Business Opportunity Rule, 19054-19096 [06-3395]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 71, Number 70 (Wednesday, April 12, 2006)]
[Proposed Rules]
[Pages 19054-19096]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-3395]



[[Page 19053]]

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Part IV





Federal Trade Commission





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16 CFR Part 437



Business Opportunity Rule; Notice of Proposed Rulemaking

Federal Register / Vol. 71, No. 70 / Wednesday, April 12, 2006 / 
Proposed Rules

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FEDERAL TRADE COMMISSION

16 CFR Part 437


Business Opportunity Rule

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Trade Commission (the ``Commission'' or ``FTC'') 
is commencing a rulemaking to promulgate a trade regulation rule 
entitled ``The Business Opportunity Rule'' (or ``the Rule''), based 
upon the comments received in response to an Advance Notice of Proposed 
Rulemaking (``ANPR'') and other information discussed in this notice. 
The proposed Business Opportunity Rule would prohibit business 
opportunity sellers from failing to furnish prospective purchasers with 
material information needed to combat fraud and would prohibit other 
acts or practices that are unfair or deceptive within the meaning of 
section 5 of the Federal Trade Commission Act (``FTC Act'').

DATES: Written comments must be received on or before June 16, 2006. 
Rebuttal comments must be received on or before July 7, 2006.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Business Opportunity Rule, R511993'' to 
facilitate the organization of comments. A comment filed in paper form 
should include this reference both in the text and on the envelope, and 
should be mailed or delivered, with two complete copies, to the 
following address: Federal Trade Commission/Office of the Secretary, 
Room H-135 (Annex W), 600 Pennsylvania Avenue, NW., Washington, DC 
20580. The FTC is requesting that any comment filed in paper form be 
sent by courier or overnight service, if possible, because U.S. postal 
mail in the Washington area and at the Commission is subject to delay 
due to heightened security precautions. Moreover, because paper mail in 
the Washington area and at the Agency is subject to delay, please 
consider submitting your comments in electronic form, as prescribed 
below. Comments containing confidential material, however, must be 
filed in paper form, must be clearly labeled ``Confidential,'' and must 
comply with Commission Rule 4.9(c).\1\
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    Comments filed in electronic form should be submitted by clicking 
on the following weblink: https://secure.commentworks.com/ftc-bizopNPR/ and following the instructions on the web-based form. To ensure that 
the Commission considers an electronic comment, you must file it on the 
web-based form at the https://secure.commentworks.com/ftc-bizopNPR/ weblink. If this notice appears at https://www.regulations.gov, you may 
also file an electronic comment through that Web site. The Commission 
will consider all comments that regulations.gov forwards to it. You may 
also visit the FTC Web site at https://www.ftc.gov/opa/2006/04/
newbizopprule.htm to read the Notice of Proposed Rulemaking and the 
news release describing this proposed Rule.
    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at https://www.ftc.gov/os/publiccomments.htm. As a matter 
of discretion, the FTC makes every effort to remove home contact 
information for individuals from the public comments it receives before 
placing those comments on the FTC Web site. More information, including 
routine uses permitted by the Privacy Act, may be found in the FTC's 
privacy policy, at https://www.ftc.gov/ftc/privacy.htm.
    Comments on any proposed filing, recordkeeping, or disclosure 
requirements that are subject to paperwork burden review under the 
Paperwork Reduction Act should additionally be submitted to: Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Attention: Desk Officer for the Federal Trade Commission. Comments 
should be submitted via facsimile to (202) 395-6974 because U.S. Postal 
Mail is subject to lengthy delays due to heightened security 
precautions.

FOR FURTHER INFORMATION CONTACT: Steven Toporoff (202) 326-3135, or 
Craig Tregillus (202) 326-2970, Division of Marketing Practices, Room 
238, Bureau of Consumer Protection, Federal Trade Commission, 600 
Pennsylvania Avenue, NW., Washington, DC 20580.

SUPPLEMENTARY INFORMATION: The Commission invites interested parties to 
submit data, views, and arguments on the proposed Business Opportunity 
Rule and, specifically, on the questions set forth in Section K of this 
notice. The comment period will remain open until June 16, 2006. To the 
extent practicable, all comments will be available on the public record 
and placed on the Commission's Web site: https://www.ftc.gov/os/
publiccomments.htm. After the close of the comment period, the record 
will remain open until July 7, 2006, for rebuttal comments. If 
necessary, the Commission also will hold hearings with cross-
examination and post-hearing rebuttal submissions, as specified in 
section 18(c) of the FTC Act, 15 U.S.C. 57a(c). Parties who request a 
hearing must file a comment in response to this notice and a statement 
explaining why they believe a hearing is warranted, how they would 
participate in a hearing, and a summary of their expected testimony, on 
or before June 16, 2006. Parties testifying at a hearing may be subject 
to cross-examination. For cross-examination or rebuttal to be 
permitted, interested parties must also file a comment and request to 
cross-examine or rebut a witness, designating specific facts in dispute 
and a summary of their expected testimony, on or before July 7, 2006. 
In lieu of a hearing, the Commission will also consider requests to 
hold one or more informal public workshop conferences to discuss the 
issues raised in this notice and comments.

Section A. Background

    The Commission is publishing this Notice of Proposed Rulemaking 
(``NPR'') pursuant to section 18 of the FTC Act, 15 U.S.C. 57a et seq., 
and part 1, subpart B, of the Commission's Rules of Practice. 16 CFR 
1.7, and 5 U.S.C. 551 et seq. This authority permits the Commission to 
promulgate, modify, and repeal trade regulation rules that define with 
specificity acts or practices that are unfair or deceptive in or 
affecting commerce within the meaning of section (5)(a)(1) of the FTC 
Act. 15 U.S.C. 45(a)(1).

1. FTC Regulation of Franchising and Business Opportunity Ventures

    In the 1970s, the Commission promulgated a trade regulation rule 
entitled ``Disclosure Requirements and Prohibitions Concerning 
Franchising and Business Opportunity Ventures' (the ``Franchise Rule'') 
to address deceptive and unfair practices in the sale of franchises and 
business

[[Page 19055]]

opportunity ventures.\2\ Based upon the original rulemaking record, the 
Commission found that franchise and business opportunity fraud was 
widespread, causing serious economic harm to consumers. To prevent 
fraudulent practices in the sale of franchises and business 
opportunities, the Commission adopted a pre-sale disclosure rule.
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    \2\ 16 CFR part 436. See also Statement of Basis and Purpose 
(``SBP''), 43 FR 59614 (Dec. 21, 1978).
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    The Franchise Rule does not purport to regulate the substantive 
terms of a franchise or business opportunity contract. Rather, it is 
designed to prevent fraud by prohibiting sellers from failing to 
disclose material information to prospective buyers. The Franchise Rule 
is posited on the notion that a fully informed consumer can determine 
whether a particular offering is in his or her best interest.
    The Franchise Rule requires extensive disclosures, including 
information about the seller; \3\ the business background of its 
principals and their litigation and bankruptcy histories; \4\ the terms 
and conditions of the offer; \5\ statistical analyses of existing 
franchised and company-owned outlets; \6\ prior purchasers, including 
the names and addresses of at least 10 purchasers nearest the 
prospective buyer; \7\ and audited financial statements.\8\ Additional 
disclosure and substantiation provisions apply if the seller chooses to 
make any financial performance representations.\9\
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    \3\ 16 CFR at 436.1(a)(1) and (3).
    \4\ 16 CFR at 436.1(a)(2)-(5).
    \5\ 16 CFR at 436.1(a)(7)-(15) and (17)-(18).
    \6\ 16 CFR at 436.1(a)(16).
    \7\ 16 CFR at 436.1(a)(16).
    \8\ 16 CFR at 436.1(a)(20).
    \9\ 16 CFR at 436.1(b)-(c) and (e).
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    The Commission recognized that requiring these extensive 
disclosures would likely impose significant compliance costs on covered 
businesses. It therefore sought to strike the proper balance between 
prospective purchasers' need for pre-sale disclosure and the burden 
imposed on those selling business arrangements. As a result of this 
balancing, the Commission limited the scope of the Franchise Rule's 
coverage in three significant ways.
    First, the Franchise Rule covers only those opportunities that 
require a buyer to make a payment of at least $500 within the first six 
months of operation.\10\ In transactions where a prospective purchaser 
may incur high financial losses if the seller withholds material 
information, the benefit for purchasers of the Rule's pre-sale 
disclosure requirements outweighs the cost to sellers of making those 
disclosures. By contrast, when the required investment to purchase a 
business opportunity is comparatively small, prospective purchasers 
face a relatively small financial risk. In such circumstances, 
compliance costs may outweigh the benefits of pre-sale disclosure. 
Therefore, the Franchise Rule does not reach opportunities that charge 
lower fees.\11\
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    \10\ 16 CFR at 436.2(a)(2) and (a)(3)(iii). In the SBP, the 
Commission noted that ``[w]here a franchisee makes no significant 
investment in the franchise business, he assumes only a limited 
risk, and the protection of the rule is inappropriate.'' 43 FR at 
59704. See also Final Interpretive Guides (``Interpretive Guides'') 
accompanying the Franchise Rule: ``The Commission's policy 
determination [is that] a significant financial investment is a 
necessary element of a franchise.'' Interpretive Guides, 44 FR 
49966, 49968 (August 24, 1978).
    \11\ Nevertheless, deceptive and unfair conduct by a business 
opportunity seller falling below the Franchise Rule's $500 threshold 
may constitute a violation of section 5 of the FTC Act. E.g., FTC v. 
Med. Billers Network, Inc., No. 05 CIV 2014 (RJH) (S.D.N.Y. 2005) 
($200-295 fee); FTC v. Kamaco Int'l, No. CV 02-04566 LGB (RNBx) 
(C.D. Cal. 2002) ($42 fee); FTC v. Healthcare Claims Network, No. 
2:02-CV-4569 MMM (AMWx) (C.D. Cal. 2002) ($485 fee); FTC v. 
Stuffingforcash.com, Corp., No. 92 C 5022 (N.D. Ill. 2002) ($45 
fee); FTC v. Medicor LLC, No. CV01-1896 (CBM) (C.D. Cal. 2001) ($375 
fee); FTC v. SkyBiz.com, No. 01-CV-0396-EA (X) (N.D. Okla. 2001) 
($125 fee).
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    Second, the ``inventory exemption'' excludes certain types of 
payments from the Rule's $500 minimum cost threshold. The ``inventory 
exemption'' is the franchise industry's shorthand term for the 
Commission's determination that, as a matter of policy, voluntary 
purchases of reasonable amounts of inventory at bona fide wholesale 
prices for resale do not count toward the required threshold 
payment.\12\ An important consequence of this policy determination is 
to eliminate from Franchise Rule coverage many pyramid marketing plans 
because the participants in such plans typically do not make a required 
payment of or exceeding $500, but instead make voluntary purchases of 
inventory in reasonable amounts and at bona fide wholesale prices for 
resale.\13\
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    \12\ Interpretive Guides, 44 FR at 49967.
    \13\ E.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL (AJWx) 
(C.D. Cal. 2002); FTC v. Equinox, Int'l, No. CV-S-99-0969-JBR-RLJ 
(D. Nev. 1999).
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    Third, the Commission focused the Franchise Rule on the types of 
business opportunities that the record showed were likely to result in 
significant purchaser injury. The record showed that vending machines, 
rack displays, and similar opportunities frequently were sold through 
deception. A feature common to these types of schemes is the promise of 
assistance in securing locations or accounts.\14\ Thus, the Commission 
incorporated this characteristic into the Rule's definitional elements 
to ensure coverage of demonstrably injurious schemes. Other forms of 
assistance that business opportunity sellers frequently offer--such as 
training \15\ and the buy-back and resale of goods assembled by the 
purchaser (an element of many craft assembly opportunities) \16\--do 
not bring a business opportunity within the scope of the Franchise 
Rule's coverage.
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    \14\ 16 CFR at 436.2(a)(1)(ii)(B)(1)-(3).
    \15\ E.g., FTC v. Academic Guidance Serv., Inc., No. 92-3001 
(AET) (D. N.J. 1992).
    \16\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. USS Elder Enter. Inc., No. SACV-04-1039 AHS (ANx) 
(C.D. Cal. 2004); FTC v. Holiday Magic, No. C 93-4038 VRW (N.D. Cal. 
1994).
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    In addition to these limits on the scope of the Franchise Rule's 
coverage--driven by balancing prospective purchasers' need for pre-sale 
disclosure against the burden imposed on business opportunity sellers--
another aspect of the Rule's language further limits the Rule's scope 
of coverage. Specifically, the Rule provides that a business 
opportunity is covered only if the purchaser of the opportunity sells 
goods or services directly to end-users other than the business 
opportunity seller.\17\ The effect of this limitation is to exclude 
most work-at-home opportunities--such as envelope stuffing and craft 
assembly ventures--from Franchise Rule coverage. In those 
opportunities, the purchaser typically works directly for the seller or 
produces various goods for the seller, who then purportedly distributes 
them to end-users.\18\
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    \17\ 16 CFR at 436.2(a)(1)(ii)(A)(1)-(3).
    \18\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. Sun Ray Trading, Inc., No. 05-20402 CIV-Seitz/Bandstra 
(S.D. Fla. 2005).
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    The proposed Business Opportunity Rule calls for streamlined 
disclosures that, compared to the Franchise Rule, substantially reduce 
the compliance burden. Therefore, the kinds of limits written into the 
Franchise Rule are not necessary to achieve an appropriate balance 
between prospective purchasers' need for pre-sale disclosure and the 
burden imposed on business opportunity sellers. Accordingly, the 
proposed Rule has no minimum cost threshold, no inventory exemption, 
and no limit on scope based on the type of assistance promised as part 
of the offer. Nor is the coverage of the proposed Rule limited to 
transactions where the purchaser of the opportunity sells goods or 
services directly to end-users other than the business opportunity 
seller. In short, the scope of coverage of the proposed Rule is much 
broader than

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that of the Franchise Rule, while the compliance burden is much 
lighter.

2. Franchise Rule Review

    In 1995, the Commission conducted a regulatory review of the 
Franchise Rule to ensure that it continues to serve a useful 
purpose.\19\ One issue that the Commission explored in that proceeding 
was the application of the Franchise Rule to the sale of business 
opportunities. Specifically, the Commission noted that although the 
Franchise Rule applied to certain business opportunities, it lacked a 
clear definition of the term ``business opportunity.'' Accordingly, the 
Commission solicited comment on an appropriate definition.\20\ In 
addition, the Commission asked whether such a definition should include 
business opportunities not covered by the Franchise Rule, such as 
``multilevel marketing, seller assisted market plans, work-at-home 
plans, and certain distributorships and licenses.'' \21\
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    \19\ Rule Review, 60 FR 17656 (April 7, 1995). References to the 
Rule Review comments are cited as: The name of the commenter, RR 
comment number (e.g., NASAA, RR 43). References to the Rule Review 
workshop conferences are cited as: Name of commenter, Sept95 Tr or 
March96 Tr, respectively (e.g., D'Imperio, Sept95 Tr, and Ainsely, 
March96 Tr). A list of the Rule Review commenters and the 
abbreviations used to identify each is attached as Attachment A.
    \20\ Rule Review, 60 FR at 17656-658 (Question 13).
    \21\ Rule Review, 60 FR at 17658 (Question 13b).
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    The Commission also inquired whether the Franchise Rule's extensive 
disclosure requirements are well-suited to business opportunity sales 
and whether the Franchise Rule imposes unnecessary compliance costs on 
both business opportunity sellers and buyers. For example, certain 
Franchise Rule disclosures--such as site selection and approval and 
public figure involvement--arguably are more likely to be important to 
franchise investors than business opportunity purchasers. To ensure 
that the required disclosures protect prospective business opportunity 
purchasers, while minimizing overall compliance costs, the Commission 
solicited comment on whether any of the Rule's disclosures should be 
eliminated because they are unnecessary in the business opportunity 
context and if any additional material disclosures should be 
required.\22\
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    \22\ Rule Review, 60 FR at 17658 (Question 14).
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    At the conclusion of the Rule Review, the Commission determined to 
retain the Franchise Rule with modifications designed to harmonize it 
better with state franchise regulations. At the same time, the 
Commission determined to seek additional comment on whether to address 
the sale of business opportunities through a separate, narrowly 
tailored new trade regulation rule. To that end, it published an 
Advance Notice of Proposed Rulemaking, as described in the next 
section.
3. Advance Notice of Proposed Rulemaking
    In 1997, the Commission published an Advance Notice of Proposed 
Rulemaking (``ANPR'') in the Federal Register,\23\ seeking further 
comment on several proposed Franchise Rule modifications, including the 
separation of disclosure requirements for sales of business 
opportunities from those for sales of franchises. The Commission also 
sought comment on the proper scope of the term ``business 
opportunity,'' \24\ the types of business opportunities that are known 
to engage in deceptive or fraudulent conduct,\25\ and the types of 
disclosures that are material to business opportunity purchasers.\26\ 
In addition to soliciting written comments, the Commission staff held 
three public workshops specifically addressing business opportunity 
sales issues. These were held in Chicago, Dallas, and Washington, DC. 
The workshop participants included: Business opportunity promoters; the 
Direct Sellers Association (``DSA''); several of DSA's multilevel 
marketer members (e.g., Amway, Longaberger Company, Pampered Chef); 
several attorneys who represent business opportunity promoters; state 
regulators; and several franchise and distribution law attorneys.
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    \23\ ANPR, 62 FR 9115 (Feb. 28, 1997). References to the ANPR 
comments are cited as: The name of the commenter, ANPR, comment 
number (e.g., NASAA, ANPR 120). References to the ANPR workshop 
conferences are cited as: Name of commenter, ANPR, date Tr (e.g., 
Bundy, ANPR, 6Nov97 Tr). A list of the ANPR commenters and the 
abbreviations used to identify each is attached as Attachment B.
    \24\ ANPR, 62 FR at 9116-117 and 9121 (Question 12).
    \25\ ANPR, 62 FR at 9121 (Questions 8-10).
    \26\ ANPR, 62 FR at 9121 (Questions 15-16).
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4. Franchise Rule Notice of Proposed Rulemaking

    After assessing the comments received in response to the ANPR, the 
Commission decided to amend the Franchise Rule and, to that end, 
published a Franchise Rule Notice of Proposed Rulemaking (``Franchise 
Rule NPR''), soliciting comment on proposed revisions to the Franchise 
Rule.\27\ At the same time, the Commission announced its intention to 
conduct a separate rulemaking to address business opportunity 
sales.\28\ Agreeing with the overwhelming view of the commenters who 
discussed this issue during the Rule Review and in response to the 
ANPR, the Commission found that franchises and business opportunities 
are distinct business arrangements that require separate disclosure 
approaches. Without proposing any specific Business Opportunity Rule 
provisions at that time, the Commission noted that:
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    \27\ Franchise Rule NPR, 64 FR 57294 (October 22, 1999). 
References to the comments responding to the Franchise Rule NPR are 
cited as: Name of commenter, FR-NPR, commenter number (e.g., IFA, 
FR-NPR 22). A list of the FR-NPR commenters and the abbreviations 
used to identify each is attached as Attachment C.
    \28\ Franchise Rule NPR, 64 FR at 57296.

[M]any of the [Franchise] Rule's pre-sale disclosures, in particular 
those pertaining to the parties' detailed relationship, do not apply 
to the sale of most business opportunities, which typically involve 
fairly simple contracts or purchase agreements. The Rule's detailed 
disclosure obligations may also create barriers to entry for 
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legitimate business opportunity sellers.

Franchise Rule NPR, 64 FR at 57296.

Section B. Need for a Separate Business Opportunity Rule

    Based upon its enforcement experience and the record developed to 
date, the Commission has determined to promulgate a separate trade 
regulation rule to address widespread fraud in the sale of business 
opportunities. This approach is consistent with the view of the vast 
majority of commenters and the regulatory approaches adopted in most 
states.
    Rule Review and ANPR commenters and participants overwhelmingly 
urged the Commission to promulgate a separate business opportunity 
rule.\29\ As an initial matter, several commenters observed that 
business opportunities and franchises are distinct business 
arrangements that pose very different regulatory challenges. For 
example,

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franchises typically are expensive and involve complex contractual 
licensing relationships, while business opportunity sales are often 
less costly, involving simple purchase agreements that pose less of a 
financial risk for purchasers.\30\ Also, in contrast to franchises, 
many business opportunity programs have no continuing relationship 
between the buyer and seller, but are a one time purchase of packaged 
information.\31\
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    \29\ E.g., Muncie, ANPR 15, at 2; Baer, ANPR 25; H&H, ANPR 28, 
at 6; Kaufmann, ANPR 33, at 6; DSA, ANPR 34, at 1; IL AG, ANPR 77, 
at 3; IFA, ANPR 82, at 2; Caffey, ANPR 94, at 1-2; Jeffers, ANPR 
116, at 2; NASAA, ANPR 120, at 4; Selden, ANPR 133, at 2; Cendant, 
ANPR 140; Wieczorek, RR 23, at 2-3; CA BLS, RR 45, at 5-6; Forte 
Hotels, RR 52, at 2. See also Harrington, Sept95 Tr at 285 (noting 
complete consensus among public workshop participants for a separate 
business opportunity rule). But see NCL, ANPR 35 (``While there may 
be clear distinctions with those involved in the trade for 
franchises and business opportunities, the consumers who contact the 
NFIC are unaware of the differences. Moreover, a review of the NFIC 
complaints received in 1996 reveals that more involve business 
opportunities than franchises. This indicates that the same pre-sale 
disclosures are needed for business opportunities as for 
franchises.''); Cory, ANPR 12; McBirney, RR 7, at 2; Perry RR 44, at 
3 (arguing that the Commission should create a level playing field 
between all income generating opportunities, subjecting each to the 
same disclosure approach).
    \30\ E.g., IFA, FR-NPR 22, at 4; NASAA, ANPR 120, at 2-3; DSA, 
RR 21, at 3-4; Wieczorek, RR 23, at 2-3; D'Imperio, Sept95 Tr at 
130; Kezios, Sept95 Tr at 365, 631.
    \31\ Caffey, ANPR 94, at 2.
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    Further, unlike most franchises, many business opportunities are 
permeated with fraud.\32\ Perhaps one business opportunity and 
franchise consultant said it best when she described many business 
opportunity sellers as:
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    \32\ E.g., Baer, ANPR 25, at 5; Wieczorek, 21Aug97 Tr at 35; 
DSA, id.; Finnigan, id. at 90; Kestenbaum, RR 14, at 3-4; Wieczorek, 
RR 23, at 2-3; Lewis, RR 40, Attachment at 3; CA BLS, RR 45, at 5-6; 
D'Imperio, Sept95 Tr at 130; Kezios, id. at 365, 631.

Individuals who go from one business opportunity to the next, 
violating laws, committing frauds, taking funds without delivering 
what was promised only to shut down the operation within a year and 
move on to another one with new officers, new company names, and new 
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products.

Chistopher, ANPR 115, at 1.\33\
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    \33\ At the Washington, DC public workshop conference, a 
business opportunity seller described an informal survey of business 
opportunity advertisements in the Boston Globe. He stated that in 
February 1997, he observed advertisements for 23 business 
opportunity ventures. When he attempted to call the advertised 
numbers the following August, he found ``20 of them were 
disconnected, meaning they shut down, left one to a thousand people 
with no customer support, no parts for machines, no parts 
whatsoever.'' M. Garceau, 20Nov97 Tr at 28-29.
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    Other commenters observed that business opportunity sellers take 
advantage of the Franchise Rule's narrow focus to avoid disclosure 
obligations.\34\ Other commenters asserted that business opportunity 
sellers do not comply with the Franchise Rule because compliance costs 
are too high.\35\ For example, attorney Kat Tidd explained:
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    \34\ Kestenbaum, RR 14, at 3-4 (``Too many companies are trying 
to avoid the disclosure requirements of the Rule by sidestepping the 
franchise definition and taking a position that what they do is not 
defined under the FTC Rule.''). See also Caffey, 20Nov97 Tr at 24 
(``I think one of the drawbacks of the existing Rule is it is very 
narrowly defined. Under the existing Rule * * * if the seller is not 
locating vending machines or providing assistance for locations, the 
seller is virtually not covered by the Rule.''); Lewis, Sept95 Tr at 
283 (observing that the narrow definition of business opportunity 
enables business opportunity sellers to conclude that they ``are not 
part of it; it's very easy to say I'm not a franchise and I'm not a 
bis op [sic].'').
    \35\ CA BLS suggested that business opportunity sellers will go 
so far as to change their program to avoid falling within the 
Franchise Rule's definition of a business opportunity, resulting in 
reduced protection for prospective purchasers:
    [I]f the only reason that a seller's program is falling within 
the definition of the Rule is that it provides personnel who assist 
the purchaser in securing sites, it may withdraw this service. In 
some instances, companies have eliminated independent owner programs 
altogether rather than attempting to comply with the Rule and the 
``patchwork quilt'' of multiple and diverse state regulations.
    CA BLS, RR 45, at 6-7. See also Muncie, ANPR 15, at 2 
(suggesting that Franchise Rule coverage of business opportunities 
``only serve[s] to drive legitimate companies out of the 
marketplace, thereby harming consumers.'').

From my experience as a franchise attorney of more than 15 years, 
many entrepreneurs will choose to risk not complying with the Rule 
because the cost of compliance is too high relative to the size of 
the company, the size of the investment to be made and/or the number 
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of, or profits to be derived from, the sale of opportunities.

Tidd, ANPR 112, at 1.\36\
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    \36\ See also, e.g., Caffey, ANPR 94, at 2; Christopher, ANPR 
115, at 1; CA BLS, RR 45, at 5-6; Huke, Sept95 Tr at 239-40.
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    The Commission is concerned that the current application of the 
Franchise Rule to the sale of business opportunities does not work 
well. Accordingly, the Commission is proposing a separate business 
opportunity rule, narrowly tailored to minimize compliance costs.\37\ 
For the present, those business opportunity sellers covered by the 
original Franchise Rule will remain covered by that rule.\38\
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    \37\ In this regard, one fairly typical comment urged that the 
Commission:
    Tailor the scope of disclosure content, creating a disclosure 
statement designed for compliance by a business opportunity seller. 
A number of sections of the FTC Rule disclosure have little 
relevance to a typical business opportunity sale. These include the 
business experience of executives of the seller, personal 
participation of the buyer in the operation of the business, 
termination/renewal information, statistical information, site 
selection, public figure involvement, financial information of the 
seller, the contract.
    Caffey, ANPR 94, at 1-2. See also Muncie, ANPR 15, at 3; Baer, 
ANPR 25, at 5; Tifford, ANPR 78, at 4-5; D'Amico, Sept95 Tr at 151, 
154; Huke, id. at 240; Simon, id. at 281; Lewis, id. at 284. A few 
commenters, however, suggested that disclosures for business 
opportunity sales should be ``stronger'' than those for franchise 
sales. E.g., Cory, ANPR 12; D'Imperio, Sept95 Tr at 132; Perry, id. 
at 258-59.
    \38\ In the event that a revised Franchise Rule is promulgated 
before a new Business Opportunity Rule, business opportunities 
presently covered by the original Franchise Rule could remain 
covered by that rule pending completion of this rulemaking. For 
example, the Commission could finalize a revised Franchise Rule (16 
CFR part 436), and simultaneously publish a modified version of the 
original Franchise Rule that would be named the ``Business 
Opportunity Rule'' (16 CFR part 437). This rule might differ from 
the original Franchise Rule in two respects. First, references to 
``franchisor'' and ``franchisee'' in the original Franchise Rule 
would be changed to ``business opportunity seller'' and ``business 
opportunity purchaser,'' respectively. Second, the term 
``franchise'' would be deleted from the original Franchise Rule's 
definitions and would be replaced with ``business opportunity.'' 
Further, the first part of the original definition--the 
``franchise'' elements--would be deleted; the revised definition 
would focus on the second part of the original definition--the 
business opportunity elements. Except for these changes, all 
disclosures and prohibitions in part 437 would be identical to those 
of the original Franchise Rule.
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Section C. Overview of the Proposed Rule

    In drafting a Business Opportunity Rule, the Commission relies 
heavily on its law enforcement experience in addressing a wide array of 
business opportunity fraud under both the Franchise Rule and section 5 
of the FTC Act. The Commission also relies on the staff's analysis of 
consumer complaints submitted to the FTC.\39\ By far, the most frequent 
allegations in Commission business opportunity cases pertain to false 
or unsubstantiated earnings claims.\40\ This is followed by false 
testimonials or fictitious references and misrepresentations concerning 
the profitability of locations, availability of support and assistance, 
nature of the products or services sold, prior success of the seller or 
locator, full extent of investment costs, and refund policies.\41\ 
These alleged material misrepresentations or omissions also were most 
frequently mentioned in complaints to the Commission submitted by 
business opportunity purchasers.\42\
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    \39\ See Bureau of Consumer Protection Staff, Franchise and 
Business Opportunity Program Review 1993-2000: A Review of Complaint 
Data, Law Enforcement, and Consumer Education (June 2001) (``Staff 
Program Review'') (available at  https://www.ftc.gov/reports/
franchise93-01.pdf). See also Tifford, ANPR 78, at 4-5 (``[T]he FTC 
should draw upon its own experience with business opportunity 
enforcement in fashioning a definition that would encompass the 
business opportunity arrangements which have been the source of most 
of the consumer injury, as well as focusing on the types of 
disclosures that are best suited for business opportunity 
purchasers.'').
    \40\ Staff Program Review, supra note 39, Table I.1; I.2. (127 
Franchise Rule allegations; 94 Section 5 allegations pertaining to 
earnings claims issues in FTC enforcement actions). See also NCL, 
ANPR 35, at 2.
    \41\ Staff Program Review, supra note 39, Table I.2.
    \42\ Id., Appendix 5 (listing earnings claims; lack of promised 
support, locations, or training; exclusive territory and cost 
misrepresentations; and refund issues among most prevalent business 
opportunity complaints).
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    The proposed Rule would address these practices by requiring five 
affirmative disclosures.\43\ The first

[[Page 19058]]

affirmative disclosure would require a business opportunity seller to 
state whether the seller chooses to make earnings claims. If the seller 
does, then the proposed Rule would require substantiation and 
additional disclosures. The other four affirmative disclosures pertain 
to certain prior litigation; the seller's cancellation or refund 
policies; statistics on cancellation and refund requests; and contact 
information for prior purchasers as references.
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    \43\ Consistent with the Franchise Rule, the Commission does not 
express any opinion about the legality of any practices that might 
be disclosed under the proposed Rule. See 16 CFR part 436, note 1. 
In the Franchise Rule SBP, the Commission recognized that the 
Franchise Rule may require franchisors to disclose practices that 
may raise antitrust issues. SBP, 43 FR at 59719. While antitrust 
issues are probably less of a concern in the narrowly tailored 
Business Opportunity Rule context, the Commission nevertheless 
reserves the right to pursue violations of antitrust laws even if a 
business opportunity seller discloses a violation in complying with 
the proposed Rule's disclosure requirements. In short, disclosure 
does not create a safe harbor for engaging in otherwise unlawful 
conduct.
    Further, a business opportunity seller may have an obligation 
under section 5 of the FTC Act to impart material information to 
prospective purchasers beyond the disclosures required by this 
proposed Rule. This clarification is critical, especially in an age 
of quickly developing changes in the marketplace. The Commission 
cannot now predict what types of business opportunities will be 
offered in the future, nor the information a business opportunity 
purchaser will find material. This does not mean that a seller must 
include additional information in its disclosure document. As noted 
below, proposed section 437.5(c) prohibits the inclusion of 
additional information in a disclosure document. Rather, when a 
seller must impart material information beyond that required by the 
Rule, it must provide the information separately from its disclosure 
document. The Commission does not purport to specify how such 
information must be disseminated, permitting sellers the flexibility 
to decide which method is best for their particular business.
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    In addition to these disclosure requirements, the proposed Rule 
would prohibit common deceptive business opportunity sales practices. 
Among other things, business opportunity sellers would be prohibited 
from misrepresenting: (1) Earnings; (2) costs or the efficacy, nature, 
or central characteristics of the business opportunity or the goods or 
services sold to the purchaser as part of the business opportunity; (3) 
cancellation or refund policies; (4) promised assistance; (5) the 
calculation and distribution of commissions, bonuses, incentives, 
premiums, or other payments from the seller; (6) the likelihood of 
finding locations for equipment or accounts for services; (7) a 
business opportunity as an offer of employment; (8) territorial 
exclusivity or more limited territorial protections; (9) endorsements; 
and (10) shills as references. Finally, the proposed Rule would 
prohibit business opportunity sellers from failing to make promised 
refunds, as well as assigning ``to any purchaser a purported exclusive 
territory that, in fact, encompasses the same or overlapping areas 
already assigned to another purchaser.''

Section D. Scope of the Proposed Rule

1. Business Opportunities Covered by the Franchise Rule

    The proposed Rule would continue to cover those business 
opportunities that are presently covered by the original Franchise 
Rule. The Commission's law enforcement experience demonstrates that 
sales of these opportunities are fraught with unfair and deceptive 
practices, in particular the making of false or unsubstantiated 
earnings claims.
    Indeed, such practices are widespread. Since 1990 alone, the 
Commission has brought more than 140 Franchise Rule cases against 
vending machine, rack display, and similar opportunities. Since 1995, 
the Commission has conducted more than 11 business opportunity 
sweeps,\44\ many with other federal and state law enforcement partners, 
to combat persistent business opportunity scams violating the Franchise 
Rule, such as those involving the sale of vending machines,\45\ rack 
displays,\46\ public telephones,\47\ Internet kiosks,\48\ and 900-
number ventures,\49\ among others.
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    \44\ E.g., Project Telesweep (1995); Operation Missed Fortune 
(1996); Project Trade Name Games (1997); Project Vend Up Broke 
(1998); Project Bizillion$ (1999); Project Busted Opportunity 
(2002); and Project Biz Opp Flop (2005). In addition to joint law 
enforcement sweeps, Commission staff has also targeted specific 
business opportunity ventures such as 900 numbers (Project Buylines 
1996); vending (Project Yankee Trader 1997); seminars (Operation 
Showtime 1998); medical billing (Project House Call 1998); and 
Internet-related services (Net Opportunities 1998).
    \45\ See, e.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-
CIV-Huck (2004); FTC v. Pathway Merch., Inc., No. 01-CIV-8987 
(S.D.N.Y. 2001); U.S. v. Photo Vend Int'l, Inc., No. 98-6935-CIV-
Ferguson (S.D. Fla. 1998); FTC v. Hi Tech Mint Sys., Inc., No. 98 
CIV 5881 (JES) (S.D.N.Y. 1998); FTC v. Claude A. Blanc, Jr., No. 
2:92-CV-129-WCO (N.D. Ga. 1992). See also FTC News Release: FTC 
Announces ``Operation Vend Up Broke'' (Sept. 3, 1998) (available at 
https://www.ftc.gov/opa/1998/09/vendup2.htm) (FTC and 10 states 
announce 40 enforcement actions against fraudulent vending business 
opportunities).
    \46\ See, e.g., U.S. v. Elite Designs, Inc., No. CA 05 058 
(D.R.I. 2005); U.S. v. QX Int'l, No. 398-CV-0453-D (N.D. Tex. 1998); 
FTC v. Carousel of Toys, No. 97-8587-CIV-Ungaro-Benages (S.D. Fla. 
1997); FTC v. Raymond Urso, No. 97-2680-CIV-Ungaro-Benages (S.D. 
Fla. 1997); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-
Gonzalez (S.D. Fla. 1996); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson 
(S.D. Fla. 1993). See also FTC News Release: Display Racks for 
Trade-Named Toys and Trinkets are the Latest in Business Opportunity 
Fraud Schemes (Aug. 5, 1997) (available at https://www.ftc.gov/opa/
1997/08/tradenam.htm) (FTC and 8 states file 18 enforcement actions 
against sellers of bogus display opportunities that use trademarks 
of well-known companies).
    \47\ See, e.g., FTC v. Advanced Pub. Commc'ns Corp., No. 00-
00515-CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Ameritel Payphone 
Distribs., Inc., No. 00-0514-CIV-Gold (S.D. Fla. 2000); FTC v. 
ComTel Commc'ns Global Network, Inc., No. 96-3134-CIV-Highsmith 
(S.D. Fla. 1996); FTC v. Intellipay, Inc., No. H92 2325 (S.D. Tex. 
1992).
    \48\ See, e.g., FTC v. Bikini Vending Corp., No. CV-S-05-0439-
LDG-RJJ (D. Nev. 2005); FTC v. Network Service Depot, Inc., No. CV-
S0-05-0440-LDG-LRL (D. Nev. 2005); U.S. v. Am. Merch. Tech., No. 05-
20443-CIV-Huck (S.D. Fla. 2005); FTC v. Hart Mktg. Enter. Ltd., 
Inc., No. 98-222-CIV-T-23 E (M.D. Fla. 1998). See also FTC v. 
FutureNet, Inc., No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998); FTC v. 
TouchNet, Inc., No. C98-0176 (W.D. Wash. 1998).
    \49\ See, e.g., FTC v. Bureau 2000 Int'l, Inc., No. 96-1473-DT-
(JR) (C. D. Cal. 1996); FTC v. Genesis One Corp., No. CV-96-1516-MRP 
(MCX) (C. D. Cal. 1996); FTC v. Innovative Telemedia, Inc., No. 96-
8140-CIV-Ferguson (S. D. Fla. 1996); FTC v. Ad-Com Int'l, No. 96-
1472 LGB (VAP) (C.D. Cal. 1996).
---------------------------------------------------------------------------

    Further, business opportunity ventures covered by the Franchise 
Rule continue to stand out as a major source of consumer 
complaints.\50\ In fact, business opportunities covered by the 
Franchise Rule consistently rank among the top 10 categories of 
consumer fraud complaints reported to the Commission.\51\
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    \50\ See FTC, The FTC in 2005: Standing Up For Consumers and 
Competition (2005) (available at https://www.ftc.gov/os/2005/04/
0504abareportfinal.pdf), at 18 (announcing 14 criminal indictments 
in connection with business opportunity fraud); FTC Staff Report, 
Consumer Fraud in the United States: An FTC Survey (Aug. 2004) 
(``Fraud Survey'') (available at https://www.ftc.gov/reports/
consumerfraud/040805confraudrpt.pdf) at 48 (showing 450,000 victims 
of business opportunity fraud).
    \51\ See, e.g., FTC News Release: Criminal and Civil Enforcement 
Agencies Launch Major Assault Against Promoters of Business 
Opportunity and Work-at-Home Schemes (Feb. 22, 2005) (available at 
https://www.ftc.gov/opa/2005/02/bizoppflop.htm) (defendants in FTC 
cases alone caused tens of thousands of consumers to lose a total of 
more than $100 million); FTC News Release: Law Enforcers Target 
``Top 10'' Online Scams; Consumer Protection Cops From 9 Countries, 
5 U.S. Agencies, and 23 States Tackle Internet Fraud (Oct. 31, 2000) 
(available at https://www.ftc.gov/opa/2000/10/topten.htm) (listing 
business opportunities and work-at-home schemes among the top 10 
Internet frauds). See also Prepared Statement of Federal Trade 
Commission on ``Internet Fraud'' before the House Subcomm. on 
Commerce, Trade, and Consumer Protection of the Comm. on Energy and 
Commerce (May 23, 2001) (available at https://www.ftc.gov/opa/2001/
05/iftestimony.htm) (listing pyramids, business opportunities, and 
work-at-home schemes among the top Internet frauds); Prepared 
Statement of the Federal Trade Commission on ``Internet Fraud'' 
before the Senate Comm. on Finance (April 5, 2001) (available at 
https://www.ftc.gov/os/2001/04/internetfraudstate.htm) (listing 
pyramid, business opportunities, and work-at-home schemes among the 
top 10 Internet frauds based on Consumer Sentinel Database).
---------------------------------------------------------------------------

    Moreover, such scams typically cost consumers thousands of 
dollars.\52\

[[Page 19059]]

While precise figures of consumer injury from fraudulent business 
opportunity ventures is unknown, the Commission's law enforcement 
experience reveals that it is not uncommon for purchasers of fraudulent 
business opportunities to lose thousands of dollars each.\53\ For these 
reasons, the Commission has determined that sales of vending machines, 
rack displays, and similar opportunities should be covered by the 
Business Opportunity Rule, now that the Franchise Rule is being amended 
to focus exclusively on the sale of franchises.

2. Business Opportunities Not Presently Covered by the Franchise Rule

    The proposed Business Opportunity Rule would also address the sale 
of other business arrangements that are currently outside the scope of 
the Franchise Rule, but have been shown by the Commission's law 
enforcement experience and complaint data to be sources of prevalent 
and persistent problems. Two important types of fraudulent or deceptive 
opportunities that would fall within the proposed Rule's coverage are 
work-at-home schemes and pyramid marketing schemes.\54\
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    \52\ E.g., FTC v. World Traders Ass'n, Inc., No. CV05 0591 AHM 
(CTx) (C.D. Cal. 2005) (estimated $30 million in consumer injury); 
FTC v. Am. Entm't Distribs., No. 04-22431-CIV-Huck (S.D. Fla. 2004) 
(estimated $20 million in consumer injury). See also United States 
Postal Inspection Service, News Release: U.S. Postal Inspectors, 
Federal Trade Commission, Department of Justice dismantle business-
opportunity scams (``Postal Inspectors have arrested 28 individuals 
* * * who victimized more than 140,000 consumers with estimated 
losses exceeding $73 million.'').
    \53\ E.g., FTC v. Am. Entm't Distribs., No. 04-22431-CIV-Huck 
(S.D. Fla. 2004) ($28,000-$37,500 for one machine); FTC v. Accent 
Mktg., Inc., No. 02-0405-CB-M (S.D. Ala. 2002) ($8,000 initial 
payment). One measure of injury attributed to business opportunity 
fraud can be gleaned from the 2001 Staff Program Review. In its 
review of 2,665 business opportunity complaints from 1997 through 
the first half of 1999, over 70% of complainants reported losses of 
at least $1,000, with over 48% reporting losses of over $5,000. 
Approximately 24% reported losses over $10,000. Staff Program 
Review, supra note 39, at 36.
    \54\ In response to the ANPR, state regulators argued for a 
broad rule covering a wide array of opportunities. For example, in 
its ANPR Comment, NASAA recommended that the disclosure requirements 
for business opportunity ventures include business opportunity 
formats such as multilevel marketing plans, seller-assisted 
marketing plans, work-at-home plans and certain distributorships and 
licensing plans not currently covered under the Franchise Rule. 
NASAA, ANPR 120, at 5. See also James, ANPR 76; WA Securities, ANPR 
117, at 2; Maxey, Sept95 Tr at 38.
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a. Work-at-Home Schemes
    Deceptive work-at-home schemes are a persistent type of fraud, 
preying upon stay-at-home parents, the physically disabled, non-English 
speakers, and others who cannot obtain employment outside of the 
home.\55\ For the most part, they are not distinguishable in any 
material respect from business opportunities covered by the existing 
Franchise Rule.\56\
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    \55\ See, e.g., FTC v. USS A Enter., Inc., No. SA CV-04-1039 AHS 
(ANx) (C.D. Cal. 2004) (craft assembly opportunity aimed at Spanish 
speakers); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex. 
2004) (product assembly opportunity aimed at Spanish speakers); FTC 
v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. Tex. 2003) (envelope-
stuffing opportunity targeting unemployed, disabled, and elderly 
hoping to work from home); FTC v. Medicor LLC, No. CV01-1896 (CBM) 
(C.D. Cal. 2001) (work-at-home scams victimizing stay-at-home 
parents, the physically disabled, and non-English speakers). See 
also James, 21Nov97 Tr at 344 (describing work-at-home program aimed 
at the elderly and poorly-educated).
    \56\ See discussion above in Section A.1 explaining that the 
Franchise Rule's limitation requiring purchasers to sell directly to 
end-users effectively exempts many work-at-home opportunities from 
Franchise Rule coverage.
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    Sellers of fraudulent work-at-home opportunities deceive their 
victims with promises of an ongoing relationship in which the seller 
will buy the output that opportunity purchasers produce. These sellers 
often misrepresent that there is a market for a purchaser's goods and 
services,\57\ just as sellers of fraudulent vending machine and rack 
display opportunities falsely claim that profitable vending locations 
are available.\58\ Work-at-home opportunity sellers also often claim to 
provide ongoing training and other assistance, as business opportunity 
sellers covered by the Franchise Rule often do.\59\
    Each of these promises by work-at-home opportunity sellers is often 
just as illusory as the analogous promises made by business opportunity 
sellers covered by the Franchise Rule. In addition, fraudulent work-at-
home opportunity sellers frequently invent undisclosed conditions and 
limitations for rejecting the work performed by purchasers and refusing 
to buy back the goods the purchasers produce.\60\ Similarly, these 
sellers' promises of continuing support and assistance frequently prove 
empty, leaving work-at-home opportunity purchasers with no help in 
figuring out how to assemble misshapen components into finished 
products.
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    \57\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. Elec. Med. Billing, Inc., No. SA02-368 AHS (ANX) (C.D. 
Cal. 2003); FTC v. Holiday Magic, No. C 93-4038 VRW (N.D. Cal. 
1994); In re New Mexico Custom Designs, Inc., FTC C-3485 (1993); In 
re Sandcastle Creations, FTC C-3484 (1993); In re Homespun Prods., 
Inc., FTC C-3483 (1993); In re Hairbow Co., FTC C-3482 (1993). See 
James, 21Nov97 Tr at 343 (bead assembly seller falsely represented a 
relationship with J.C. Penney).
    \58\ E.g., FTC v. Nat'l Vending Consultants, Inc., No. CV-S-05-
0160-RCJ-PAL (D. Nev. 2005); FTC v. Pathway Merchandising, Inc., No. 
01-CIV-8987 (S.D.N.Y. 2001); FTC v. Int'l Computer Concepts, Inc., 
No. 1:94CV1678 (N.D. Ohio 1994).
    \59\ E.g., FTC v. USS Elder Enter., Inc., No. SA CV-04-1039 AHS 
(ANx) (C.D. Cal. 2004) (company would provide work or substantial 
assistance in obtaining work); FTC v. Leading Edge Processing, Inc., 
No. 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2003) (company would provide 
specialized software, manuals, and training); FTC v. Fin. Res. 
Unlimited, No. 03-C-8864 (N.D. Ill. 2003) (no prior experience 
necessary; company would provide all supplies needed); FTC v. 
Darrell Richmond, No. 3:02-3972-22 (D.S.C. 2003) (seller claimed to 
provide all necessary materials to perform the work-at-home envelope 
stuffing business); FTC v. Elec. Med. Billing, Inc., No. SACV02-368 
AHS (ANX) (C.D. Cal. 2003) (company promised to provide everything 
necessary to perform medical billing, including a list of doctors, 
training, and software). See also Finnigan, 21Aug97 Tr at 95 (a 
business or income-earnings opportunity inherently must offer some 
sort of assistance or training); Catalano, 20Nov97 Tr at 37 
(purchasers buy business opportunities to obtain the seller's 
expertise and know-how).
    \60\ See FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005). See also James, 21Nov97 Tr at 244-45 (describing clown 
assembly work-at-home program that repeatedly rejected goods 
produced by investor).
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    Moreover, as the Commission's cases and complaint data demonstrate, 
the con artists who promote fraudulent work-at-home schemes frequently 
dupe consumers with false earnings claims,\61\ a very prevalent 
practice among fraudulent business opportunity sellers. For example, in 
one envelope-stuffing case brought under section 5 of the FTC Act, the 
defendant allegedly offered to pay purchasers $550 to $3,000 
weekly.\62\ Similarly, in a medical billing work-at-home case, the 
defendant allegedly promised purchasers annual incomes of $25,000-
$50,000.\63\ Because the initial investment is relatively low, hundreds 
of thousands of bilked consumers do not formally complain or take 
action against these illegal operators.
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    \61\ E.g., FTC v. Sun Ray Trading, No. 05-20402 CIV-Sitz/
Bandstra (S.D. Fla. 2005) (potential weekly income of $550 to 
$3,000); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. Tex. 
2003) (earn $2,900 to $5,000 and more weekly); FTC v. Darrell 
Richmond, No. 3:02-3972-22 (D.S.C. 2002) (earn between $100 and 
$1,000 or more per week). See also James, 21Nov97 Tr at 341 
(describing a bead assembly work-at-home program that claimed 
earnings of $1,400 per $1,000 investment).
    \62\ FTC v. Fin. Res. Unlimited, No. 03-C-8864 (N.D. Ill. 2003) 
(earn ``$550.00 to $3,000 and more weekly'' stuffing envelopes).
    \63\ FTC v. Elec. Med. Billing, Inc., No. SA02-368 AHS (AN) 
(C.D. Cal. 2002).
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    The Commission's law enforcement experience demonstrates that work-
at-home scams are widespread, causing significant consumer injury. 
Indeed, since 1990 the Commission has brought over 60 work-at-home 
cases.\64\ These actions have targeted a variety of schemes, ranging 
from envelope

[[Page 19060]]

stuffing \65\ and craft assembly programs,\66\ to technology-driven 
opportunities,\67\ including medical billing plans.\68\ In some of 
these cases, what appeared to be simple work-at-home scams turned out 
to be illegal pyramid schemes.\69\
    Consumer complaints to the Commission also demonstrate the 
prevalence of fraudulent work-at-home schemes.\70\ To determine the 
level of complaints and alleged injury from work-at-home scams, the 
Commission staff analyzed fraud complaint information from the 
Commission's complaint database for the period January 1997 through 
December 2005. The staff's analysis shows 37,333 work-at-home 
complaints, resulting in alleged injury of over $15 million 
($15,408,934).\71\ Indeed, work-at-home complaints ranked among the top 
fraud complaint categories submitted to the Commission. For example, 
during the period studied, work-at-home schemes ranked among the top 20 
fraud complaint categories each year:
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    \64\ Many of these cases were brought in connection with sweeps 
of fraudulent work-at-home and related employment opportunities, 
including Project Biz Opp Flop (2005); Project Homework (2001); 
Operation Top Ten Dot Con (2000); and Operation Missed Fortune 
(1996).
    \65\ E.g., FTC v. Sun Ray Trading, No. 05-20402 CIV-Seitz/
Bandstra (S.D. Fla, 2005); FTC v. Fin. Res. Unlimited, No. 03-C-8864 
(N.D. Ill. 2003); FTC v. Castle Publ'g, Inc., No. AO3CA 905 SS (W.D. 
Tex. 2003); FTC v. Patrick Cella, No. CV03-3202 GAF (SHSx) (W.D. 
Cal. 2003); FTC v. Terrance Maurice Howard, No. SA02CA0344 (W.D. 
Tex. 2002); FTC v. Stuffingforcash.com, Corp., No. 92 C 5022 (N.D. 
Ill. 2002); FTC v. America's Shopping Network, Inc., No. 02-80540-
CIV-Hurley (S.D. Fla. 2002).
    \66\ E.g., FTC v. Misty Stafford, No. 3: CV 05-0215 (M.D. Pa. 
2005); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex. 2004); 
FTC v. Nat'l Crafters, Corp., No. 01-4825-CIV-Graham-Turnoff (S.D. 
Fla. 2001); FTC v. Ed Boehlke, No. 96-0482-E-BLW (D. Idaho 1996); In 
re Sandcastle Creations, FTC C-3484 (1993); In re Hairbow Co., FTC 
C-3482 (1993); FTC v. Holiday Magic, No. C 93-4038 VRW (N.D. Cal. 
1993); In re Homespun Prods., Inc., FTC C-3483 (1993); In re New 
Mexico Custom Designs, Inc., FTC C-3485 (1993). See also Prepared 
Statement of the FTC on ``Internet Fraud'' before the House Subcomm. 
on Commerce, Trade, and Consumer Protection, Comm. on Energy and 
Commerce (May 23, 2001) (listing business opportunities and work-at-
home schemes among top 10 Internet or online scams); Prepared 
Statement of the FTC on ``Internet Fraud'' before the Senate Comm. 
on Finance (April 5, 2001) (listing business opportunities and work-
at-home schemes among top 10 online scams).
    \67\ E.g., FTC v. Wealth Sys., Inc., No. CV 05 0394 PHX JAT (D. 
Ariz. 2005) (web design); FTC. v. Leading Edge Processing, Inc., No. 
6:02-CV-681-ORL-19 DAB, (M.D. Fla. 2002) (data entry); FTC v. LS 
Enter., FTC C-3884 (1999) (bulk email); In re Computer Bus. Servs., 
FTC C-3705 (1996) (in-home computer work); FTC v. AMP Publ'n, Inc., 
No. SACV-00-112-AHS-ANx (C.D. Cal. 2000) (in-home computer work).
    \68\ E.g., FTC v. Med. Billers Network, Inc., No. 05 CV 2014 
(RJH) (S.D.N.Y. 2005); FTC v. Elec. Med. Billing, No. SA02-368 AHS 
(AN) (C.D. Cal. 2002); FTC v. Elec. Processing Servs., Inc., No. CV-
S-02-0500-L.H.-R.S. (D. Nev. 2002); FTC v. Medicor, LLC, No. CV01-
1896 (CBM) (C.D. Cal. 2001); FTC v. Encore Networking Servs., No. 
00-1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. Physicians Healthcare 
Dev. Serv. Corp., No. CV-02-2936 RMT (C.D. Cal. 2000); FTC v. Data 
Med. Capital, Inc., No. SACV-99-1266 AHS (C.D. Cal. 1999); FTC v. 
Elec. Filing Acad., No. 98-0054-PHX-EHC (D. Ariz. 1998).
    \69\ E.g., FTC v. David Martinelli, Jr., No. 3:99 CV 1272 (CFD) 
(D. Conn. 1999) (income from work-at-home opportunity processing 
applications dependent upon signing new recruits to join the 
opportunity).
    \70\ In adopting amendments to the Telemarketing Sales Rule 
(``TSR''), the Commission observed ``that telemarketing fraud 
perpetuated by the advertising of work-at-home and other business 
opportunity schemes in general media sources is a prevalent and 
growing phenomenon.'' Indeed, the Commission stated that ``the 
single greatest per capita monetary loss category in complaints 
reported to the FTC is for business opportunities, including work-
at-home schemes.'' 67 FR 4492, at 4530 (Jan. 30, 2002). See also TSR 
Statement of Basis and Purpose, 68 FR 4480, at 4661 (Jan. 29, 2003).
    \71\ See also James, 21Nov97 Tr at 340-45 (describing three 
work-at-home opportunities in Florida, one of which took in $18 
million, victimizing 6,000 consumers).

------------------------------------------------------------------------
               Year                         Rank            Complaints
------------------------------------------------------------------------
1997.............................  5th..................           1,399
1998.............................  20th.................           1,653
1999.............................  19th.................           2,611
2000.............................  18th.................           3,448
2001.............................  13th.................           4,852
2002.............................  11th.................          17,307
2003.............................  9th..................          16,694
2004.............................  12th.................           6,485
2005.............................  15th.................           4,366
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    Were it not for the minimum investment requirement and direct sales 
to end-user limitation in the Franchise Rule, many work-at-home schemes 
would be covered by that rule because the same potential for abuse 
exists as with vending machines and rack display opportunities, which 
are covered. In view of the misrepresentations and omissions that 
fraudulent work-at-home opportunity sellers have used, as shown by 
consumer complaints and past Commission cases, the Commission has 
determined that the proposed business opportunity disclosure 
requirements and prohibitions would provide potential work-at-home 
purchasers with the tools they need to protect themselves from false 
claims.

b. Pyramid Marketing Schemes

    Like business opportunities covered by the existing Franchise Rule, 
pyramid schemes often deceive consumers with the promise of large 
potential incomes. It is not uncommon for promoters of these schemes to 
claim potential incomes of thousands of dollars a week or month.\72\ 
Because of the claimed high earnings potential, pyramid schemes are 
highly successful in attracting prospective investors. For example, one 
pyramid program attracted more than 150,000 consumers who collectively 
paid over $80 million during the course of three years.\73\ Indeed, 
cases brought under section 5 against pyramid marketing promotions have 
resulted in huge consumer redress, such as $40 million in Equinox and 
$20 million in SkyBiz.com.\74\
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    \72\ E.g., FTC v. 2Xtreme Performance Int'l, LLC, No. JFM 99CV 
3679 (D. Md. 1999) (``about $2,000 in the first month * * * and then 
it went to $60,000''); FTC v. Bigsmart.com, No. CIV 01-0466 PHX ROS 
(D. Ariz. 2001) (``50 people made over $50,000 their first month! We 
also had a $100,000 first month money earner!''); FTC v. FutureNet, 
Inc., No. CV-98-1