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FTC Business Opportunity Rule Exemption Falls Short…Intent Clear…Draft Language Too Ambiguous: MLMLegal.com and DSA offer Suggested Clarifying Language
Jeffrey Babener, Babener and Associates
Right direction…but still seriously short of the goal…one more try should "get there"…
In April 2006, the FTC released a sweeping proposed change in its FTC Business Opportunity Rule. During the following two-year period, the FTC received more than 17,000 comments on its proposed rule, the majority of which were from companies, representatives and distributors in the MLM industry. The vast majority of comments raised serious concerns regarding the onerous and burdensome nature of the proposed rule, as well as extending the scope of the rule to the MLM /Direct Selling industry. In addition, scores of members of Congress weighed in with concerns about the impact on a well-established industry that involved millions of home-based businesses.
On March 18, 2008, the FTC responded favorably to constructive criticism, and announced that it was seeking to modify the Proposed Business Opportunity Rule to exempt MLM companies. (As part of its explanation of MLM exemption, the FTC cited comments from the editor of www.mlmlegal.com, Babener & Associates.) The FTC issued a Revised Proposed Business Opportunity Rule for comment. The revised draft, announced with the intent of exempting MLM companies, is still flawed in that its wording may still inadvertently create applicability to many leading MLM companies because proposed "definitions" section 437.1(c)(3)(ii) may mistakenly include MLM/Direct Selling companies that assist in customer gathering on the web, in print, institutional or co-op advertising campaigns or other customer lead generation programs. However, the proposed rule represents a good faith start to narrow the scope of the Proposed FTC Business Opportunity Rule and invite comments from the public to assist in this process. At the very least, the FTC was unequivocal in its stated intent to exempt the MLM industry, noting in its public statement:
Two industry organizations, MLMLegal.com (sponsored by the law firm of Babener and Associates, editors; Jeffrey Babener, editor) and the DSA (Direct Selling Association) "weighed in" with constructive comments and suggestions that would help effectuate the FTC stated intent to exempt the MLM and Direct Selling industry from the Proposed FTC Business Opportunity Rule. MLMLegal.com opined:
A Constructive Critique of the FTC Revised Proposed Business Opportunity Rule
In addition to the DSA and other direct selling, direct sales and network marketing commentators, MLM Lawyer Jeffrey Babener and www.mlmlegal.com, weighed in with detailed constructive suggestions on refinements to the proposed FTC Business Opportunity Rule:
DSA weighs in with Constructive Comments
On a similar wavelength to the suggestions of MLM Lawyer Jeffrey Babener and www.mlmlegal.com, the DSA (Direct Selling Association) offered constructive criticism of the FTC Revised Proposed Business Opportunity Rule, to help avoid an inevitable "ambiguity driven" collision between the Direct Selling industry and future FTC enforcement implementation of the updated FTC Business Opportunity rule:
A Threshold Trigger or "At Cost" or "Not-for-Profit" Exemption has a Long Historical Precedent
Although, the adoption of a stand-alone Business Opportunity Rule may be a new endeavor for the FTC, it may look for guidance to its own Franchise Rule which provides a $500 threshold exemption in a far more complex business opportunity arena. The FTC may look to state franchise statutes which typically exempt "purchase of goods" (which is broader in scope of exemption than merely "inventory") at bona fide wholesale prices and also often adopt a $500 threshold. The FTC may draw on guidance from a myriad of state MLM statutes and pyramid legislation in which it is not unusual to find an exemption for "at cost" sales and marketing materials.
Most importantly, in fashioning a free-standing Business Opportunity Rule, the FTC should draw on the successful implementation of Business Opportunity legislation at the state level which has been ongoing for several decades. Such legislation, which exists in approximately two dozen states almost invariably adopts a threshold required payment within the first six months, typically $500, and also typically exempts the purchase of "at cost" sales support materials.
Of the two dozen states with Business Opportunity statutes threshold exemptions, fourteen adopt $500, four adopt $300, four adopt $250 and two adopt $200. Not only is the threshold exemption precedent in Business Opportunity legislation "proven" and several decades old, almost all states also adopt a further exemption for "at cost" sales and marketing support materials that also exempts the typical MLM/Direct Selling business. In fact, although MLM/Direct Selling companies routinely register under state MLM Distribution statutes, it is "rare to never" for a MLM/Direct Selling company to register under a state Business Opportunity statute. A typical Business Opportunity exemption may be found in the South Dakota Business Opportunity Act, one of the states with a lower $250 threshold:
South Dakota Codified Laws Section 37-25A-3, subsections (2) and (6):
Recommended: Call Out the MLM/Direct Selling Exemption and Other Typical Exemptions
In summary, the FTC's stated intent, to exempt MLM/Direct Selling companies from the Revised Proposed Business Opportunity Rule, has clearly moved the discussion in a direction much appreciated by the MLM/Direct Selling industry and in keeping with the detailed analysis of the issue set forth by the FTC. However, four recommendations are respectfully suggested to achieve the intent of the FTC that will further FTC objectives, create consistency with a long-standing state tradition of regulation of business opportunities, and finally, address the goals and needs of the MLM/Direct Selling industry:
Please see the follow links for the complete text of the comments to the FTC by www.MLMLegal.com (MLM Lawyer Jeffrey Babener of Babener & Associates) and the DSA (Direct Selling Association).
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