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ArcaMax

Are You Selling Business Opportunities Without Knowing It?

Cliff Ennico on

"I have a small manufacturing business in the Midwest.

"For years, I have hired individuals to act as distributors for my products throughout the United States, similar to what the Avon cosmetics people do. They have assigned territories and cannot solicit business in a territory outside their own, but they can accept orders from anywhere.

"I train these people on how to sell my products, and I provide them with business cards that say they are 'authorized distributors' of my business, but there's no exclusive relationship -- they can represent any other products they want. I do not charge an upfront fee for a sales territory, the way franchises do, but I do impose minimum sales quotas on the distributors each month if they want to keep their territories.

"My attorney recently expressed concern that what I've been doing all these years may be viewed as a 'business opportunity.' Now, I know a little bit about those, and they're usually raise-chinchillas-at-home-for-fun-and-profit programs that advertise in the back of comic books or through spam emails. I'm a thoroughly legitimate operation. Should I be concerned about this?"

The short answer is maybe.

First, you need to check out the Federal Trade Commission Business Opportunity Rule on the FTC website. Under this rule, which has been around since the 1970s, companies that sell business opportunities to consumers are required to provide them with a disclosure document containing very specific information about the opportunity and how it performs.

 

Like franchises, there is no requirement for business opportunities to register with the FTC before they sell. A number of states, however (including Connecticut and Florida), require business opportunities to file copies of their disclosure documents with a state agency (usually the state banking regulator) before they offer their program to state residents. For a list of states that regulate business opportunities, see https://www.franchiselawsolutions.com/faqs/business-transaction-faqs/business-opportunity-laws/ (there's also an excellent article by my good friend and franchise attorney Tom Pitegoff at https://www.lexology.com/library/detail.aspx?g=6ab54f7d-8693-4ae1-a3f0-a1b977f877c2)

Until a few years ago, the FTC rule had only a limited impact on the world of business opportunities, focusing on businesses that give rise to the most fraud claims, such as vending machine programs (in which consumers buy vending machines and their contents and place them in local retail stores, splitting the proceeds with the store owner). Then, in 2012, the rule was broadened to include business opportunities where the seller promises to buy back goods or services from the consumer, such as through payment for services like stuffing envelopes from the purchaser's home.

Under the rule, a business opportunity is defined as a commercial arrangement in which:

-- A seller solicits a prospective purchaser to enter into a new business.

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