The term “business opportunity” is sometimes used in a generic sense to mean a variety of things related to purchasing and/or starting a business. Much like a “franchise,” however, a “business opportunity” (or “Biz Op”) has specific meaning under state and federal law. This blog is the first in a series of short articles discussing business opportunities. This part is dedicated to defining a business opportunity, an important threshold issue in determining whether the particular business is subject to regulation.
Since the term “franchise” is familiar to most people, it may be helpful to understand what a business opportunity is in terms of how it is different from a franchise. Purchasers of a franchise (franchisees) sell goods or services that are associated with the franchisor’s trademark, and the franchisee is subject to significant control by, or receives significant assistance from, the franchisor. By contrast, purchasers of business opportunities do not operate under the seller’s trademark, and the biz op purchaser has substantially more flexibility to run the business as he or she sees fit. Where the franchise typically becomes part of a “system,” the biz op purchaser is typically given the tools to operate his own business and then does so with a greater degree of freedom. For further discussion on how a biz op platform can be used to grow your business, see the next blog in this series.
While this is a general definition of a business opportunity, the definition as prescribed by law is more particular and varies somewhat from state to state. Nonetheless, it is essential to understand whether an enterprise qualifies as a business opportunity as defined by relevant law, because, if it does, the seller of the business opportunity must then comply with certain disclosure and registration requirements. Like securities laws, this is the ultimate purpose of business opportunity and franchise law – to promote transparency and accountability on the part of the seller and to give prospective purchasers enough information to make educated investment decisions. With that in mind, let’s take a loot at the specific definition of business opportunity under federal and state law.
Under the Federal Trade Commission (FTC) Trade Regulation Rules, 16 CFR § 437 et seq., a business opportunity is defined as a commercial arrangement in which a seller solicits a prospective purchaser to enter into a new business in exchange for a required payment, where the seller represents one of the following: (i) that the seller will provide locations at which the purchaser may operate vending machines or similar devices, (ii) that the seller will provide outlets, accounts, or customers for the purchaser’s goods or services (which includes providing sales leads for purchasers or recommending a source for sales leads), OR (iii) that the seller will buy back goods or services made by the purchaser. Vending machine or display routes, envelope stuffing or craft-building enterprises, and other opportunities that promise refund or buy-back are the traditional concerns of business opportunity law because these are some of the original business opportunities and those which have been the subject of the most abuse and deception.
Twenty-eight states have laws regarding business opportunities. The definition of a business opportunity varies on a state-by-state basis. Many states define business opportunities as the sale of products or services to a purchaser for a payment of $500 or more that enable the purchaser to start a business in which the seller represents one of the following: that the seller will provide locations for vending machines (mirroring federal law), that the seller will buy back products made by the purchaser (also mirroring federal law), that the seller guarantees that the purchaser will derive income from the opportunity that exceeds the price paid for the opportunity, or that the seller provides a marketing plan.
As you can see, while some state definitions of a business opportunity mirror those of federal law, some are more encompassing. For example, simply by offering a “marketing plan” along with the business, a seller may be providing a biz op. A marketing plan often is broadly defined, and includes a situation in which the seller provides know-how to help the purchaser get the business up and running. Suddenly, the representations made by the seller are of critical importance. While it is surely a compelling sales pitch to guarantee that purchasers of a business opportunity will make a certain amount of money, or at least make enough to cover the purchase price, doing so may cause the seller to be a biz op as defined by relevant state law, triggering duties of registration and disclosure. What’s more, certain marketing representations can trigger a seller’s duty to obtain a bond to protect purchasers, which is costly and time-consuming. If the seller does not comply with disclosure and registration requirements (explored further in a future blog), there can be serious consequences, including misdemeanor charges, right to full refund, and perhaps most damaging, a ban from selling in that state in the future (penalties will be explored further in a future blog).
To avoid the consequences of non-compliance, it is critical to identify the states in which compliance is required before selling in those states. For my clients, I suggest creating a roll-out plan. I highly recommend this practice. The offering will most likely be on the Internet, and it is tempting for the seller to begin expanding as quickly as interest develops and the market will bear, but doing so is certain to run afoul of state law. Picture a map of the United States where all the states are red. When a state turns green, you can begin selling there. The roll-out plan determines the order in which states will turn from red to green, and ensures that compliance always precedes sales. If you are considering growing your business by leveraging your knowledge, concept, or name, contact the business opportunity and franchise attorneys at Briskin, Cross & Sanford to learn more.