|Received:||7/13/2006 10:08:57 PM|
|Subject:||Business Opportunity Rule|
|Title:||Notice of Proposed Rulemaking|
|CFR Citation:||16 CFR Part 437|
Comments:Proposed section 437.1(h): All Multi-Level Marketing (Direct Sales) companies should be required to disclose earnings statistics (not be allowed to pretend at making 'no earnings claims'.) Most importantly, they need to disclose net income from retail sales, not just commissions payed by the company. // It is unrealistic to think that Multi-Level marketing (MLM) businesses might not make earnings claims. These businesses will typically recruit people via unrecorded, face-to-face conversations. It will be difficult to prove what recruiters have said. Besides, there are many subtle ways these companies and their agents give impressions about earnings potential, and it's highly unlikely any MLM business will stop them all. For example: // a) Agents develop printed forms, disguised as 'training documents', which are really most often used as recruitment tools (or to encourage inventory buying.) The form will provide blanks for the 'Business Opportunity buyer' to fill in goals, for example: [ I will talk to ___ people this week.] [ I will hold ____ selling events.] [I will sell at least ___ at each event] The agent will present the forms during a recruiting session, fill in some 'possible' (albeit unlikely) numbers, and make calculations on how much the 'buyer' could expect to earn if they accomplish those goals. (Later, agents add calculations on how much inventory they will need.) I have seen this several times personally, and have heard of it being done from a surprising number of people around the country on message boards. // b) Typically, MLMs offer incentives or prizes for varying levels of inventory purchases. This system of graduated incentives leaves a very strong impression that it is reasonable for the 'opportunity buyer' to make enough sales to support buying inventory at the lower prize levels on a regular basis. Furthermore, the agents tell potential recruits about the prizes they themselves have won, and recognize others for their prizes. This is certainly an implied claim about how much these people are earning (although in truth it only tells how much they've bought.) These claims are often misleading, since many people make a one-time atypical purchase when first starting, and these purchases are recognized as if they're a regular thing even if they are never supported by actual retail sales. // Furthermore, the natural thing for a reasonable person to expect, in the absense of any earnings claims, is that some reasonable number (say, 20%) of those buying the 'opportunity' actually make (rather than lose) some amount of money. For some MLMs, close to 99% of people lose money on them. This is clearly important information for the buyer to know when deciding whether to get involved with an 'opportunity.' // Section 437.2(a) This is a very good provision as it stands. // Section 437.3(a)(5) Many multi-level marketing companies report earnings statistics based only on 'active' members (i.e, they exclude drop-outs from their statistics.) Since the rule will not require them to report drop-out rates, they must be required to include inactive members in any earnings numbers they provide. // 437.3(a)(6) I only wish this were available 5 year ago. However, there needs to be a provision to ensure that very popular companies can not cherry-pick references. Suppose, for example, there are already 100 reps in the potential buyer's zip code. Is it reasonable to expect the company to figure out which 10 are truly the closest to the address of each purchaser? If the recruiter can pick any 10 in the zip code, he can choose references he knows to be enthusiastic and ensure they're at the top of the list. Also, recently recruited but inactive members should not be allowed to be ommitted from the list (if they are closest.) The references of these members, including reasons they did not keep up with the business, could be very valuable information to the prospective 'buyer'.