April 16, 1997
RE: 16CFR PART 436
To Whom It May Concern:
Information regarding the FTC Advance Notice of Rulemaking has been forwarded to me from the law offices of Rudnick and Wolfe with the request that we offer comment to help you in your decision-making process.
1. Definition of Business Opportunity. I feel your proposed definition of a business opportunity is overbroad, and could lead to misinterpretation and therefore unnecessary legal battles between the FTC and business opportunity vendors. For example, the term "nominal assistance" is so broad in its definition that it could even be construed to cover the mere sale of a software program such as Word Perfect to a new business, wherein the vendor offered technical support for the software program. Thus, the software vendor would fall within your proposed definition of a "business opportunity vendor."
The phrase "nominal assistance" could also be construed to apply to an office supply vendor or electronic products vendor who provided a computer system, fax machine, photocopier, etc., with a service contract and/or training in the equipment operation, knowing that the person was going to use it to start a new business. Therefore, I would suggest that if you do decide to use this definition that you define "nominal assistance" very clearly in your ruling.
I would suggest that "nominal assistance" NOT be construed to include technical support whereby a business opportunity vendor or product vendor offers phone support, BBS (bulletin board support), etc., to help a company or an individual understand how to use the computer equipment, software, etc., which it has provided to assist the individual or company in starting their business. I would suggest that "more than nominal assistance" be defined as physically assisting or agreeing to assist the person in securing accounts or locations, or where the vendor agreed to offer on-site assistance in physically setting up the business and equipment, and in training the new entrepreneur in how to use them.
Frankly, to avoid confusion and misinterpretation, I feel a clearer definition of the term "business opportunity" which sets out specific, easy to comprehend criteria is needed. I would suggest, as an alternative to the proposed definition, that you carefully consider the definition of a business opportunity as defined in the California SAMP Act (Seller Assisted Marketing Plan Act) and adopt similar language. This definition is found in paragraph 1812.201 of the Act, as follows:
(a) "Seller assisted marketing plan" means any sale or lease or offer to sell or lease any product, equipment, supplies, or services which requires a total initial payment exceeding five hundred dollars ($500), but requires an initial cash payment of less than fifty thousand dollars ($50,000), which will aid a purchaser or will be used by or on behalf of the purchaser in connection with or incidental to beginning, maintaining or operating a business when the seller assisted marketing plan seller has advertised or in other manner solicited the purchase or lease of the seller assisted marketing plan and done any of the following acts:
(1) Represented that the purchaser will earn, is likely to earn, or can earn an amount in excess of the initial payment paid by the purchaser for participation in the seller assisted marketing plan.
(2) Represented that there is a market for the product, equipment, supplies, or services, or any product marketed by the user of the product, equipment, supplies, or services sold or leased or offered for sale or lease to the purchaser by the seller, or anything, be it tangible or intangible, made, produced, fabricated, grown, bred, modified, or developed by the purchaser using, in whole or in part, the product, supplies, equipment, or services which were sold or leased or offered for sale or lease to the purchaser by the seller assisted marketing plan seller.
(3) Represented that the seller will buy back or is likely to buy back any product made, produced, fabricated, grown, or bred by the purchaser using, in whole or in part, the product, supplies, equipment, or services which were initially sold or leased or offered for sale or lease to the purchaser by the seller assisted marketing plan seller.
The definition used in California (or variations thereof) has been copied or emulated by most of the twenty-three other states who require registration. California was among the first states to require business opportunities to register, and I feel their Act is extremely well-written and could serve as a model for new FTC legislation.
2. Distinguishing between disclosure requirements for business opportunities and franchises.
a) It would be extremely unwise to attempt to lump business opportunities into the same category as franchises. They are entirely different business arrangements. Business opportunities do not demand or extract a percentage of income from the purchaser to use for national advertising or mere profit overrides, nor does the purchaser of a business opportunity use the same name or trade name as does a franchisee. There is also a far greater amount of training which is provided to franchisees by franchisers. Furthermore, franchisers exert a far greater degree of control over the operation of the business than do business opportunity vendors. Business opportunities are also sold at a much cheaper price.
Lumping them together in one category would spell the death knell for legitimate business opportunity vendors. They would not be able to comply with all of the requirements and still market their product to those who are not capable of raising extremely large sums of money, often in the hundreds of thousands of dollars, as required to purchase most legitimate franchises. It would not, however, have any effect on the scumbag and sleazeball vendors who neglect to and refuse to follow existing federal and state legislation and who will continue to do the same with any changes you institute.
Therefore, I see no value in lumping the two entirely different business arrangements into one category. It would only serve to drive legitimate companies out of the marketplace, thereby harming consumers.
b) I feel that if a company provides direct marketing assistance that this should move them out of the business opportunity category and into the franchise category. By "direct marketing assistance" I do not mean merely providing manuals regarding how to sell to or approach potential clients.
Rather, I am referring to the practice of some companies who advertise that they will assist in providing accounts, but who rarely do. I feel that "direct marketing assistance" should be defined as any on-site sales and marketing training provided either by the vendor or by an affiliate or business associate of the vendor. Direct assistance would also include arranging for sales people to accompany the purchaser on sales calls.
However, providing training programs as part of one's business opportunity package so the purchasers can develop their own marketing plan should not be deemed as direct marketing assistance. Indeed, I feel such indirect assistance is imperative for the success of business opportunity purchasers, since only a small percentage of them have any training in sales or marketing.
c) I also feel if a vendor allows purchasers of its program to use its trademark, service mark, trade name, etc., that it be subject to franchise rather than business opportunity laws. It is my suggestion that the legislation specifically prohibits business opportunity vendors from allowing their purchasers to use or trade under the vendor's own trade name, service mark, etc. The purchase price of the typical business opportunity does not provide the legitimate vendor with enough money to police trademark use. Furthermore, when the use of a trademark is authorized or even required, numerous restrictions have to be put on the conditions under which that trademark may be used, and also, in order to protect one's trade name, a tremendous amount of control has to be exerted over the purchaser.
3. Disclosure requirements.
a) Again, I recommend implementing laws similar to the State of California. I am enclosing a copy of the California SAMP Act (see Exhibit 1), as well as a copy of the "guideline disclosure" they send out to help companies comply with their Act (see Exhibit 2). I feel this legislation is well-written, and that it would be in the best interests of the consumer and the Federal Trade Commission to adopt similar disclosure requirements. I am also enclosing a copy of our own current SAMP Act disclosure document (see Exhibit 3). Copies of this disclosure are sent to all potential purchasers within the State of California and within every state which has no business opportunity disclosure laws. In the other states, which do require disclosure, we either are registered with and have a disclosure for that state, or have received an exemption. As further examples, I enclose copies of our Texas and Florida disclosure documentation (see Exhibits 4 and 5).
b) It should be against the law to provide "disclosure documentation" when in fact one is not actually registered, according to the requirements of either the federal or state laws. I enclose herewith a copy of a so-called FTC disclosure (see Exhibit 6), which based upon my limited knowledge of federal regulations falls far short of actual FTC requirements. Such disclosures are often used to lull purchasers into security by making it appear that unscrupulous vendors are complying with federal or state regulations, when in fact they are not (I do not know if that is the case with the company whose disclosure document I have attached herewith). Also enclosed are copies of the advertisement the company is currently running in newspapers across the country (see Exhibit 7). As you can see, the focal point of the ad is not only an income claim, but there is also a false statement that no selling is required.
4. The dangers of over-legislation. There is a great danger in creating legislation so stringent that legitimate companies cannot follow it. Currently, although I agree with the need to modify the existing legislation to some degree, I feel that the main problem is not under-legislation or lack of legal control over business opportunity vendors, but rather THE LACK OF ENFORCEMENT OF EXISTING BUSINESS OPPORTUNITY REGULATIONS. Frankly speaking, in our own field of medical billing, I feel that only around 10% or 20% of the vendors at any given time are actually legitimate companies sincerely attempting to provide a package which will allow a hardworking individual to build a sound business. To the contrary, most of them are sleazeballs and scumbags who provide inferior packages, terrible support, and who quite frankly don't give a damn if their purchasers succeed or fail. I have two file folder drawers full of companies who have gone out of business in the past six years, since I first started collecting advertising packets on competitors. Most of them were fly-by-night operations, and it is extremely unfortunate that so many good, honest Americans have been cheated by them. They paint an unrealistic picture of what a person can expect to earn if they purchase the business, and try to make it seem as if you only need to put a few minutes or a few hours a day into the business and that you're going to become a millionaire. They are selling so-called "get-rich-quick" schemes, and the fact of the matter is, nobody is going to succeed at any business without a lot of hard work and effort.
If you over-legislate the sale of business opportunities, you will have no effect whatsoever on these sleazeballs and scumbags. They already ignore the existing laws, and they will ignore your new laws. Stricter legislation will affect legitimate vendors, however, in that you will drive many of us out of business, because it will simply not be possible to comply with overly strict regulations and simultaneously be able to compete with individuals who ignore them. You will also have little effect on what I refer to as the "borderline" companies. They are basically those who are situated somewhere between the sleazeballs and the legitimate vendors. In many cases, they are registered or do provide some form of disclosure, although they don't always follow the regulations. It is my feeling that if you over-legislate business opportunity sales, many of these people will continue to operate, but will ignore your new laws. Thus the ultimate loser of over-legislation is the consumer. This is probably the most important contribution that I have to make. If you want to truly protect consumers, enforce existing laws.
5. Trade shows and trade show promoters.
a) I do not feel that trade show promoters should be exempted from requiring their exhibitors to follow FTC or state disclosure laws. At least they should be required to have evidence the vendor is actually registered as required by law. There are a few good trade show circuits that I consider to be legitimate, however, some of the trade show promoters and operators are themselves sleazeballs and scumbags. We have notified some of the trade show promoters, on several occasions, that certain competitors of ours exhibiting in their shows are not providing disclosure documents or following federal and state regulation. Simply put, they do not care. Their only interest is in seeing who will pay them the most money. In some cases, thoroughly dishonest business opportunity vendors are given exclusives for a particular field, such as our own, medical billing, because they agree to pay six months or one year in advance for all the shows. Therefore, the show operators choose them over legitimate vendors for this purpose.
b) We have had limited success during trade show exhibitions, because of the fact that other medical billing companies competing against us do not follow proper disclosure laws. Such vendors sell on the principle of thrill, excitement and emotion, and both encourage and pressure people to buy on-the-spot. How can we compete against them, when potential clients have to wait at least 48 hours, and sometimes up to ten days, before we can accept a contract or initial payment from them? By that time, the other vendors have already left town with a pocket full of sales, and we are left with nothing, simply because we refuse to violate the law.
c) One way to deal with the problem listed in (b) above is to legislate against "closing booths" at trade shows. A "closing booth" is a booth with a curtain, located immediately behind or to the side of the vendor's main display booth. Unscrupulous business opportunity vendors take interested individuals into these booths, close the curtain, and cajole and pressure them to buy their business opportunity. They provide no disclosure and say whatever they think the prospective clients want to hear. They sign the contract and take the check, right on the spot.
d) If you are going to exempt trade show promoters, there should be some legislation which governs them. I would suggest the following requirements at a minimum: 1) that they require all exhibitors to sign a contract stating unequivocally that they are complying with federal and state regulations, 2) that they provide a copy of the disclosure document they are currently using to the trade show promoter as evidence of their registration, 3) that "closing booths" be prohibited, 4) that all vendors be prohibited from taking any funds or signing any contracts with potential purchasers at the show itself, 5) that all visitors to trade shows are provided with a SHORT -- no more than one page both sides -- notice printed in large type advising that each vendor is required by law to give them a disclosure and that they should not purchase or contract to purchase at the show.
6. How to better track business opportunity vendors.
a) It would not be difficult for you to track whether or not business opportunity vendors are complying with state and/or federal legislation. Most of them advertise in national magazines such as Entrepreneur and Home Office Computing, or in other national magazines published by the Entrepreneur group, such as Business Start-Ups, Business Opportunities, etc. These publications could be scanned each month for new advertisements. Simply by responding to an ad and requesting information from each vendor, it would be very easy for you to follow and track whether or not they are complying with business opportunity statutes.
b) I would also support the formation of a "watchdog group" of business opportunity vendors who could contact all nationally advertised business opportunity vendors, inform them of the laws, and pass information on to the FTC about those who refuse to comply. If this is something that you feel would help, please let me know, as I would be willing to help organize it.
I hope the information and opinions I have expressed in this letter are helpful or provide some assistance to you in your endeavors.