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Business opportunity laws are federal or state regulations that govern the sale of “business opportunities.” What constitutes a “business opportunity” varies among the federal and state laws, however, as a general matter, a business opportunity is an “out-of-the-box” investment that allows the purchaser to start a business at once. While the specific regulations of the sale of business opportunities vary among the federal and state laws, they all have the same purpose. This is to protect buyers of business opportunities by prohibiting certain seller-practices and requiring sellers to disclose certain information to prospective buyers before the sale occurs.
Like the Franchise Rule under 16 C.F.R. § 436.1-436.11, the Federal Trade Commission (FTC) prohibits certain practices and requires certain disclosures in the sale of business opportunities under its FTC Business Opportunity Rule, which is codified at 16 C.F.R. §§ 437.1–437.10 (2020). Generally, franchisors are exempt from complying with the requirements of the FTC Business Opportunity Rule.
There are, however, two specific instances in which a franchisor will not be exempt: if the franchise itself is exempt from the Franchise Rule because (1) under 16 C.F.R. § 436.8(a)(1), the total amount of required payments to the franchisor or an affiliate that are made any time from before to within six months after commencing operation of the franchisee’s business is less than $ 500; or (2) under 16 C.F.R. § 436.8(a)(7), there is no written document describing any material term or aspect of the relationship or arrangement. If a franchise is exempted from the requirements of the Franchise Rule for either of these two reasons, the franchisor must comply with the FTC Business Opportunity Rule, in addition to any state business opportunity laws.
Even if a franchisor is exempt from complying with the FTC Business Opportunity Rule, “business opportunity” is defined broadly under numerous state laws to include franchisor-franchisee relationships, and subject franchise offerings to their prohibitions and disclosure requirements.
State business opportunity laws are sometimes referred to as “seller-assisted marketing plan laws”. The following states have enacted laws under either name: Alabama, Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Nebraska, New Hampshire, North Carolina, Ohio, South Carolina, South Dakota, Texas, Utah, Virginia and Washington. Some of these state business opportunity laws have different registration and disclosure requirements than the FTC Franchise Rule.
A franchisor is exempt from most of these state business opportunity laws, if it is complying with the FTC Franchise Rule and if the franchise uses a federally registered trademark. For example, where a franchisor with a federally registered trademark provides a prospective franchisee with a Franchise Disclosure Document, it is likely the franchisor will be exempt from further compliance with any state business opportunity laws. Even with a federally registered trademark, however, a franchisor may still be subject to a number of these laws if the franchise offering includes an assurance of profits or a guarantee to refund fees if the franchisee is not satisfied with its investment.
Overall, these state business opportunity laws are not uniform, and whether a franchisor is exempt from their requirements requires a careful reading of the specific language of each state’s business opportunity laws. A franchise is a business opportunity, but not all business opportunities are franchises. For most, state business opportunity laws have a minimal impact on the operation of the franchise. A franchisor who complies with the FTC Franchise Rule and has a federally registered trademark is one of the best assured ways to ensure exemption from compliance with state business opportunity laws. A careful reading of the state business opportunity law in question, however, is the safest assurance. For help navigating these regulations, contact our firm today.