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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL TRADE COMMISSION

16 CFR Part 437

RIN 3084-AB04

Business Opportunity Rule

AGENCY: Federal Trade Commission (FTC or Commission).
ACTION: Final rule.
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 athttp://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 athttp://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'sStaff Report to the Federal Trade Commission and Proposed Revised Trade Regulation Rule(16 CFR Part 437). The Staff Report is available athttp://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 theFederal RegisterNotice 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.

143 FR 59614 (Dec. 21, 1978).

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 ofthe 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 theFederal Registera 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

260 FR 17656 (Apr. 7, 1995).

362 FR 9115 (Feb. 28, 1997).

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

464 FR 57296 (Oct. 22, 1999).

5 Id.

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 franchises6 and one to govern the sale of business opportunities. Accordingly, in the ANPR, the Commission solicitedcomment on several proposed regulatory modifications, including the creation of a separate trade regulation rule governing the sale of business opportunities.7

6The 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.

762 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.

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

872 FR 15444 (Mar. 30, 2007).

9For 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.

1073 FR 16111, 16112 (Mar. 26, 2008).

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

1171 FR 19054 (Apr. 12, 2006).

12The 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.

13Multi-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.”SeePeter 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).

14Promoters 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.

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

1571 FR at 19057.

16 Id.

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

1771 FR at 19091.

1871 FR at 19068.

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.

19Comments responding to the INPR are available athttp://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).

20Thousands of comments were form letters submitted by participants in various MLM programs. 73 FR at 16113.

21Numerous letters came from individuals having negative experiences with various MLMs. 73 FR at 16113 n.37.

2273 FR at 16113.

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

23 Id.at 16110.

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, includingretail 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

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 alsoTimberland-INPR (noting that numerous manufacturers structure their retail distribution in this manner).

25This 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.

26This 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 infraSection 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.

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

28 Id.at 16125.

29 Id.

30 Id.

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 groups35 and approximately twelve individuals36 who expressed their disappointment that the FTC's proposed rule would exclude MLMs from coverage.

31 Id.at 16133.

32Comments responding to the RNPR are available athttp://www.ftc.gov/os/comments/bizoprevised/index.shtm.References to RNPR comments are cited herein as: Name of commenter-RNPR.

33Some 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.

34Planet Antares-RNPR.

35The two consumer groups are the Consumer Awareness Institute (“CAI”) and Pyramid Scheme Alert (“PSA”).

36Some letters came from individuals having negative experiences with MLMs.

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 aFederal RegisterNotice (“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 Followingrobust discussion on various topics, the Commission received follow-up written comment from six individuals and entities.42

37A copy of the expert's report to the FTC, “Design and Testing of Business Opportunity Disclosures,” (“Macro Report”) is available athttp://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.

38The 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.SeeMacro Report at 2.

39 See74 FR 18712 (Apr. 24, 2009).

40Commission staff selected individuals as panelists based upon their comments, backgrounds, and interest in the subject matter.

41A copy of the transcript of the June 1, 2009 workshop is available athttp://www.ftc.gov/bcp/workshops/bizopps/index.shtml.References to thetranscript 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).

42Comments received in response to the Workshop Notice are available athttp://www.ftc.gov/os/comments/bizoprulerevwrkshp/index.shtm.References to workshop comments are cited herein as: Name of commenter-Workshop.

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.

43 SeeBureau 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 athttp://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf.In November, the Commission published a notice in theFederal Registerannouncing the availability of, and seeking comment on, the Staff Report.See75 FR 68559 (Nov. 8, 2010).

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

44Comments received in response to the Staff Report are available athttp://www.ftc.gov/os/comments/bizoppstaffreport/index.shtm.References to Staff Report comments are cited herein as: Name of commenter—Staff Report.

45Comments on behalf of the MLM industry were submitted by Tupperware and Primerica.

46 E.g.,Dub-Staff Report; Tupperware-Staff Report.

47DOJ-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.

49The 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.

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.

5073 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 OpportunityRule.51 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.

51 See, e.g., FTCv.Med. Billers Network, Inc.,No. 05 CIV 2014 (RJH) (S.D.N.Y. 2005) ($200-$295 fee);FTCv.Sun Ray Trading,No. Civ. 05-20402-CIV-Seitz/Bandstra (S.D. Fla. 2005) ($160 fee);FTCv.Wholesale Mktg. Group, LLC,No. 05 CV 6485 (N.D. Ill. 2005) ($65 to $175 registration fees);FTCv.Vinyard Enters., Inc.,No. 03-23291-CIV-ALTONAGA (S.D. Fla. 2003) ($139 fee);FTCv.Leading Edge Processing, Inc.,6:02-CV-681-ORL-19 DAB (M.D. Fla. 2002) ($150 fee);FTCv.Healthcare Claims Network, Inc.,No. 2:02-CV-4569 MMM (AMWx) (C.D. Cal. 2002) ($485 fee);FTCv.Stuffingforcash.com, Corp.,No. 92 C 5022 (N.D. Ill. 2002) ($45 fee);FTCv.Kamaco Int'l,No. CV 02-04566 LGB (RNBx) (C.D. Cal. 2002) ($42 fee);FTCv.Medicor LLC,No. CV01-1896 (CBM) (C.D. Cal. 2001) ($375 fee);FTCv.SkyBiz.com,No. 01-CV-0396-EA (X) (N.D. Okla. 2001) ($125 fee);FTCv.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 See71 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., FTCv.Darling Angel Pin Creations, Inc.,No. 8:10-cv-00335-JSM-TGW (M.D. Fla. Feb. 2010);FTCv.Indep. Mktg. Exch. Inc.,No. 1:10-cv-00568-NLH-KMW (D.N.J. Feb. 2010);FTCv.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 actions54 in connection with more than ten law enforcement sweeps55 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.

54In 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$e Hope$,seeFTC 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,seeFTC 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,seeFTC 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$,seeFTC 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,seeFTC 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,seeFTC 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,seeFTC 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,seeFTC 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.SeeFTC 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 Statesv.Lifestyle Vending, Inc.,No. CV-06-6421 (E.D.N.Y. 2006);FTCv.Am. Entm't Distribs., Inc.,No. 04-22431-CIV-Huck (2004);FTCv.Inspired Ventures, Inc.,No. 02-21760-CIV-Jordan (S.D. Fla. 2002);FTCv.Essex Mktg. Group, Inc.,No. 2:02-cv-03415-TCP-AKT (E.D.N.Y 2002);United Statesv.Univend, LLC,No. 02-0433-P-L (S.D. Ala. 2002);FTCv.Pathway Merch., Inc.,No. 01-CIV-8987 (S.D.N.Y. 2001);United Statesv.Photo Vend Int'l, Inc.,No. 98-6935-CIV-Ferguson (S.D. Fla. 1998);FTCv.Hi Tech Mint Sys., Inc.,No. 98 CIV 5881 (JES) (S.D.N.Y. 1998);FTCv.Claude A. Blanc, Jr.,No. 2:92-CV-129-WCO (N.D. Ga. 1992);see alsoFTC 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 Statesv.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);FTCv.Carousel of Toys,No. 97-8587-CIV-Ungaro-Benages (S.D. Fla. 1997);FTCv.Raymond Urso,No. 97-2680-CIV-Ungaro-Benages (S.D. Fla. 1997);FTCv.Infinity Multimedia, Inc.,No. 96-6671-CIV-Gonzalez (S.D. Fla. 1996);FTCv.O'Rourke,No. 93-6511-CIV-Ferguson (S.D. Fla. 1993);see alsoFTC 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., FTCv.Advanced Pub. Commc'ns Corp.,No. 00-00515-CIV-Ungaro-Benages (S.D. Fla. 2000);FTCv.Ameritel Payphone Distribs., Inc.,No. 00-0514-CIV-Gold (S.D. Fla. 2000);FTCv.ComTel Commc'ns Global Network, Inc.,No. 96- 3134-CIV-Highsmith (S.D. Fla. 1996);FTCv.Intellipay, Inc.,No. H92 2325 (S.D. Tex. 1992).

59 See, e.g., FTCv.Bikini Vending Corp.,No. CV- S-05-0439-LDG-RJJ (D. Nev. 2005);FTCv.Network Serv. Depot, Inc.,No. CV-S0-05-0440- LDG-LRL (D. Nev. 2005);United Statesv.Am. Merch. Tech.,No. 05-20443-CIV-Huck (S.D. Fla. 2005);FTCv.Hart Mktg. Enter. Ltd., Inc.,No. 98-222-CIV-T-23 E (M.D. Fla. 1998);see also FTCv.FutureNet, Inc.,No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998);FTCv.TouchNet, Inc.,No. C98-0176 (W.D. Wash. 1998).

60 See, e.g., FTCv.Bureau 2000 Int'l, Inc.,No. 2:96-cv-01473-WMB-RC (C.D. Cal. 1996);FTCv.Genesis One Corp.,No. CV-96-1516-MRP (MCX) (C.D. Cal. 1996);FTCv.Innovative Telemedia, Inc.,No. 96- 8140-CIV-Ferguson (S.D. Fla. 1996);FTCv.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 pyramidschemes—which the Commission intended to cover—and legitimate companies using an MLM model.

61 See73 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.

69CAI-INPR at 2 (“I can certify thatMLM (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 alsoBrooks-INPR at 2 (“In my opinion, most MLM firms operate in a deceptive or fraudulent manner”).

70PSA-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

71Staff 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

72These 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.SeeMcKee-Staff Report; Ashby-Staff Report.

73Tupperware-Staff Report.

74DSA-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 potenti