/Vol. 76, No. 236/Thursday, December 8, 2011/Rules and Regulations
62 FR at 9115. In response to the ANPR, theCommission received 166 written comments. Thestaff also held six public workshops on the issuesraised in the comments, three of which specificallyaddressed business opportunities.
72 FR 15444 (Mar. 30, 2007).
For example, references to ‘‘franchisor’’ and‘‘franchisee’’ used in the Original Franchise Rulewere changed in the interim Business OpportunityRule to ‘‘business opportunity seller’’ and ‘‘businessopportunity purchaser,’’ and the Original FranchiseRule’s definition of ‘‘franchise’’ was changed to‘‘business opportunity.’’
73 FR 16111, 16112 (Mar. 26, 2008).
71 FR 19054 (Apr. 12, 2006).
The INPR also specified the process theCommission would follow in amending theBusiness Opportunity Rule. Pursuant to theCommission’s Rules of Practice, 16 CFR 1.20, theCommission determined to use a modified versionof the rulemaking process set forth in section 1.13of those Rules. Specifically, the Commissionannounced that it would publish a Notice of Proposed Rulemaking, with a 60-day commentperiod, followed by a 40-day rebuttal period. Inaddition, pursuant to Section 18(c) of the FTC Act,the Commission announced that it would holdhearings with cross-examination and rebuttalsubmissions only if an interested party requested ahearing. The Commission also stated that, if requested to do so, it would contemplate holdingone or more informal public workshops in lieu of hearings. Finally, pursuant to 16 CFR 1.13(f), theCommission announced that staff would issue aReport on the Business Opportunity Rule (‘‘Staff Report’’), which would be subject to additionalpublic comment. 71 FR at 19079–80.
Multi-level marketing is one form of directselling, and refers to a business model in which acompany distributes products through a network of distributors who earn income from their own retailsales of the product and from retail sales made bythe distributors’ direct and indirect recruits.Because they earn a commission from the sales theirrecruits make, each member in the MLM networkhas an incentive to continue recruiting additionalsales representatives into their ‘‘down lines.’’
Peter J. Vander Nat & William W. Keep,
Marketing Fraud: An Approach to Differentiating Multilevel Marketing from Pyramid Schemes,
21 J. Pub. Pol’y& Marketing 140 (Spring 2002).
Promoters of business opportunities were ableto evade coverage under the Original FranchiseRule and the interim Business Opportunity Rule bypricing their offerings opportunities below $500,the monetary threshold of coverage.
71 FR at 19057.
71 FR at 19091.
71 FR at 19068.
Comments responding to the INPR are availableat
References to INPRcomments are cited herein as: Name of thecommenter-INPR (
Thousands of comments were form letterssubmitted by participants in various MLMprograms. 73 FR at 16113.
Numerous letters came from individuals havingnegative experiences with various MLMs. 73 FR at16113 n.37.
73 FR at 16113.
comment on several proposedregulatory modifications, including thecreation of a separate trade regulationrule governing the sale of businessopportunities.
Subsequently, the Commissioncompleted all procedural stepsprescribed by Section 18 of the FTC Actto finalize the Amended Franchise Rule,along with a Statement of Basis andPurpose, in March 2007.
At that time,the Amended Franchise Rule—nolonger covering businessopportunities—was codified at Part 436in Title 16 of the CFR. The OriginalFranchise Rule with all definitionalelements and references regarding business format franchising deleted, wasretained and redesignated as Part 437.Part 437 was titled the ‘‘interimBusiness Opportunity Rule.’’
Theinterim Business Opportunity Rulecontained no new substantivedisclosure requirements or prohibitions,and in all material respects wassubstantially identical to the OriginalFranchise Rule. Until the final Rule becomes effective, Part 437 governssales of non-franchise businessopportunities.
B. Rule Amendment Proceedings
1. Initial Notice of Proposed Rulemakingand Initial Proposed BusinessOpportunity RuleIn 2006, having determined that aseparate business opportunity rule wasnecessary, the Commission publishedan Initial Notice of ProposedRulemaking (‘‘INPR’’), announcing itsintention to proceed with its proposalfor a separate Business OpportunityRule (the ‘‘initial proposed BusinessOpportunity Rule’’ or ‘‘IPBOR’’).
TheINPR proposed to amend the interimBusiness Opportunity Rule by updatingit, streamlining it, and expanding itsscope of coverage.
The IPBORcontained an expansive definition of ‘‘business opportunity’’ thatencompassed business opportunitiespreviously covered by the OriginalFranchise Rule as well as work-at home,medical billing, and multi-levelmarketing (MLM)
operations. It alsoeliminated the $500 threshold for Rulecoverage.
Streamlining the interim BusinessOpportunity Rule and tailoring it to fit business opportunities (as opposed to business format franchises) has been aprimary focus of this proceeding. Boththe Original Franchise Rule and theinterim Business Opportunity Rulerequire extensive disclosures coveringover twenty specified topics. In theINPR, the Commission recognized thatthese extensive disclosure requirementsentail disproportionate compliancecosts for sellers of comparatively low-cost business opportunity ventures.
Therefore, the Commission proposed tomitigate the compliance burden bysimplifying and streamlining thedisclosure requirements.
Specifically, the INPR proposed aone-page business opportunity pre-saledisclosure document (the ‘‘initialproposed disclosure document’’) withonly six required material disclosures.
The initial proposed disclosuredocument was intended to provideprospective purchasers with essentialmaterial information they could use inmaking a purchase decision. The INPRproposed to require sellers to use theexact form and language set forth by theCommission and to include informationregarding (1) the seller; (2) earningsclaims; (3) legal actions involving theoffered business and its key personnel;(4) the existence of cancellation orrefund policies; (5) the number of cancellation or refund requests; and (6)references.
In response to the INPR, theCommission received more than 17,000comments, the overwhelming majorityof which came from individuals activein the MLM industry.
MLMcompanies, their representatives andtrade associations, as well as individualparticipants in various MLM plans,expressed grave concern about the burdens the IPBOR would impose onthem and urged the Commission toexclude them from the scope of theIPBOR, to implement various safeharbor provisions, and to reduce therequired disclosures.
The Commissionalso received approximately 187comments, primarily from individualconsumers or consumer groups, in favorof the IPBOR.
Only a handful of comments came from non-MLMcompanies and industry groups,expressing various concerns aboutobligations that the IPBOR wouldimpose upon them.
None of thecomments addressed the form of theinitial proposed disclosure document.2. The Revised Notice of ProposedRulemaking and Revised ProposedBusiness Opportunity RuleBased on an extensive review of thecomments received in response to theINPR and the Commission’s lawenforcement history, the Commissionissued a revised Notice of ProposedRulemaking (‘‘RNPR’’) on March 28,2008, that set forth a revised proposedRule (the ‘‘Revised Proposed BusinessOpportunity Rule’’ or ‘‘RPBOR’’) thatwas more narrowly tailored than theIPBOR.
In the RNPR, the Commissionrecognized that there were two mainproblems with the IPBOR’s breadth of coverage. First, the IPBOR would haveunintentionally swept in numerouscommercial arrangements, including
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