After its promulgation in 2012, I wrote a piece entitled, “Does the New FTC ‘Biz-Op’ Rule Cover Internet ‘Make-Money’ Schemes?” specifically asking about the marketing and sale of web stores. The text of the rule seemed to indicate that the answer was yes.
It defines “business opportunity,” in pertinent part, as a solicitation, for a “payment” (of any amount), to “enter into a new business” in which the seller offers to “provide outlets, accounts, or customers, including … internet outlets, accounts, or customers, for the purchaser’s goods or services.” “Providing outlets, accounts or customers,” means, in pertinent part, “requiring … recommending …[or] “providing a list of …[or] collecting a fee on behalf of … lead-generating companies … or otherwise assisting the prospective purchaser in obtaining … outlets, accounts, or customers.” (Emphasis added.) It does not include providing “advertising and general advice about business development and training.”
While the Federal Trade Commission document explaining the rule hardly discusses internet-based, work-at-home opportunities, the explicit inclusion of “internet outlets, accounts, or customers” within the definition of “business opportunity,” and identification of “lead-generating” support as one form of covered seller assistance, left no doubt of the FTC’s intention to enforce the rule against internet make-money schemes. To the extent digital stores are deemed to be “outlets” or “accounts” within the meaning of the rule, and helping purchasers of such internet-based opportunities to get leads is deemed to be “providing customers,” then the biz-op rule does apply, and the FTC has a powerful weapon to add to its Section 5 statutory authority over unfair and deceptive business practices in policing this type of online offering.
What makes the rule so formidable as a regulatory tool are its disclosure and earnings claim substantiation requirements. It is, in essence, a disclosure regulation, requiring detailed written disclosure, in a prescribed form, of material information, including the basis of earnings claims – the sine qua non of biz-op offers. A seller must disclose, at least seven days prior to sale: a) who it is; b) whether it’s making an earnings claim; c) whether it has been involved in legal actions; d) whether it has a cancellation or refund policy; and e) a list of purchasers within the past three years. If the seller makes earnings claims, has been involved in legal actions, or has a cancellation or refund policy, it must provide supplementary information substantiating the claims, identifying the legal actions, and stating the key terms of the cancellation/refund policy.
Shortly after the rule took effect, the FTC initiated a well-publicized sweep to enforce the new rule against several alleged violators. Only one was offering a web-based business opportunity, which involved helping the purchaser set up websites to use to work with big retailers. Since that splash, enforcement of the rule has been infrequent, with no further actions at all against sellers of web stores.
Until now. Last month, in FTC v. AWS LLC, et al., the FTC obtained a temporary restraining order (TRO) shutting down the business and freezing the assets of sellers of the Amazing Wealth System (AWS), an allegedly exclusive “plug-and-play” system to assist purchasers in launching and growing a new online business as third-party sellers on Amazon. As stated in the complaint, AWS meets the definition of a “business opportunity” under the biz-op rule because it offered consumers, for a “payment,” the opportunity to “enter into a new business,” with a representation by the sellers that they would provide them with an “internet outlet” in the form of one or more Amazon stores or accounts where they would be able to sell products as third-party sellers on Amazon.
Defendants promised prospective purchasers: (1) assistance to get up and running on Amazon; (2) access to wholesalers and major suppliers (i.e., “outlets” or “accounts”); storage, handling, packing, labeling, shipping, and inventorying of products to sell on Amazon; (3) exclusive access to authentic products likely to sell at "healthy'' profit margins on Amazon; (4) “tips, tricks, and techniques" to profit and out compete other third-part sellers on Amazon; and (5) login access to the AWS Members Area, to obtain coaching, top-tier wholesale suppliers, and tools to help them systematize and grow their business. The price ranged from $995 to more than $35,000 depending on the level of "enrollment'' or "package" and "bonuses" selected. Defendants enticed consumers to pay these steep enrollment fees with promises of “riches,” such as:
- “Get started selling on Amazon and Make $5,000-$10,000 in the next 3 days ... Even if you have never sold anything online before.”
- “For years we have been helping thousands of ordinary people … create financial freedom by implementing our systems for success on Amazon.”
- “Just last year, we sold over $12 Million on Amazon.com. Now we want to help you become our next Amazon success story.”
- “I'm going to show you how to build a business to whatever size you want it to be online, on Amazon. So whether you want an extra $20-to-$30,000 a year or you want to create a million dollar a year business, I'm going to show you how to do either of those."
- “See, in our system … our students … target minimum net ROI, is 20 percent. Write that down. Twenty percent.”
- “I'm going to show you products that are going to give you ROI 50, 80, 100, 200, 500 percent return on your money."
- “John Bean took $l,000, turned it into ... $65,000… on a very compressed time frame.”
The complaint alleges, and the court in issuing the TRO provisionally agreed, that these claims were untrue, and that “brief” earnings disclaimers were inadequate to dispel the deception. In fact, most, if not all, AWS purchasers earned no income on Amazon. The complaint also alleges that defendants violated Amazon’s own rules by, for example, instructing purchasers to post fake product reviews and recommending that they sell counterfeit goods.
It also cites findings from an internal analysis Amazon had prepared and used in a lawsuit it itself had filed against defendants that AWS purchasers were "more likely than other third-party sellers on Amazon to experience problems with their Amazon seller accounts," and AWS third-party seller accounts identified by Amazon had also “performed worse than other Amazon sellers, as demonstrated by their higher-than-average rate of customer returns and lower average sales volume and revenue."
While the biz-op rule has not been enforced with great regularity, and the conduct of the AWS sellers was, as alleged, egregious, the case serves as an important reminder to other marketers of internet-based businesses: if their offers are a “business opportunity” as defined in the rule, and they fail to heed its demanding earnings claim substantiation and disclosure requirements, they, too, can find themselves under a TRO, with their business in receivership, their assets frozen, and facing civil penalties of more than $41,000 for each violation.