FTC Business Opportunity Summary – MLM

This is a guest post from top MLM consultant, Jay Leisner. Jay is the President of Sylvina Consulting. Compensation plan design, business performance reviews, and software consulting are three of Sylvina’s specialties. Jay is also a partner with me for the Direct Selling Edge conference for MLM startups. While Jay is not a lawyer, I have yet to see a better summary of the Business Opportunity regulation than this one. I could not have written a better summary than the one prepared below.

There’s a lot of uncertainty surrounding this new business opportunity regulation. In my opinion, 99% of the traditional MLMs out there have nothing to worry about. However, with the newer internet based companies that rely heavily on lead generation, the regulation poses a significant challenge. I hope you find this article informative.

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This month, I attended the 2012 Global Regulatory Summit held by the Direct Selling Association in Washington, DC. It is an annual event attended primarily by lawyers and employees of direct selling companies who are responsible for legal compliance.

In March 2012, the Federal Trade Commission or FTC promulgated a significant new Business Opportunity Rule known as Rule 16 C. F.R. Part 437 (click here to download a full copy of the regulation). Direct selling companies are not specifically or explicitly excluded from this rule.

If your company is subject to this rule, potential buyers of your business opportunity must be given a one-page disclosure statement at least seven calendar days before the prospective buyer signs an agreement or pays any amount of money for the business opportunity.

If you have a direct selling company with independent representatives who recruit others to sell and recruit, anything that slows down the recruiting process isn’t good for recruiters or your company because during the waiting period, some new recruits will change their minds and opt not to enroll! Fortunately, there are things you can do to not be subject to this new rule.

Before explaining these things, I’d like to tell you about the one-page disclosure statement referenced above. It must include full disclosure of any civil or criminal legal actions that the company or any of its key personnel have been the subject of within the last 10 years (regardless of the outcomes). This means that if your company was sued by an independent representative and you were the prevailing party, you would still need to disclosure this legal action. The disclosure statement must also include the names and telephone numbers of at least 10 people who have purchased this business opportunity from the seller. If the seller has sold the business opportunity to less than 10 people, then all of them must be listed. In addition, the person receiving the disclosure statement is notified that if he or she purchases the business opportunity, that person’s identity may be disclosed to future prospective business opportunity purchasers.

Rule 16 C.F.R. Part 437 defines a business opportunity as a commercial arrangement in which:

  1. A seller solicits a prospective purchaser to enter into a new business; and
  2. The prospective purchaser makes a required payment; and
  3. The seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will
    1. Provide locations for the use of operation of equipment, displays, vending machines, or similar devices, owned, leased, controlled, or paid for by the purchaser; or
    2. Provide outlets, accounts or customers, including but not limited to, Internet outlets, accounts, or customers, for the purchaser’s goods or services; or
    3. Buy back any or all of the goods and services that the purchaser makes, produces, fabricates, grows, breeds, modifies, or provides, including but not limited to payment for such services as, for example, stuffing envelopes from the purchaser’s home.

A new business means a business in which the prospective purchaser is not currently engaged, or a new line or type of business.

A required payment is all consideration that the purchaser must pay to the seller or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the business opportunity. Such payment may be made directly or indirectly through a third party. A required payment does not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease.

Providing locations, outlets, accounts, or customers means furnishing the prospective purchaser with existing or potential locations, outlets, accounts, or customers; requiring, recommending or suggesting one or more locations or lead generating companies; providing a list of locator or lead generating companies; collecting a fee on behalf of one or more locators or lead generating companies; offering to furnish a list of locations; or otherwise assiting the prospective purchaser in obtaining his or her own locations, outlets, accounts, or customers, provided, however, that advertising and general advice about business development and training shall not be considered as “providing locations, outlets, accounts, or customers.”

The first two elements of a business opportunity as defined above clearly apply to you as your direct selling company offers a new business for which a required payment is made. It is the third element that may or may not be relevant, that is, whether your company suggests or provides customers or lead generating companies to the purchasers of your business opportunity.

Some direct selling companies provide leads to their representatives or suggest the use of lead generation companies. If a company refers prospective customers or representatives to existing representatives, will this practice cause a direct selling company to be subject to this new business opportunity rule? If a company has a relationship with a lead generation company and encourages its representatives to buy leads from this third party, will this similarly be a problem? Does it matter whether these practices are disclosed by your company to new representatives at the time they join? Does the number of leads provided as compared to the total number of new customers or representatives enrolled have any relevance? If leads are given only to representatives who have achieved a specific rank or higher in your compensation plan, does that matter?

Party plan representatives may offer a hostess who signs up on the night of the party to be a consultant the opportunity to be credited with this party as her own, that is to say, she may offer the party and its customers and sales to the joining consultant as an incentive to purchase the business opportunity. Could this practice cause the party plan company to be subject to the new business opportunity rule? If a company doesn’t encourage this practice, does that make this practice irrelevant to the business opportunity rule?

I wish I could tell you the answers to these questions, but I can’t because the rule is new and we just don’t know exactly how it will be interpreted and enforced. With this information, you can choose to change nothing and just wait and see what happens, or you can take steps now to respond to the new rule in town. The most conservative approach would be to (a) not recommend the use of lead generating companies, (b) not provide leads or customers to representatives, and (c) not suggest that representatives “gift” a party to a hostess. All of these steps are achievable, although they may be a change to how you’re doing business today.

End article
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See below for the FTC’s short summary of the regulation.

MLM Startup Conference – DS Edge

Ultimate MLM Startup Conference

The Direct Selling Edge conference for MLM startups is back!  The event kicks off on Thursday, September 20th in Las Vegas.  Purchase your ticket before August 15 and save $50 per ticket.  See below for a link to purchase your ticket.  The details for the conference can be found on our MLM Startup Conference page.  Based on feedback from attendees, we’ve made the agenda stronger and added more content.  We’re very pleased to announce two new speakers.  There’s been a lot of discussion lately about the importance of solid compliance to ensure the safety and longevity of network marketing companies.  With this in mind, we’ve got the great Donna Marie Serritella.  As the founder of Direct Selling Solutions, she leads MLMs and leading distributors in the areas of compliance consulting and distributor compliance relations.  She’s literally written the book on the subject.  We’re very excited to have her!

We’re also excited to announce the participation of another great vendor, Karen Clark.  She’s is the founder of My Business Presence, a social media training company for network marketing companies. She began her direct selling career as an independent representative who achieved the highest title in her company’s compensation plan in just seven years. Karen now works with independent consultants of direct selling companies to master the world of internet marketing, including the effective use of social media. She’s also the co-author of two books, Incredible Business and Direct Selling Power.

UPDATE: Daren Falter will also be joining us! Daren is a MLM celebrity. Daren has experienced success both as a distributor in the field and as a company owner. Daren wrote one of the most widely read books in the network marketing industry: How to Select a Network Marketing Company. Daren will be speaking about one of the most important topics: Recruiting Top Leaders. It’s going to be fun!

See below for a complete agenda.

DS Edge – 2012 Agenda

We’re also happy to be working once again with MLM software guru, Mel Atwood, from YourSolutions.net. Mel brings an incredible level of commitment, energy and passion to his work for MLM clients.  Whether he’s serving as the Vice President at the Association of Network Marketing Professionals or adding value as a fellow DSA supplier member, Mel’s activity inside and outside of his software firm adds tremendous value to the industry.

And of course, Jay Leisner of Sylvina Consulting will rock the house with great content regarding compensation plan design. Jay has an amazing ability of taking complex principles regarding compensation design and explaining them in terms that are easy to understand and actionable.

Satisfaction is 100% guaranteed.  

At the end of each day, from 5 until 8 pm, you’ll have the the opportunity to meet with conference speakers for 30 minute appointments at no additional cost! Add the six hours up and you’re easily walking away with over $1,000 worth of consultation.

Register Now

If you purchase by August 15, you can save $50 per ticket, no questions asked.   After August 15, prices return to normal at just $199 per ticket.    

Eventbrite - Direct Selling Edge Conference for New MLM and Party Plan Companies

I sincerely hope to see you there!

Testimonials

    • Definitely worth the money. As a matter of fact, after 30 minutes, I think I got my money’s worth. I found out that my business plan was not legal and by the end of this, I’ve learned all the tools and information to make this work. It’s a really good program.  Zach Taylor
    • Thank you for the most crucial information supporting my Party Plan Business. This 2 day class was exactly what I needed! Great job by everyone! Absolutely every aspect of my business was covered. Thank you again. Cheryl Wollrab
    • I was amazed at the information. I thought it was going to be a broad stroke event to get you with different vendors. I was very surprised to see all of the targetted topics, how in depth they went into discussing very important issues, for anyone whose considering getting into the MLM business as a startup company. Mike Duke

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