Request By:
Mr. Lewis Kelly
Administrative Supervisor
Division of Securities
Department of Banking and Securities
911 Leawood Drive
Frankfort, Kentucky 40601
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Ruth H. Baxter, Assistant Attorney General
Your office has requested an opinion regarding two sections of the Sale of Business Opportunities Act. First, you have requested an interpretation of the application of KRS 367.819 to National Photo Supply Company, Inc. (National Photo). This Ohio corporation, doing business in Kentucky, is seeking registration with your office pursuant to the provisions of Sale of Business Opportunities Act. The question posed by the Department of Banking and Securities is whether the thirty (30) day cooling-off-period provision of KRS 367.819 requires National Photo to refund the entire $5,000 investment by a consumer-investor at any time during said thirty (30) days despite expenses or commissions incurred by the corporation as a result of assisting the consumer-investor with his or her new business. Second, you have asked if a foreign state surety is acceptable in light of KRS 367.815(2).
I.
KRS 367.819 provides that "(T)he purchaser of a business opportunity has the right to cancel such purchase for any reason at any time prior to midnight of the thirtieth (30th) calendar day after signing a contract for purchasing the business opportunity. " If the company offering the business opportunity fails to provide the locations as represented, fails to deliver the goods or merchandising materials, or fails to obtain a registration number, then the consumer-investor may cancel at any time. KRS 367.819(1)(a-c). The one exception to these cancellation provisions is found in KRS 367.819(9):
"The purchaser may not cancel a purchase of a business opportunity if the products or inventory furnished to the purchaser cannot be returned to the seller in substantially as good condition as when received by the buyer."
Within fifteen (15) days of the notice of cancellation, the seller is required by KRS 367.819(7) to tender to the consumer any payments made by him and to terminate all financial obligations created by the investment.
The cancellation provisions of KRS 367.819 were undoubtedly established by the Kentucky General Assembly to allow a consumer-investor an adequate period of time to reflect upon his or her investment and its potential for realizing the earnings represented by the company offering the opportunity. This period of time is especially significant in the sale of business opportunities, the Legislature must have felt, because it provided for an initial thirty (30) day cancellation for any reason with unlimited time for cancellation if the company-offeror breaches its agreement or fails to comply with the state registration provisions. It is noteworthy that the only exception to the requirement that the company must refund to the consumer-investor his entire payment and cancel his investment obligation concerns tangible products or inventory which ". . . cannot be returned to the seller in substantially as good condition as when received . . ." by the consumer. KRS 367.819(9). Thus, it is our conclusion that the General Assembly did not intend, and the statute does not allow, company-offerors to deduct any other amounts for alleged expenses, "set-up" fees or commissions from the payments and/or purchase price of the consumer's investment, other than the excepted items noted in KRS 367.819(9).
Moreover, this conclusion seems consistent when one reviews a similar cancellation provision found in the Home Solicitation Sales Act, KRS 367.410, and the Federal Trade Commission Trade Regulation, 16 CFR 429, 37 Federal Reporter 22934, 38 Federal Register 30105, 33766. KRS 367.440(2) notes that if cancellation is made by the consumer within the statutory three (3) day "cooling off" period, the goods received by the consumer must be tendered in "substantially as good condition as when received by the seller. " However, if the seller has for some reason performed any services pursuant to the sale and prior to its cancellation, he is entitled to no compensation for his services. KRS 367.560(3).
II.
KRS 367.815(2) provides that all companies registering pursuant to the Sale of Business Opportunities Act furnish a bond of twenty-five thousand dollars ($25,000) with ". . . a surety acceptable" to the Division of Securities. There is no statutory requirement that the surety be issued from a Kentucky corporation or business. Accordingly, it appears that the Division is free to accept foreign state sureties that can provide bonds in the amount and under the conditions enumerated in the Act.