E.g., FTC v. AMP Publ'ns, Inc., No. SACV-00-112-AHS-ANx 
(C.D. Cal. 2001) (failure to honor 90-day money back guarantee); FTC 
v. Star Publ'g Group, Inc., No. 00-023 (D. Wyo. 2000) (failure to 
honor 90-day refund policy).
    \444\ 73 FR at 19076.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(l) as recommended in the Staff Report.
13. Section 437.6(m): Misrepresenting Business Opportunity as an 
Employment Opportunity
    Section 437.6(m) prohibits business opportunity sellers from 
misrepresenting a business opportunity as an employment opportunity. 
The Commission's law enforcement experience demonstrates that some 
business opportunity sellers lure unsuspecting consumers by falsely 
representing that they are offering employment when, in fact, they are 
offering vending, work-at-home, or other business opportunities. For 
example, in some instances consumers have responded to advertisements 
seeking sales executives, only to discover that the ``position'' 
requires them to purchase equipment or products from the seller and, in 
turn, to sell those products.\445\ The Commission concludes that this 
prohibition is necessary to protect consumers against false 
representations of employment opportunities.
---------------------------------------------------------------------------

    \445\ See, e.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL 
(AJWx) (C.D. Cal. 2002) (defendants placed ads in ``Help Wanted'' 
sections of newspaper offering salaried position); FTC v. Leading 
Edge Processing, Inc., No. 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2003) 
(defendants sent emails to job seekers who posted their resumes on 
job Web sites, falsely representing the availability of jobs and 
guaranteeing a steady stream of work); FTC v. David Martinelli, Jr., 
No. 3:99 CV 1272 (D. Conn. 2000) (defendants sent unsolicited emails 
falsely offering a $13.50 per hour position processing applications 
for credit, loans, or employment).
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(m) as recommended in the Staff Report.
14. Section 437.6(n): Misrepresenting the Exclusivity of Territories
    Section 437.6(n) prohibits misrepresentations about the terms of 
any territorial exclusivity or limited territorial protection offered 
to a prospective purchaser.\446\ In the Commission's experience, false 
or misleading promises about territories are a common deceptive 
practice reported by business opportunity purchasers.\447\ The 
Commission has stated that representations about territorial 
exclusivity or more limited territorial protections are material 
because they often induce a prospective purchaser into believing that 
he or she will not be competing for customers with the seller or other 
purchasers, thereby increasing the purchaser's likelihood of 
success.\448\
---------------------------------------------------------------------------

    \446\ 71 FR at 19076. In some instances, a business opportunity 
seller may offer a prospect an exclusive territory, in which no 
other person has the right to compete within the territory. In other 
instances, a seller may offer a more limited protection. For 
example, the seller may prohibit other purchasers from operating in 
the territory, but reserve to itself the ability to conduct 
telemarking or Internet sales in the territory. Regardless of the 
scope of the territorial protection, Sec.  437.6(n) prohibits 
business opportunity sellers from misrepresenting the nature of the 
territory.
    \447\ Id. at 19065.
    \448\ Id. at 19075.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(n) as recommended in the Staff Report.
15. Section 437.6(o): Assigning a Purported Exclusive Territory to 
Another Purchaser
    Section 437.6(o) prohibits a seller from assigning a single 
``exclusive'' territory to more than one purchaser. This prohibition 
complements Sec.  437.6(n), which prohibit sellers from misrepresenting 
territories. It is intended to address sellers' post-sale conduct, and 
prohibits the seller from failing to honor its promises regarding 
exclusive or protected territories. Consumer complaints indicate, and 
the Commission's law enforcement experience confirms, that fraudulent 
business opportunity sellers often sell the same purportedly exclusive 
territory to several unsuspecting purchasers.\449\ In these 
circumstances, purchasers who have been lured to invest in an 
opportunity on the basis of promises of an exclusive territorial lock 
on their market find that their chances of success are materially 
reduced by competition from the other purchasers.
---------------------------------------------------------------------------

    \449\ E.g., FTC v. Am. Safe Mktg., No. 1:89-CV-462-RLV (N.D. Ga. 
1989).
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(o) as recommended in the Staff Report.
16. Section 437.6(p): Misrepresenting Third Party Endorsements or Other 
Affiliation
    Section 437.6(p) prohibits business opportunity sellers from 
misrepresenting 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.'' \450\ The 
Commission's enforcement experience indicates that business opportunity 
frauds often lure consumers by misrepresenting that their opportunities 
have been approved or endorsed by a government agency or well-known 
third party.\451\ In other instances, business opportunity sellers 
falsely claim that their opportunities are sponsored by or associated 
with a charity, or that a charity will benefit from a percentage of 
sales.\452\ The Commission has concluded that such claims are material 
to a purchaser because an alleged endorsement or shared-profit 
arrangement may create the impression that the opportunity is 
legitimate or that the affiliation will enhance sales and profits.\453\
---------------------------------------------------------------------------

    \450\ Cf. TSR, 16 CFR 310.3(a)(vii) (prohibiting 
misrepresentations concerning ``affiliation with, or endorsement or 
sponsorship by, any person or government entity'').
    \451\ E.g., FTC v. Streamline Int'l, No. 01-6885-CIV-Ferguson 
(S.D. Fla. 2001) (misrepresented FDA approval); FTC v. Star Publ'g 
Group, Inc., No. 00-023 (D. Wyo. 2000) (misrepresented HUD 
approval); FTC v. Bus. Opportunity Ctr., Inc., No. 95 8429-CIV-Zloch 
(S.D. Fla. 1995) (misrepresented FDA approval); see also FTC v. 
Hawthorne Commc'ns, No. 93-7002 AAH (JGX) (C.D. Cal. 1993) (order 
restricting use of testimonials and endorsements in the sale of 
business opportunities).
    \452\ E.g., FTC v. Global Assistance Network for Charities, No. 
96-2494 PHX RCB (D. Ariz. 1996).
    \453\ 71 FR at 19077.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(p) as recommended in the Staff Report.
17. Section 437.6(q): Misrepresenting References (the Use of 
``Shills'')
    Section 437.6(q) addresses one of the most pernicious practices 
common in fraudulent business opportunity sales--

[[Page 76854]]

the use of ``shill'' references to lure unsuspecting consumers to 
invest in a business opportunity.\454\ The Commission has brought many 
actions against business opportunity sellers who provided prospects 
with the names of individuals they falsely claimed were independent 
prior purchasers or independent third parties, but who, in fact, were 
paid by the seller to give favorable false reports confirming the 
seller's claims, especially their earnings claims.\455\ The use of paid 
shills to give false reports induces prospective purchasers into 
believing that the opportunity is a safe and lucrative investment.
---------------------------------------------------------------------------

    \454\ See id. at n.236 (``After earnings claims, false 
testimonials and shill references are the most common Section 5 
allegations in Commission business opportunities cases.'')
    \455\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); United States v. Vaughn, No. 01-20077-01-
KHV (D. Kan. 2001); FTC v. Hart Mktg. Enters. Ltd., No. 98-222-CIV-
T-23 E (M.D. Fla. 1998); FTC v. Inetintl.com, No. 98-2140 (C.D. Cal. 
1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez 
(S.D. Fla. 1996); FTC v. Allstate Bus. Consultants Group, Inc., No. 
95-6634-CIV-Ryskamp (S.D. Fla. 1995).
---------------------------------------------------------------------------

    To address this deceptive practice, Sec.  437.6(q) contains two 
related prohibitions. First, it prohibits any seller from 
misrepresenting that any person ``has purchased a business opportunity 
from the seller.'' This prevents a seller, for example, from claiming 
that a company employee, locator, or other third party is a prior 
purchaser of the opportunity, when that is not the case. Second, the 
provision prohibits a seller from misrepresenting that any person--such 
as a locator, broker, or organization that purports to be an 
independent trade association--``can provide an independent or reliable 
report about the business opportunity or the experiences of any current 
or former purchaser.'' Providing a prospect with a list of brokers who 
are paid to give favorable reports, for example, would violate this 
provision because any statement a person on such a list makes would not 
be independent and reliable.\456\
---------------------------------------------------------------------------

    \456\ E.g., FTC v. Affiliated Vendors Ass'n, Inc., No. 02-CV-
0679-D (N.D. Tex. 2002); FTC v. Raymond Urso, No. 97-2680-CIV-
Ungaro-Benages (S.D. Fla. 1997); see also 71 FR at 19077 n. 238.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.6(q) as recommended in the Staff Report.
18. Section 437.6(r): Failing To Disclose Consideration Paid to or 
Prior Relationship With Prior Purchaser
    Section 437.6(r) is intended to complement the prohibition in Sec.  
437.6(q) regarding the use of ``shills.'' Section 437.6(r) prohibits a 
seller from failing to disclose payments to individuals identified as 
references, as well as any personal relationships the seller has with 
such individuals. Such prohibitions are necessary because an individual 
with a personal relationship with the seller, or who has been paid for 
his or her assessment of an opportunity, is likely to be biased, and 
any story of success or high earnings from any such person is 
suspect.\457\ The final Rule clarifies that the term ``consideration'' 
is to be interpreted broadly to include not only direct cash payments, 
but indirect financial benefits, such as forgiveness of debt, as well 
as other tangible benefits such as equipment, services, and 
discounts.\458\
---------------------------------------------------------------------------

    \457\ Indeed, the Commission has long held that the failure to 
disclose compensation paid to an endorser is a deceptive practice in 
violation of Section 5. See 71 FR at 19077; see also Guides 
Concerning the Use of Endorsements and Testimonials in Advertising, 
16 CFR 255 (Oct. 15, 2009).
    \458\ 71 FR at 19078.
---------------------------------------------------------------------------

    The RPBOR modified slightly the language of this provision to make 
clear that the information that must be disclosed to a potential 
purchaser is not only the payment of any consideration to the reference 
by the seller, but also the existence of any relationship between the 
seller and the reference.\459\ Therefore, the RPBOR added clarifying 
language to the opening clause of Sec.  437.6(r) so that it prohibits a 
failure to disclose any consideration paid, any personal relationship, 
or other past or current business relationship other than as the 
purchaser of the business opportunity being offered.
---------------------------------------------------------------------------

    \459\ 73 FR at 16128, 16136.
---------------------------------------------------------------------------

    No comments, either in response to the RNPR or the Staff Report, 
addressed this provision. Because the Commission finds that the small 
clarification to Sec.  437.6(r) more accurately identifies the 
information that must be disclosed to a potential purchaser, the 
Commission adopts Sec.  437.6(r) in the final Rule in the form 
recommended in the Staff Report.

G. Section 437.7: Record Retention

    Section 437.7 establishes the minimal record retention requirements 
necessary to document compliance and permit effective Rule enforcement. 
This section applies to both the business opportunity seller and its 
principals, to ensure that records required by the Rule are not 
destroyed if the seller goes out of business or otherwise ceases 
operations.\460\ As detailed below, sellers and their principals must 
keep, and make available to the Commission, the following five types of 
records for a period of three years:
---------------------------------------------------------------------------

    \460\ 71 FR at 19078.
---------------------------------------------------------------------------

    (1) Section 437.7(a): Each materially different version of all 
documents required by the Rule;
    (2) Section 437.7(b): Each purchaser's disclosure receipt;
    (3) Section 437.7(c): Each executed written contract with a 
purchaser;
    (4) Section 437.7(d): Each oral or written cancellation or refund 
request received from a purchaser; and
    (5) Section 437.7(e): All substantiation upon which the seller 
relies from the time an earnings claim is made.
    The Commission finds that these limited recordkeeping requirements 
strike the right balance, requiring no more than necessary for 
effective law enforcement, while minimizing compliance costs.\461\ 
Moreover, records can be retained electronically, helping to further 
minimize compliance costs.
---------------------------------------------------------------------------

    \461\ Id.
---------------------------------------------------------------------------

    No comments received in response to the RNPR or the Staff Report 
were directed to this provision, and the final Rule contains Sec.  
437.7 as recommended in the Staff Report.

H. Section 437.8: Franchise Exemption

    Section 437.8 is designed to eliminate potential overlap between 
the final Rule's scope of coverage and that of the Amended Franchise 
Rule, so that no business would face duplicative compliance 
burdens.\462\ Accordingly, Sec.  437.8 exempts from the final Rule's 
coverage those business opportunities that: (1) Satisfy the 
definitional elements of the term ``franchise'' under the Amended 
Franchise Rule; (2) entail a written contract between the seller and 
the business opportunity buyer; and (3) require the buyer to make a 
payment that meets the Amended Franchise Rule's minimum payment 
requirement. These criteria were designed to accomplish two ends: to 
ensure that certain categories of businesses ``carved out'' from the 
Amended Franchise Rule are not inappropriately subjected to coverage by 
the Business Opportunity Rule; \463\ and, simultaneously, to obviate

[[Page 76855]]

any loophole that could be exploited by certain other types of business 
opportunities that are exempt from the Amended Franchise Rule but that 
should be regulated by the Business Opportunity Rule.
---------------------------------------------------------------------------

    \462\ Id.; see also 15 U.S.C. 57a(g) (authorizing the Commission 
to exempt persons or classes from all or part of rule coverage).
    \463\ For example, businesses exempt from Amended Franchise Rule 
coverage pursuant to the exemption for fractional franchises would 
not be subject to coverage by the Business Opportunity Rule because 
such businesses would meet the criteria of Sec.  437.8. This is an 
appropriate result because the same rationale underlying exemption 
of these types of businesses from the Amended Franchise Rule would 
also dictate that they not be covered by the Business Opportunity 
Rule--i.e., the franchisor is not likely to deceive the prospective 
franchisee or to subject the prospective franchisee to significant 
investment risk. Therefore, imposing the requirements of either the 
Amended Franchise Rule or the Business Opportunity Rule would not be 
justified. See 71 FR at 19078.
---------------------------------------------------------------------------

    On the other hand, certain businesses carved out of Amended 
Franchise Rule coverage should not escape regulation by the final 
Rule--specifically, those exempt from the Amended Franchise Rule's 
coverage due to the minimum payment exemption \464\ or the oral 
agreement exemption.\465\ The Commission has concluded that while these 
two exemptions are warranted in the franchise context to ensure that 
the significant disclosure costs imposed by the Amended Franchise Rule 
are cost-justified, they do not apply to the final Rule, with its 
significantly lighter disclosure burden.\466\
---------------------------------------------------------------------------

    \464\ 16 CFR 436.2(a)(3)(iii).
    \465\ 16 CFR 436.2(a)(3)(iv).
    \466\ 71 FR at 19078.
---------------------------------------------------------------------------

    In the RNPR, the Commission solicited comment on whether the 
exemption was overly broad or overly narrow.\467\ In response to the 
RNPR, some commenters, primarily from the MLM industry, suggested 
limitations on the Rule by granting a safe harbor to exempt firms that 
require very low registration fees; \468\ firms that offer refunds on 
inventory purchases; \469\ firms that are publicly-traded; \470\ firms 
that have a high net worth; \471\ or firms that are members of a self-
regulatory body, such as the DSA.\472\ These are not novel suggestions; 
each also was made in response to the INPR.\473\ In the RNPR, the 
Commission concluded that none of these factors is determinative of 
whether a company is, in fact, a pyramid scheme or otherwise engaged in 
deceptive conduct. Furthermore, the Commission noted that the effort to 
craft a workable rule using these criteria could undermine law 
enforcement efforts, as it would, at least in the case of minimum 
payment thresholds, provide scam operators with a means to circumvent 
the Rule.\474\ The Staff Report recommended that the Commission not 
expand the exemptions beyond those identified in the RPBOR. The 
Commission adopts Sec.  437.8 as recommended in the Staff Report.
---------------------------------------------------------------------------

    \467\ 73 FR at 16133.
    \468\ See, e.g., Babener-RNPR; Pre-Paid Legal-RNPR.
    \469\ See, e.g., Pre-Paid Legal-RNPR; Tupperware-RNPR; IBA-RNPR.
    \470\ Id.
    \471\ See, e.g., IBA-RNPR.
    \472\ See, e.g., DSA-RNPR.
    \473\ 73 FR at 16119-20. Moreover, none of the commenters 
offered any new rationale for expanding the proposed categories of 
exemption that had not previously been considered by the Commission.
    \474\ Id. at 16120.
---------------------------------------------------------------------------

I. Section 437.9: Outstanding Orders; Preemption

1. Section 437.9(a): Effect on Prior Commission Orders
    Section 437.9(a) addresses the effect the Rule may have on 
outstanding Commission orders. The Commission recognizes that the final 
Rule significantly changes the disclosure obligations for those sellers 
who are now under order in prior Commission actions. To enable business 
opportunity sellers to take advantage of the final Rule's reduced 
disclosure obligations, as well as to reduce any potential conflicts 
between existing orders and the final Rule, Sec.  437.9(a) permits 
persons under order to petition the Commission for relief consistent 
with the provisions of the new Rule. Under the RPBOR, business 
opportunities required by FTC or court order to follow the Franchise 
Rule, 16 CFR Part 436, would have been permitted to petition the 
Commission to amend the order so that the business opportunity could 
follow the provisions of the Business Opportunity Rule instead.\475\
---------------------------------------------------------------------------

    \475\ Id. at 16136 (RPBOR Sec.  437.8(a)).
---------------------------------------------------------------------------

    Although no comments received in response to the RNPR addressed 
this provision, the Staff Report noted that while the Commission could 
modify an FTC administrative order, it would not have the authority to 
modify any order entered by a court.\476\ In the case of a court order, 
the Commission could, however, stipulate to an amendment of the order 
by the court to allow the business opportunity to follow the provisions 
of the Business Opportunity Rule. The Staff Report recommended, 
therefore, that Sec.  437.9(a) be revised to add the phrase ``or to 
stipulate to an amendment of the court order'' as follows: ``A business 
opportunity required by prior FTC or court order to follow the 
Franchise Rule, 16 CFR part 436, may petition the Commission to amend 
the order or to stipulate to an amendment of the court order so that 
the business opportunity may follow the provisions of this part.''
---------------------------------------------------------------------------

    \476\ Staff Report at 127.
---------------------------------------------------------------------------

    In addition, the Staff Report noted that the first sentence of 
Sec.  437.9(a) proposed in the RPBOR was superfluous, and recommended 
deleting it. No comments in response to the Staff Report were directed 
at this provision. Upon consideration of the staff's recommendation and 
the rationale for that recommendation, the Commission has decided to 
modify the text of this provision in the manner recommended in the 
Staff Report. As the Commission has stated previously, all 
determinations under this provision regarding the amendment of orders 
will be made on a case-by-case basis.
2. Section 437.9(b): Preemption
    Section 437.9(b) adopts a preemption policy similar to that 
embodied in the Amended Franchise Rule.\477\ It provides that the 
Commission does not intend to preempt state or local business 
opportunity laws, except to the extent of any conflict with the Rule. 
Further, a law does not conflict if it affords prospective purchasers 
equal or greater protection, such as a requirement for registration of 
disclosure documents or more extensive disclosures.\478\
---------------------------------------------------------------------------

    \477\ 16 CFR 436.10. This approach is consistent with other 
Commission trade regulation rules. See, e.g., Appliance Labeling 
Rule, 16 CFR 305.17; Cooling-Off Rule, 16 CFR 429.2; Mail Order 
Rule, 16 CFR 435.3(b)(2).
    \478\ Although state laws offering equal or greater protections 
are not preempted, Sec.  437.6(c) of the final Rule prohibits 
providing state and federal disclosures together in one document.
---------------------------------------------------------------------------

    One commenter suggested that the FTC should preempt conflicting 
state business opportunity rules, noting its belief that ``enforcement 
of a nationwide standard by the FTC is preferable to a patchwork series 
of laws and regulations.'' \479\ The Staff Report noted that the 
commenter is suggesting that all state laws and regulations that do not 
mirror exactly the Business Opportunity Rule would be in conflict with 
the Rule, and should therefore be preempted. The Commission has long 
recognized that state laws and regulations that afford equal or greater 
protections than do FTC trade regulations are not subject to 
preemption,\480\ and therefore declines to follow this commenter's 
recommendation.
---------------------------------------------------------------------------

    \479\ Tupperware-RNPR (5/28/2008). No other comments were 
received. At the June 2009 Workshop, however, the panelist from the 
Maryland Attorney General's Office expressed appreciation that 
states were not preempted from requiring that business opportunity 
sellers provide information in addition to that required by the 
proposed Rule. Cantone, June 2009 Tr at 20.
    \480\ See, e.g., Mail Order Rule, 16 CFR 435.3(b)(2) (rule does 
not preempt state or local laws that afford equal or greater 
protections).
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J. Section 437.10: Severability

    Finally, Sec.  437.10 adopts the severability provision recommended 
by the Staff Report with one non-substantive change: The Commission 
removed the superfluous phrase, ``it is the Commission's intention 
that'' from the provision. This provision makes clear that, if any part 
of the Rule is held

[[Page 76856]]

invalid by a court, the remainder will still be in effect.\481\ No 
comments received in response to the RNPR or the Staff Report were 
directed to this provision.
---------------------------------------------------------------------------

    \481\ This provision is comparable to the severability provision 
in the Amended Franchise Rule, 16 CFR 436.11, as well as the 
severability provisions in other Commission rules. See, e.g., TSR, 
16 CFR 310.9.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The Commission is submitting the final Rule and a Supplemental 
Supporting Statement to the Office of Management and Budget (OMB) for 
review under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501-21. The 
final Rule amends a trade regulation rule governing business 
opportunity sales. The final Rule covers 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, such as sellers of work-at-home programs. The final 
Rule requires business opportunity sellers to disclose specified 
information and to maintain certain records relating to business 
opportunity sales transactions. The currently approved estimate for the 
disclosure and recordkeeping burden under the interim Business 
Opportunity Rule is 16,750 hours for business opportunity sellers. That 
estimate was based on an estimated 2,500 business opportunity sellers. 
As discussed below, the final Rule reduces the existing burden on 
business opportunity sellers by streamlining disclosure requirements to 
minimize compliance costs.
    In the RNPR, Commission staff estimated there were approximately 
3,050 business opportunity sellers covered by the RPBOR. This figure 
consisted of an estimated 2,500 vending machine, rack display, and 
other opportunity sellers currently covered by the interim Business 
Opportunity Rule, and an estimated 550 work-at-home opportunity 
sellers, which would be newly covered entities under the final Rule. 
Because the final Rule is no different than the RPBOR regarding the 
types of entities to which it applies, and the Commission received no 
information suggesting the need to update these prior estimates, the 
Commission retains them for the final Rule. Additionally, Commission 
staff estimates that approximately 174 of those sellers market business 
opportunities in Spanish and that approximately 79 of the 3,050 
business opportunity sellers market in languages other than English or 
Spanish.\482\
---------------------------------------------------------------------------

    \482\ To estimate how many of the 3,050 sellers market business 
opportunities in languages other than English, staff relied upon 
2009 United States Census Bureau (``Census'') data. Calculations 
based upon a recent Census survey reveal that approximately 5.7% of 
the U.S. population speaks Spanish or Spanish Creole at home and 
speak English less than ``very well.'' Calculations based upon that 
same survey reveal that approximately 2.6% of the U.S. population 
speaks a language other than Spanish, Spanish Creole, or English at 
home and speak English less than ``very well.'' Staff therefore 
projected that 5.7% of all entities selling business opportunities 
market in Spanish or Spanish Creole and 2.6% of all entities selling 
business opportunities market in languages other than English, 
Spanish and Spanish Creole. http://factfinder.census.gov/servlet/STTable?_bm=y&-geo_id=01000US&-qr_name=ACS_2009_1YR_G00_S1601&-ds_name=ACS_2009_1YR_G00_&-_lang=en&-redoLog=false.
---------------------------------------------------------------------------

A. Disclosure Requirements

    As discussed below, the final Rule is designed to streamline and 
substantially reduce the quantity of information business opportunity 
sellers are required to disclose under the interim Business Opportunity 
Rule. The final Rule impacts sellers differently, depending upon 
whether they are currently covered by the interim Business Opportunity 
Rule and what language they use to market the business opportunities.
1. Mandatory Disclosures
    For the 2,500 vending machine, rack display, and other business 
opportunity sellers currently covered by the interim Business 
Opportunity Rule, the final Rule substantially reduces the disclosures 
from more than 20 categories of information to five--the seller's 
identifying information, earnings claims, lawsuits, refund and 
cancellation policies, and prior purchasers. This streamlining also 
will minimize compliance costs for the 550 business opportunity sellers 
that will be newly subject to the Rule. Business opportunity sellers 
must disclose whether or not they make earnings claims. The decision to 
make an earnings claim, however, 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.\483\
---------------------------------------------------------------------------

    \483\ See supra Section III.C.2.
---------------------------------------------------------------------------

    The final Rule imposes one additional requirement that was not 
present in either the interim Business Opportunity Rule or the RPBOR, 
which was introduced in the Staff Report. For business opportunities 
marketed in Spanish, Sec.  437.5 of the final Rule requires that 
sellers provide potential purchasers with the Spanish version of the 
disclosure document (Appendix B to the Rule) and provide all other 
required disclosures in Spanish. For sales conducted in a language 
other than English or Spanish, the final Rule requires that sellers 
make the required disclosures in the same language as the sale, using 
the form and an accurate translation of the language set forth in 
Appendix A, as well as any additional required disclosures. As 
discussed in the Statement of Basis and Purpose, this translation 
requirement is supported by long-standing Commission policy, the 
Commission's law enforcement experience, the rulemaking record, and the 
rationale supporting staff's recommendation.
2. Incorporation of Existing Materials
    The final Rule reduces collection and dissemination costs from 
those imposed by the interim Business Opportunity Rule, by permitting 
sellers to reference in their disclosure documents materials already in 
their possession. For example, a seller need not repeat its refund 
policy in the text of the disclosure document, but may incorporate its 
contract or brochures, or other materials that already provide the 
necessary details.
3. Use of Electronic Dissemination of Information
    The final Rule defines the term ``written'' to include electronic 
media. Accordingly, all business opportunities covered by the final 
Rule are permitted to use the Internet and other electronic media to 
furnish disclosure documents. Allowing this distribution method should 
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 final Rule 
will be minimal. For example, a seller can easily maintain a 
spreadsheet of its purchasers, which can be sorted by location. This 
would enable a seller to easily comply with the reference disclosure 
requirement (at least 10 prior purchasers in the last three years who 
are located nearest to the prospective

[[Page 76857]]

purchaser, or, if there are not 10 prior purchasers, then all prior 
purchasers). In the alternative, the final Rule permits a seller to 
maintain a national list of purchasers.

B. Recordkeeping Requirements

    Section 437.7 of the final Rule prescribes recordkeeping 
requirements necessary for effective enforcement of the Rule. 
Specifically, sellers of a covered business opportunity, and their 
principals, must retain for at least three years the following 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 final 
Rule requires that these records be made available for the Commission's 
inspection, but does not otherwise require their production. As 
previously noted, because of advances in computerized data collection 
technology, the Commission anticipates that the costs of collecting 
information and recordkeeping requirements imposed by the final Rule 
will be minimal.

C. Estimated Hours Burden and Labor Cost

    For the RNPR, the Commission submitted the RPBOR and associated 
documentation under the PRA for OMB review.\484\ The Commission did not 
receive any public comments regarding staff's PRA burden estimates. The 
instant burden estimates differ from those previously submitted in the 
RNPR in two respects: (1) They account for the final Rule's requirement 
that sellers must provide the disclosure document and other required 
disclosures to potential purchasers in the same language the seller 
uses to market the business opportunity; \485\ and (2) they incorporate 
the one hour recordkeeping burden estimate included in the currently 
approved interim Business Opportunity Rule's burden estimates under the 
PRA.
---------------------------------------------------------------------------

    \484\ 73 FR at 16129.
    \485\ As discussed within the Statement of Basis and Purpose, 
this requirement was not present in the RNPR. Rather, it was 
recommended in the Staff Report, and ultimately adopted in the final 
Rule.
---------------------------------------------------------------------------

    Through the Staff Report, the Commission sought comment on the new 
foreign language disclosure requirement, including the usefulness and 
sufficiency of the added foreign language disclosure requirement. The 
Staff Report, however, did not address the associated PRA burden.\486\ 
The Commission received just one comment on the new disclosure 
translation requirement.\487\
---------------------------------------------------------------------------

    \486\ See Bureau of Consumer Protection, Staff Report to the 
Federal Trade Commission and Proposed Revised Trade Regulation Rule 
(16 CFR Part 437) (Nov. 2010) (``Staff Report''), available at 
http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf. In November, the 
Commission published a notice in the Federal Register announcing the 
availability of, and seeking comment on, the Staff Report. See 75 FR 
68559 (Nov. 8, 2010).
    \487\ DOJ Staff Report at 2. The comment, from the Office of 
Consumer Litigation, U.S. Department of Justice, registered strong 
support for the requirement.
---------------------------------------------------------------------------

1. Estimated Hours Burden: 10,533
    The estimated 2,500 vending machine, rack display, and related 
opportunity sellers currently covered by the interim Business 
Opportunity Rule (and, previously, the Original Franchise Rule) will 
have a disclosure document that needs merely streamlining and updating 
to comply with the final Rule. Thus, FTC staff estimates that these 
businesses likely will require no more than 3 hours to complete those 
tasks. Conversely, staff estimates that for existing businesses that 
were not covered by the interim Business Opportunity Rule but will be 
covered by the final Rule, e.g., work-at-home opportunities, 
approximately 5 hours will be required to prepare a new disclosure 
document. Staff further estimates that the total hours required in the 
first year to develop a disclosure document will be 10,250 [(2,500 
entities x 3 hours per entity) + (550 entities x 5 hours per entity)]. 
In addition, all these businesses likely will require approximately one 
hour per year to file and store records, for a total of 3,050 hours 
[3,050 entities x 1 hour per entity]. Accordingly, the estimated total 
hours burden for the first year of implementation of these amendments 
would be 13,300 hours [10,250 hours + 3,050 hours]. Commission staff 
estimates that in subsequent years, the 3,050 existing businesses will 
require no more than approximately two hours to update the disclosure 
document [6,100 total hours] and approximately one hour to file and 
store records [3,050 total hours], for a total of 9,150 hours [6,100 
hours + 3,050 hours] per year to meet the final Rule requirements.
    Thus, cumulative average annual burden for affected sellers, based 
on a prospective three-year OMB clearance is 10,533 hours [((13,300 
hours) + 18,300 hours (2 years x 9,150 hours per year)) / 3].
2. Estimated Labor Cost: $2,633,333
    Labor costs are determined by applying applicable wage rates to 
associated burden hours. Commission staff assumes that an attorney 
likely would prepare or update the disclosure document at an estimated 
hourly rate of $250. As noted above, Commission staff estimates that 
13,300 hours will be needed to prepare, file, and store the disclosure 
document and required records in the first year, for a total cost of 
$3,325,000 [13,300 hours x $250 per hour].
    As noted above, Commission staff expects that there will be a 
reduction in the annual hours burden after the first year to 
approximately 9,150 hours. Accordingly, staff estimates that the labor 
cost burden for subsequent years will be reduced to $2,287,500 [9,150 
hours x $250 per hour]. Thus, the average annual cost is approximately 
$2,633,333 [(($3,325,000) + ($2,287,500 x 2)) / 3], when averaged over 
a prospective three-year OMB clearance. Should disclosure or 
recordkeeping obligations be performed by clerical staff, the total 
labor costs would be significantly less.
3. Estimated Capital and Other Non-Labor Costs: $3,068,838
    Business opportunity sellers must also incur costs to print and 
distribute the single-page disclosure document, plus any attachments. 
These costs vary based upon the length of the attachments and the 
number of copies produced to meet the expected demand. Commission staff 
estimates that 3,050 business opportunity sellers will print and mail 
approximately 1,000 disclosure documents per year at a cost of $1.00 
per document, for a total cost of $3,050,000. This is a conservative 
estimate because Commission staff anticipates that these costs will be 
reduced by many business opportunity sellers electing to furnish 
disclosures electronically, e.g., via email or the Internet.
    For sales conducted in a language other than English and Spanish, 
the final Rule requires that sellers use the form appearing in Appendix 
A and accurately translate it into the language used for sale. Thus, 
sellers marketing in languages other than English or Spanish will incur 
costs to translate the disclosure document, and these sellers may also 
need to translate the other required disclosures that may be attached 
to the disclosure document. Commission staff estimates that sellers 
marketing business opportunities in languages other than English and 
Spanish will incur a cost of

[[Page 76858]]

approximately $6,705 to translate the disclosure document in the first 
year. This figure is based upon Commission staff's estimate that it 
will cost approximately 17.5 cents to translate each word into the 
language the sellers use to market the opportunities.\488\ There are 
485 words in Appendix A. Therefore, the total cost burden to translate 
the disclosure document is approximately $6,705 [79 sellers x (17.5 
cents per word x 485 words)]. In subsequent years, the existing 
business opportunities sellers will not incur additional costs to 
translate the Appendix A as it will already have been translated during 
the first year. The 174 sellers marketing business opportunities in 
Spanish will not incur any additional costs to translate Appendix A, as 
a Spanish version of that document is provided for them, as Appendix B 
to the final Rule.
---------------------------------------------------------------------------

    \488\ 17.5 cents is staff's estimate of the current market 
translation rate per word.
---------------------------------------------------------------------------

    Commission staff estimates that in the first year, sellers 
marketing business opportunities in languages other than English will 
incur a total cost burden of approximately $27,672 [(79 sellers + 174 
sellers) x (17.5 cents per word x 625 words)] to translate their 
responses to the five mandatory disclosures required in the disclosure 
document. This estimate is based upon assumptions that all sellers 
marketing business opportunities in languages other than English: (1) 
Are marketing in both English and another language; (2) are not 
incorporating any existing materials into their disclosure document; 
(3) have been the subject of civil or criminal legal actions; (4) are 
making earnings claims; (5) have a refund or cancellation policy; and 
(6) because of all of the above assumptions, require approximately 625 
words (approximately 2.5 standard, double-spaced pages) to provide the 
required information. In reality, because it is unlikely that all such 
assumptions will apply to every seller marketing business opportunities 
in languages other than English, the cost burden will likely be much 
lower. In subsequent years, due to the final Rule's requirement that 
sellers must update their disclosures, Commission staff estimates that 
sellers may incur an additional cost burden of $11,069 [253 sellers x 
(17.5 cents per word x 250 words--approximately one standard, double-
spaced page)] to translate the updates.
    Therefore, cumulative average cost for affected sellers, based on a 
prospective three-year OMB clearance, to print and distribute the 
disclosure document and any attachments and to translate both the 
disclosure document and the additional required disclosures would be 
$3,068,838 [(($3,050,000 x 3) + $6,705 + $27,672 + ($11,069 x 2)) / 3].

V. Regulatory Analysis and Regulatory Flexibility Act

    Under Section 22 of the FTC Act, 15 U.S.C. 57b, the Commission must 
issue a regulatory analysis for a proceeding to amend a rule only when 
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. The Commission has determined that the final 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.
    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-612, 
requires an agency to provide an Initial Regulatory Flexibility 
Analysis (``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.\489\
---------------------------------------------------------------------------

    \489\ See 5 U.S.C. 603-605.
---------------------------------------------------------------------------

    The FTC does not expect that the final Rule will have a significant 
economic impact on a substantial number of small entities and this 
document serves as notice to the Small Business Administration of the 
agency's certification of no significant impact. The abbreviated 
disclosure and recordkeeping requirements of the final Rule 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 interim Business Opportunity Rule 
will experience a reduction in their compliance burden, while companies 
not previously covered will have minimal new disclosure obligations. As 
such, the economic impact of the final Rule will be minimal. In any 
event, the burdens imposed on small entities are likely to be 
relatively small.
    In the RNPR, the Commission provided notice to the Small Business 
Administration of the agency's certification of no significant impact. 
Nonetheless, the Commission determined that it was appropriate to 
publish an IRFA in order to inquire into the impact of the proposed 
Rule on small entities. Based on the IRFA set forth in the Commission's 
earlier notice of proposed rulemaking, a review of the public comments 
submitted in response to that notice and additional information and 
analysis by Commission staff, the Commission submits this FRFA.

A. Need for and Objectives of the Final Rule

    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 
final Rule will give consumers the information they need to protect 
themselves from fraudulent sales claims, while minimizing the 
compliance costs and burdens on sellers.
    The objective of the final Rule is to provide consumers considering 
the purchase of a business opportunity with material information they 
need to investigate the offering thoroughly so they can protect 
themselves from fraudulent claims, while minimizing the compliance 
burdens on sellers. The legal basis for the final 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).

B. Significant Issues Raised by Public Comments, Summary of Agency's 
Assessment of These Issues, and Changes, if Any, Made in Response

    In crafting the final Rule, the Commission has carefully considered 
the comments received throughout the Rule amendment proceeding. Section 
III of this document provides a more detailed discussion of the 
comments received by the Commission and the Commission's response to 
those comments.
    In sum, in response to INRP, the Commission received more than 
17,000 comments, the overwhelming majority

[[Page 76859]]

of which came from the MLM industry. The MLM industry urged the 
Commission to exclude MLM plans from the scope of IPBOR due to the 
burdens imposed on them through the IPBOR and the IPBOR's failure to 
differentiate between unlawful pyramid schemes and legitimate companies 
using an MLM model. In consideration of the comments received in 
response to the INPR, and a reassessment of the Commission's law 
enforcement history, the Commission subsequently issued a RNPR, in 
which the Commission decided to narrow the scope of the IPBOR to avoid 
broadly sweeping in all sellers of MLM plans. In addition, the 
Commission proposed a more narrowed definition of ``business 
opportunity'' and also eliminated two required disclosures--information 
about legal actions pertaining to a business opportunity seller's sales 
personnel, and the number of cancellation or refund requests the seller 
received. The Commission received fewer than 125 comments and rebuttal 
comments in response to RNPR addressing these changes. The Commission 
received written comment from six individuals and entities following 
the public workshop held by the Commission. Finally, the Commission 
received 27 comments in response to the Staff Report. Many of those 
comments opposed the Commission's decision to narrow the scope of the 
Rule to avoid broadly sweeping in the MLMs.

C. Description and an Estimate of the Number of Small Entities to Which 
the Final Rule Will Apply, or Explanation Why No Estimate Is Available

    The final Rule primarily applies to ``sellers'' of business 
opportunities, including vending, rack display, medical billing, and 
work-at-home (e.g., craft assembly, envelope stuffing) opportunities. 
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 final Rule, 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. 
Most established and some start-up business opportunities would likely 
be considered small businesses according to the applicable Small 
Business Administration (``SBA'') size standards.\490\ The FTC staff 
estimates that as many as 70% of business opportunities, as defined by 
the Rule, are small businesses.
---------------------------------------------------------------------------

    \490\ 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 $7 million or less. See 
http://www.sba.gov/content/summary-size-standards-industry.
---------------------------------------------------------------------------

D. Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Final Rule, Including an Estimate of the 
Classes of Small Entities That Will Be Subject to the Requirements, and 
the Type of Professional Skills That Will Be Necessary To Comply

    As discussed in the Paperwork Reduction Act analysis of this notice 
(Section IV), the final Rule will impose compliance requirements (e.g., 
disclosure) and minor recordkeeping requirements on those entities 
covered by the final Rule. Specifically, the final Rule imposes 
disclosure and recordkeeping requirements, within the meaning of the 
Paperwork Reduction Act, on the ''sellers'' of business opportunities 
and their principals.
    The disclosure and recordkeeping 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 
final Rule requires ``sellers'' of covered business opportunities to 
provide potential purchasers with a one-page disclosure document, as 
specified by Sec.  437.3 and Appendix A and if applicable, Appendix B, 
at least seven calendar days before they sign a contract or pay any 
money toward a purchase. For business opportunities marketed in 
Spanish, Sec.  437.5 of the final Rule requires that sellers provide 
potential purchasers with the Spanish version of the disclosure 
document (Appendix B to the Rule) and provide any required disclosures 
in Spanish. For sales conducted in a language other than English or 
Spanish, the final Rule requires that sellers use the form and an 
accurate translation of the language set forth in Appendix A.
    Section 437.7 of the final Rule prescribes recordkeeping 
requirements necessary for effective enforcement of the Rule. 
Specifically, sellers of a covered business opportunity, and their 
principals, must retain for at least three years the following 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 final 
Rule requires that these records be made available for inspection by 
the Commission, but does not otherwise require production of the 
records.
    Commission staff assumes that sellers will hire an attorney to 
complete, update, file, and store the disclosure documents. If 
applicable, sellers may require translation services to comply with the 
disclosure requirements.

E. Steps the Agency Has Taken in the Final Rule To Minimize Any 
Significant Economic Impact of the Final Rule on Small Entities, 
Consistent With Applicable Statutory Objectives, Including the Factual 
and Legal Basis for the Alternatives Adopted and Those Rejected

    As discussed throughout this document, the Commission has attempted 
to reduce compliance costs wherever possible. Compliance with the final 
Rule's disclosure requirements is significantly less burdensome than 
with the interim Business Opportunity Rule. The final Rule's disclosure 
and recordkeeping requirements are designed to impose the minimum 
burden on all affected business opportunity sellers, regardless of 
size. In formulating the final Rule, 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 final Rule 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 final Rule will drastically 
reduce their current compliance costs, while imposing exceedingly 
modest ongoing compliance costs on all covered sellers. Consequently, 
the Commission believes that the final Rule will not have a

[[Page 76860]]

significant economic impact upon small businesses.
    The final Rule requires business opportunity sellers to provide 
only five affirmative disclosures in a one-page disclosure document. 
This is a significant reduction from the more than 20 disclosures now 
required by the Commission's interim Business Opportunity Rule, with 
which many business opportunity sellers are now obligated to comply.

VI. Final Rule Language

List of Subjects in 16 CFR Part 437

    Reporting and recordkeeping requirements, Trade practices.

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

    For the reasons set forth in the preamble, the Federal Trade 
Commission amends title 16, Code of Federal Regulations, by revising 
part 437 to read as follows:

PART 437--BUSINESS OPPORTUNITY RULE

Sec.
437.1 Definitions.
437.2 The obligation to furnish written documents.
437.3 The disclosure document.
437.4 Earnings claims.
437.5 Sales conducted in Spanish or other languages besides English.
437.6 Other prohibited practices.
437.7 Record retention.
437.8 Franchise exemption.
437.9 Outstanding orders; preemption.
437.10 Severability.
Appendix A to Part 437--Disclosure of Important Information About 
Business Opportunity
Appendix B to Part 437--Disclosure of Important Information About 
Business Opportunity (Spanish-Language Version)

    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, an assurance of voluntary 
compliance, and an assurance of discontinuance.
    (b) Affiliate means an entity controlled by, controlling, or under 
common control with a business opportunity seller.
    (c) Business opportunity means a commercial arrangement in which:
    (1) A 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, owned, leased, 
controlled, or paid for 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, Web site, commercial 
bulk email, and mobile communications.
    (i) Material means likely to affect a person's choice of, or 
conduct regarding, goods or services.
    (j) New business means a business in which the prospective 
purchaser is not currently engaged, or a new line or type of business.
    (k) Person means an individual, group, association, limited or 
general partnership, corporation, or any other business entity.
    (l) 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.
    (m) 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, provided, however, that advertising and general advice about 
business development and training shall not be considered as 
``providing locations, outlets, accounts, or customers.''
    (n) Purchaser means a person who buys a business opportunity.
    (o) Quarterly means as of January 1, April 1, July 1, and October 
1.
    (p) 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.
    (q) Seller means a person who offers for sale or sells a business 
opportunity.
    (r) Signature or signed means a person's affirmative steps to 
authenticate his or her identity.
    It includes a person's handwritten signature, as well as an 
electronic or digital form of signature to the extent that such 
signature is recognized as a valid signature under applicable federal 
law or state contract law.
    (s) Written or in writing means any document or information in 
printed form or in any form capable of being downloaded, printed, or 
otherwise

[[Page 76861]]

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  The disclosure document.

    In connection with the offer for sale, sale, or promotion of a 
business opportunity, it is a violation of this Rule and an unfair or 
deceptive act or practice in violation of Section 5 of the FTC Act, for 
any seller to:
    (a) Fail to disclose to a prospective purchaser the following 
material information in a single written document in the form and using 
the language set forth in appendix A to this part; or if the offer for 
sale, sale, or promotion of a business opportunity is conducted in 
Spanish, in the form and using the language set forth in appendix B to 
this part; or if the offer for sale, sale, or promotion of a business 
opportunity is conducted in a language other than English or Spanish, 
using the form and an accurate translation of 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, 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, including 
violations of any FTC Rule, 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). For each action, the seller may also provide a 
brief accurate statement not to exceed 100 words that describes the 
action.
    (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 
all material terms and conditions 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, 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, 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 document 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:

[[Page 76862]]

    (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, or does not exceed, 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  Sales conducted in Spanish or other languages besides 
English.

    (a) If the seller conducts the offer for sale, sale, or promotion 
of a business opportunity in Spanish, the seller must provide the 
disclosure document required by Sec.  437.3(a) in the form and language 
set forth in appendix B to this part, and the disclosures required by 
Sec. Sec.  437.3(a) and 437.4 must be made in Spanish.
    (b) If the seller conducts the offer for sale, sale, or promotion 
of a business opportunity in a language other than English or Spanish, 
the seller must provide the disclosure document required by Sec.  
437.3(a) using the form and an accurate translation of the language set 
forth in appendix A to this part, and the disclosures required by 
Sec. Sec.  437.3(a) and 437.4 must be made in that language.


Sec.  437.6  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 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.  437.7  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.  437.8  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

[[Page 76863]]

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.  437.9  Outstanding orders; preemption.

    (a) A business opportunity required by prior FTC or court order to 
follow the Franchise Rule, 16 CFR part 436, may petition the Commission 
to amend the order or to stipulate to an amendment of the court 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.  437.10  Severability.

    The provisions of this part are separate and severable from one 
another. If any provision is stayed or determined to be invalid, the 
remaining provisions shall continue in effect.

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