During the 1849 gold rush, tens of thousands of people flocked west to stake their claims. While some struck it rich, most went bust. Little did they know that the real “gold” was not in prospecting, but in selling the picks and shovels to mine those often worthless claims.
Selling the promise of riches and then profiting by selling the means to those riches is still a tried-and-true formula. Today, thousands of unscrupulous operators peddle it daily under the broad guise of a “business opportunity.” It’s the most persistent type of business fraud, and thanks to the Internet, it’s growing exponentially.
The new year is a good time to focus attention on this age-old problem, because starting a business is always a popular New Year’s resolution. Most corporate downsizings also occur at this time of year. Those affected may be out of a job, but typically they also receive severance checks worth thousands of dollars. It’s the perfect setup for a business opportunity fraud. According to law enforcement authorities, scammers zero in on individuals who want to earn extra money or be their own boss, and they appeal to emotions. As one official said, “Who doesn’t want checks rolling in every week through the mail?”
The Federal Trade Commission (FTC) and about 26 states regulate business opportunities, and according to an examination of their records, the basic formula of these scams is always the same. Someone wants to sell you the means to what they claim will be easy riches. Upfront fees for these “proven” and “lucrative” opportunities are often relatively low. They can range from $500 to $20,000. But like the gold rush miners of old, investors often discover that these opportunities just don’t pan out.
While the basic formula for business opportunity fraud doesn’t vary, its application is only limited by the imagination of the perpetrators. Broadly, they include work-at-home scams, pyramid schemes, and the sale of prepackaged small businesses involving everything from vending machines to medical billing services.
These scams seem to come in waves. They become popular and proliferate quickly, mainly over the Internet, then fade away almost as fast, usually after colorfully named crackdowns and lots of publicity. According to state and federal records, here is a sampling of some high-profile cases over the last few years:
“Operation Missed Fortune,” involving the FTC and law officials from 25 states, netted more than 75 companies engaged in business opportunity fraud. The companies made false promises about high earnings; sometimes referred consumers to phony references or “shills” who gave glowing, but false, reports about the business; and frequently failed to provide detailed business disclosure documents required by federal or state law.
In a separate investigation, a Florida-based company was cited by the FTC for selling DVD and VHS movie rental machines. The company misrepresented the income potential; failed to find high-traffic locations for the rental machines as promised; and provided bogus customer references. Variations on this theme include companies that sold Internet kiosks, ATMs, dollar change machines, and portable Breathalyzers for bars.
Several other companies were cited for a variation of that scam involving merchandise racks for such things as plush toys, cigars, coffee, jewelry, and greeting cards. In this situation, the company sold the racks, offered to find in-store locations, and promised to supply top-quality merchandise. But the merchandise turned out to be out-of-date or returns from other stores. Even so, the vendors were charged retail prices for the goods. The promised locations were never provided and vendors discovered that their “exclusive” territories had been sold to others as well.
Work-at-home schemes are also popular and can involve everything from envelope stuffing and record keeping to billing operations and craft assembly. In some cases, victims discovered that they had to pay the postage or buy the craft supplies upfront, but never received the promised reimbursement. In a variation of this theme inspired by the proliferation of home computers, one company was busted by the feds for selling an at-home Web site promotion software and services business.
Another operation known as “Project Buylines” cracked down on 900-number schemes. Unlike display rack or vending machine schemes, which involve servicing dozens of racks or machines, pay-per-call franchise marketers promise “effortless” revenue, according to the FTC. Investors were told they only needed to purchase the lines, advertise, and “wait for the profits to roll in.” For as little as $4,000 upfront, investors were told they could make up to $200,000 a year.
Of course, many business opportunities and home-based business offers are legitimate, and there are ways to tell the difference between sound opportunities and scams. First and foremost is the age-old truism: If the offer sounds too good to be true, then it probably is. Beyond that, there are a few other rules of thumb. For example, companies that provide opportunities must comply with the FTC’s franchise rule. That requires them to make a number of upfront disclosures about the opportunity. The FTC publishes several publications that spell out these obligations.
Starting a small business can be a rewarding, life-fulfilling career. Or it can be a potential nightmare. As P.T. Barnum once said, a sucker is born every minute. As long as that’s the case, business opportunity fraud will persist. The best way to avoid becoming a victim is to arm yourself with the information you need to make intelligent decisions, and avoid those offers that seem too good to be true.