Flushing Out Frauds

Flushing Out Fraudsyou'renot provided with such a document from the
© 2002 Elena Fawknercompany whenyou ask for it, assume the
"... ALWAYS carry out your own due diligence!opportunity is a fraud until provenotherwise.
Remember,if it sounds too good to be true, it2. If the opportunity is not being offered in one of
probably is."these 13states, determine whether it falls within the
Regular readers will recognize the above language. Itdefinition ofa franchise under the FTC's Franchise &
comesfrom the "Caveat Emptor" section whichBusiness Opportunity
appears towards theend of each issue of ARule. If so, check whether a disclosure document has
Home-Based Business Online.beenfiled with the FTC. If not, assume the
Good advice to be sure (even if I do say so myself).opportunity's a frauduntil proven otherwise.
Butwhat does "due diligence" mean and how do you3. If the opportunity doesn't fall within the federal or
do it?statedefinitions of what constitutes a franchise, if it's
Basically, it means to be diligent in researching yourbeing offeredin one of the states with business
proposedbusiness opportunity so you can be as sureopportunity laws on its bookswhich requires
as you can bewhat you're getting into and why.disclosure documents to be filed with the state,check
All very well and good, but how do you actually dothat it has been. If not, assume the opportunity's
iteffectively?afraud until proven otherwise. If the state doesn't
Stock-standard advice includes:require filing,and the company doesn't provide you
1. Check with the BBB about whether yourwith a disclosuredocument when you ask for one,
opportunityhas any complaints filed against it.again assume the opportunity'sa fraud until proven
2. Do a Dun & Bradstreet search to find out aboutotherwise.
itscredit history.Also, bear in mind that just because your state may
3. Check business references.not havebusiness opportunity disclosure laws, other
4. If practical, visit the place of business.states do. Manybusiness opportunities are offered
Only one problem with this approach. Although it's anationally. Where that's thecase, make enquiries of
goodstart for researching a legitimate opportunity, itthe states that do have businessopportunity
won't flushout a fraudulent one.disclosure laws to see if the company has complied.
A newly formed company won't have any complaintsIf it has, that should provide some comfort (all other
filedagainst it with the BBB. D&B won't be much helpthingsbeing equal).
since scamartists will generally keep their tradeThe above approach is kind of an initial disqualifying
creditors in goodstanding until immediately beforeround. Ifthe opportunity is required to provide some
they pull up stakes andvanish into the night. Businessform of disclosureand fails to do so, that's a big red
references are invariablynothing but shills (associatesflag.
of the scammer paid for theirrecommendationOf course, just because you receive the disclosure
services). And few potential purchasersliving in Newdocumentdoesn't necessarily mean that this is a good
York are likely to travel to California just tolay eyesbusinessopportunity for you. All it does is
on the so-called corporate headquarters of(theoretically) provide youwith enough information
theiropportunity. Even if they do, a serviced officefrom which you can make yourdetermination. At the
gives justthe right professional impression.end of the day, you must still exerciseyour own
So, how do you flush out a fraudulent businessgood judgment.
opportunity?There are still going to be situations where a
Well, there's a hard way and there's an easy way.disclosuredocument is not required to be provided
Thehard way (which is oh so easy at the time) is tothough, simply becausethe opportunity is not a
fork overyour money and then watch as it fliesfranchise and it's not being offered in astate that has
away. The easy waybusiness opportunity disclosure laws.
(which is oh so difficult at the time, at leastSo, here's a 10-point checklist of things to do and
compared tojust handing over your money) is to usecheck whenyou have nothing else to rely on. In fact,
your state's and/orthe FTC's disclosure laws forthey're a good ideaeven if you do have a disclosure
business opportunities (ifavailable) and thendocument to review. Anyinconsistency between the
methodically work through the informationavailable todisclosure document and your owninvestigations gives
you until you have enough information to makeyou another question to ask.
anintelligent decision.1. Check with the BBB in the city in which the
There are 23 states in the United States withcompany isbased. Although no complaints don't
businessopportunity laws on their books. Most prohibitnecessarily meananything, complaints that have been
sales of businessopportunities unless the seller givesfiled do.
prospective purchasersdisclosure documentation that2. Check with D&B. Again, although a good report
has been filed with the state.doesn'tnecessarily mean anything, a bad one does.
The 23 states are: California, Connecticut, Florida,3. Check with the Chamber of Commerce in the city
Georgia,in whichthe company is based. Whether the company
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine,is a member ornot doesn't mean anything but you
Maryland,can still ask about theirreputation or whether there's
Michigan, Minnesota, Nebraska, New Hampshire, Northany reason why someoneshouldn't do business with
Carolina,them.
Ohio, Oklahoma, South Carolina, South Dakota,4. Check with your state's Attorney General's office
Texas, Utah,and
Virginia and Washington. (See for linksto moreSecretary of State for any complaints or
information.)pendinginvestigations.
In addition, if the business opportunity falls within5. Ask for a list of references of previous local
thedefinition of a franchise or is a vending machine orpurchasersincluding name, address, telephone number
display rackopportunity, the FTC's Franchise &and when theyentered into the opportunity. Make it
Business Opportunity Rulemandates detailedclear that you wanta list of people you can meet
disclosures such as identifying informationabout theface to face. If the companyis reluctant to provide
franchisor (the person offering thethis, be suspicious.
businessopportunity), the franchisor's business6. If your opportunity is being presented on a web
experience, litigationhistory, bankruptcy history, initialsite,check to make sure there is a physical address
funds required, recurringfunds required, financial(not justa post office box) and contact telephone
information about the franchisor andmuch more . Anumbers. Andcheck them out.
franchise is defined broadly and just becauseit's not7. Look carefully at the business experience of
referred to as a franchise doesn't mean it isn't. Seethemanagement behind your opportunity. If they
for the fulltext of the Rule.leave a trail ofshort-term ventures in their wake this
The point of all of this is that many, perhaps most,could be a sign they'reeither not particularly good at
opportunitiesyou'll come across will either fall withinwhat they do or they have tomove on frequently (if
the FTC's definition ofa franchise and thereby triggeryou get my drift). Also, look forspecifics - names,
the federal disclosurerequirements (or, if the franchisedates, places. Vague statements like "10years
offer is made in California,experience in the widget industry" are meaningless.
Illinois, Indiana, Maryland, Michigan, Minnesota, NewAskfor details. Who, what, when, where and why
York,(did you leave?).
North Dakota, Oregon, Rhode Island, South Dakota,8. Beware vague, generalized or evasive answers to
Washington or Wisconsin, state franchiseduediligence questions that require simple factual
disclosurerequirements) or, if not technically aanswers. Youwant to hear "123 Main Street, Suite
franchise, the opportunitymay very well fall within the405, Your Town" inresponse to the question, "What
scope of the state businessopportunity disclosureis your corporate address?".
laws of the 23 states listed earlier.If you get a "Why do you want to know?" instead,
So, when considering a particular businessmove on.
opportunity, takethis approach:9. Beware policies that require payment for product
1. Determine whether it is being offered in one of theand/orsupplies by check or money order only. By not
13 states with franchise disclosure laws. If so,accepting creditcards, the ability dispute charges for
determinewhether the opportunity is a franchise asdefective or non-existentproduct is eliminated.
defined under thestate's law. If so, check whether10. Most important of all, trust your gut instinct. If it
the state requires thedisclosure document to be filedall justsounds too good to be true, it probably is.
with the state. If so, checkwhether it has been. If** Reprinting of this article is welcome! **
not, assume the opportunity's a frauduntil provenThis article may be freely reproduced provided that:
otherwise. If the state in question doesn't requirethe(1) youinclude the following resource box; and (2) you
disclosure document to be filed with the state andonly mail toa 100% opt-in list.