New Arizona Law Imposes Registration, Disclosure Requirements on Sales of “Business Opportunities”
Franchise & Distribution Law Alert 11/01/12 James A. Ullman, Kevin D. Quigley, Jennifer Eichholz
Franchisors and their counsels have a long history of more than passing familiarity with federal and state business opportunity statutes. Because the definitions of a franchise and business opportunity are oftentimes similar (e.g. a sale to enter a business with an initial investment of $500 or more), these state business opportunity statutes require either compliance or, hopefully, exemption.
In most jurisdictions, the lawful offering of a franchise under 16C.F.R. 436.1 et seq. exempts the franchisor from compliance with the provisions of federal or state business opportunity laws. There are some notable exceptions, such as Connecticut and Georgia where exemptions are based on registered federal or state trademarks.
On April 5, 2012, Arizona enacted a new business opportunity rule (the "Arizona Rule"). Under the Arizona Rule, which took effect August 2, 2012, anyone that sells or leases a "business opportunity" (as that term is defined in A.R.S. § 44- 1271), which costs at least $500 must now register with the State of Arizona and must make certain written disclosures as part of any sale or lease of such business opportunity.
Business opportunity sellers who fail to register with the state potentially face severe consequences. For instance, if a seller of a business opportunity does not register correctly, then every buyer of that business opportunity has the unlimited right to rescind the sale at any time.
Arizona's Rule appears to reach more broadly than the revised FTC Business Opportunity Rule (published December 8, 2011 at 76 Fed. Reg. 76,860), which took effect March 1, 2012. As a result, compliance with the FTC Business Opportunity Rule does not ensure compliance with the new Arizona Rule. Compared with the FTC Business Opportunity Rule, the Arizona Rule adopts both a broader definition of what is a "business opportunity" and imposes registration and disclosure requirements that differ from the FTC's Business Opportunity Rule. As a result, businesses should not use the FTC's Business Opportunity Rule to gauge what steps they should take to comply with the Arizona Rule.
The Arizona Rule defines a "business opportunity" as almost anything that helps a person run a business, costs at least $500, and whose sales pitch includes: (i) a promise of income; (ii) a built-in sales or marketing plan; or (iii) a promise that the buyer will receive certain types of assistance making sales of the buyer's products or services. The Arizona Rule does not apply to sales of all assets of an ongoing business. It also does not apply to the purchase of a "franchise" (as that term is defined by 16 C.F.R. § 436.1).
Specifically, the Arizona Rule applies to any "business opportunity" that does the following:
- Sells or leases goods or services that enable a person or a business to start or operate a business;
- Costs at least $500 within the first six months;
- Includes a sales pitch where the seller represents that:
- the buyer will earn a profit or receive guaranteed income;
- the buyer will be guaranteed a market or purchasers for the buyer's goods or services;
- the seller will provide a sales or marketing program to the buyer; or
- the seller will provide or help provide locations for vending machines, racks, display cases, or similar devices.
Under the Arizona Rule, anyone who sells a business opportunity must register annually with the Arizona Secretary of State and must pay an annual registration fee. In addition, the Arizona Rule requires a business opportunity seller to make certain written and oral disclosures, including some disclosures that must be made before a sales presentation begins. If these disclosures are not made, the sale of the business opportunity can be voided by the purchaser.
The Arizona Rule has been grafted onto statutes that previously applied only to telephone solicitations (as that term is defined in A.R.S. § 44-1271(18)). So by adopting the Arizona Rule, the Arizona Legislature greatly expanded the reach of statutes that previously only regulated businesses that conducted sales by telephone. As a result, businesses should not assume that the Arizona Rule only regulates transactions related to telephone sales. The Arizona Rule also clearly indicates that the sale of a business opportunity does not need to involve a telephone.
The complete text of the Rule can be found at Ariz. Rev. Stat. §§44-1271 through 44-1281.
This alert is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact James Ullman at (602) 229-5283 / firstname.lastname@example.org, Kevin Quigley at (602) 229-5433 / email@example.com, Jennifer Eichholz at (602) 230-5509 / firstname.lastname@example.org or your local Quarles & Brady attorney.