HB 2480--
Session of 1997
By Committee on Federal and State Affairs

9 AN ACT supplementing the Kansas consumer protection act; relating to 10 business opportunities; prohibiting certain acts and providing remedies 11 for violations. 12 13 Be it enacted by the Legislature of the State of Kansas: 14 Section 1. (a) This act shall be liberally construed and applied to 15 promote the underlying purposes of the act, which are to protect pur- 16 chasers against false, misleading or deceptive practices in the advertising, 17 offering for sale or lease and sale or lease of business opportunities and 18 to provide efficient and economical procedures to secure such protection. 19 Sec. 2. As used in this act: 20 (a) ``Business opportunity'' means the sale or lease of any products, 21 equipment, supplies or services that are sold to the purchaser upon pay- 22 ment to the seller or the seller's affiliate or designee of an initial required 23 consideration exceeding $300 and will be used by or on behalf of the 24 purchaser to begin a business and in which the seller represents that: 25 (1) The purchaser will earn or is likely to earn a profit in excess of 26 the initial consideration paid by the purchaser; and 27 (2) (A) the seller will provide locations or assist the purchaser in find- 28 ing locations for the use or operation of the products, equipment, supplies 29 or services on premises neither owned nor leased by the purchaser or 30 seller; (B) the seller will provide a sales, production or marketing pro- 31 gram; or (C) the seller will buy back or is likely to buy back any products, 32 supplies or equipment purchased or any product made, produced, fab- 33 ricated, grown or bred by the purchaser using in whole or in part the 34 product, supplies, equipment or services that were initially sold or leased 35 or offered for sale or lease to the purchaser by the seller. 36 (b) ``Business opportunity contract'' means any agreement regarding 37 a business opportunity which is intended to or does obligate a purchaser 38 to a seller. 39 (c) ``Buy-back'' or ``secured investment'' means any representation 40 that implies in any manner that the purchaser's payment is protected from 41 loss. 42 (d) ``Designee'' means a person who is designated by a seller as a 43 source of goods or services to be used by a purchaser in connection with HB 2480

 1  the business opportunity and who gives consideration to the seller in
 2  connection with the designation or the disposition of goods or services to
 3  the purchaser.
 4    (e)  ``Equipment'' includes machines, electrical devices, video and au-
 5  dio devices, molds, display racks, vending machines, coin-operated game
 6  machines, machines that dispense products and display units of all kinds.
 7    (f)  ``Initial consideration'' means the total amount a purchaser is ob-
 8  ligated to pay under the terms of a business opportunity contract prior to
 9  or at the time of delivery of the equipment, supplies, products or services
10  or within six months of the purchaser commencing operation of the busi-
11  ness opportunity plan. If the contract sets forth a specific total sale price
12  for purchase of the business opportunity plan which total price is to be
13  paid partially as a down payment and then in an additional payment or
14  installments, ``initial consideration'' means the total sale price. Initial con-
15  sideration shall not include the not-for-profit sale of sales demonstration
16  materials, samples and equipment, not to exceed $500.
17    (g)  ``Marketing program'' means advice or training provided to the
18  purchaser by the seller or a person recommended by the seller, pertaining
19  to the sale of any products, equipment, supplies or services, and the advice
20  or training includes but is not limited to preparing or providing:
21    (1)  Promotional literature, brochures, pamphlets or advertising ma-
22  terials;
23    (2)  training regarding the promotion, operation or management of
24  the business opportunity; or
25    (3)  operational, managerial, technical or financial guidelines or assis-
26  tance.
27    (c)  ``Seller'' is a principal or agent who sells or leases or offers to sell
28  or lease a business opportunity.
29    (h)  ``Person'' means an individual, partnership, corporation, associa-
30  tion or other group, however organized.
31    (i)  ``Product'' includes any tangible property, including food or living
32  animals.
33    (j)  ``Purchaser'' means an individual or sole proprietor who is solicited
34  to become obligated or does become obligated on a business opportunity
35  contract.
36    (k)  ``Services'' includes any assistance, guidance, direction, work, la-
37  bor or services provided by the seller to initiate or maintain a business
38  opportunity.
39    (l)  ``Supplies'' includes any and all materials used to produce, grow,
40  breed or make any product or item.
41    Sec. 3.  As used in this act:
42    (a)  ``Business opportunity'' does not include:
43    (1)  The sale or lease of an established and ongoing business or en-
HB 2480

 1  terprise that has actively conducted business before the sale or lease,
 2  whether comprised of one or more than one component businesses or
 3  enterprises, where the sale or lease represents an isolated transaction or
 4  series of transactions involving a bona fide change of ownership or control
 5  of such business or enterprise or liquidation thereof;
 6    (2)  any contract or agreement by which a retailer of goods or services
 7  sells the inventory of one or more ongoing leased departments to a pur-
 8  chaser who is granted the right to sell the goods or services within or
 9  adjoining the retail business establishment as a department or division
10  thereof;
11    (3)  transactions regulated by the commissioner of insurance or the
12  Kansas real estate commission, when engaged in by persons licensed by
13  those agencies;
14    (4)  real estate syndications;
15    (5)  the offer or sale of a franchise as defined under the federal pe-
16  troleum marketing practices act (15 U.S.C. 2801 et seq.); or
17    (6)  any arrangement defined as a ``franchise'' under the then current
18  federal trade commission regulations entitled disclosure requirements
19  and prohibitions concerning franchising and business opportunity ven-
20  tures in 16 C.F.R. section 436.2(a)(1)(i) if the franchisor complies in all
21  material respects in the state of Kansas with the disclosure requirements
22  and prohibitions concerning franchising in such federal trade commission
23  regulations applicable to such franchisor including the relevant exemp-
24  tions and exclusions in the regulations or an order or other action of the
25  federal trade commission. Any alternative franchise disclosure statements
26  permitted by the federal trade commission may be used in lieu of its
27  franchise disclosure requirements. This subsection applies provided that
28  prior to offering for sale or selling a franchise in this state, a person files
29  a notice with the secretary of state, along with any reasonable fee that
30  may be charged by the secretary of state to cover the costs incurred as a
31  result of this filing. The form of the notice shall be prescribed by the
32  secretary of state and shall require only the name of the franchisor, the
33  name under which the franchisor intends to do business, and the fran-
34  chisor's principal business address.
35    (b)  In any administrative, civil or criminal proceeding related to this
36  act, the burden of proving an exemption, an exception from a definition
37  or an exclusion from this act is upon the person claiming the exemption
38  exception or exclusion.
39    Sec. 4.  (a) Prior to the sale or offer for sale, including advertising, of
40  a business opportunity, the principal seller shall register such business
41  opportunity with the secretary of state by filing a copy of all disclosure
42  statements required under this act, as well as a list of the names and
43  resident addresses of those individuals who sell or will sell the business
HB 2480

 1  opportunity on behalf of the principal seller. The disclosure statements
 2  on file shall be updated through a new filing whenever material changes
 3  occur, but at least once a year. The list of salespersons shall be updated
 4  through a new filing every six months. If the principal seller is required
 5  to provide a bond or irrevocable letter of credit, or establish a trust ac-
 6  count, the seller shall contemporaneously file with the secretary of state
 7  a copy of the bond, the irrevocable letter of credit or a copy of the formal
 8  notification by the depository that the trust account is established.
 9    (b)  Any seller who has registered as required by subsection (a) and
10  does not comply with the requirements governing the updating of filings
11  made under this article may have the seller's registration terminated. The
12  secretary of state may adopt rules and regulations governing the termi-
13  nation of such delinquent registration, the effective dates thereof and any
14  grace periods. All registration terminations must be conducted in con-
15  formity with the Kansas administrative procedure act (K.S.A. 77-501 et
16  seq. and amendments thereto).
17    (c)  The secretary of state may charge a reasonable fee to cover costs
18  incurred as a result of the filing required by this section. The secretary
19  of state shall remit to the state treasurer all moneys collected from such
20  fees. On receipt of the remittance, the state treasurer shall deposit the
21  entire amount in the state treasury and credit it to the business oppor-
22  tunity fee fund.
23    (d) (1)  There is hereby created in the state treasury the business
24  opportunity fee fund. Moneys in the fund shall be expended only for the
25  purpose of administering the registration provisions of this act. Expend-
26  itures from the fund shall be made in accordance with appropriation acts
27  upon warrants of the director of accounts and reports issued pursuant to
28  vouchers approved by the secretary of state or a person designated by the
29  secretary of state.
30    (2)  On or before the 10th day of each month, the director of accounts
31  and reports shall transfer from the state general fund to the business
32  opportunity fee fund interest earnings based on:
33    (A)  The average daily balance of moneys in the business opportunity
34  fee fund for the preceding month; and
35    (B)  the net earnings rate of the pooled money investment portfolio
36  for the preceding month.
37    Sec. 5.  At the time of sale the seller must provide the prospective
38  purchaser a written document, the cover sheet of which is entitled, in at
39  least 12-point boldface capital letters ``DISCLOSURES REQUIRED BY
40  KANSAS LAW.'' Under this title shall appear the following statement in
41  at least 10-point boldface type: ``The State of Kansas has not reviewed
42  and does not endorse, approve, recommend or sponsor any business op-
43  portunity. The information contained in this disclosure has not been ver-
HB 2480

 1  ified by the state. If you have any questions about this investment, see an
 2  attorney before you sign a contract or agreement.'' Nothing except the
 3  title and required statement shall appear on the cover sheet. The disclo-
 4  sure document shall contain the following information:
 5    (a)  The name, birth date and address of the seller, whether the seller
 6  is doing business as an individual, partnership, corporation or other busi-
 7  ness entity; the names under which the seller has done, is doing or intends
 8  to do business; and the name of any parent or affiliated company that will
 9  engage in business transactions with the purchasers or who takes respon-
10  sibility for statements made by the seller;
11    (b)  the names, addresses and titles of the seller's officers, directors,
12  trustees, general partners, general managers, principal executives, stock-
13  holders owning more than 20% of the stock shares of the seller and any
14  other persons charged with the responsibility for the seller's business
15  activities relating to the sale of business opportunities;
16    (c)  the length of time the seller has:
17    (1)  Sold business opportunities; and
18    (2)  sold business opportunities involving the products, equipment,
19  supplies or services currently being offered to the purchaser;
20    (d)  a full and detailed description of the actual services that the busi-
21  ness opportunity seller undertakes to perform for the purchaser;
22    (e)  a copy of a current (not older than 13 months from the date
23  prepared) financial statement of the seller prepared according to gener-
24  ally accepted accounting principles, updated to reflect material changes
25  in the seller's financial condition;
26    (f)  if training is promised by the seller, a complete description of the
27  training, the length of training and the cost or travel and lodging expenses
28  of that training, which cost or expense the purchaser will be required to
29  incur;
30    (g)  if the seller promises services to be performed in connection with
31  the placement of equipment, products, or supplies at a location, the full
32  nature of those services as well as the nature of the agreements to be
33  made with the owners or managers of the location where the purchaser's
34  equipment, product or supplies will be placed;
35    (h)  if the business opportunity seller is required to secure a bond or
36  establish a trust account, either of the following statements:
37    (1)  ``As required by Kansas law, the seller has secured a bond issued
38  by ____________, a surety company authorized to do business in this state.
39  Before signing a contract to purchase this business opportunity, you
40  should confirm the bond's status with the surety company.''; or
41    (2)  ``As required by Kansas law, the seller has established a trust ac-
42  count with ____________. Before signing a contract to purchase this busi-
43  ness opportunity, you should confirm with the bank or savings institution
HB 2480

 1  the current status of the trust account.'';
 2    (i)  if the seller is required to deliver to the purchaser the product,
 3  equipment, supplies or services necessary to begin substantial operation
 4  of the business and states a definite or approximate delivery date, the
 5  following statement: ``If the seller fails to deliver the product, equipment,
 6  supplies or services necessary to begin substantial operation of the busi-
 7  ness within 45 days of the delivery date stated in your contract, you may
 8  notify the seller in writing and cancel your contract.'';
 9    (j)  if the seller makes any statement concerning sales or earnings that
10  may be made through this business opportunity, a statement disclosing:
11    (1)  The total number of purchasers of business opportunities involv-
12  ing the product, equipment, supplies or services being offered who, to
13  the seller's knowledge, have actually achieved sales of or received earnings
14  in the amount or range specified within three years prior to the date of
15  the disclosure statement; and
16    (2)  the total number of purchasers of business opportunities involving
17  the product, equipment, supplies or services being offered within three
18  years prior to the date of the disclosure statement;
19    (k)  a statement disclosing whether any person listed in response to
20  subsection (a) or (b) has:
21    (1)  At any time during the previous seven years, been convicted of a
22  felony, or pleaded nolo contendere to a charge of a felony, involving fraud,
23  embezzlement, fraudulent conversion, deceptive commercial practices or
24  misappropriation of property;
25    (2)  at any time during the previous seven years, been held liable in a
26  civil action resulting in a final judgment, or has settled out of court any
27  civil action or is a party to any civil action, involving allegations of fraud,
28  embezzlement, fraudulent conversion or misappropriation of property or
29  the use of untrue or misleading representations in an attempt to sell or
30  dispose of real or personal property or the use of unfair, unconscionable,
31  unlawful or deceptive business practices; or
32    (3)  is subject to any currently effective injunction or restrictive order
33  relating to business activity as a result of an action brought by a public
34  agency or department;
35    (b)  with respect to each disclosure required by subsection (k), the
36  identity and location of the court or agency; the date of the conviction,
37  judgment or decision; the penalty imposed; the damages assessed; the
38  terms of the settlement or the terms of the order; and the date, nature
39  and issuer of the conviction, judgment or decision;
40    (m)  a statement disclosing the name and location of any person listed
41  in response to subsection (a) or (b) who has, at any time during the pre-
42  vious seven years:
43    (1)  Filed in bankruptcy;
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 1    (2)  been adjudged bankrupt;
 2    (3)  been reorganized due to insolvency; or
 3    (4)  been a principal, director, executive officer or partner of any other
 4  person that has so filed or was so adjudged or reorganized, during or
 5  within one year after the period that such person held such position in
 6  relation to such other person;
 7    (n)  with respect to each disclosure required by subsection (m), the
 8  name and location of the person having filed or been adjudged or reor-
 9  ganized, the date thereof and any other material facts relating thereto;
10  and
11    (o)  a copy of the business opportunity contract that the seller uses as
12  a matter of course and that is to be presented to the purchaser at closing.
13    Sec. 6.  Every business opportunity contract shall be in writing and
14  shall be subject to the provisions of this act. A copy of the fully completed
15  contract and all other documents the seller requires the purchaser to sign
16  shall be given to the purchaser at the time the purchaser signs the con-
17  tract.
18    Sec. 7.  Every business opportunity contract shall set forth the follow-
19  ing in 10-point type (or equivalent size, if handwritten):
20    (a)  The terms and conditions of payment, including the initial con-
21  sideration, additional payments and down payment required;
22    (b)  a full and detailed description of the acts or services the seller will
23    undertake to perform for the purchaser;
24    (c)  the seller's principal business address and the name and the ad-
25  dress of its agent in the state of Kansas authorized to receive service of
26  process;
27    (d)  the delivery date or, when the contract provides for staggered
28  delivery times to the purchaser, the approximate delivery date of those
29  products, equipment, supplies or services the seller is to deliver to the
30  purchaser's home or business address or are to be placed by the seller at
31  locations owned or managed by persons other than the purchaser;
32    (e)  a complete description of the nature of the buy-back or secured
33  investment arrangement, if the seller has represented orally or in writing
34  when selling, leasing, soliciting or offering a business opportunity that
35  there is a buy-back or that the investment is secured.
36    (f)  a notice that the buyer has the right to cancel the contract until
37  midnight of the 10th calendar day following the signing of the business
38  opportunity contract.
39    Sec. 8.  Any assignee of the business opportunity contract or the sel-
40  ler's rights is subject to all equities, rights and defenses of the purchaser
41  against the seller.
42    Sec. 9.  Every seller shall at all times keep and maintain a complete
43  set of books, records and accounts of business opportunity sales made by
HB 2480

 1  the seller. All documents relating to each specific business opportunity
 2  sold or leased shall be maintained for five years after the date of the
 3  business opportunity contract.
 4    Sec. 10.  If the business opportunity seller represents that the buyer
 5  is assured of making a profit from the business opportunity in question,
 6  the principal seller must have obtained a surety bond by a surety company
 7  authorized to do business in this state, established a trust account or
 8  obtained an irrevocable letter of credit. The amount of the bond, trust
 9  account or irrevocable letter of credit shall be in an amount not less than
10  $100,000. The bond, trust account or irrevocable letter of credit shall be
11  in the favor of the state of Kansas. Any purchaser who is damaged by any
12  violation of this act or by the seller's breach of contract for the business
13  opportunity sale or of any obligation arising therefrom may bring an action
14  against the bond, trust account or irrevocable letter of credit to recover
15  damages suffered, except that the aggregate liability of the surety, trustee
16  or issuer shall be only for actual damages and in no event shall exceed
17  the amount of the bond, trust account or irrevocable letter of credit.
18    Sec. 11.  (a) A business opportunity seller shall not:
19    (1)  Fail to comply with any provision of this act;
20    (2)  employ any representation, device, scheme or artifice to deceive
21  a purchaser;
22    (3)  make any untrue statement of a material fact or omit to state a
23  material fact in connection with the documents and information required
24  to be furnished to the secretary of state or prospective purchaser;
25    (4)  represent that the business opportunity provides or will provide
26  income or earning potential of any kind unless the seller has documented
27  data to substantiate the claims of income or earning potential and dis-
28  closes this data to the prospective purchaser at the time such represen-
29  tations are made; or
30    (5)  make any claim or representation in advertising or promotional
31  material or in any oral sales presentation, solicitation or discussion be-
32  tween the seller and the prospective purchaser that is inconsistent with
33  the information required to be disclosed by this act.
34    (b)  Any violation of the provisions of this act shall be deemed a de-
35  ceptive act or practice under the Kansas consumer protection act.
36    (c)  The attorney general may review the required disclosure state-
37  ments filed with the secretary of state pursuant to this act. If a disclosure
38  statement filed with the secretary of state fails to comply with the require-
39  ments of this act in any way, the attorney general, in addition to other
40  remedies provided under the Kansas consumer protection act, may:
41    (1)  Notify the secretary of state and the seller in writing of the defi-
42  ciency; the secretary of state shall attach a copy of the notice from the
43  attorney general to the front of the disclosure statement; upon inquiry of
HB 2480

 1  the status of such a disclosure statement, the secretary of state shall dis-
 2  close that a statement has been filed but that the correctness of the state-
 3  ment has been questioned by the attorney general's office; and
 4    (2)  file suit to enjoin the seller from doing business until the failure
 5  to comply has been corrected.
 6    Sec. 12.  This act shall be a part of and supplemental to the Kansas
 7  consumer protection act.
 8    Sec. 13.  This act shall take effect and be in force from and after its
 9  publication in the statute book.