At its most recent open meeting, the Federal Trade Commission voted unanimously to issue an Advance Notice of Proposed Rulemaking, seeking public comment on whether to modify or expand its Business Opportunity Rule.
The Business Opportunity Rule, first adopted in 2012, requires sellers of “business opportunities” to be able to substantiate any earnings claims they make, and to make certain enumerated disclosures pertaining to the potential transaction. These disclosures include:
- The seller’s identifying information
- Whether the seller is making earnings claims and, if so, substantiation for those claims
- Whether the seller, affiliates of the seller, or its leaders have been involved in legal actions concerning misrepresentation, fraud, securities law violations, or unfair or deceptive practices in the previous 10 years
- The terms of the seller’s cancellation or refund policy, if it has one
- A list of people who have purchased the business opportunity in the previous three years
Among other things, the FTC is seeking comment on whether the rule should be expanded to cover business coaching or mentoring programs, e-commerce opportunities, investment opportunities, and more.
Under the current definition, a “business opportunity” covers only transactions in which:
- A “seller solicits a prospective purchaser to enter into a new business”
- The “prospective purchaser makes a required payment”
- The “seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will” provide locations for the purchaser’s equipment, such as a vending machine); provide outlets, accounts, or customers for the purchaser’s goods or services; or buy back any or all of the goods or services that the purchaser makes or provides
As part of this rule review process, the FTC will consider past comments from the ANPR earlier this year concerning a rule making on earnings claims. The FTC also seeks to understand whether business opportunity practices disproportionately affect minority communities or communities of lower socioeconomic status and, accordingly, whether the rule needs amending to address such effects.
If the FTC’s focus on money-making opportunities was not already apparent, an enforcement action it brought just last week should serve to remind everyone. The FTC filed a complaint in the Southern District of Florida against DK Automation and its owners and affiliates, alleging that the defendants used unfounded earnings claims to “lure[d] consumers into purchasing business opportunities” involving Amazon business packages, business coaching, and cryptocurrency. According to the FTC, the defendants promised to build purchasers a “100% Turnkey Amazon Empire” that “generates passive income on autopilot,” but in reality, few consumers ever made money from these programs.
Specifically, the FTC asserted that the defendants used testimonials suggesting huge profits could be made, but such testimonials did not reflect the experience of real consumers. Moreover, when disclaimers were used, according to the complaint, they were in such small type or so distant from the claims that they were essentially useless to consumers. Finally, the FTC alleged that the defendants regularly failed to provide the disclosures required under the Business Opportunity Rule.
The defendants stipulated to a settlement with the FTC in which they must
- Cease all misleading claims
- Substantiate any earnings claims they make
- Stop restricting consumers’ ability to file complaints or leave negative reviews
- Pay a penalty of at least $2.6 million in consumer redress
The settlement provided for a total judgment of nearly $53 million, which was partially suspended because of the defendants’ purported inability to pay. The FTC announced that, if the inability to pay turns out to be untrue, then the full amount will be immediately due.
The FTC’s enforcement actions, along with the current ANPR, reveal that the FTC is not letting up on the money-making opportunity market and is using various remedial tools to try and recover funds from alleged wrongdoers. Because of the sharp regulatory eye on business opportunity sellers, it is important that such sellers adhere to the disclosure and substantiation requirements of the Rule when promoting their products or services to consumers. The public has 60 days from the date of publication in the Federal Register to comment on the proposed rule changes.