Rudnick & Wolfe
203 NORTH LA SALLE STREET
September 2, 1997
WRITER'S DIRECT LINE
Via Fax and Mail
Steven Toporoff, Esq.
Re: Exemptions from Business Opportunity Regulation
As we discussed at the public workshop conference in Chicago, the following are some additional thoughts regarding exemptions from the business opportunity regulation being considered by the FTC. Many of the suggestions below are intended to eliminate coverage of those types of companies that typically have not been the subject of enforcement efforts by the FTC. Also, due to the potential breadth of the definition of business opportunity, it is critical that traditional distribution formats such as franchises, licenses, dealerships, distributorships and manufacturers representatives be excluded from the requirements of a business opportunity rule.
I have used the term "exemption" in this letter but any of the following could be characterized as an exclusion or as outside the scope of the definition of business opportunity. Many of these suggested exemptions can be, found in the Illinois Business Opportunity Sales Law (the "Illinois Law"), which was derived from the Model Business Opportunity Sales Act promulgated by NASAA.
1. Existing exemptions and exclusions under the FTC Franchise and Business Opportunities Rule (the "Rule"). When the Rule was promulgated, it was determined that a series of exemptions and exclusions were applicable to both franchises and business opportunities. These exemptions and exclusions should be carried over to any new business opportunity rule. They include: fractional franchises or business opportunities; leased departments; employer/employee relationships; general partner relationships (or limited partnerships where the business opportunity seller is the general partner; oral agreements; cooperatives; certification and testing services; and single trademark licenses.
2. Minimal investments. Although this is listed as an exemption in the Rule, it is deserving of additional comment. First, a number of commenters have sensibly suggested raising the threshold to $1000. In addition, since the typical fly-by-night business opportunity seller is looking for "quick money," it may be appropriate. to shorten the time period in which payment is made from 6 months to l or 2 months. Also, it is critical that only "required", not optional or discretionary, payments are covered by any regulation.
3. Inventory. Any payments for inventory sold at a bona fide wholesale price for resale should be exempted.
4. Franchise. A clear exemption should be created for franchises. This should extend not only to franchises defined under the Rule and state franchise laws, but also to franchises exempted from registration under state law (see Section 14-104(a)(3) of the Maryland Business Opportunity Sales Act).
5. Sale of securities. Many state laws specifically exempt the sale of securities.
6. Substantial seller. Many state laws exempt sellers with a net worth above a specific threshold. For example, the Illinois Law uses a $1,000.000 net worth based on an audited financial statement. The rationale for the exemption is that a substantial company is more likely to be a "good citizen" and will be in a position to satisfy any judgment against it.
7. Sophisticated investor. Some state laws exempt a sale to an investor with a substantial net worth. Under the Illinois Law, the minimum net worth is $250,000, exclusive of residence, furnishings and automobiles. Such investors are viewed as having the capability, on the counsel, to protect themselves from fraudulent sellers.
8. Large investment. This is usually a material investment made by a sophisticated investor. A number of states use an exemption for transactions involving at least $25,000 to $50,000.
9. Other sophisticated investors. Several laws exempt banks, insurance companies, broker-dealers and the like.
10. Bankruptcy and other sales. Several laws exempt sales made by trustees in bankruptcy, executors, guardians, receivers, etc.
11. Ongoing business. A number of laws exempt the sale of an existing business and/or renewals, extensions and modifications of existing agreements.
12. Marketing programs. Several of the older state laws exempt the sale of a marketing program in conjunction with the licensing of a registered trademark. Some of the newer laws couple this with a substantial seller requirement (see Illinois Law Section 5-5, 10(b)(5)).
13. Demo equipment. Some laws exempt the not-for-profit sale of demo equipment, materials or samples.
14. Multi-line buyer. Several laws exempt sales to a buyer who sells products or services not supplied by the seller and which are not utilized with the products or services of the seller (see the Nebraska and Texas statutes).
15. Experienced buyer. A few laws exempt sales to a buyer who has for a specified period purchased and resold the seller's products and recovered the cost of such products on resale.
16. Other federal and state laws. Several laws exempt sales if the seller is already regulated by or licensed under another law, such as the Petroleum Marketing Practices Act.
If you have any questions or would like any additional information, please feel free to contact me.
Very truly yours,
RUDNICK & WOLFE
Dennis E. Wieczorek