Business Opportunity Rule, 16110-16138 [E8-6059]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 73, Number 59 (Wednesday, March 26, 2008)]
[Proposed Rules]
[Pages 16110-16138]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-6059]



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Part II





Federal Trade Commission





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16 CFR Part 37



Business Opportunity Rule; Proposed Rule

Federal Register / Vol. 73, No. 59 / Wednesday, March 26, 2008 / 
Proposed Rules

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FEDERAL TRADE COMMISSION

16 CFR Part 437

RIN 3084-AB04


Business Opportunity Rule

AGENCY: Federal Trade Commission.

ACTION: Revised Notice of Proposed Rulemaking.

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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.
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    \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).
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    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 https://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 https://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 https://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 https://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: https://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-

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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.
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    \2\ Statement of Basis and Purpose (``SBP''), 43 FR 59614 (Dec. 
21, 1978) (Franchise Rule codified at 16 CFR 436).
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    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.
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    \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.
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    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\
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    \4\ 60 FR at 17658 (Question 14).
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    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\
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    \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).
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    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.
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    \9\ Franchise Rule NPR, 64 FR 57294 (Oct. 22, 1999).
    \10\ Id. at 57296.
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    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

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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\
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    \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).
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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.
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    \14\ Id.
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    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\
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    \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 
https://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 https://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.
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    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\
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    \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.
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    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\
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    \25\ Id. at 19059.
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    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\
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    \26\ IPBOR, 437.1(d)(3).
    \27\ IPBOR, 437.1(h).
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    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\
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    \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).
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    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.
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    \32\ See infra Section D.1.a.1.ii.
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    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.
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    \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.
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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\
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    \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.
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    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.
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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.
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    \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).
    \1