Tag Archives: MLM Training 101

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How To Protect Against Cross Recruiting aka Cross-Sponsoring & Income Claims

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LegalPerspective

Two of the largest ethical and legal issues that face the network marketing community are cross-recruiting/sponsoring and income claims. And without a doubt these two issues seem to always be the topic of discussion when I am talking with direct selling insiders. So how to we protect against cross-recruiting and income claims?

MLM Income Claims

 

First let’s look at the common definition of both.

Cross-Recruiting/Sponsoring can occur when an independent professional who has left, is leaving, or is starting to build an additional independent sales organization for a different network marketing company, contacts active distributors in his/her LOS (Line of Sponsorship) who are not personally sponsored/recruited, to join them in the new network marketing company.

It can also be seen as cross-recruiting/sponsoring when an independent professional for a specific MLM company, intices an independent professional in a sideline LOS of the same company to create a second position under a new Line of Sponsorship.

Income Claims are not exclusive to the direct selling aka network marketing, and can result in far more damaging issues for both a company or independent professional than cross-sponsoring since income claims fall under the FTC disclosure rules as well as the FTC Business Opportunity Rule. Plus many reps and even company founders do not realize that several states including Wyoming and Massachusetts DO NOT allow any form of income claims.

Several of the leading attorneys inside the network marketing community have written some articles on income claims and I have covered them a few times. Review the links below for more info.

KevinGrimes

Kevin Grimes – Partner at Grimes & Reese – Income & Earning Representations

MLM Attorney Kevin Thompson

Kevin Thompson – Partner at Thompson & Burton – MLM Income Claims: Basic Guidelines for companies and distributors

MLM Help Desk – What Are Income Claims, And What Does The FTC Say?

MLM Help Desk – Are MLM Companies Liabel For 3rd Party Income Claims?

WUN

 

One of my clients, Wake Up Now has been working through their current policies and procedures to make sure the P&Ps are fair and balanced and provide the independent professionals with clear guideline in which to work. Although each network marketing companies P&Ps will differ based on the products or services marketed, I do believe these are a good example of what NOT to do as an independent professional, and what to DO as a direct selling company.

4.7.3.   Income Claims. An IBO, when presenting or discussing the WAKEUPNOW opportunity or Compensation Plan to a prospective IBO, may not make income projections, income claims, or disclose his or her WAKEUPNOW income (including the showing of checks, copies of checks, bank statements, or tax records). In addition, whenever a WAKEUPNOW presentation is made, the IBO must provide a current copy of the WAKEUPNOW Income Disclosure Statement (IDS) to the person(s) to whom he or she is making the presentation. The current WAKEUPNOW income claim statement can be downloaded at www.wakeupnow.com/ids.

Notice above that Wake Up Now as provided a link to the IDS (Income Disclosure Statement). Anytime an income claim is made, the independent professional or company representative MUST provide the prospective business partner with the link and/or the Income Disclosure Statment. My professional opinion is, never to make an income claim. But if you do, then have an IDS printed to provide, or if marketing online, make sure it is inside your social profiles, on your blogs and available for all to see. 

4.7.4.   Income Disclosure Statement. WAKEUPNOW’s corporate ethics compel us to do not merely what is legally required, but rather, to conduct the absolute best business practices. To this end, we have developed the Income Disclosure Statement (“IDS”). The WAKEUPNOW IDS is designed to convey truthful, timely, and comprehensive information regarding the income that WAKEUPNOW distributors (Independent Business Owners) earn. In order to accomplish this objective, a copy of the IDS must be presented to all prospective distributors.

A copy of the IDS must be presented to a prospective distributor (someone who is not a party to a current WAKEUPNOW Distributor Agreement) anytime the Compensation Plan is presented or discussed, or any type of income claim or earnings representation is made.

The terms “income claim” and/or “earnings representation”(collectively “income claim”)

include:

4.7.4.1.      statements of average earnings,

4.7.4.2.      statements of non-average earnings,

4.7.4.3.      statements of earnings ranges,

4.7.4.4.      income testimonials,

4.7.4.5.      lifestyle claims, and

4.7.4.6.      hypothetical claims.

Examples of “statements of non-average earnings” include, “Our number one distributor earned XXX dollars last year” or “Our average Pearl Executive makes XXX per month.” An example of a “statement of earnings ranges” is “The monthly income for a Pearl Executive is XXX on the low end to YYY on the high end.”

A lifestyle income claim typically includes statements (or pictures) involving large homes, luxury cars, exotic vacations, or other items suggesting or implying wealth. They also consist of references to the achievement of one’s dreams, having everything one always wanted, and are phrased in terms of “opportunity” or “possibility” or “chance.” Claims such as “My WAKEUPNOW income exceeded my salary after six months in the business,” or “Our WAKEUPNOW business has allowed my wife to come home and be a full-time mom” also fall within the purview of “lifestyle” claims.

Notice above the income claims include “LIFESTYLE CLAIMS.” Many times I see independent professionals, try to get around an income claim by stating “we never mentioned money!” Well if you are promoting your lifestyle; fancy car, trips, rings, watches, large home, then in the case of Wake Up Now, and many other MLM companies, as well as the FTC you would be violating the P&Ps, federal and state regulations. 

A hypothetical income claim exists when you attempt to explain the operation of the Compensation Plan through the use of a hypothetical example. Certain assumptions are made regarding the: (1) number of retail customers enrolled, (2) number of preferred customers enrolled, (3) number of distributors (Independent Business Owners) sponsored, (4) number of distributors (Independent Business Owners) in one’s sales organization, (5) average product volume per distributor, and (6) total organizational volume. Attempting to calculate these assumptions through the Compensation Plan yields income figures which constitute income claims.

In any non-public meeting (e.g., a home meeting, one on- one, regardless of venue) with a prospective distributor or distributors (Independent Business Owners) in which the Compensation Plan is discussed or any type of income claim is made, you must provide the prospect(s) with a copy of the IDS. In any meeting that is open to the public in which the Compensation Plan is discussed or any type of income claim is made, you must provide every prospective distributor with a copy of the IDS and you must display at least one (3 x 5 foot poster board) in the front of the room in reasonably close proximity to the presenter(s). In any meeting in which any type of video display is utilized (e.g., monitor, television, projector, etc.) a

slide of the IDS must be displayed continuously throughout the duration of any discussion of the Compensation Plan or the making of an income claim.

Copies of the IDS may be printed or downloaded without charge from the corporate website at www.WakeUpNow.com/ids.

Distributors (Independent Business Owners) who develop approved sales aids and tools in which the Compensation Plan or income claims are present must incorporate the IDS into each such sales aid or tool prior to submission to the Company for review.

WAKEUPNOW’s corporate ethics compel us to do not merely what is legally required, but rather, to conduct the absolute best business practices as well as comply to all regulations that govern the direct sales industry. To this end, if information regarding WAKEUPNOW, its products or compensation plan have been presented incorrectly or contrary to the Income Disclosure Policy in a video, in written materials, on the internet, or through social media, please contact the WAKEUPNOW Compliance Department immediately.

Now let’s look at the cross-recruiting/sponsoring policies at Wake Up Now for an example. 

4.20.    One WAKEUPNOW Business Per IBO and Per Household. An IBO may operate or have a beneficial ownership interest, legal or equitable, as a sole proprietorship, partner, shareholder, trustee, or beneficiary, in only one WAKEUPNOW business. No individual may have, operate or receive compensation from more than one WAKEUPNOW business. When a customer becomes an IBO, the

IBO must cancel all other customer accounts. If an IBO creates a subsequent IBO account, the later account will be canceled. Individuals of the same Household may not enter into or have an interest in more than one WAKEUPNOW Business. A “Household” is defined as spouses and dependent children, or any other individuals living at or doing business at the same address.

In order to maintain the integrity of the WAKEUPNOW Compensation Plan, husbands and wives or common-law couples (collectively “spouses”) who wish to become WAKEUPNOW IBOs must be jointly sponsored as one WAKEUPNOW business. Spouses, regardless of whether one or both are signatories to the IBO Application and Agreement, may not own or operate any other WAKEUPNOW business, either individually or jointly, nor may they participate directly or indirectly (as a shareholder, partner, trustee, trust beneficiary, or have any other legal or equitable ownership) in the ownership or management of another WAKEUPNOW business in any form.

An exception to the one business per IBO/household rule will be considered on a case-by-case basis if two IBOs marry or in cases of an IBO receiving an interest in another business through inheritance. Requests for exceptions to policy must be submitted in writing to the Compliance Department. In order for this exception to be considered the following three items must be submitted to company in writing to Compliance Department at: compliance@WAKEUPNOW.com.

4.20.1. Tax  Returns  that  demonstrate  the  two  individuals  requesting  separate  IBO

agreements  file separately.

4.20.2. Bank Statements that demonstrate that the two individuals requesting separate IBO agreements have separate bank accounts.

4.20.3. Notarized Affidavit from an Attorney demonstrating that the two individuals requesting separate IBO agreements have been in business individually for more than 12 months consecutively prior to the request.

Additionally, all individuals/business entities identified as having more than one beneficial interest ownership in WAKEUPNOW as of September 30, 2011, will be required to divest their interest in the second business they enrolled completely and with prejudice prior to December 31, 2011. Any businesses that are not divested will be canceled and will convert to Retail Customer status on January 1, 2012

In closing, ALL companies and independent professionals should slow down make sure they are conducting their business well within the current regulatory guidelines as well as the policies and procedures of the companies.

If the company is applying for membership to the DSA, then additional guidelines, as found in the DSA Code of Ethics. 

 

 

 

 

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MLM Training 101: The FTC Business Opportunity Rule And How It May Affect Your MLM Business

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LegalPerspective

Well it has been a little over a year since the Federal Trade Commission Business Opportunity Rule became law. And in that short period of time, we have seen lead generation change, and have even seen billion dollar direct selling companies like Herbalife move away from talking about their “business opportunity” to talking about their “income opportunity.”

Yet, also during this time period we have seen more and more Internet based companies like Empower Network, Pure Leverage, and new MLM Mobile Marketing Apps come on strong, which in part, teach people how to generate their own leads to grow their primary Network Marketing business.

As I started reviewing the Business Opportunity Rule, and thinking about the new trend of mobile advertising entering direct selling, a couple of questions came to mind…

1. Could the Independent Professionals representing these companies be at risk?

2. Could the marketing companies themselves be at risk?

3. Are Direct Selling Independent Professionals exempt because most are not really selling a business opportunity, but just marketing products and recruiting additional sales reps to their overall sales organizations?

Well, I did not find all the answers, but the information below will help provide guidance to those who truly desire to Raise The Bar inside the Network Marketing Profession!

FTC Business Opportunity Rule Download By Clicking Here

ftc

 

“Be your own boss!”

For would-be entrepreneurs, a claim like that is sure to attract attention.

And if you’re an entrepreneur who markets business opportunities, we have some important information about an FTC rule that affects the business of bizopps.

Hello.  I’m Christine Todaro, an attorney with the Federal Trade Commission, the nation’s consumer protection agency.  The goal of the FTC’s Business Opportunity Rule is to make sure people who are thinking about buying a bizopp  get informed  before they invest.

If you offer  to sell someone a business opportunity and say certain things – or imply them – this Rule applies to you.

For example, if you say or imply:
•    That you’ll help the buyer  set  up or run the business —  like provide locations where they can use  equipment or displays they buy from you;
•    OR that you’ll provide the buyer with outlets, accounts, or customers;
•    OR that you’ll buy back any products they create or, for example, pay for envelopes they stuff.

Well, then you have three key responsibilities under the Business Opportunity Rule.

First, at least 7 days before a prospective buyer signs a contract or pays any money for a biz opp, you have to give them a one-page disclosure document.  To make sure all buyers get the information they need – and to simplify compliance – there’s a form the Rule requires you to use.  You can get copies at business.ftc.gov/businessopportunitydisclosure.

Briefly, here’s the  information you have to disclose on the form:

•    Your company’s name, business address, and phone number; the sales person’s name; and the date you gave the document to the prospective buyer.
•    Any earnings claims.  If you say or imply how much money a prospective buyer can earn, your claim must be in writing.
•    You have to disclose whether you, certain people you’re affiliated with, or your former businesses have been the subject of a legal action for misrepresentations, fraud, securities law violations, or deceptive practices in the past 10 years.
•    If you offer refunds or the right to cancel, you need to attach all material terms and conditions to the form.  If you don’t offer refunds, check the box to make that clear.
•    You also have to list references – the name, state, and phone number of everyone who’s bought the business opportunity in the past three years.  If more than 10 people have bought it, it’s OK to list the 10 who live closest to the prospective buyer.  In addition, the document must say clearly and conspicuously: “If you buy a business opportunity from the seller, your contact information can be disclosed in the future to other buyers.”

•    You’ll have to attach a copy of the disclosure document that the buyer has to sign and date.  Let the buyer know how to return the signed receipt to you.

And if you promote your business opportunity in Spanish or another language,
The one-page disclosure document along with the required disclosures must be in that language.
Visit business.ftc.gov/businessopportunitydisclosure for a copy of the Spanish-language disclosure form.  In addition, you have to update the form every quarter.

Now your second responsibility under the Rule relates to earnings claims.
If you make a claim about how much money a person can earn, you have to put the claim in writing.  It’s illegal to make an earnings claim unless you have written materials on hand that back up your claim. You must have these materials available to a prospective buyer or to the FTC, if they ask for them.

In addition, if you make an earnings claim, you have to give the prospective buyer a separate document that says in big letters across the top — EARNINGS CLAIM STATEMENT REQUIRED BY LAW.  This document has to include:
•    The name of the person making the claim and the date;
•    The specifics of the claim;
•    The start and end date those earning were achieved;
•    The number and percentage of your buyers who got at least that result;
•    Any information about the  buyers who got those results that might vary  from prospective buyer’s – like their location; and
•    a statement that prospective buyers can get written proof for your earnings claims if they ask for it.

What about earnings claims made in ads on TV, online, or in other media?

Same verse, just like the first: You must have written materials on hand that substantiate your claims, and you have to give certain information when you are making the claim.  Again: the start and end dates the earnings were achieved, and the number and percentage of your buyers who got at least that result.

What if you’re talking about earnings or performance information for an entire industry?  You’ll need to have written materials on hand showing that the results for the opportunity you’re selling are at least as good.

If there have been substantive changes to what you said in the earnings statement, you have an obligation to let prospective buyers know in writing, before they sign a contract or pay you any money.  Of course, if you promote your business opportunity in another language, your earnings claim statement has to be in that language, too.

Moving on to your third responsibility under the Rule:  It’s about as basic as it gets. Steer clear of any prohibited practices.  For example, don’t say anything that contradicts the information in your one-page disclosure document or your earnings claim statement.
Other don’ts:
•    Don’t include anything in those two documents other than what the Rule specifically allows.
•    Don’t lie about what other buyers have earned, what a prospective buyer will earn, or how much help you’ll give them.
•    And don’t tell people they’ll have exclusive territories if that’s not the case.  Just tell them the truth when you’re talking about the likelihood of finding locations, outlets, or customers.
•    If you hold someone out as a successful buyer of your business opportunity, you’ve got to say whether you’ve paid them or have some other relationship to them.
•    Finally, don’t tell people you’re offering them a job if what you’re really doing is selling them a business.

The Rule also requires you to keep certain records and make them available to the FTC for three years.  The records include each buyer’s disclosure receipt, all executed written contracts, and substantiation supporting your earnings claims. The Rule generally exempts business opportunities that meet the definition of a “franchise,” but it’s a good idea to check that out to see if it applies to you.

The FTC’s Business Opportunity Rule is designed to prevent unfair and deceptive practices.  And by clarifying and streamlining the obligations of sellers, it certainly makes compliance easier, too.
If you’d like more information, visit the BCP Business Center at business.ftc.gov.