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FTC Proposed Business Opportunity Rule:
DSA Speaks Out

Jeffrey Babener, Babener and Associates

? 2006

In April 2006, the FTC released a sweeping proposed change in its FTC Business Opportunity Rule. The proposal was immediately and strongly criticized by representatives of and experts in the MLM, Direct Sales, Direct Selling, Network Marketing and Party Plan industry. The process to a completed Rule is expected to last 18 months to 3 years. The DSA (Direct Selling Association) has assumed the primary role in organizing the industry response to the FTC Proposed Business Opportunity Rule. It has issue the below public announcement press release and, among many interested industry parties, is the "filer" of record of comments to the FTC on the FTC Proposed Business Opportunity Rule, representing the position of hundreds of its members, including such major companies as Avon, Tupperware, Shaklee, Alticor (Quixtar), Primerica, PrePaid Legal, Mary Kay, Herbalife, Pampered Chef, Creative Memories, etc. On going public statements by the DSA are to be found at its website at www.dsa.org. For extensive analysis, text of the actual FTC Proposed Business Opportunity Rule and ongoing updates, please visit www.mlmlegal.com.

DSA Position Statement on FTC Proposed Business Opportunity Rule

Among leading spokespersons for the Direct Selling industry, the Washington D.C. based Direct Selling Association (DSA), is clearly at the forefront on the challenges posed by the FTC Proposed Business Opportunity Rule. The trade association and its various subcommittees and member companies coordinate a multifaceted campaign to address the tremendous hardship that would fall upon an industry with approximately 14 million earners in the U.S. alone. Below is the actual text of the position statement issued by the DSA on the FTC Proposed Business Opportunity Rule.

DSA Public Position Statement:
Constructive Comments Sought

Upon the premature publication of his obituary, Mark Twain once famously remarked that the reports of his death had been greatly exaggerated. By now, you may have heard various reports that suggest direct selling will shortly meet with an untimely end. Rest assured, though, that as in Twain's case, the reports of this imminent demise, come July, are premature. To be sure, direct sellers are severely threatened, perhaps more so than at any time in the professional lives of most executives of direct selling companies, but as an industry, we are poised to act, and prevail.

So what is it that can so swiftly and directly impact our business model? The culprit is an ill advised proposed rule from the United States Federal Trade Commission (FTC) designed to eliminate business opportunity frauds like work at home frauds (e.g. envelope stuffing) and "pyramid marketing schemes." The proposal would, if it becomes effective, have dire consequences for direct sellers. More precisely, it would:

  • Regulate direct selling like a "mini-franchise"
  • Require direct sellers to provide recruits with a set of "disclosure statements" before they sign up
  • Impose a seven-day waiting period before any recruit could be signed up or pay any money toward their direct selling activity
  • Mandate that the names and phone numbers of at least 10 other direct sellers in the same area be given to the recruit as "references"
  • Broadly define an "earnings claim" to include a photo of an expensive car, and require disclosure of certain earnings information as a result

The rule and accompanying comments are more than 100 pages long, so you can imagine that there is a lot more to be concerned about than can be reflected in this column. Suffice it to say that the FTC has been ham-handed in its proposal, and does not seem to understand, or care, about the effect their new regulation might have on direct selling and individual direct sellers. In fact, it appears clear that the FTC intended to cover direct sellers in their rule, and have significantly underestimated the dramatic consequences for legitimate businesses.

So why isn't the sky falling, Chicken Little? Here's the good news. The Direct Selling Association (DSA) has mobilized every resource at its disposal to respond to the proposal, and while the rule could become effective as early as next fall, all indications are that the rulemaking process will take two to three more years before anything is finalized (this is the federal government, after all!) Some history may help put the matter into context. The FTC has had some form of this rule since the late 70s. Direct sellers were usually not covered because the cost of getting involved in direct selling was minimal (less than the $500 threshold of the old rule.) The FTC has been revising the rule ever since, and DSA and direct sellers have been commenting all along the way. In the 1990s, the FTC began a process to create different rules for large investment franchises and smaller business opportunities. DSA and its members submitted significant written comment and participated in in-person workshops. The finalization of the stand-alone Franchise Rule took many years.

No matter, DSA and its members are taking the immediate threat seriously and going forward as if a rule could come out at any time. Clearly, despite years of discussion and comment, there is much work yet to be done. Here's our plan:

  • Communicate to all interested industry parties (i.e. DSA member companies, other direct selling organizations, industry publications like DSN) about the threat
  • Inform other non-direct selling businesses and business organizations about the potential threat to their businesses
  • Ensure that all affected businesses (including all DSA members) submit comment to the FTC by the deadline (The current deadline in June 16, but we've asked for an extension of time to file comments given the severity of the proposal)
  • File DSA's own comments and request public workshops so the industry can discuss the issue with FTC in a frank, constructive format
  • Alert lawmakers and the Administration to the proposal and its potentially devastating consequences for direct sellers if not amended.

What's next? DSA comments will suggest alternative approaches to combating business opportunity fraud. It is in our interest, after all, to make sure that these frauds don't confuse things for the good guys - us. We'll continue the push for significant change in the proposal during the anticipated workshops and our discussions with FTC staff. Ultimately, any proposal will have to be voted on by the five FTC Commissioners themselves. Their approval of the FTC-staff authored proposal is not a sure thing, and as we've said, probably won't come for some time. Should the worst happen and a bad rule is issued, we'll press our case with the Administration and through legislation on Capitol Hill. We'll challenge a bad rule in the courts, if necessary.

We're confident, however, that a united industry, working together through DSA to make sure reason sees the light of day, should prevail in this critical challenge. We'll propose constructive solutions when we can, and fight wrong-headed proposals with our last breaths. We have the strength of the efforts, aspirations and dreams of 13.6 million Americans on our side. The reports of our demise are clearly exaggerated.

End of DSA Public Position Statement

Please click here to download and read the complete text in PDF format of the FTC Proposed Business Opportunity Rule

Look for ongoing updates on the status of the FTC Proposed Business Opportunity Rule at MLMLegal.com Copyright Jeffrey Babener Jeffrey Babener

On any given day you can catch Jeffrey Babener, editor of www.mlmlegal.com, lecturing on Network Marketing at the University of Texas or the University of Illinois, addressing thousands of distributors in Los Angeles, Bangkok, Tokyo and Russia, or writing a new book on Network Marketing, an article for Entrepreneur Magazine or a chapter for a University textbook. Over two decades he has served as marketing and legal advisor to some of the world's largest direct selling companies, the likes of Avon, Nikken, Shaklee, Tupperware, Prepaid Legal, Longaberger, Melaleuca, Discovery Toys, Usana, Amazon Herb, NuSkin, Cell Tech, Sunrider?. and he has provided counsel to the most successful telecom network marketing companies...Excel, ACN, World Connect, ITI, Acceris, AOL Select and Network 2000. An active spokesperson for the industry, he has assisted in new legislation and served on the Lawyer's Council, Government Relations Committee and Internet Task Force of the Direct Selling Association (DSA) as well as serving as General Counsel for the Multilevel Marketing International Association. He is an MLM attorney supplier member of the DSA and has served as legal counsel and MLM consultant on MLM law issues for many DSA companies. He is author of multiple books, including, Network Marketing: What You Should Know, Network Marketer's Guide To Success, Tax Guide for MLM/Direct Sellers, Starting and Running the Successful MLM Company, The MLM Corporate Handbook and Window of Opportunity. He is author of countless articles on network marketing, many of which can be found at www.mlmlegal.com where he is the editor. You will see his articles and interviews in such publications as Money, Atlantic Monthly, Success, Entrepreneur, Business Startups, Home Office Computing, Inc., Money Makers Monthly, etc. He has been chairman of numerous industry conference series, including, Starting and Running the Successful MLM Company, The MLM Entrepreneur Series and The MLM Masters series. He has served as the close advisor to scores of MLM Companies and their distributors, comprising millions of distributors and billions of dollars in sales. Mr. Babener is a graduate of the University of Southern California Law School, where he served as editor of the USC Law Review. After an appointment to be an advisor law clerk to a U.S. Federal Judge, he went on to become a member of the California and Oregon State Bar, where he has also served as chairman of the Oregon State Bar Committee on Judicial Administration. He has exclusively practiced in the area of direct selling for over 20 years. A Regulatory Update for MLM,Direct Selling, Network Marketing, Direct Sales, Party Plan Independent Distributors and Companies

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