Franchisors often complain about the complexity of franchise laws and wish to structure distribution systems in a way to avoid those laws. Anybody who manages to do that, however, should be aware of the federal and state business opportunity laws that may apply to such systems. To generalize, a business opportunity is an agreement under which the seller/franchisor provides the buyer/franchisee with goods or services to help start a business and makes some representations about the money the buyer can make, that the seller will reimburse the buyer for losses, or provide a sales or marketing plan. Franchisors can usually escape applicability of the business opportunity law because exemptions for franchises that comply with the FTC Franchise Rule, but for those systems that structure around that rule business opportunity laws may become an issue.
New Arizona Business Opportunity Law
Arizona amended its Telephone Solicitations Act (the “Arizona Act”) earlier this year to add provisions applicable to business opportunities. The amendments went into effect on August 1, 2012. The statute requires that business opportunity sellers obtain a $100,000 bond, submit an extensive registration document, and provide a disclosure document to prospective buyers.
The Arizona Act requires filing of an extensive registration statement. A notarized “verified registration statement,” signed by all of the seller’s principals must be filed and then renewed annually by June 30. It also needs to be amended for material changes.
Business opportunity laws vary significantly with respect to the form of registration and what information needs to be submitted. The Arizona registration requirements are similar to those of many states, but in some regards go beyond most other states. For example, the seller must submit its articles of incorporation and by-laws or similar organizational documents as well as well as copies of any script, outline or presentation that the seller requires to be used when soliciting buyers.
Just like the registration requirements vary widely by state, so do the business opportunity disclosure documents. It is possible to prepare a multi-state disclosure document for some states, but Arizona is not one of them. Though the disclosure requirements are similar to many other business opportunity state laws, the disclosures must appear in the particular order that they are listed in the Arizona Act and an Arizona specific disclaimer is required to appear in the middle of the document.
Changes to Ohio Business Opportunity Law
On September 25, 2012 amendments to the Ohio Business Opportunity Plan Law (the “Ohio Act”) will go into effect. Part of the current business opportunity definition of the Ohio Act is that the initial fee is greater than $500 but less than $50,000. After the amendment, the maximum payment will be raised to $100,000, presumably catching many additional arrangements within the scope of the Ohio Act.
The scope of the Ohio Act will also be broadened by the change to the large seller exemption to the statute. Currently the net worth that a seller must be able to show to satisfy the large seller exemption is $5,000,000 on a consolidated basis. This amount is being increased to $15,000,000.
The addition of a bona fide whole sale price exemption to the Ohio Act will likely exclude some distribution systems that were previously covered by the statute while at the same time covering some that were previously excluded. The Ohio Act will now provide that payment of the bona fide wholesale price for reasonable quantities of goods or services for resale or lease are not considered part of the initial payment. For distribution systems where the buyer is paying very little initially except for the wholesale price for its initial inventory, this may mean that the system no longer falls within the scope of the Ohio Act, as long as the other initial payments are below $500. However, a distribution system where the buyer buys a significant amount of initial inventory but also pays more than $500 in other initial payments, may end up falling within the scope of the statute. For example, if the buyer buys an initial inventory at wholesale for $120,000 and pays $1,000 in other initial payments, the system was previously excluded from the Ohio Act because the inventory payments would have counted towards the total initial payments and would have exceeded the $50,000 maximum in the business opportunity definition. After the amendment, the inventory payments will be excluded from the calculation of the initial payment and the system will fall within the statutory minimum and maximum payments.