On April 12, 2006, the Federal Trade Commission (FTC) published a Notice of Proposed Rulemaking for the new business opportunity rule that would affect franchising by more clearly delineating the difference between what constitutes a business opportunity and what constitutes a franchise.

The proposed rule is officially known as Business Opportunity Rule 71 Fed. Reg. 19054 (to be codified at 16 CFR Part 437). Sellers of business opportunities are currently and have in the past been regulated by the FTC's franchise trade regulation rule ("Franchise Rule"), which also regulates sellers of franchises. The FTC has long considered that the same regulation is not the best way to regulate both sellers of franchises and sellers of business opportunities.

The FTC believes that the differences between these two groups (e.g., their differing history of consumer protection problems, sophistication of target purchasers, investment commitments, and complexity of business systems) requires a dedicated regulatory approach for each.

In addition, several types of business opportunities are not covered by the existing business opportunity definition contained in the Franchise Rule. With respect to those business opportunities that are not currently regulated, but which the FTC would cover in the proposed Bus Opp Rule, the FTC has brought 60 enforcement actions against "work-at-home" businesses (such as envelope stuffing and craft assembly programs) since 1990, has received 37,333 consumer complaints against work-at-home businesses from January 1997 through December 2005, and estimates that consumers have lost over $15 million in purchasing fraudulent work-at-home businesses.

The FTC has also brought 20 enforcement actions against "pyramid" schemes since 1990 and received 17,858 consumer complaints during the period January 1997 through December 2005 in which consumers have alleged to have sustained over $46 million in losses.

The Bus Opp Rule thus is designed to create a regulatory scheme to focus on the special characteristics of business opportunities. It would regulate business opportunity sellers who now are covered by the Franchise Rule, as well as sellers of certain business opportunities who are not now covered by the Franchise Rule. Until the Bus Opp Rule is promulgated, these business opportunity sellers currently covered by the Franchise Rule must continue to comply with it.

Under the Bus Opp Rule, the FTC has broadened the Franchise Rule definition of a business opportunity primarily in order to cover work-at-home and pyramid businesses. The definition of business opportunity in the Bus Opp Rule has three elements.

The first is that the seller solicits persons to enter into a new business, and the second is that the purchaser makes any payment or provides any other direct or indirect consideration through a third party (no $500 minimum payment needed).

The third element is more complex. It states that the seller either makes an earnings claim or represents that some type of business assistance will be provided to the purchaser. In the context of this rule, "business assistance" means the offer of material advice, information, or support to a prospective purchaser.

It specifically includes more detailed versions of the Franchise Rule's "providing locations/customer accounts" business opportunity definitional element and the "significant assistance" franchise definitional element.

It also specifically includes purchasing products made, grown, etc. by work-at-home businesses, as well as paying commissions based on the purchaser's product sales or recruitment efforts (pyramid schemes).

The proposed Bus Opp Rule explicitly exempts franchisors who satisfy the definitional elements of a "franchise" under the Franchise Rule, utilize a written contract and require the purchaser to make a payment that meets the Franchise Rule's minimum $500 payment requirement. Thus, the Bus Opp Rule will have no impact on franchisors who comply with the Franchise Rule.

The Bus Opp Rule also would exempt franchisors who rely on certain exemptions from the Franchise Rule, such as the fractional franchise and leased department exemptions. According to FTC staff, franchisors who defer required payments for six months also will be exempt from the Bus Opp Rule.

Some franchisors who currently do not need to comply with the Franchise Rule will be covered under the Bus Opp Rule. These are franchisors who avoid the Franchise Rule because they either avoid the Franchise Rule's "required payment" definitional element by limiting franchisees' payments to purchases at bona fide wholesale prices of reasonable quantities of inventory for resale, or they collect a payment of less than $500.

The FTC also has concluded that prospective business opportunity purchasers do not need as much pre-sale disclosure information as prospective franchise purchasers because, among other things, business opportunity businesses tend to be less complex and require smaller investments, utilize simpler contracts and rely less on the seller's ongoing assistance than franchised businesses.

Business opportunities also typically have fewer financial and management resources available to shoulder the compliance burdens imposed by the Franchise Rule's pre-sale disclosure document. For these reasons, the proposed Bus Opp Rule sharply reduces the amount of pre-sale disclosures required from business opportunity sellers.

The Bus Opp Rule features a one-page disclosure document that limits required disclosures to five categories of information that the FTC believes to be of greatest importance to business opportunity purchasers. The five categories of information are: earnings claims; criminal and civil actions; cancellation and refund policies; a two-year sales, cancellation and refund history; and a list of purchasers.

For the first three categories, the seller either checks the "No" box if no disclosure about the category is needed, or checks the "Yes" box and, in addition, attaches the required information to the disclosure form.

The seller also must list the name, address, and telephone number of all purchasers within the past three years, but it has the option, similar to the Franchise Rule, of limiting the list to the 10 purchasers closest to the prospective purchasers" location. New purchasers must be advised that similar information about them will be included in future disclosure forms.

Disclosure under the Bus Opp Rule must be made at least seven calendar days before the business opportunity purchaser buys the business or pays-directly, indirectly, or through a third party-and money to the seller. Quarterly updates are required for all changes (including the purchaser list); monthly updates are required if fewer than 10 purchasers are listed in the disclosure document. Disclosure may be provided electronically.

Earnings claims disclosures are reasonably similar to the Franchise Rule requirements. The seller may not provide overall industry earnings information unless the seller can demonstrate that its purchasers" results are similar to the industry results.

Finally, the Bus Opp Rule will use the same state preemption standard as the Franchise Rule (e.g., state laws will be preempted only to the extent that the laws conflict with the Bus Opp Rule and provide less protection to purchasers).

However, unlike the Franchise Rule where the UFOC disclosure will suffice for both FTC and state disclosure law purposes, business opportunity sellers under the Bus Opp Rule will need two forms.

The FTC proposes to greatly expand the scope of its business opportunity coverage to include many business opportunity sellers. At the same time, it reflects an interesting trade-off between coverage and compliance.