The Federal Trade Commission is proposing a rule to protect consumers from bogus business opportunities and enhance law enforcement efforts in this area. The rule is intended to cover business opportunities commonly touted by fraudsters, while minimizing compliance costs for legitimate businesses . The proposed rule defines business opportunity as a situation that includes (a) a solicitation to enter a new business, (b) payment or a promise of payment to a third party, and (c) an earnings claim or an offer to provide business assistance. The FTC uses the Franchise Rule and the FTC Act to attack fraudulent business opportunities. However, neither is specifically designed for the typical scams that occur with these schemes. The FTC’s Notice of Proposed Rulemaking states that “unlike most franchises, business opportunities are permeated with fraud.”  A strong and vigorously enforced Business Opportunity Rule could protect millions of Americans from being swindled.
This article focuses on the rule as it applies to the opportunity to earn money in multilevel marketing (MLM), in which independent distributors sell products, recruit more distributors, and theoretically profit from both their own sales and those of the people they recruit. The Direct Sales Association, whose members include many MLMs, estimates that 13 million Americans are involved in MLMs today and that the sales of products and services through MLMs totaled more than $29 billion in 2003. Since 1980, I have examined the offerings of more than 150 MLMs that sell health-related products and found that all of them have misrepresented their products, their income opportunity, or both.
The proposed rule would include MLMs by eliminating the $500 minimum investment requirement from the Franchise Rule. The proposed rule would also eliminate many of the disclosures (such as trademarks) that are required for franchises but do not currently apply to business opportunities. Instead, it would require a one-page disclosure that includes:
- Whether or not sellers make earnings claims
- A list of any criminal or civil legal actions against the seller or its representatives that involve fraud, misrepresentations, or deceptive or unfair trade practices
- The terms of any cancellation or refund policies
- The total number of purchasers in the past two years
- The number of those purchasers seeking a refund or to cancel in that time period
- Names of people who can provide references
The proposed rule would also prohibit unfair or deceptive practices that are common among business opportunity sellers, including misrepresentations about the material terms of the business relationship, misrepresentations of endorsements or testimonials, and failure to honor refunds.
The FTC’s current proposal in intended to require all sellers of business opportunities to provide sufficient information to enable prospective buyers to make an informed decision about their probability of earning money. As far as I know, no health-related MLM has ever voluntarily disclosed such information. The proposed rule would not require any seller to make an earnings claim. However, those that do would be required to have a reasonable basis and written substantiation and provide a printed “Earnings Claims Statement” that includes:
- The title ‘‘EARNINGS CLAIM STATEMENT REQUIRED BY LAW’’ in capital, bold type letters
- The name of the person making the earnings claim and the date of the earnings claim
- The earnings claim
- The beginning and ending dates when the represented earnings were achieved
- The number and percentage of all purchasers during the stated time period who achieved at least the stated level of earnings
- Any characteristics of the purchasers who achieved at least the represented level of earnings, such as their location, that may differ materially from the characteristics of the prospective purchasers being offered the business opportunity
- A statement that written substantiation for the earnings claim will be made available to the prospective purchaser upon request
I believe this proposal should be strengthened in several ways:
- Because the promise of high income is the cornerstone of MLM recruiting, all MLMs should be required to comply with the earnings-claim disclosure rules and no MLM company should be permitted to make “no earnings claims.” Second, great care should be taken in constructing the details of the rule so that MLM disclosures are clear, meaningful, and conspicuous. All MLMs should be required to disclose in a clear and understandable format (such as easily interpreted percentile columns), and separate from all other materials furnished to prospective distributors:
- Total company revenue from distributors based in the United States
- The total number of distributors in the United States involved in the company for at least three years or since the company’s founding if the company is less than three years old.
- The number of terminations and the number of new recruits for each of the past three years in the United States.
- The net increase (new ones less those who drop out) in the number of distributors in the various ranks of the upline as a percent of all who have been distributors for three years
- The percentile incomes of all who have signed up for a distributorship in the United States. (In other words, “the top 10% averaged $_____, the next 10% averaged $_____, etc.”) Percentile income is far more meaningful than “average” income (total company income divided by the number of distributors) because including the income of top distributors would make the “average” higher than most distributors make. Income data should not be limited to those a company would describe as “active distributors.”
- Income as described above should be defined as money the company pays to distributors minus all money the distributors pay to the company. However, it should be disclosed that this does not take into account distributor expenses such as advertising, exhibiting, travel, purchase of sales aids from non-company sources, or other overhead.
- The percentage of U.S.-based distributor income derived from sales outside of the United States
- To ensure that the rules are conspicuous and to help the FTC monitor compliance, copies of all disclosures should be given to each distributor and posted on each company Web site. In addition, all distributor Web sites that solicit new distributors should either post the earnings claim statement or link to it on the company Web site.
- To facilitate comparison and further consumer education, the FTC should maintain a separate Web site that contains the final Business Opportunity Rule, the individual company disclosures, and other information that would assist prospective business opportunity investors.
How to Comment
Commission is seeking public comments on the proposed rule. The FTC has published a list of questions it would like addressed, but comments are welcome any aspect of the rule. The comment period will close on July 17, 2006, and rebuttal comments are due by August 7th. Comments can be submitted online or on paper. Online comments are limited to 4000 characters in the body of the message, but additional documents can be attached. Those filed in paper form should refer to “Business Opportunity Rule, Matter No. R511993” both in the text and on the envelope, and should be mailed or delivered to: Federal Trade Commission; Office of the Secretary; Room H-135 (Annex W); 600 Pennsylvania Avenue, NW; Washington, DC 20580. If a comment contains any material for which confidential treatment is requested, it must be filed in paper form and the first page of the document must be clearly labeled “Confidential.” Comments filed in paper form should be sent by courier or overnight service, if possible, because postal mail in the Washington area and at the Commission is subject to delay because of heightened security precautions.
- Overview of Multilevel Marketing
- Complete Federal Register Notice of Proposed Rulemaking
- Copy of Proposed Rule (just the rule itself)
- Suggestions for Supportive Comments
- Statement from Pyramid Scheme Alert
- Statement from Douglas Brooks, Esq.
- Statement from Consumer Awareness Institute
- Industry Plan to Defeat MLM Regulation
This page was revised on July 17, 2006.