Likely changes ahead for the FTC's Business Opportunity Rule

This year, the FTC is beginning its periodic 10-year review of the FTC Business Opportunity Rule that was established in 2011, and changes may be to come in 2022.

The FTC’s Business Opportunity Rule requires sellers of small business opportunities to provide certain written disclosures regarding earning opportunities, references, legal actions, and refund policies at least seven days before any contract for such a business opportunity is signed. The FTC requires the submission of a one-page form along with additional disclosures as necessary. This rule is separate from the FTC's franchise rule, other franchise regulations, or state business opportunity rules; franchises are normally exempted from the rule unless i) the “buy-in” for the franchise is less than $500 in the first six months of the business, or ii) there is no written document describing any material term of the franchise relationship.

Notably, businesses that may sometimes be confused with franchises, including multi-level marketing (“MLM”) companies and programs and companies that use “gig” workers (such as rideshare companies), are not explicitly covered by this rule.  However, this may change in the next year. MLM companies have proliferated in the last decade and received substantial (positive and negative) media attention. Further, the number of businesses that use gig workers has greatly increased, and this trend is likely to continue in a post-COVID, more flexible work environment.

Former FTC Commissioner Rohit Chopra noted in a statement that that the business opportunity rule was originally intended “to ensure that would-be entrepreneurs are not cheated through deceptive earnings claims and other forms of fraud, and it allows the Commission to seek civil penalties, damages, and other relief against violators.”[1] Per former Commissioner Chopra, the failure to specifically include MLMs – the exact type of businesses that often may often require a “small” initial buy-in or may have unrealistic earning claims – has caused many businesses to go unchecked for the last decade. While Commissioner Chopra no longer serves with the FTC, it is likely that the revised Business Opportunity Rule may address MLMs in some capacity. Other changes may include aligning the FTC’s business opportunity rule more closely with state business opportunity rules; right now, the rule is simply in addition to these state rules.

The FTC rule review process includes publishing notices of proposed rulemaking, soliciting public comments, reviewing responses, and potentially holding hearings regarding responses. Although the process is just beginning at the FTC, businesses who may sell small business opportunities to individuals should be on the lookout for changes to the Business Opportunity Rule coming the near future.