How To Avoid FTC Biz Op Regulation
How To Avoid FTC Biz Op Regulation
By Chip Cooper, ESQ
Effective on March 1, 2012, the FTC’s new Business Opportunity Rule (New Biz Op Rule) became effective.
The Biz Op Rule applies to a specific type of offer defined as a “Business Opportunity” (Biz Op).
The FTC’s objective with the New Biz Op rule was to make it very tough to make legally compliant Biz Op offers, particularly Biz Op offers that make earnings claims.
Because the New Biz Op Rule imposes numerous, detailed requirements, Internet marketers and online entrepreneurs should not offer Biz Ops. Even with careful attention to all the requirements, it would still be relatively easy to inadvertently cross the line into non-compliance, and therefor huge exposure to liability. In a nutshell, offering Biz Ops is a very high risk activity that should be avoided altogether.
Biz Op Defined
The New Biz Op Rule stipulates three elements that must be satisfied for an offer to be a Biz OP.
- Solicitation For New Business Opportunity – a seller solicits a prospective purchaser to enter into a “new business” (i.e. a new line or type of business that the prospect is not currently engaged in);
- “Required Payment” By Prospect – the prospect makes a payment, meaning all consideration paid by the prospect to the seller or an affiliate for the right to obtain or commence the operation of the business opportunity;
- Business Assistance – the seller (or someone recommended by the seller) provides any of the following types of assistance:
- Locations for the use or operation of equipment or other devices paid for by the prospect;
- Outlets, accounts, or customers; or
- Buy back promises for goods or services provided by the prospect.
How To Avoid Biz Op Regulation
The way to avoid regulation as a Biz Op is to not satisfy one of the three elements of a Biz Op under the New Biz Op Rule. Remember, all three elements must be satisfied for a Biz Op to exist, so if you satisfy any two elements, but not three, you’ve avoided Biz Op regulation.
So, one way to avoid Biz Op regulation is to offer only educational and training services, and not offer a “new business”. The FTC stated specifically that “general business advice and training” services are not included in the Biz OP definition. However, some of the typical offers by Internet marketers and online marketers may come close
to crossing over from education and training to operation of a “new business”.
However, if you analyze the three Biz Op elements, elements 1 and 2 may be satisfied by some offers typically made by Internet marketers and online entrepreneurs. With many offers there are “grey areas” with elements 1 and 2, where there’s no way to determine with confidence whether you’ve satisfied the element or not.
- For example, the “new business” requirement of Element 1 does not mean a person who has never been in business. The “new business” could be satisfied by an offer to an experienced business person if the offer presents a new line of business to the prospect. Sellers generally have no way of knowing the present business status of prospects.
- Another example: The “required payment” requirement of Element 2 may be satisfied by indirect payments through a third party. Even if you split a product into a free part and paid part, you’ll still satisfy the “required payment” requirement if the paid part is a “practical necessity” for obtaining or operating the business opportunity.
So, due to the relative uncertainty regarding elements 1 and 2, the recommended approach is to focus on not satisfying element 3, thereby avoiding Biz Op regulation.
Avoiding Element 3
Element 3 should be your primary focus in avoiding Biz Op regulation.
The key is to avoid providing business assistance by not offering to provide locations (this applies primarily to offline businesses), outlets, accounts, customers, or buy back promises.
Remember, providing “general business advice and training” services is OK, but the prospect must be solely responsible for finding his/her own customers or other ways to monetize the purchase.
Offering Biz Ops is a very high risk activity that should be avoided altogether.
To avoid Biz Op regulation with confidence, understand the definition of Biz Op under the New Biz Op Rule, and be sure that you’ve not satisfied at least one of its three elements.
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Disclaimer: This article is provided for informational purposes only. It’s not legal advice, and no attorney-client relationship is created. Neither the author nor FTC Guardian, Inc. is endorsed by the Federal Trade Commission.