October 22, 2014

The FTC’s New Business Opportunity Rule: What It Means for You

“Make thousands stuffing envelopes!  Unique work at home business opportunity!”

stuffing envelopes

It’s statements like these which often lead to bogus business opportunities that have spurred the U.S. Federal Trade Commission into taking action to protect people who think they’re buying a legitimate business. Called the Business Opportunity Rule, this new requirement states that any individual who sells a business opportunity to another is required to disclose more information than in the past.  This is an update of an existing rule about business opportunities, and it now applies to an even broader set of opportunities and has some other changes.

A business opportunity is simply a comprehensive business investment that lets the buyer start a business immediately. It’s “out of the box,” so to speak. It’s different from a franchise.  A franchise is a business opportunity, but not all business opportunities are franchises, says Joel Libava, author of Become a Franchise Owner.

“Sometimes, people confuse a franchise business opportunity with a business opportunity, or bizopp. The major differences include upfront costs, (which are almost always significantly lower with a bizopp) support, and  the rules. In a business opportunity, there aren’t that many rules to follow as an owner. Business opportunities are generally looser in nature; you buy the opportunity, learn how to run the business, and then you’re pretty much free to market it and run it as you wish.”

What’s Required if You SELL Business Opportunities to Others

Anyone selling a business opportunity or bizopp must now provide information on a one-page disclosure document (PDF file) at least seven days before the buyer pays money or signs a document. The seller must state the following:

  • Whether legal action has ever been taken against the seller
  • Whether there is a cancellation or refund policy for the business transaction
  • Any earnings claims that the buyer will earn a specific amount of money through the bizopp
  • References for the seller

Because of the rising number of business opportunity scams over the past few years, the FTC wanted to step up the measures taken to ensure the safety of buyers.

If you’re selling a business opportunity, understand that this new rule is meant to help you and the buyer perform a smooth transaction. Here are some tips to minimize the stress on your end:

  • Never make unsubstantiated claims. Be prepared to back up any income potential your business opportunity can provide.
  • Offer a refund or cancellation policy. It’s good business. Outline what the stipulations are for the buyer to be able to cancel.
  • Stay in contact with your buyers so you can use them for references down the road. Even if you don’t promise support in your contract, it’s good customer service to be available should your buyer have questions.

What You Need to Know if You Are BUYING a Business Opportunity

If you are buying or considering buying a business opportunity, then know that the Business Opportunity Rule is to designed to help protect you from potentially bogus deals. Armed with the information the seller is required to give you, you should be able to get a better sense of whether a deal is legitimate. If it’s not, you now have ammunition for legal proceedings.

Pay attention to the earnings claims. In the past, companies have claimed that you could retire off of what you make stuffing envelopes, or make thousands of dollars off a work from home opp. These claims must now be substantiated in writing, and the buyer must list how much other buyers have made, and where they were located (since results may vary depending on many factors).

“The revised Business Opportunity Rule is long overdue,” says Libava, “The most positive change has to do with research. Business opportunity buyers will now have access to a list provided by the business opportunity seller of at least 10 people who have bought their business opportunity. And, if fewer than 10 people have bought the business opportunity, every person that’s bought it must be listed.”

Libava says that buyers should know that they will have to sign a document stating that the buyer can share their personal contact information with future buyers.

Here are more tips to ensure you find a trustworthy business opportunity from the Business Opportunity blog:

  • Ensure that the seller has filled out the disclosure document thoroughly, and has provided supporting documents.
  • Contact the references the seller lists and ask questions about their experiences with the business opportunity.
  • Look for bizopps that illustrate how you’ll make the money, rather than drawing you in with promises of  big financial rewards.

You can read the complete Business Opportunity Rule document on the FTC website. The Rule will go into effect March 1, 2012.


Envelopes Photo via Shutterstock

13 Comments ▼

Susan Payton - Awards Communication Mgr.


Susan Payton Susan Payton is the Communications Manager for the Small Business Trends Awards programs. She is the President of Egg Marketing & Communications, an Internet marketing firm specializing in content marketing, social media management and press releases. She is also the Founder of How to Create a Press Release, a free resource for business owners who want to generate their own PR.

13 Reactions

  1. Sounds to me like we’ll be seeing a few companies change their names because the requirement to disclose any past legal action will kill conversion rates for a lot of these business opportunities (provided the purchaser reads the document).

  2. It took the FTC 6 years to come up with these simple rules and they completely missed the biggest point. 27 different sets of rules!

  3. @Robert–
    Very sneaky, and I bet you’re right!

    @Steven–
    I think they finally got tired of the complaints. But nobody’s perfect!

    Susan

  4. Susan,
    The FTC has actually had Biz Opp requirement for some time (first time I read them was 1997). They may have added something new this year or something that is more pertinent to the internet. But anyone that sells Biz Opps across state lines must adhere to the FTC guidelines and provide the appropriate disclosures.

    Exception: If you are only dealing in a single state (i.e. your business and the customer you are selling to are in the same state) you do not have to abide by the FTC, which are Federal guidelines. But, that doesn’t mean your off the hook for disclosures.
    Almost every state also has their own Biz Opp rules and disclosure requirments that are governed by the Attorney General – SAMP Division (Seller Assisted Marketing Program). If you are selling within a single state you only need to adhere to the states requirements. If you are selling from from one state to another you are supposed to have the FTC Disclosure and the state Disclosure for the state you are selling in. Thus needing to provide 2 disclosures – state and Federal.

    Most people that buy and most people that sell biz opps have no idea these rules even exist. And there are so many complaints that unfortunately, unless a government agency gets a lot of complaints about a specific company, nothing is usually done.

    • HI Chad, Thanks for pointing out that there has been an FTC rule in effect for Biz Opps — previously it was an “interim rule.” This is the “final rule.”

      The final rule that goes into effect March 1, 2012, is “new” because it broadens the types of opportunities that are now subject to the rule, to include opportunities such as envelope stuffing and medical billing. It also makes other changes, including steamlining the disclosure process. We edited the article by adding a sentence to make it clear that it is a new rule to replace an existing rule.

      And i agree with you that most people have absolutely no idea that rules exist governing business opportunities.

      However, I am not so sure about your statement that the FTC only applies if you are selling in two states. The law is complex. Anyone selling a business opportunity should consult with their own attorney for a definitive answer. The way I am reading the law, you have to comply with both the FTC rule and any applicable state rule, in all cases. The FTC’s website has a section with links to states that have business opportunity rules: http://www.ftc.gov/bcp/franchise/netbusop.shtm. But I am not an expert on this law, so again, I caution readers: use any article on the Web as a starting point in your research about business opportunity rules, not as the definitive answer to all your legal questions. In an article, there is no way anyone can cover all the nuances and exceptions in a complex law, without knowing all the facts of your particular situation.

      – Anita Campbell
      Editor in Chief, Small Business Trends

  5. I personally do not participate in them, but how will this affect MLM companies. I do business consulting and want to make sure I give accurate info.

  6. Somewhat expected change from the FTC. Also it seems like it only applies if people are charged to participate in a biz opp (so hiring comission based sales people wouldn’t fall under this)

    It does rise two questions in my mind:

    1) How would a “jin free, pay a monthly “maintenance” fee” model be handled (like one of those “run your own store” biz opps) Would it still fall under this change and be considered a biz opp, even if a client doesn’t have to pay a fee to “join.”

    2) Do mlm companies fall under this? They probably do (definitely do if they charge to join) but what if “joining” an mlm is free, but obviously you have to buy product before you can sell it.. does it fall uder biz opp definition?

    Anyway, nothing really extreme seems to be asked of the biz opp sellers – be honest about money making potential, offer a refund, disclose stuff, all things an honest company should be doing anyway.

    • Boston Marketer–
      I’m not sure whether your examples would fall under this rule or not, but they should probably be “better safe than sorry.” It’s designed to weed out bad opps, and I think it’s a good requirement!

      Susan

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