Almost everyone is familiar with the concept of franchises and franchise law but many people are unaware of another statute governing business opportunities called the Texas Business Opportunities Act. The importance of understanding this law cannot be understated due to the penalties involved – failure to comply is by law a deceptive trade practice in violation of the Texas Deceptive Trade Practices Act. So here is what you need to know.
What is a “business opportunity?”
A business opportunity can be quite literally, anything. Whether the opportunity falls within the statutory definition is determined by the promises or representations made by the person or entity selling the opportunity.
To fall within the statutory definition of a “business opportunity,” the seller must:
- sale or lease more than $500 of products equipment, supplies, or services that the purchaser will use to begin a business;
- the seller must represent that the purchaser will or is likely to earn a profit in excess of the amount paid to the seller; and
- the seller must:
- provide a location or assistance in finding a location for the business;
- provide a sales, production or marketing program; or
- make a promise to buy back or buy back the products, equipment, supplies, or products resulting from them.
Are there exceptions to the definition of a “business opportunity?”
Yes, there are a number of exceptions to the definition of a business opportunity. For example, franchises that comply with the federal Franchise Rule can claim an exemption from the Texas Business Opportunities Act. Other examples of exceptions include the sale or lease of an established and ongoing business, a retailer’s sale of goods or services, a sale or lease to a business enterprise that also sells or leases other products, equipment ,or supplies, and exceptions for certain high net worth individuals. There are detailed rules and requirements for each exemption that must be carefully scrutinized to ensure the transaction fits within the exemption.
In addition, exemptions are not always automatic. To claim an exemption as a franchise, the franchisor must file an exemption notice with the secretary of state’s office.
What does the Texas Business Opportunities Act require if you intend to offer a “business opportunity” for sale or lease?
The Texas Business Opportunities Act lists a number of requirements for sellers to comply with in order to avoid sanctions under the statute. For example, there are record keeping requirements as well as bonding, trust account, and letter of credit requirements. Most importantly, sellers are required to register the business opportunity with the secretary of state and provide specific disclosures in a disclosure statement provided to prospective purchasers. The statute also lays out minimum time periods for providing the disclosure statement to a purchaser before they can purchase the business opportunity.
The act also provides specific requirements for the terms that must be included in the business opportunity contract.
What disclosures does the Texas Business Opportunities Act require in a disclosure statement?
Before offering a “business opportunity” for sale, the seller must file a copy of the disclosures with the secretary of state’s office. The seller must provide a copy of the disclosure statement to each prospective purchaser. The act requires the disclosure statement to contain, among other things, information relating to the following topics:
- A statutorily specified cover sheet.
- Names and address for the seller as well as information on the seller’s business.
- Information regarding the sales period for the business opportunity.
- A detailed description of the services the seller will perform.
- Recent financial statements of the seller.
- A detailed description of any training services offered by the seller in connection with the business opportunity.
- A description of the security maintained by the seller as required by statute.
- Information on delivery dates and cancellation rights.
- Information supporting any sales or earnings representations made by the seller.
- A history of legal actions involving the seller and certain individuals involved in the seller’s business.
- Information regarding any bankruptcies or reorganizations involving the seller or certain individuals involved in the seller’s business.
- A copy of the business opportunity contract.
What acts does the Texas Business Opportunities Act prohibit?
The act specifically prohibits sellers from the following:
- Employing a representation, device, scheme, or artifice to deceive a purchaser;
- Making an untrue statement of a material fact or omitting to state a material fact in connection with the documents and information required to be provided to the secretary of state or a purchaser;
- Representing that the business opportunity provides or will provide income or earning potential unless the seller:
- has documented data to substantiate the representation of income or earning potential; and
- discloses the data to the purchaser when the representation is made; or
- Making a claim or representation that is inconsistent with the information required to be disclosed by the act in:
- any advertising or other promotional material; or
- any oral sales presentation, solicitation, or discussion between the seller and the purchaser.
You can read more frequently asked questions regarding business opportunities on the Secretary of State’s website.
You can also read more about Texas business opportunities on the Attorney General’s website.