[Federal Register: March 26, 2008 (Volume 73, Number 59)] [Proposed Rules] [Page 16109-16138] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr26mr08-35] [[Page 16109]] ----------------------------------------------------------------------- Part II Federal Trade Commission ----------------------------------------------------------------------- 16 CFR Part 37 Business Opportunity Rule; Proposed Rule [[Page 16110]] ----------------------------------------------------------------------- FEDERAL TRADE COMMISSION 16 CFR Part 437 RIN 3084-AB04 Business Opportunity Rule AGENCY: Federal Trade Commission. ACTION: Revised Notice of Proposed Rulemaking. ----------------------------------------------------------------------- SUMMARY: The Federal Trade Commission (the ``Commission'' or ``FTC'') is publishing a revised Notice of Proposed Rulemaking to amend Part 437, the trade regulation rule governing sale of business opportunities that are not covered by the amended Franchise Rule. The revised proposed Business Opportunity Rule (or ``the Rule'') is based upon the comments received in response to an Advance Notice of Proposed Rulemaking (``ANPR''), a Notice of Proposed Rulemaking (``NPRM''), and other information discussed in this notice. The revised proposed Business Opportunity Rule would require business opportunity sellers to furnish prospective purchasers with specific information that is material to the consumer's decision as to whether to purchase a business opportunity and which should help the purchaser identify fraudulent offerings. The proposed rule also would prohibit other acts or practices that are unfair or deceptive within the meaning of Section 5 of the Federal Trade Commission Act (the ``FTC Act''). DATES: Written comments must be received on or before May 27, 2008. Rebuttal comments must be received on or before June 16, 2008. ADDRESS: Interested parties are invited to submit written comments. Comments should refer to ``Business Opportunity Rule, R511993'' to facilitate the organization of comments. A comment filed in paper form should include this reference both in the text and on the envelope, and should be mailed or delivered, with two complete copies, to the following address: Federal Trade Commission/Office of the Secretary, Room H-135 (Annex S), 600 Pennsylvania Avenue, NW, Washington, DC 20580. Comments containing confidential material, however, must be filed in paper form, must be clearly labeled ``Confidential,'' and must comply with Commission Rule 4.9(c).\1\ The FTC is requesting that any comment filed in paper form be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions. Moreover, because paper mail in the Washington area and at the Agency is subject to delay, please consider submitting your comments in electronic form, as prescribed below. --------------------------------------------------------------------------- \1\ The comment must be accompanied by an explicit request for confidential treatment, including the factual and legal basis for the request, and must identify the specific portions of the comment to be withheld from the public record. The request will be granted or denied by the Commission's General Counsel, consistent with applicable law and the public interest. See Commission Rule 4.9(c), 16 CFR 4.9(c). --------------------------------------------------------------------------- Comments filed in electronic form should be submitted by using the following weblink: https://secure.commentworks.com/ftc-bizopRNPR/ (and following the instructions on the web-based form). To ensure that the Commission considers an electronic comment, you must file it on the web-based form at the weblink https://secure.commentworks.com/ftc- bizopRNPR/. If this notice appears at http://www.regulations.gov, you may also file an electronic comment through that website. The Commission will consider all comments that regulations.gov forwards to it. You may also visit the FTC website at http://www.ftc.gov/opa/ index.shtml to read the Revised Notice of Proposed Rulemaking and the news release describing this proposed Rule. The FTC Act and other laws the Commission administers permit the collection of public comments to consider and use in this proceeding as appropriate. The Commission will consider all timely and responsive public comments that it receives, whether filed in paper or electronic form. Comments received will be available to the public on the FTC website, to the extent practicable, at http://www.ftc.gov. As a matter of discretion, the FTC makes every effort to remove home contact information for individuals from the public comments it receives before placing those comments on the FTC website. More information, including routine uses permitted by the Privacy Act, may be found in the FTC's privacy policy, at http://www.ftc.gov/ftc/privacy.htm. Comments on any proposed filing, recordkeeping, or disclosure requirements that are subject to paperwork burden review under the Paperwork Reduction Act should additionally be submitted to: Office of Information and Regulatory Affairs, Office of Management and Budget, Attention: Desk Officer for the Federal Trade Commission. Comments should be submitted via facsimile to (202) 395-6974 because U.S. Postal Mail is subject to lengthy delays due to heightened security precautions. FOR FURTHER INFORMATION CONTACT: Monica Vaca (202) 326-2245, Division of Marketing Practices, Room 286, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580. SUPPLEMENTARY INFORMATION: This Revised Notice of Proposed Rulemaking seeks comment on a revised proposed Business Opportunity Rule. In addition to minor wording and punctuation changes to improve clarity, the revised proposed rule modifies the initial proposal in six significant ways: It narrows the scope of the proposed Rule to avoid broadly sweeping in sellers of multi-level marketing opportunities, while retaining coverage of those business opportunities sellers historically covered by the FTC's original Franchise Rule (and by the FTC's interim Business Opportunity Rule), as well as coverage of sellers of work-at- home schemes; It cures a potential overbreadth problem that may have inadvertently swept in companies using traditional product distribution arrangements; It eliminates the previously-proposed requirement that a covered business opportunity seller disclose the number of cancellation and refund requests it received; It eliminates the requirement to disclose litigation history of certain sales personnel (while retaining the requirement to disclose litigation history of the seller, its principals, officers, directors, and sales managers, as well as any individual who occupies a position or performs a function similar to an officer, director, or sales manager); It adds a requirement to include a citation to the Rule in the title of the required disclosure document; and It prohibits misrepresenting that the government or any law forbids providing prospects with a list of prior purchasers of a business opportunity. The Commission invites interested parties to submit data, views, and arguments on the proposed Business Opportunity Rule and, specifically, on the questions set forth in Section J of this notice. The comment period will remain open until May 27, 2008. To the extent practicable, all comments will be available on the public record and placed on the Commission's website: http://www.ftc.gov/os/ publiccomments.htm. After the close of the comment period, the record will remain open until June 16, 2008, for rebuttal comments. If necessary, the Commission also will hold hearings with cross- examination and post- [[Page 16111]] hearing rebuttal submissions, as specified in Section 18(c) of the FTC Act, 15 U.S.C. 57a(c). Parties who request a hearing must file a comment in response to this notice and a statement explaining why they believe a hearing is warranted, how they would participate in a hearing, and a summary of their expected testimony, on or before May 27, 2008. Note that because the NPR has been revised, parties interested in a hearing must resubmit their request in comments to this Revised NPR. Parties testifying at a hearing may be subject to cross- examination. For cross-examination or rebuttal to be permitted, interested parties must also file a comment and request to cross- examine or rebut a witness, designating specific facts in dispute and a summary of their expected testimony, on or before June 16, 2008. In lieu of a hearing, the Commission will also consider requests to hold one or more informal public workshop conferences to discuss the issues raised in this notice and comments. Section A. Background The Commission is publishing this Revised Notice of Proposed Rulemaking pursuant to Section 18 of the FTC Act, 15 U.S.C. 57a et seq., and Part 1, Subpart B, of the Commission's Rules of Practice. 16 CFR 1.7, and 5 U.S.C. 551 et seq. This authority permits the Commission to promulgate, modify, and repeal trade regulation rules that define with specificity acts or practices that are unfair or deceptive in or affecting commerce within the meaning of Section 5(a)(1) of the FTC Act. 15 U.S.C. 45(a)(1). On December 21, 1978, the Commission promulgated a trade regulation rule entitled ``Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures'' (the ``Franchise Rule'') to address deceptive and unfair practices in the sale of franchises and business opportunity ventures.\2\ Based upon the original rulemaking record, the Commission found that franchise and business opportunity fraud was widespread, causing serious economic harm to consumers. The Commission adopted the Franchise Rule to prevent fraudulent practices in the sale of franchises and business opportunities through pre-sale disclosure of specified items of material information. --------------------------------------------------------------------------- \2\ Statement of Basis and Purpose (``SBP''), 43 FR 59614 (Dec. 21, 1978) (Franchise Rule codified at 16 CFR 436). --------------------------------------------------------------------------- The purpose of the Franchise Rule was not to regulate the substantive terms of a franchise or business opportunity agreement but to ensure that sellers disclose material information to prospective buyers. The Franchise Rule was posited on the notion that a fully informed consumer can determine whether a particular offering is in his or her best interest. As part of the Commission's overall policy of periodic review of its trade regulation rules, in 1995 the Commission commenced a regulatory review of the Franchise Rule.\3\ From the outset of that review proceeding, the predominant theme sounded by commenters and other participants was that the Rule, insofar as it concerned sales of business format franchises, should be more closely harmonized with state franchise regulations--i.e., the Uniform Franchise Offering Circular (``UFOC'') Guidelines. A corollary theme was that business opportunity sales should be governed by a separate regulation, in accordance with the approach followed generally at the state level. --------------------------------------------------------------------------- \3\ Rule Review, 60 FR 17656 (Apr. 7, 1995). References to the Rule Review comments are cited as: the name of the commenter, RR comment number (e.g., NASAA, RR 43). References to the Rule Review workshop conferences are cited as: name of commenter, Sept95 Tr or March96 Tr, respectively (e.g., D'Imperio, Sept95 Tr, and Ainsely, March96 Tr). A list of the Rule Review commenters and the abbreviations used to identify each in this notice is cited in the Notice of Proposed Rulemaking for the Business Opportunity Rule (``Business Opportunity Rule NPR''). See 71 FR 19054, 19092-93. --------------------------------------------------------------------------- Moreover, early in the review the issue arose as to whether the Franchise Rule's extensive disclosure requirements were well-suited to business opportunity sales and whether the Franchise Rule imposed unnecessary compliance costs on both business opportunity sellers and buyers. To ensure that the required disclosures protect prospective business opportunity purchasers, while minimizing overall compliance costs, the Commission solicited comment on whether any of the Rule's disclosures should be eliminated as unnecessary in the business opportunity context and whether any additional material disclosures should be required.\4\ --------------------------------------------------------------------------- \4\ 60 FR at 17658 (Question 14). --------------------------------------------------------------------------- At the conclusion of the Rule Review, the Commission determined to retain the Franchise Rule with modifications designed to harmonize it better with state franchise requirements. At the same time, the Commission determined to seek additional comment on whether to address the sale of business opportunities through a separate narrowly tailored new trade regulation rule. In 1997, the Commission published an Advance Notice of Proposed Rulemaking (``ANPR'') in the Federal Register,\5\ seeking further comment on several proposed Franchise Rule modifications, including the separation of disclosure requirements for sales of business opportunities from those for sales of franchises. The Commission also sought comment on the proper scope of the term ``business opportunity,''\6\ the types of business opportunities that are known to engage in deceptive or fraudulent conduct,\7\ and the types of disclosures that are material to business opportunity purchasers.\8\ --------------------------------------------------------------------------- \5\ ANPR, 62 FR 9115 (Feb. 28, 1997). References to the ANPR comments are cited as: the name of the commenter, ANPR, comment number (e.g., NASAA, ANPR 120). References to the ANPR workshop conferences are cited as: name of commenter, ANPR, date Tr (e.g., Bundy, ANPR, 6Nov97 Tr). A list of the ANPR commenters and the abbreviations used to identify each is cited in the NPR. See 71 FR at 19093-19095. \6\ 62 FR at 9116-117 and 9121 (Question 12). \7\ Id. at 9121 (Questions 8-10). \8\ Id. at 9121 (Questions 15-16). --------------------------------------------------------------------------- After assessing the comments received in response to the ANPR, the Commission decided to amend the Franchise Rule to harmonize it better with the UFOC. Accordingly, the Commission published a Franchise Rule Notice of Proposed Rulemaking (``Franchise Rule NPR''), soliciting comment on proposed revisions to the Franchise Rule,\9\ and simultaneously announcing the intention to conduct a separate rulemaking to address business opportunity sales.\10\ Agreeing with the overwhelming view of the commenters who discussed this issue during the Rule Review and in response to the ANPR, the Commission found that franchises and business opportunities are distinct business arrangements that require separate disclosure approaches. --------------------------------------------------------------------------- \9\ Franchise Rule NPR, 64 FR 57294 (Oct. 22, 1999). \10\ Id. at 57296. --------------------------------------------------------------------------- After addressing each of the required stages of rulemaking under Section 18 of the FTC Act, the Commission announced adoption of an amended Franchise Rule on January 23, 2007, and published the amended rule and accompanying Statement of Basis and Purpose on March 30, 2007.\11\ In that Federal Register notice, the Commission also separated the Franchise Rule into two distinct CFR parts--part 436 governing the sales of business format franchises, and a new part 437, governing the sales of non-franchise business opportunities. Part [[Page 16112]] 437 is identical to the original Franchise Rule, with all of the definitional elements and references regarding business format franchising deleted.\12\ Part 437 will continue to govern sales of non- franchise business opportunities, pending completion of the Business Opportunity rulemaking proceedings advanced in a Notice of Proposed Rulemaking published April 12, 2006.\13\ --------------------------------------------------------------------------- \11\ Amended Franchise Rule Statement of Basis and Purpose (``Amended Franchise Rule SBP'') 72 FR 15444 (March 30, 2007) (Amended Franchise Rule codified at 16 CFR 436). \12\ The interim Business Opportunity Rule differs from the original Franchise Rule in three respects. First, references to ``franchisor'' and ``franchisee'' in the original Franchise Rule have been changed to ``business opportunity seller,'' and ``business opportunity purchaser,'' respectively. Second, the original definition of ``franchise'' set out at 436(a)(2) has been changed to ``business opportunity,'' and the first part of the original definition--the ``franchise'' elements--has been deleted; the definition now focuses on the second part of the original definition--the business opportunity elements. Third, part 437 sets forth a new exemption for franchises that comply with or are exempt from part 436. Amended Franchise Rule SBP, 72 FR at 15444. \13\ Business Opportunity Rule NPR, 71 FR 19054 (April 12, 2006). --------------------------------------------------------------------------- Section B. The Notice of Proposed Rulemaking Having determined to create a separate rule for business opportunities, in 2006 the Commission published in the Federal Register a Notice of Proposed Rulemaking (``NPR'') on a Business Opportunity Rule,\14\ which would amend what is now designated as 16 CFR Part 437. The NPR explained the need for a Business Opportunity Rule separate from the Franchise Rule, noting particularly that business opportunities and franchises are distinct business arrangements that pose very different regulatory challenges. For example, franchises typically are expensive and involve complex contractual licensing relationships, while business opportunity sales are often less costly, involving simple purchase agreements that pose less of a financial risk for purchasers. --------------------------------------------------------------------------- \14\ Id. --------------------------------------------------------------------------- Yet, the Commission's law enforcement experience in conducting numerous sweeps of the business opportunity industry demonstrates that fraud is not only prevalent but persistent, and many comments also sounded this theme.\15\ Just in the period since 1990, the Commission has brought some 150 Franchise Rule cases against vending machine, rack display, and similar opportunities. Since 1995, the Commission has conducted more than 15 business opportunity sweeps,\16\ many with other federal and state law enforcement partners, to combat persistent business opportunity frauds violating the Franchise Rule, such as those involving the sale of vending machines,\17\ rack displays,\18\ public telephones,\19\ Internet kiosks,\20\ and 900-number ventures,\21\ among others. The great majority of these cases alleged Franchise Rule violations. To attack other forms of business opportunity fraud-- notably, work-at-home and pyramid schemes--the Commission used Section 5 of the FTC Act, because these schemes were not covered by the original Franchise Rule.\22\ --------------------------------------------------------------------------- \15\ E.g., Baer, ANPR 25, at 5; Wieczorek, 21Aug97 Tr at 35; DSA, id.; Finnigan, id. at 90; Kestenbaum, RR 14, at 3-4; Wieczorek, RR 23, at 2-3; Lewis, RR 40, Attachment at 3; CA BLS, RR 45, at 5-6; D'Imperio, Sept95 Tr at 130; Kezios, id. at 365, 631. But see MLMIA, at 7 & Exhibit A (comment submitted in response to the NPR and its attached declaration argue that fraud is not widespread in the business opportunity sector). The exhibit attached to the MLMIA's comment is belied by the Commission's law enforcement experience, described above, as well as that of the Department of Justice, described in its comment. DOJ, at 1. \16\ E.g., Project Fal$e Hope$ (2006); Project Biz Opp Flop (2005); Project Busted Opportunity (2002); Project Telesweep (1995); Project Bizillion$ (1999); Operation Money Pit (1998); Project Vend Up Broke (1998); Project Trade Name Games (1997), and Operation Missed Fortune (1996). In addition to joint law enforcement sweeps, Commission staff has also targeted specific business opportunity ventures such as envelope stuffing (Operation Pushing the Envelope 2003, medical billing (Operation Dialing for Deception 2002, and Project Housecall 1997); seminars (Operation Showtime 1998); Internet-related services (Net Opportunities 1998); vending (Project Yankee Trader 1997); and 900 numbers (Project Buylines 1996). \17\ E.g., FTC v. American Entm't Distribs., Inc., No. 04-22431- CIV-Martinez (S.D. Fla. 2004); FTC v. Pathway Merch., Inc., No. 01- CIV-8987 (S.D.N.Y. 2001); U.S. v. Photo Vend Int'l, Inc., No. 98- 6935-CIV-Ferguson (S.D. Fla. 1998); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); FTC v. Claude A. Blanc, Jr., No. 2:92-CV-129-WCO (N.D. Ga. 1992). See also FTC News Release: FTC Announces ``Operation Vend Up Broke'' (Sept. 3, 1998) (available at http://www.ftc.gov/opa/1998/09/vendup2.htm) (FTC and 10 states announce 40 enforcement actions against fraudulent vending business opportunities). \18\ E.g., U.S. v. Elite Designs, Inc., No. CA 05 058 (D.R.I. 2005); U.S. v. QX Int'l, No. 398-CV-0453-D (N.D. Tex. 1998); FTC v. Carousel of Toys, No. 97-8587-CIV-Ungaro-Benages (S.D. Fla. 1997); FTC v. Raymond Urso, No. 97-2680-CIV-Ungaro-Benages (S.D. Fla. 1997); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez (S.D. Fla. 1996); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D. Fla. 1993). See also FTC News Release: Display Racks for Trade-Named Toys and Trinkets are the Latest in Business Opportunity Fraud Schemes (Aug. 5, 1997) (available at http://www.ftc.gov/opa/1997/08/ tradenam.htm) (FTC and 8 states file 18 enforcement actions against sellers of bogus display opportunities that use trademarks of well- known companies). \19\ E.g., FTC v. Advanced Pub. Commc'ns Corp., No. 00-00515- CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Ameritel Payphone Distribs., Inc., No. 00-0514-CIV-Gold (S.D. Fla. 2000); FTC v. ComTel Commc'ns Global Network, Inc., No. 96-3134-CIV-Highsmith (S.D. Fla. 1996); FTC v. Intellipay, Inc., No. H92 2325 (S.D. Tex. 1992). \20\ E.g., FTC v. Bikini Vending Corp., No. CV-S-05-0439-LDG-RJJ (D. Nev. 2005); FTC v. Network Service Depot, Inc., No. CV-S0-05- 0440-LDG-LRL (D. Nev. 2005); U.S. v. Am. Merch. Tech., No. 05-20443- CIV-Huck (S.D. Fla. 2005); FTC v. Hart Mktg. Enter. Ltd., Inc., No. 98-222-CIV-T-23 E (M.D. Fla. 1998). See alsoFTC v. FutureNet, Inc., No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998); FTC v. TouchNet, Inc., No. C98-0176 (W.D. Wash. 1998). \21\ E.g., FTC v. Bureau 2000 Int'l, Inc., No. 96-1473-DT-(JR) (C.D. Cal. 1996); FTC v. Genesis One Corp., No. CV-96-1516-MRP (MCX) (C.D. Cal. 1996); FTC v. Innovative Telemedia, Inc., No. 96-8140- CIV-Ferguson (S.D. Fla. 1996); FTC v. Ad-Com Int'l, No. 96-1472 LGB (VAP) (C.D. Cal. 1996). \22\ Likewise, they are not covered under 16 CFR Part 437. --------------------------------------------------------------------------- The NPR highlighted features of the original Franchise Rule that excluded from its coverage certain types of schemes, such as pyramid schemes and work-at-home schemes.\23\ The Commission noted that many of these schemes fell outside the ambit of the Franchise Rule because: (1) the purchase price was less than $500, the minimum payment necessary to trigger coverage under the original Franchise Rule; (2) required payments were primarily for inventory, which did not count toward the $500 monetary threshold; (3) the scheme did not offer location or account assistance; or (4) the scheme involved the sale of products to the business opportunity seller rather than to end-users, a further limitation on coverage under the original Franchise Rule.\24\ --------------------------------------------------------------------------- \23\ Two types of work-at-home schemes mentioned in the NPR were product assembly schemes and envelope-stuffing schemes. 71 FR at 19059-19060. \24\ The limits on coverage of the original Franchise Rule and the effects of those limitations are discussed in detail in the NPR. See 71 FR at 19055. --------------------------------------------------------------------------- To bring the wide array of fraudulent business opportunities within the scope of the Rule, the NPR proposed an expansive definition of ``business opportunity.'' In addition to those business opportunities that had been covered by the original Franchise Rule, the Initial Proposed Business Opportunity Rule (the ``IPBOR'') aimed to cover work- at-home schemes and pyramid schemes.\25\ --------------------------------------------------------------------------- \25\ Id. at 19059. --------------------------------------------------------------------------- To reach these schemes, the NPR proposed a broad definition of ``business opportunity'' that would have included commercial arrangements where the seller made ``earnings claims'' or offered ``business assistance.''\26\ The Commission recognized that the most frequent allegation in its law enforcement actions against business opportunity frauds has been that the seller made false and unsubstantiated earnings claims. Therefore, the IPBOR incorporated the broad definition of ``earnings claims'' from the original Franchise Rule.\27\ --------------------------------------------------------------------------- \26\ IPBOR, 437.1(d)(3). \27\ IPBOR, 437.1(h). --------------------------------------------------------------------------- The IPBOR also defined a new term, ``business assistance,'' in a broad manner, using five illustrative examples [[Page 16113]] of the types of assistance that would trigger coverage.\28\ Among these examples, the IPBOR included ``buy back'' assistance, which refers to a seller's offer to buy back products that consumers have assembled at home.\29\ Another example captured the tracking of payments and commissions, a type of assistance that pyramid schemes routinely offer.\30\ Additionally, the definition of ``business assistance'' expressly included assistance in the form of training.\31\ --------------------------------------------------------------------------- \28\ IPBOR, 437.1(c). \29\ IPBOR, 437.1(c)(1)(iii). \30\ IPBOR, 437.1(c)(1)(iv). \31\ IBPOR, 437.1(c)(v). --------------------------------------------------------------------------- At the same time, the IPBOR excised two features of the original Franchise Rule that limited the scope of its coverage: the $500 minimum payment threshold, and the exemption for purchases of inventory at bona fide wholesale prices. By eliminating the $500 minimum payment requirement, the IPBOR would have included within its scope the various types of fraudulent business opportunity sellers that have evaded coverage under the disclosure requirements of the Franchise Rule by pricing their schemes below $500. Envelope stuffing, product assembly, medical billing schemes, and other schemes frequently are priced below the monetary threshold of Franchise Rule coverage.\32\ Additionally, the IPBOR would have ensured coverage of pyramid schemes by eliminating the inventory exemption. --------------------------------------------------------------------------- \32\ See infra Section D.1.a.1.ii. --------------------------------------------------------------------------- In response to the NPR, the Commission received more than 17,000 comments.\33\ The overwhelming majority of these comments came from the multilevel marketing\34\ (``MLM'') industry, including industry representatives, companies, and individual distributors. These commenters urged the Commission to narrow the scope of the IPBOR, to implement various safe-harbor provisions, and/or to reduce the required disclosures. Thousands of comments were form letters\35\ submitted by participants in various MLM operations, including Quixtar, Shaklee, PartyLite, Xango, among others.\36\ The Commission also received approximately 187 comments, primarily from individual consumers or consumer groups, in favor of the IPBOR.\37\ Only a handful of comments came in from non-MLM companies and industry groups, expressing various concerns about obligations that the IPBOR would impose upon them. --------------------------------------------------------------------------- \33\ References to the comments responding to the Business Opportunity Rule NPR are cited by the name of the commenter and the page number. Individual commenters are identified by their first and last names. Companies and organizations are identified by abbreviated names. A list of companies and organization that are cited herein and the abbreviations used to identify each is attached as Attachment A. \34\ Multi-level marketing is one form of direct selling, and refers to a business model in which a company distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors' direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their ``down lines.'' See Peter J. Vander Nat and William W. Keep, Marketing Fraud: An Approach to Differentiating Multilevel Marketing from Pyramid Schemes, 21 J. of Pub. Pol'y & Marketing (Spring 2002), (``Vander Nat and Keep'') at 140. \35\ Some commenters provided information demonstrating that certain MLM companies solicited their distributors to submit letters in their proposed form or template to the FTC. See e.g., James Kellogg (Quixtar); Smith (Arbonne); Anonymous (PartyLite). \36\ In addition, the Commission received form letters from participants in AdvoCare, Tastefully Simple, Nature's Sunshine, Arbonne, Lia Sophia, Mannatech, Cookie Lee Jewelry, Sunrider, Scent Station, Neways, Synergy Worldwide, Freelife, Young Living Essential Oils, and Vemma. In addition, the Commission received thousands of letters that were individualized but followed a template that covered the same issues as the form letters. \37\ Numerous letters came from individuals with negative experience with various MLMs, including Quixtar, 4Life, Mary Kay, Arbonne, Liberty League International, Financial Freedom Society, Herbalife, Xango, Melaleuca, EcoQuest, Pre-Paid Legal, PartyLite, Shaklee, Vartec/Excel, and Vemma. --------------------------------------------------------------------------- Section C. Scope of the Proposed Rule The revised proposed Business Opportunity Rule (``RPBOR'') is more narrowly tailored than the IPBOR. The RPBOR expressly excludes from coverage training and/or educational organizations that, as the comments showed, may have been inadvertently covered. In addition, the revised proposal does not attempt to cover MLMs. Instead, the Commission will continue to use Section 5, a flexible and effective weapon, against MLMs that engage in unfair or deceptive practices. In recognition of the prevalence of fraud in the sale of business opportunities, including work-at-home and pyramid schemes, the Commission had designed the IPBOR with an expansive scope in order to reach various fraudulent practices. While expanding the scope of the original Franchise Rule's coverage of business opportunities, the IPBOR greatly reduced the compliance burden that the original Franchise Rule imposed on business opportunity sellers. The Commission recognized that the extensive disclosures of the original Franchise Rule would entail disproportionate compliance costs for comparatively low-cost transactions involving the sale of business opportunities.\38\ Therefore, in an attempt to strike the proper balance, the Commission mitigated the compliance burden by including in the IPBOR substantially simplified and streamlined disclosure requirements. --------------------------------------------------------------------------- \38\ 71 FR at 10057. --------------------------------------------------------------------------- However, the streamlining did not fully achieve the Commission's purpose. Two key problems emerged with the IPBOR's breadth of coverage. First, the IPBOR would have unintentionally swept in numerous commercial arrangements where there is little or no evidence that fraud is occurring. Second, the IPBOR would have imposed greater burdens on the MLM industry than other types of business opportunity sellers without sufficient countervailing benefits to consumers. 1. Traditional Product Distribution Arrangements and Others Several commenters contended that the IPBOR would have regulated a wide range of legitimate and traditional product distribution arrangements that are not associated with the types of fraud that business opportunity laws are designed to remedy.\39\ As one commenter described it, the IPBOR would have swept in traditional arrangements for distribution of ``food and beverages, construction equipment, manufactured homes, electronic components, computer systems, medical supplies and equipment, automotive parts, automotive tools and other tools, petroleum products, industrial chemicals, office supplies and equipment, and magazines.''\40\ For example, one commenter, a footwear manufacturer, suggested that the IPBOR could be read to cover the commenter's product distribution through retail stores simply because the retailer pays for inventory and the manufacturer provides sales training to its retail accounts.\41\ Thus, this aspect of the commenter's operations would meet the definition of ``business opportunity'' in the IPBOR because: (1) the ``payment'' [[Page 16114]] prong of the definition did not exempt voluntary purchases of inventory; and (2) providing retail staff with sales training would satisfy the ``business assistance'' prong of the definition.\42\ Moreover, review of the comments suggests that even if a company provides no ``business assistance,'' a product distribution arrangement still easily could have fallen within the scope of the IPBOR if the company made some representation about sales or profits sufficient to constitute an ``earnings claim.''\43\ One trade association notes, ``[a]s a practical matter, suppliers will find it difficult to enter into a business relationship with a distributor or dealer without at least discussing possible sales volumes or profit levels.''\44\ --------------------------------------------------------------------------- \39\ E.g., IBA, at 1, 5; PMI, at 2; Timberland, at 1; Sonnenschein, at 1-2 (stating that the rule would cover ``manufacturers, suppliers and other traditional distribution firms that have relied on the bona fide wholesale price exclusion to avoid coverage'' under the rule). The Cosmetic, Toiletry and Fragrance Association posits that the IPBOR would cover the relationship between a manufacturer and an independent contractor who sells the product to beauty supply companies, salons, and others. CTFA, at 4. See also LHD&L at 2 (noting that the IPBOR could cover the relationship between a manufacturer and a regional distributor of products). \40\ IBA, at 5; Timberland, at 1 (noting that numerous manufacturers structure their retail distribution in this manner). \41\ Timberland, at 1. \42\ IPBOR, 437.1(d)(2); IPBOR, 437.1(c)(v). \43\ IPBOR, 437.1(d)(3)(i). \44\ IBA, at 4. See also PMI, at 3 n. 1. --------------------------------------------------------------------------- Other commenters argued that the IPBOR would have been broad enough to cover: bona fide educational programs offered by colleges and universities;\45\ the sale of certain books by publishers or book stores;\46\ and even the relationship between newspapers and independent carriers who distribute the papers to homes and businesses.\47\ Because application of the IPBOR to these types of arrangements was unintended, the Commission has narrowed the proposed definition of the term ``business opportunity,'' to exclude from coverage distribution arrangements in which the only required payment is for reasonable amounts of inventory at bona fide wholesale prices. In addition, the proposed definition of ``business opportunity'' has been substantially narrowed as explained in Section D, infra. --------------------------------------------------------------------------- \45\ Chadbourne, at 7 - 13 (illustrating the point with numerous course offering descriptions that could arguably fall within the definition of ``business opportunity''); Venable, at 3-5 (same). \46\ Venable, at 2 - 3. \47\ NAA, at 1-3. --------------------------------------------------------------------------- 2. The MLM Industry The second problem with the breadth of the IPBOR's coverage relates to the Commission's attempt to reach pyramid schemes with the Business Opportunity Rule. An overwhelming majority of commenters\48\ argued that the IPBOR failed to differentiate between unlawful pyramid schemes and legitimate companies using an MLM business model. These commenters argued that the requirements of the IPBOR simultaneously would have been insufficient to curb pyramid fraud\49\ yet devastating to MLM companies and individual MLM distributors. Criticism was not confined to industry comments. Two consumer groups also filed comments asserting that, although MLMs should be covered, the disclosures the Commission proposed in the IPBOR would be inadequate to remedy deceptive earnings claims.\50\ On balance, based upon this record and its law enforcement experience, the Commission does not believe it is practicable or sufficiently beneficial to consumers to attempt to apply the proposals advanced in this rulemaking against multi-level marketing companies, particularly when considering the burdens upon industry. The Commission, therefore, has determined that at this point, it will continue to use Section 5 to challenge unfair and deceptive acts or practices in the MLM industry. --------------------------------------------------------------------------- \48\ Of the more than 17,000 comments that the Commission received, it is fair to estimate that well over 95% came from members of the MLM industry expressing opposition to the IPBOR. As noted above, many of these were form letters. \49\ DSA, at 21 (positing that compliance with the new mandates would be ignored by fraudulent pyramid schemes). \50\ The Consumer Awareness Institute and Pyramid Scheme Alert each submitted comments and rebuttal comments. --------------------------------------------------------------------------- a. Industry comments MLM industry representatives, MLM companies, and independent distributors for those companies submitted numerous comments. The strongly stated theme common to all these comments was that the low economic risks of participating in a typical MLM do not justify imposing burdensome regulations that would threaten to strangle the MLM industry. These commenters pointed out that the fees top MLM companies charge prospective distributors for the right to sell products are low--often less than $100.\51\ Furthermore, commenters argued, the risk that consumers will lose money through large purchases of inventory is low. The Direct Selling Association (``DSA''), a national trade association of direct selling firms that claims to account for 95% of the industry's sales in the United States,\52\ asserts that its members offer a 90% refund on resalable inventory and on other start-up costs, as well.\53\ Certain MLM companies commented that they do not require distributors to purchase any inventory in advance of selling it.\54\ As one commenter put it, purchasing a direct selling opportunity ``is less complicated and carries less financial risk for a participant than purchasing a flat-screen TV set.''\55\ Commenters contended that the low-risk nature of the distributorship is essential to facilitate ease of entry because the MLM industry relies on part-time and seasonal distributors.\56\ Furthermore, these commenters argued that there is no evidence that the MLM industry is permeated with fraud.\57\ --------------------------------------------------------------------------- \51\ Shaklee, at 3 ($19.95); Avon, at 10 ($10 or $60); Quixtar, at 5 ($45); Pampered Chef, at 2 ($90); Mary Kay, at 3 ($100). \52\ DSA, at 4. According to the DSA, 84% of direct selling firms use some form of multilevel compensation. DSA, at 9, 13 (defining direct selling as ``the sale of a consumer product or service, in a face-to-face manner, away from a fixed retail location''). \53\ DSA, at 24 n. 45 (describing the Code of Ethics that members must follow). See also, e.g., Shaklee, at 6 (stating it has a 90% buy back requirement for its products and start-up kit purchased within the last two years); Quixtar at 3. \54\ Primerica Rebuttal, at 6; Avon, at 4; Quixtar, at 5; Mary Kay, at 4. \55\ Primerica Rebuttal, at 17. \56\ E.g., Mary Kay, at 4 (estimating that 80% of its sales force members are part-time); Avon, at 3 (``With its low cost / low risk design, many Representatives take advantage of its ease of entry and exit to come and go as their needs / goals change.''); CTFA, at 2. \57\ E.g., SIA, at 5; Primerica, at 34; DSA, at 18-20. --------------------------------------------------------------------------- The MLM industry commenters also sharply criticized each of the primary requirements of the IPBOR. They argued that, balanced against the low risk of financial loss, it would be excessively burdensome to mandate a seven-day waiting period and the various disclosure and recordkeeping obligations. The seven-day waiting period would require sellers to wait seven days after presenting disclosure documents to the prospective purchaser before collecting any money or obtaining an executed contract.\58\ The provision is designed to allow prospective purchasers the opportunity to review required disclosures thoroughly or to speak with an advisor. The proposed seven-day waiting period drew intense criticism from industry groups, and was characterized as ``regulatory overkill'' by Primerica Financial Services, Inc.\59\ --------------------------------------------------------------------------- \58\ IPBOR, 437.2. \59\ Primerica Rebuttal, at 16. See also MLM DRA, at 5 (stating that ``the majority of MLM distributors are very small mom and pop businesses'' and that ``this burden would very likely ruin their business.''). United States Congressman Tom Cole also submitted a comment expressing the opinion that the seven-day waiting period is inappropriate for business opportunity sales costing less than $500. Cole, at 1. --------------------------------------------------------------------------- MLM industry commenters argued that the waiting period would undercut the basic MLM business model, characterized by minimal risk of financial loss and maximum ease of entry. The DSA submitted a survey showing that the level of interest in becoming a direct salesperson drops at least 33% and as much as 57% when a waiting period is imposed.\60\ Commenters opined that the waiting [[Page 16115]] period would make entry into this business much harder; moreover, some commenters stated that the waiting period would significantly burden recruiting because multiple visits would be necessary for each potential recruit.\61\ --------------------------------------------------------------------------- \60\ DSA, at 24. \61\ DSA, at 25-26 (positing that three visits would be required to sign up a prospective participant); Shaklee, at 6 (stating that a waiting period would be ``as though regulators had painted a big `X' on the backs of direct selling companies, warning consumers `not to go there.'''); Avon, at 14. --------------------------------------------------------------------------- Industry commenters also contended that the various disclosure obligations of the IPBOR are ill-suited to the MLM business model. For example, industry commenters assert that an MLM's list of distributors is proprietary information\62\ that is kept strictly confidential because distributors necessarily compete with each other to recruit additional distributors into their ``down lines.''\63\ The IPBOR would have required an MLM distributor to provide to every potential recruit a disclosure document that includes a list of other distributors as references.\64\ As one commenter put it, furnishing a list of distributors to every individual who inquires about an MLM distributorship, ``would be like requiring a salesman to introduce his customer to ten competing salesmen and then wait seven days before attempting to close a sale.''\65\ The Commission notes that another characteristic of the MLM model may undermine the utility of the list of references that the IPBOR would have required MLMs to disclose. Specifically, a previous purchaser on the reference list likely would stand to receive a financial benefit if a prospect who contacts them were successfully recruited by that previous purchaser. Under these circumstances, information from such a reference might not be the most reliable basis for the prospect's purchasing decision. --------------------------------------------------------------------------- \62\ Shaklee, at 7 (``a company's distributor and customer lists are its most important and confidential information which competitors must be kept from accessing.''); DSA, at 30 (stating that the list of sellers has been kept confidential even from the IRS); Avon, at 16-17; \63\ Avon, at 16-17 (stating that direct selling companies compete for same recruits); DSA, at 30-31. \64\ IPBOR, 437.3(a)(6). \65\ Quixtar, at 31-32. --------------------------------------------------------------------------- Other disclosure obligations of the IPBOR, industry commenters contended, ``will paint all direct selling companies in a falsely negative light.''\66\ For example, according to one commenter, the proposed obligation to disclose legal actions\67\ would cast successful and long-established companies in a worse light than a fly-by-night fraudulent business opportunity promoter ``simply because bigger companies with more sales representatives and more years of operation are likely to get involved in a larger number of cases.''\68\ Some commenters pointed out that as publicly-traded companies, information about their legal actions is already publicly available.\69\ --------------------------------------------------------------------------- \66\ Pre-Paid Legal, at 8. \67\ IPBOR, 437.3(a)(3). \68\ Quixtar, at 34. See also SPC, at 3 (stating that it is a subsidiary of Time, Inc., and the litigation disclosure of affiliate companies would encompass all of Time Warner, which includes hundreds of companies). \69\ Avon, at 10, 15; Pre-Paid Legal, at 14. --------------------------------------------------------------------------- Similarly, according to these commenters, the obligation to disclose refund requests and cancellations\70\ would penalize MLM industry members who deliberately structure their business model to facilitate ease of entry by offering refunds. Because companies with liberal refund policies are more likely to have refund requests than those offering no refunds, disclosure of refund requests could mislead consumers into thinking that the company offering liberal refunds is less reputable than the company offering no refunds.\71\ The rule would create a perverse incentive to discontinue refund policies.\72\ --------------------------------------------------------------------------- \70\ IPBOR, Section 437.3(a)(5). \71\ E.g., Pre-Paid Legal at 15-16; DSA, at 29 (stating that because individuals enter and exit direct selling each year to meet short term goals, the number of cancellation requests is likely to be artificially high and misleading). See also Quixtar, at 39 (asserting that because individuals join and leave for various personal reasons, information on cancellations would be ``of little, if any, benefit''); PANM, at 3 (stating that reporting cancellations and refunds serves no purpose at all where the fee is nominal). \72\ MLMIA, at 51-52, Pre-Paid Legal, at 16; Herbalife, at 10. See also Carico, at 1 (stating that because dishonest companies would not honor an agreement to make refunds, the IPBOR would only have a negative effect on legitimate companies). --------------------------------------------------------------------------- Some industry commenters contended that the IPBOR's earnings claim disclosure requirement\73\ would itself be misleading or incomplete. While some commenters stated they already make an earnings disclosure, they opposed the IPBOR's provisions for a variety of reasons.\74\ For example, some industry commenters argued that only the earnings of so- called ``active'' distributors should be considered because many individuals use their distributorship as a ``buyers club'' and are only interested in purchasing goods at a wholesale price for their own use, not for resale.\75\ Commenters argued that those who use the distributorship in this way do not expect to earn money, and so the earnings of these inactive distributors should not be counted.\76\ Further, one commenter stated that a disclosure of average earnings may unfairly suggest that distributors achieve low earnings when, in fact, those earnings are substantial given the amount of time spent selling.\77\ --------------------------------------------------------------------------- \73\ IPBOR, 437.3(a) and 437.4. \74\ E.g., Quixtar, at 25-26 (proposing an earnings disclosure that would include only ``active'' distributor earnings and would allow the company to ``infer a reasonable level of `retail' profit''); Melaleuca, at 9-10 (stating that it publishes income statistics but opposing a federally mandated disclosure); FreeLife, at 4 (preferring disclaimers to the IPBOR's requirements). \75\ E.g., Shaklee, at 3 (stating that 85% of individuals who sign up with Shaklee do so as ``wholesale buyers'' rather than distributors); Quixtar, at 8; Herbalife, at 2. \76\ E.g., Quixtar, at 25 & n. 30; Primerica Rebuttal, at 34. \77\ Avon, at 19. See also DSA, at 33 (questioning the relevance of earnings statistics to an individual who enters as discount buyer or for short term supplemental income). --------------------------------------------------------------------------- Furthermore, many industry commenters argued that the IBPOR's required earnings disclosure would be far too complicated because it would require a disclosure of the material characteristics of purchasers who earned the claimed income.\78\ As such, some industry commenters expressed concern that the proposed earnings disclosure would unnecessarily complicate a simple and low-risk transaction.\79\ Furthermore, other commenters pointed out that it would be extremely burdensome for legitimate businesses that attempted to comply,\80\ but it would not be helpful to consumers in evaluating the opportunity or in distinguishing fraudulent claims.\81\ One commenter went further, stating that: ``the required disclosures do not address the crucial distinction between pyramids and legitimate multi-level marketing-- i.e., in pyramids, compensation is based on recruitment, rather than sales for consumption.''\82\ --------------------------------------------------------------------------- \78\ The IPBOR would require disclosure of ``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.'' IPBOR, 437.4(a)(4)(vi). \79\ Avon, at 18; Quixtar, at 21 (stating that the goal should not be ``to provide a maze of intricate calculations and disclosures but to instead put across the simple point that most participants in the business opportunity earn modest incomes''). \80\ E.g., DSA, at 33; HIG, at 3; Pre-Paid Legal, at 10. Some commenters contend that it would be impossible to comply with this requirement. Shaklee, at 10; Xango, at 6; Vector, at 3. \81\ E.g., DSA, at 33; Xango, at 6; Mary Kay, at 10; Synergy, at 2. See also Xango, at 6 (``[s]uch complicated compilations will only serve to confuse prospective purchasers''); Symmetry, at 2. \82\ Primerica, at 26. --------------------------------------------------------------------------- Finally, echoing the concerns raised above, industry commenters uniformly asserted that the cost of compliance with the IPBOR would be extremely high, much higher than the Commission [[Page 16116]] estimated.\83\ The costs of complying would arise, first, from the burden of developing, providing, and keeping records of the proposed disclosures, and second, from the impaired ability to recruit. With regard to the first point, industry commenters contended that the burden of making the proposed disclosures would fall disproportionately on established, legitimate businesses.\84\ For example, the single page disclosure would be simple for a new--possibly fraudulent--company that has no litigation history and fewer than 10 references.\85\ For long- established MLMs, however, the costs would be quite high: having polled its members on this issue, the DSA states that the median total compliance cost for a small firm would be approximately $130,000 annually, and more than $567,000 annually for a large firm.\86\ DSA further estimates that because about 5 million people are recruited into direct selling each year, the paperwork burden would include distributing over 750 million pages of disclosure documents annually.\87\ Furthermore, according to the DSA, the IPBOR's requirement to retain documents for three years would require 2.25 billion pieces of paper to be generated and warehoused.\88\ --------------------------------------------------------------------------- \83\ Mary Kay, at 9 (estimating that the record keeping requirement would cost ``between $300,000 and $500,000 per year in additional expenses, software and training''). \84\ Primerica, at 15-16. \85\ Id. \86\ DSA, at 21-22 (stating that 26 firms responded to its July 2006 survey on compliance costs). See also Shaklee, at 9 (estimating that the cost of compliance would likely exceed $100 million for the industry); MLMIA, at 12 (estimating that cost of compliance for each MLM distributor would be between $25,000 to $45,000 for the first year and $10,000 to $20,000 per year thereafter). \87\ Id. at 21 (reporting that respondents estimate disclosing 15 pages of documents under the IPBOR). See also Vector, at 3 (estimating that the proposed disclosure would require Vector to provide over 100 million pieces of paper annually to potential recruits). \88\ Id. at 21. See also Melaleuca, at 5 - 6 (estimating that Melaleuca would need to store 1.8 million disclosure documents over a rolling three-year period). --------------------------------------------------------------------------- Second, and apart from the direct cost of complying, industry commenters contend that the IPBOR's requirements would impose high costs because it would significantly impair the ability to recruit.\89\ According to Primerica, ``[b]ased on a conservative estimate that the Proposed Rule would reduce Primerica's recruiting by 25 percent, Primerica projected an economic loss of $1 billion for Primerica alone over the next ten years if the [IPBOR were] promulgated.''\90\ The cost of impaired recruiting, some commenters argued, would be borne by the millions of individual MLM distributors who would find their home businesses adversely affected.\91\ Indeed, the MLM Distributors Rights Association (``DRA'') warned that the IPBOR would put ``millions out of business,'' and concluded with a plea to ``come up with a new rule that will protect without damaging the little guy in America trying to make a living.''\92\ Numerous letters submitted by individual MLM participants echo this theme, as well.\93\ --------------------------------------------------------------------------- \89\ ``If a new application, disclosure document and seven-day waiting period were required for a Member to become a Distributor, the number of Members who choose to build a small home-based business would dramatically decline.'' Shaklee, at 6 (stating that recruitment dropped when Shaklee introduced two applications instead of one). \90\ Primerica Rebuttal, at 11 (emphasis in original). \91\ MLM DRA, at 2, 5 (estimating that there are between 13 million and 15 million MLM distributors in the United States); Babener, at 3 (the IPBOR would cripple ``the livelihoods of 14 million Americans that look to direct selling to help support their families''). \92\ DRA, at 2, 7. The DRA demands that the Commission drop the IPBOR in its entirety. DRA, at 2. \93\ E.g., Tina Bailey, at 1 (``This bill would kill my business and I would loose (sic) my ability to be a stay at home mom with an income.''); Eric Gang, at 1 (``If adopted, the Rule would destroy my small business that I have worked so hard to develop.''); Anne Trevaskis, at 1 (``As a person with a disability, unable to go out to work, if [the IPBOR] is adopted, I will be prevented, continuing as an independent distributor''); Marian Warshauer, at 1 (``Please don't penalize and ruin and honest earning opportunity for tens of thousands of people with legitimate companies); Noelle Marino, at 1 (``I'm very concerned about [the IPBOR], because I believe it will jeopardize my business.''). --------------------------------------------------------------------------- b. Consumer group comments The Commission received comments from two consumer groups, the Consumer Awareness Institute (``CAI'') and Pyramid Scheme Alert (``PSA''),\94\ a few other consumer advocates,\95\ individuals who regret becoming involved in MLMs,\96\ and other individual MLM participants in favor of a Business Opportunity Rule that would cover MLMs.\97\ Consumer advocates contend that the MLM industry is comprised primarily of pyramid scheme operators masquerading as legitimate companies.\98\ While commenters lauded the Commission's efforts to impose a business opportunity rule that would cover MLM firms, they argued that the rule's earnings disclosure requirements were insufficient to expose a fraudulent MLM company as a pyramid scheme.\99\ CAI expressly recommended a different disclosure for MLM companies than for all other forms of business opportunities.\100\ --------------------------------------------------------------------------- \94\ CAI and PSA each submitted comments with numerous reports attached. Citations to their comments will specifically note the submitting entity and the name of the report. \95\ See Eric Scheibeler (author of Merchants of Deception, a book ostensibly warning the public about Quixtar); Bruce Craig (former Assistant Attorney General for the State of Wisconsin); Douglas Brooks (law practitioner who has represented class actions against MLM companies). \96\ E.g., Katy Li (``If I had been given basic statistics about the company I never would have joined''); Marshelle Hinojosa (``Please pass the BUSINESS OPPORTUNITY LAW and stop these pyramid schemes!''); Valerie Andersen (``Words cannot express the humiliation, financial loss and lost respect and trust from friends and family members ... whom [sic] were persuaded by me because they trusted me ... to join the MLM ...''); J Padgett (describing his wife's involvement in an MLM); Robin Smith (stating that she would not have joined an MLM if she had known the background of the principals); David McHenry (``Make these MLMs legally responsible for their claims with documentation that is accurate from the beginning.''); James Kenny; Charles Wagner; Brian Wess; Kelly Boucher, Rebuttal; Carol Franklin, Rebuttal. \97\ E.g., Barbara Avery (``Direct selling or mlm CAN be a good program if done with honesty and integrity- enacting laws to protect the consumer would be a welcome change!!''); Kristine Keesler (``I think this new legislation would be very beneficial. If I had seven days to consider my decision and 10 references I would not have jumped into the ... business so quickly.''). \98\ CAI, at 2 (``I can certify that MLM (sic) are not direct selling programs, but chain selling programs''); CAI Rebuttal of DSA Comments, at 3 (``The Direct Selling Association (DSA), recently taken over by chain sellers now promotes chain selling (pyramid marketing) - even more than legitimate direct selling''). See also Brooks, at 2 (``In my opinion, most MLM firms operate in a deceptive or fraudulent manner''). \99\ CAI, at 3; PSA, at 2. See also Douglas Brooks, at 3 (stating that disclosures will not prevent consumer injury caused by pyramid schemes). \100\ CAI, at 6. --------------------------------------------------------------------------- According to these consumer groups, virtually all MLMs are pyramid schemes that enrich those at the top through the endless recruitment of new participants.\101\ These commenters contended that the purported sale of products to end users (i.e., typical customers) is just a mirage, because the MLM sales force seldom engages in retail selling.\102\ --------------------------------------------------------------------------- \101\ CAI, at 2 (``out of hundreds of MLM programs we have evaluated, no more than a (sic) three of them could qualify as legitimate retail-based programs.''). See also PSA, at 1. \102\ PSA, The Myth of Income Opportunity in Multi-Level Marketing, at 4. --------------------------------------------------------------------------- Further, according to these commenters, MLMs deceptively market distributorships as a low-risk opportunity with high earnings potential. In fact, the cost of participating in an MLM can be quite high, including not only the registration fees, but also the cost of product purchases, training and seminars, and other features purported to enhance a recruit's performance in an MLM.\103\ The typical earnings, by contrast, are extremely small and cannot be [[Page 16117]] considered anything but a net loss when business expenses are considered.\104\ In fact, these commenters contended, more than 99% of individuals who participate in MLMs lose money.\105\ --------------------------------------------------------------------------- \103\ PSA, The Myth of Income Opportunity in Multi-Level Marketing, at 4 (pointing to Amway/Quixtar's sale of books, tapes and seminar registrations to new recruits); Douglas Brooks, at 4, 5; Scott Johnson, at 1. \104\ PSA, The Myth of Income Opportunity in Multi-Level Marketing, at 3 (stating that 99% of all sales representatives in the sample of companies analyzed earned less than $14 per week, a figure that does not count any business expenses, such as inventory purchases). \105\ PSA, at 2; CAI, The 5 Red Flags, at 15-16. One commenter, noting that some MLMs require no advance purchases of inventory, strongly disagreed with this conclusion: ``The facts in the record provide no basis for deducting assumed `costs' from the available income estimates and jump to the conclusion that participants actually lose money . ... It is simply not possible that agents are required to pay more money to Primerica than they receive in commissions, because there is no requirement that they buy anything from Primerica.'' Primerica Rebuttal at 6 (emphasis in original). --------------------------------------------------------------------------- These consumer groups recommended implementing a number of changes to the disclosure requirements in the IPBOR. To begin with, the IPBOR would have required business opportunity sellers to state whether they make any earnings claim, and if they do, to have written substantiation for the claim.\106\ PSA argued that MLMs are presented to consumers as income opportunities, and therefore, should not be allowed the option of asserting that they make no earnings claim.\107\ With regard to the earnings disclosure itself, they recommended two changes to the IPBOR. First, they recommended that the earnings disclosure state the average retail-based income that participants achieve.\108\ They argued that, by focusing on dollars earned from retail sales, the disclosure document would highlight the key feature that distinguishes a legitimate company from a pyramid scheme--the sale of products to end users.\109\ --------------------------------------------------------------------------- \106\ 437.3(a)(2) & 437.4(a)(2). \107\ PSA at 2. Several individuals filed form comments, with small variations, making this point as well. E.g., Jean Smith; Douglas Konkol; Harold Ducre; Rachel Quill; N Gursahani; Petteri Haipola; Bradford Chase; Curtis Marburger; Joel Rolfe; Marshall Massengill; Marcus Batte. See also CAI, at 6 (asserting that if MLMs present themselves as offering an ``income opportunity,'' they should have to disclose earnings). \108\ PSA, at 2. \109\ PSA, at 2. CAI, Red Flags at 5 (acknowledging that an MLM may be legitimate if it allows a person to earn a significant income from retailing products to end users). --------------------------------------------------------------------------- Second, these commenters asserted that the