Biz Opp. '08 SS for Proposed Amended Rule SS FIN

Supporting Statement
Proposed Amended Trade Regulation Rule on Business Opportunities
16 C.F.R. Part 437
(OMB Control No. 3084-NEW)
1.

Necessity for Collecting the Information

Since 1978, the Federal Trade Commission (“FTC” or “Commission”) has enforced the
Trade Regulation Rule on Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures (“Franchise Rule”), 16 C.F.R. Part 436 (OMB Control No.
3084-0107). The rulemaking record revealed evidence of widespread deceptive and unfair
practices in the sale of franchises and business opportunities. To correct these problems, the
Franchise Rule required franchisor and business opportunity sellers to furnish a disclosure
document to prospective investors prior to sale. Additional disclosures were required if a seller
made earnings representations.
The Commission amended the Franchise Rule on January 23, 2007, separating it into two
parts, 16 C.F.R. Parts 436 and 437. Part 436 is the amended Franchise Rule, which covers the
sale of business format franchises. Part 437 covers the sale of non-franchise business
opportunities (the interim Business Opportunity Rule). The disclosure requirements in Part 437
are essentially identical to those in the original Franchise Rule. Part 437 continues to cover the
sale of non-franchise business opportunities, pending completion of the Business Opportunity
rulemaking begun on April 12, 2006. The initially proposed Business Opportunity Rule
(“IPBOR”) would have expanded the coverage of business opportunity promoters then covered
by the original Franchise Rule), such as vending machines and rack display opportunities, to
include work-at-home and multilevel marketing programs.
Voluminous comments on the 2006 Business Opportunity proposal led the Commission
to issue a Revised Notice of Proposed Rulemaking (“RNPR”). The RNPR noted that although
business opportunity fraud is widespread, resulting in significant injury to consumers each year,
given the rulemaking record and considering burden on industry members, the Commission
determined not to include multi-level marketing companies. Instead, the Commission proposed
a revised Business Opportunity Rule (“RPBOR”) expanding coverage only to work-at-home
business opportunity promoters.
The RPBOR would require business opportunity sellers to disclose information to
prospective buyers and to maintain certain records. The expanded coverage of the RPBOR,
however, would be offset by more limited disclosure requirements, which would reduce
compliance costs.
The RPBOR would require business opportunity sellers to give prospective buyers four
material disclosures in a basic disclosure document. Each required disclosure was intended to
help prospective buyers make informed investment decisions. Specifically, sellers would, first,
disclose whether or not they make earnings claims. If so, sellers must include the claim in a
separate earnings claims statement attached to the basic disclosure document. Second, sellers
must disclose prior civil or criminal litigation involving misrepresentation, fraud, securities law

violations, or unfair or deceptive business practices. Third, sellers must disclose their
cancellation or refund policy. Fourth, sellers must provide contact information for at least 10 of
their purchasers nearest to the prospective purchaser’s location.
The RPBOR would require sellers: (1) to furnish disclosures at least seven days before
any sale, and (2) to use disclosure documents that comply with the form and content set forth in
the RPBOR. The RPBOR would not regulate the substantive terms of the buyer/seller
relationship. Nor would the proposal require the registration or filing of disclosure documents
with the Commission in connection with the sale of business opportunities. The RPBOR would,
however, require sellers to keep for a period of three years copies of: (1) each materially
different version of documents required by RPBOR; (2) each purchaser’s disclosure receipt and
contract; and (3) substantiation for any earnings claims.
2.

Use of the Information

Prospective business opportunity buyers use the disclosures both to become better
informed about the prospective investment and to verify the seller’s representations. The
RPBOR’s disclosure document must include:
(1) Identifying information about the business opportunity seller;
(2) Whether the seller makes any earnings claims and, if so, substantiation for such
claims;
(3) The litigation history of the seller, its directors, and key executives, involving
misrepresentation, fraud, securities law violations, and unfair or deceptive business
practices;
(4) Any cancellation or refund policy the seller offers; and
(5) Contact information for at least 10 purchasers nearest to the prospective purchaser.
Because future earnings are at the heart of any business opportunity purchase, the
RBPOR would require sellers to provide further information about any earnings claims. This
information is to enable the buyer to assess the accuracy or reliability of such claims. For
example, a seller might represent that the buyer could expect annual sales of $50,000. Without
some context, such a claim may mislead the prospective buyer. To allow the prospective
purchaser to independently judge the reliability of the claim, the RPBOR would require the seller
to: (1) provide the number and percentage of sellers whose performance equaled or exceeded the
claim; and (2) save and offer to show prospective purchasers the basis for the claim. Such
disclosures also would discourage unrealistic earnings claims, since the seller knows that the
purchaser can determine whether an earnings claim is credible by examining the background
material. The RPBOR would also require that any background material must be available to the
Commission in a compliance investigation.
2

3.

Consideration of Using Improved Information Technology to Reduce Burden

Consistent with the aims of the Government Paperwork Elimination Act, Pub. L. 105277, Title XVII, 112 Stat. 2681-749, 44 U.S.C. § 3504 note, the RPBOR permits business
opportunity sellers great latitude in using new technologies, in particular the Internet, to reduce
compliance costs. Business opportunity sellers would be able to reduce significantly printing
and distribution costs through the expanded use of email and the Internet to furnish disclosure
documents. The RPBOR would also permit the use of electronic signatures and electronic
recordkeeping.
4.

Efforts to Identify Duplication/Availability of Similar Information

Approximately twenty two states have some kind of business opportunity sales
regulations. These state regulations, however, are not uniform, varying widely both in their
coverage and in the disclosure requirements. Accordingly, coordination with states to reduce
duplication efforts would be difficult. The Commission intends to keep the disclosure
obligations arising from the RPBOR to a minimum. In most instances, business opportunity
sellers complying with the RPBOR would be able to furnish a single-page disclosure document,
with appropriate attachments. Indeed, the additional disclosures required by the earnings claims
provisions are only necessary if sellers elect to make earnings information available to
purchasers. Moreover, the single-page disclosure document could be provided as a cover page to
any additional disclosures required by state law, thus reducing compliance burdens.
Similarly, the RPBOR would reduce duplication by enabling business opportunity sellers
to comply with the RPBOR by using existing materials. For example, rather than repeating its
cancellation or refund policy in the disclosure document, a seller could simply check a box
indicating that it offers a cancellation or refund policy and then attach to the disclosure document
a brochure or other document that already sets forth the required information.
5.

Efforts to Minimize Burden on Small Businesses

Unlike business opportunity regulations in many states, the RPBOR – like the interim
Business Opportunity Rule – does not require a seller to register or file disclosure documents
with the government as a prerequisite to a sale. Thus, compliance with the RPBOR does not
invoke the fees usually associated with registering or filing disclosure documents, a
consideration that might be especially important to small businesses.
In addition, the RPBOR is intended to limit burden on small businesses by keeping
required disclosures to a minimum, permitting sellers to reference existing materials, and
permitting electronic disclosure. Further, in lieu of extensive disclosures, common in some state
business opportunity regulations, the RPBOR would prohibit misrepresentations that have arisen
frequently in business opportunity sales. Thus, the RPBOR would prohibit sellers from
misrepresenting: (1) costs and the quality or nature of goods or services offered for sale; (2)
assistance provided; (3) the nature of any exclusive territories; and (4) any third-party
3

endorsements, among others.
6.

Consequences of Conducting Collection Less Frequently

Any reduction in compliance is not an appropriate alternative to the RPBOR. The
purpose of the RPBOR is to ensure that all prospective business opportunity purchasers receive
valuable pre-sale information about proposed investments.
7.

Circumstances Requiring Collections Inconsistent with Guidelines

The collection of information in this RPBOR is consistent with all applicable guidelines
contained in 5 C.F.R. § 1320.5(d)(2).
8.

Consultation with Outside Sources

The Commission has had a long history of seeking outside input regarding the Franchise
Rule and the Business Opportunity Rule. In 1995, the Commission conducted a review of the
Franchise Rule as part of its program to review periodically all Commission trade regulation
rules and guides, and published in the Federal Register a Notice for Comment on the Rule. See
60 Fed Reg. 17,656 (April 7, 1995). Among other things, the Commission sought comment on:
(1) the continuing need for the Rule; (2) the costs and benefits of the Rule; and (3) what changes,
if any, should be made to the Rule to reduce the burdens and costs imposed on the firms
subjected to its requirements. In addition, the Commission sought comment on whether the
Franchise Rule’s disclosures are appropriate for business opportunity sellers, whether there
should be a separate business opportunity trade regulation rule and, if so, the scope of coverage.
In response, the Commission received numerous comments from franchisors, franchisees,
business opportunity sellers, state regulators, trade associations, law firms, and academicians.
The Commission also held two public workshop conferences on the Rule, in which 56
individuals participated in round table discussions on the Rule or otherwise made statements for
the record. All of the comments and the transcripts of the public workshop conferences were
placed on the public record.
Subsequently, the Commission published an Advance Notice of Proposed Rulemaking
(“ANPR”) in the Federal Register, announcing its intention to consider amending the Franchise
Rule. See 62 Fed. Reg. 9,115 (February 28, 1997). In the ANPR, the Commission summarized
the Rule Review record on the continuing need for the Franchise Rule. At the same time, the
Commission proposed promulgating a separate business opportunity rule. The commenters
overwhelmingly expressed support for promulgating a separate business opportunity rule.

4

Through the ANPR, the Commission also sought comment on a number of issues on the
scope of a separate business opportunity rule, including: (1) the proper scope of any business
opportunity sales rule; (2) how to define the term “business opportunity”; and (3) the types of
disclosures that are warranted for business opportunity sales.
In response to the ANPR, the Commission received 167 comments in writing, through email, and through a telephone message line. In addition, the Commission has held six public
workshop conferences throughout the United States, three of which focused exclusively on
business opportunity sales issues. Sixty-four individuals participated in the workshops,
including franchisees and franchisee representatives, franchisors, business opportunity sellers
and representatives, state franchise and business opportunity regulators, and computer
consultants. The workshop conferences generated transcripts totaling 1,548 pages. As with the
responses to the Rule Review, commenters continued to express wide support for separating the
disclosure requirements for franchisors and for business opportunity sellers through the
promulgation of a separate business opportunity rule.
As noted above, the Commission issued an NPR on the Business Opportunity Rule that
published on April 12, 2006. In response to the NPR, the Commission received over 17,000
comments. The comments primarily came from members of the multi-level marketing industry
arguing that the IPBOR would provide few protections for consumers considering joining an
MLM while imposing heavy burdens upon legitimate industry. In addition, the Commission
received comments from trade associations, consumer advocates, other companies, and the
Department of Justice. Although many commenters voiced criticism for the scope of the IPBOR,
they largely supported the goal of protecting consumers from fraudulent schemes.
The RPBOR is narrowly tailored to address fraud by business opportunity sellers. The
RPBOR would not broadly sweep in MLMs or certain other sellers that were inadvertently
included in the Rule and further simplifies sellers’ disclosure obligations.1
9.

Payment or Gift to Respondents
Not applicable.

10.

Assurances of Confidentiality

No assurance of confidentiality is necessary, because the RPBOR would not require
business opportunity sellers to register or file any documents with the Commission. To the
extent that information covered by a recordkeeping requirement is collected by the Commission
for law enforcement purposes, the confidentiality provisions of Sections 6(f) and 21 of the FTC
Act, 15 U.S.C. §§ 46(f), 57b-2, will apply.

1

If the Commission ultimately amends the interim Business Opportunity Rule, FTC staff will seek all
necessary PRA clearances and/or adjustments.

5

11.

Sensitive or Private Information

Under the provisions in the RPBOR, a business opportunity seller would have to disclose
certain purchaser’s names, business addresses and telephone numbers. This information lets
prospective purchasers conduct their own due diligence investigation of the business opportunity
seller’s claims; in particular, earnings claims. No other information about individual purchasers
must be disclosed. For example, sellers who choose to make an earnings claim based upon the
earnings history of current purchasers need not identify in the disclosure document the individual
purchasers whose information formed the basis of the earnings claim, or the earnings of any
individual purchaser.
Further, to ensure that purchasers understand that their contact information may be
disclosed, the RPBOR would require sellers to include in the disclosure document the following
privacy statement: “If you buy a business opportunity from the seller, your contact information
can be disclosed in the future to other buyers.” Armed with such information, a purchaser
concerned about the release of their contact information may elect not to make the purchase.
12.

Hours Burden: 14,000 hours, rounded to the nearest thousand

The currently approved estimates for disclosure and recordkeeping burden under the
Franchise Rule includes 16,750 hours under Part 437 for business opportunity sellers. That was
based on an estimated 2,500 non-exempt business opportunity sellers.2
Based on a review of trade publications and information from state regulatory
authorities, the Commission staff now estimates that there are approximately 3,050 business
opportunity sellers, comprised of some 2,500 vending machine, rack display, and related
opportunity sellers and 550 work-at-home opportunity sellers that would be covered by the
RPBOR.
For the 2,500 vending machine, rack display, and related opportunity sellers currently
covered by the interim Business Opportunity Rule (and, previously, the original Franchise Rule),
the RPBOR would reduce required disclosures from 20 categories of information to five (selleridentifying information, earnings claims, lawsuits, refund policy, and references). For the 550
business opportunity sellers currently exempted from the interim Business Opportunity Rule
(and, previously, the original Franchise Rule), the disclosures, as noted below, are streamlined to
minimize compliance costs.
1. Reduced Mandatory Disclosures
The RPBOR contains five required disclosures: seller-identifying information, earnings
2

See 71 Fed. Reg. 19,054, 19,081 (April 12, 2006); 70 Fed Reg. 51,818, 51,819 (August 31, 2005). As
discussed further in item #15, the hour total reflected strictly year one totals, not an annualizing projected over
a 3-year PRA clearance period.

6

claims, lawsuits, refund policy, and references. The seller must tell the prospective buyer
whether or not it is making any earnings claims; of course, whether it makes such claims is up to
the seller. The disclosures of references and earnings claims largely follow existing
requirements, but the disclosures about lawsuits would be streamlined.
The interim Business Opportunity Rule (and, previously, the original Franchise Rule)
requires an extensive list of suits that must be disclosed including those involving allegations of
fraud, unfair or deceptive business practices, embezzlement, fraudulent conversion,
misappropriation of property, and restraint of trade. Franchise sellers also must disclose suits
filed against them involving the franchise relationship. 16 C.F.R. at § 436.1(a)(4). In contrast,
the RPBOR’s lawsuit disclosure requirements are limited to suits for misrepresentation, fraud,
securities law violations, and unfair or deceptive business practices.
2. Incorporation of existing materials
The RPBOR would also reduce collection and dissemination costs 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 RPBOR redefines the term “written” to include electronic media. Accordingly, all
business opportunities covered by the RPBOR would be permitted to use the Internet and other
electronic media to furnish disclosure documents. Allowing this distribution method could
greatly reduce sellers’ compliance costs over the long run, especially costs associated with
printing and distributing disclosure documents. As a result of this proposal, the Commission
expects sellers’ compliance costs will decrease substantially over time.
4. Use of computerized data collection technology
Finally, because of advances in computerized data collection technology, the
Commission staff anticipates that the costs of collecting information and recordkeeping
requirements imposed by the RPBOR will be minimal. For example, a seller can maintain a
spreadsheet of its purchasers, which can be sorted by location. This would enable a seller to
comply easily with the proposed reference list requirement (at least 10 prior purchasers in the
last three years who are located nearest the prospective purchaser, or, if there are not 10, then all
prior purchasers). In the alternative, the RPBOR would permit a seller to maintain a national list
of purchasers. Such a list could be posted on the seller’s website, for example.
As a result of these proposals, the Commission staff estimates that the 3,050 business
opportunity sellers will require between three and five hours each to develop a Rule-compliant
disclosure document. On the higher end, the staff estimates that for existing businesses that have
7

not previously been covered by the interim Business Opportunity Rule but will be covered by the
RPBOR, such as work-at-home schemes, the time required for making a new disclosure
document is approximately 5 hours. These businesses have experience that they will be required
to disclose, including litigation histories, lists of prior purchasers, and earnings experience of
prior purchasers (if they choose to make earnings claims). On the other hand, businesses that
have been covered by the interim Business Opportunity Rule (and, previously, the original
Franchise Rule) will already have a disclosure document that will solely need updating to meet
the requirements of the RPBOR. The staff estimates that these 2,500 businesses will likely need
only 3 hours to prepare the disclosure statement and perform necessary updating. Therefore, the
hours required to develop a disclosure document in the first year would be 10,250 ((550 x 5
hours) + (2,500 x 3 hours)). In addition, these entities likely will require between one and two
hours per year to file and store records, for a total of 6,100 hours (3,050 x 2 hours).
Staff estimates that in subsequent years, sellers will require no more than approximately
two hours each to update the disclosure document (6,100 hours) and between one and two hours
to file and store records (6,100 hours). Thus, the average cumulative burden for a period of three
years is 14,000 hours [(10,250 hours + 6,100 hours) + 2(6,100 hours + 6,100) ÷3], rounded to the
nearest thousand.
Labor Costs: Labor costs are determined by applying applicable wage rates to associated
burden hours. Staff assumes that an attorney likely would prepare or update the disclosure
document at an estimated hourly rate of $250. FTC staff estimates that the total number of hours
initially to comply with the Rule would be 16,350, at a total cost of $4,087,500 (16,350 x $250).
FTC staff expects that the annual burden will diminish after the first year, however, to
approximately 12,200 hours (3,050 sellers x 4 hours for recordkeeping and disclosure) or fewer,
for a total average of annual legal costs of $3,050,000 (12,200 hours x $250), or less. Thus, the
average cost for a period of three years is $3,396,000 rounded to the nearest thousand
[($4,087,500) + ($3,050,000 x 2) ÷ 3]. Should disclosure or recordkeeping obligations be
performed by clerical staff, the total labor costs would be significantly less.
13.

Estimated Capital and Other Non-Labor Costs: $3,050,000

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. 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 staff anticipates that these costs will be reduced by many business
opportunity sellers electing to furnish disclosures electronically, such as via email or the Internet.

8

14.

Estimate of Cost to Federal Government

Staff estimates that the annualized cost to the Commission (per year over the 3-year
clearance renewal being sought) to administer and enforce the Rule will be approximately
$250,000. This estimate includes attorney, clerical, and other support staff costs.
15.

Changes in Burden

FTC staff estimates that the annual burden for the RPBOR will approximate 14,000
hours, which is a decline from its prior estimate of 16,750 hours for business opportunity
ventures under the interim Business Opportunity Rule (and the original Franchise Rule). The
prior subtotal, though based on a lower population estimate of business opportunity sellers
(2,500 versus the 3,050 now estimated), overstated hours because it did not reflect annualized
hours projected over the three-year PRA clearance sought; rather, it strictly accounted for the
relatively higher burden hours of the initial year of clearance.
16.

Statistical Use of Information
There are no plans to publish any information for statistical use.

17.

Failure to Display of the Expiration Date for OMB Approval
Not applicable.

18.

Exceptions to the Certification for Paperwork Reduction Act Submissions
Not applicable.

9