Greenberg Traurig Alert
Not a Franchise? Do Business Opportunity Statutes Apply?
By James A. Ullman, Greenberg
Traurig, Phoenix Office
View or download the PDF version of this Alert
What is a Business Opportunity?
|"The function of these statutes
is to extend certain disclosure protections afforded to purchasers
of franchises to those that purchase business opportunities."
Twenty-four states, including Florida, have enacted business opportunity
statutes. The function of these statutes is to extend certain disclosure
protections afforded to purchasers of franchises to those that purchase
business opportunities. The statutory definitions of a business opportunity
vary significantly, although each statute has the following common elements:
- An oral or written contract for a seller to provide products, services,
equipment or supplies to enable the buyer to commence a previously nonexistent
- Certain representations made by the seller, e.g. a guarantee of income
exceeding the price paid for the business opportunity, a right to a refund
or re-purchase, or provision of a sales or marketing program enabling
the purchaser to derive income from the business opportunity. The representations
by the seller to the buyer are generally in the form of some sort of guarantee
or buy back provision and a promise that the buyer will not lose the cost
of the investment.1
Normally, a sales or marketing program claiming that the purchaser will
derive income from the venture that is NOT tied to a license of a federally
registered trade or service mark will be considered a business opportunity.
Certain states expand upon the definition, indicating that if a seller will
find outlets or accounts for the purchaser, that is considered a business
opportunity, even if no guarantee of success is associated.2
The jurisdictional threshold of these statutes is extremely low - ranging
from an initial investment of $200.00 to substantial investments with no
Therefore, the reach of these statutes can be broad and, as such, a trap
for unwary sellers.
What Are Typical Business Opportunity Ventures?
There are a myriad of commercial endeavors that can and will trigger
these statutes. Sellers promoting “guaranteed income” from the sale of a
service or product that is associated with the seller’s marketing plan or
scheme to accomplish those guaranteed results would meet the definition.
Advertising such as “earn $50,000 per year in a new business” or “new product
line sells itself - guaranteed profits in excess of $100,000 on your investment”
will trigger the eye of most state examiners.
Historically, the sales of vending machines or displayed racks are the
most typical kinds of business opportunities. However, reported decisions
have shown that there is a panoply of commercial endeavors that have been
held to be business opportunities. Examples include, loan brokerage businesses,
merchandise discount programs, rabbit breeding kits, personnel services,
frozen pizza distributorships, home health care services, billing services
for physicians, and Internet web site building companies.
How Does One Comply with Business Opportunities Statutes?
Each state that has promulgated a business opportunity statute has a
requirement to prepare and present a disclosure document to a prospective
purchaser. Several states require filing of these documents prior to disclosure.4
Many other states mandate a merit review of the disclosure document before
it will be accepted for filing and a registration issued.5
Disclosures will vary, but the intent of such disclosures is generally
to provide the purchaser with information about the business opportunity
sufficient to make an informed investment decision. The following items
are routinely required:
- Background information on the principals of the seller, (including
work history, litigation, bankruptcies and arbitration);
- The length of time the seller has sold business opportunities;
- A full and detailed description of the services the seller will perform;
- Current financial statements;
- Complete description of the training provided by the seller including
duration, description of any major expense to be incurred, an earnings
claim which illustrates the number of purchasers who have actually achieved
sales or received earnings in the year prior to the disclosure date; and,
- The total number of purchasers of business opportunities within a
three year period.
Under the Florida statute, the disclosure statement must be filed annually
prior to placing an advertisement designed to sell a business opportunity,
with any material updates required within thirty days thereafter. The regulatory
authority, the Florida Department of Agriculture and Consumer Services,
can impose a bond, trust, or guaranteed letter of credit for the protection
of purchasers. Upon filing and registration, a certificate issues in Florida
that permits the sales of business opportunities. There is a three business
day cooling off period prior to receipt of any funds or execution of any
contract. The other states all have had administrative agencies charged
with certain regulatory authority including imposition of bonds, escrows
of purchasers’ fees, and jurisdiction over unfair trade practices including
injunctive relief and penalties.
Remedies to Purchaser
Commercial relationships that are subject to these statutes have draconian
penalties to the seller for failure to comply. Juxtaposed to franchising
or other licensing agreements, it is safe to assume that state regulators
do not favor these relationships. There are a series of specific remedies
for either the failure to comply with the business opportunity statutes
or a willful misrepresentation either verbally or in the disclosure document
that lead to a sale.6
The most common remedy for these violations is rescission. Many statutes
permit the purchaser within a period of time (normally for one to three
years after discovery), to receive all sums paid upon return of the product,
equipment or supplies received by the purchaser. Further, cease and desist
injunctive relief is available by most regulators in the event that the
seller has either defrauded the public, made a false statement in his offering
circular, or refused to provide information to the regulatory agency, or
violated any rules promulgated by the agency involved in regulation.
There is a private cause of action in all states and attorney’s fees
are recoverable in most states, including Florida. Monetary penalties imposed
by the state agency are part of each state’s regulatory scheme. Criminal
sanctions are available for willful violations in all states, except Nebraska,
North Carolina, South Carolina, Texas and Utah.
Although the business opportunity disclosure document is not overly burdensome
to prepare, most entrepreneurs would prefer to avoid the characterization
of their venture as a business opportunity. In that regard, legal advice
with respect to exemptions or exclusions that may be available becomes paramount.
The essential exclusions are as follows:
- Licensing of a Federally Registered Trademark - The license of a federally
registered trademark or service mark to the purchaser exempts an offering
from business opportunity statutes in several states.7
The license must be granted to the specific purchaser and the trademark
must have already been registered with The United States Patent and Trademark
Office. Applications for registrations of a trademark that have not ripened
to an actual registration will not permit this exemption to be utilized.
- Franchising - Since the definition of a franchise encompasses, among
other provisions, the license of a federally registered trademark or service
mark, virtually every state that has enacted a business opportunity law
grants an exemption from it if the seller is undertaking legitimate franchising
activities, i.e. preparation of disclosure documents mandated by the Federal
Trade Commission at 16 C.F.R. 436.1 et seq. Certain states with
business opportunity statute also have franchise regulations requiring
registrations and merit review prior to sale. In those states, an exemption
cannot be claimed unless the franchise can lawfully be sold within the
- Limiting Sales to Established Businesses - Essentially, business opportunity
statutes target new enterprises. If the purchaser is already engaged in
the business and acquires additional marketing plans, inventory, equipment
or services for an identical business, then arguably the statute will
- Negotiating a Waiver of the Business Opportunity Laws - Approximately
half of the states specify that the parties cannot waive business opportunity
laws. Waiver is not permitted in California, Connecticut, Illinois, Iowa,
Kentucky, Minnesota, Nebraska, Ohio, South Dakota, Tennessee and Texas.
A recent Florida case that implies that waiver is permissible. See
S.J. Business Enterprises, Inc. v. Colorall Technologies, Inc., 755 So.
2nd 769 Business Franchise Guide (CCH) ¶ 11,828 (Fla. Dist. Ct. App. 2000).
There are other strategies that may work to avoid these statutes:
- Limiting Sales to States without Business Opportunity Laws - One half
of the states do not have any business opportunity laws. The Federal Business
Opportunity laws that exist are narrower in scope.9
- Sale of an Ongoing Business - If the majority of the assets or stock
of a business is sold, the transaction is exempt from business opportunity
registration in several states.10
- Purchases with High Net Worth11
- A sophisticated buyer exemption is available in some instances. See
Lang, Lang & Suhor Investors, L.L.C., et al. v. The American Bagel
Co., et al., Business Franchise Guide (CCH) ¶11,447 (U.S. Dist. Ct. MD.
1998), discussing Ohio Law.
- Disclaimer of any guarantee of earnings or profits. This is a thin
reed to assert as courts often construe this condition for the benefit
of the purchaser.
Business opportunity regulations at the state level are a patchwork quilt
of similar definitional statutes with widely varying prohibitions, enforcement
activity, and exemptions. State enforcement has been sporadic; however,
registrations or exemptions filed create a significant amount of activity
within these states. If possible, business opportunities sales should be
avoided, as compliance state-by-state is time consuming and expensive.
1 The guarantee that the buyer typically will
earn income in excess of the initial investment is required in California,
Indiana, Iowa, Kentucky, Michigan, Nebraska, Oklahoma and Texas. Fourteen
other states do require some kind of representation relating to profit or
income in order to trigger the statutory coverage: Kentucky, Florida, Illinois,
Louisiana, Maine, Maryland, Minnesota, North Carolina, South Carolina, Oklahoma,
South Dakota, Utah, Virginia and Washington. The guarantee requirement can
be satisfied by a representation of potential profits and has been loosely
construed by several courts.
2 Iowa, Illinois, Maryland, Oklahoma and South
3 Three states, California, Indiana and Ohio,
have maximum investment limits of $50,000.
4 California, Florida, Indiana, Michigan, Nebraska,
North Carolina and Utah.
5 Connecticut, Illinois, Iowa, Kentucky, Minnesota,
New Hampshire, Oklahoma, South Dakota, Texas, South Carolina, Washington,
Maryland and Maine.
6 Many state permit enforcement of business
opportunities via consumer fraud statutes. However, the specifics of consumer
fraud remedies are not addressed herein.
7 Connecticut, Georgia, Louisiana, Maine, North
Carolina, South Carolina.
8 California, Illinois, Virginia and Washington.
9 The definition contained within the federal
regulations is limited to “retail outlets or counters for the goods, commodities
for services, locations or sites for vending machines, rack displays or
other product sales displays.” However, enforcement has been heightened
at the federal level under the United States Department of Justice's cooperation
with the FTC on "Project BIZ-ILLION$" commenced in 2000 as a "multi-prong
on traditional business opportunity scams..."
10 Maine and Florida.
11 Illinois Business Opportunity Law Section
© 2002 Greenberg Traurig
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