In Part 1 of the crowdfunding series, I discussed the rise of the crowdfunding phenomenon and Title III’s recent enactment under the JOBS Act. While Title III may appear to be an attractive avenue of capital fundraising for entrepreneurs and startups, founders of a network marketing company may find it a boardwalk littered with more stops than gos. As for crowdfunding as a MLM product service or offering, in my opinion, its a chance to go directly to jail.
TITLE III CROWDFUNDING AS WAY FOR MLMs TO RAISE CAPITAL
If you remember, the benefits of a Company looking to use Title III appear numerous. Title III provides the ability to raise up to $1 million without having to deal with burdensome SEC requirements. For an MLM looking for startup funding, what’s not to like? Well . . . er, money for one. The logic goes something like this: you have to have money if you want to raise money.
From time to time we see career transitions between the corporate world and the field within the direct selling industry. Most often, the direction is from the field to corporate life. It is not common for a direct sales company manager to leave his/her job and start working as a distributor. This is especially true if that person is holding a position like Ben Woodward’s. Ben Woodward has recently left his job as the President of Nikken and moved to the other side.
Let’s hear what Ben has to say on his experiences.
Your last corporate role was with Nikken. Could we start with your educational background and work experiences before joining Nikken?
I recently fielded a phone call from a business owner who asked me the following question: Does my business model qualify as a multi-level marketing company? It’s a good question whose answer invokes a variety of possible legal implications.
THE MLM LEXICON
With no single authority providing some sort of precedential definition of “MLM,” the best way of boiling the concept down to its essential elements is through the lens of different authorities and sources.
The FTC recently announced that it has finalized the amendments to the Federal Cooling-Off Rule, (aka Door-to-Door Sales Rule). The amended Rule will go into effect on March 13. When the proposed amendment was published, there was some anticipation on the part of the direct selling industry that sellers would be granted some relief from the Rule.
For those not familiar, the Rule requires that customers (including new distributors or consultants) be given two copies of the 3-day Notice of Right to Cancel whenever a purchase transaction for consumer goods or services takes place at a location other than the seller’s place of business. While there are some possible exemptions, for the most part the rule covered many transactions between distributors and their customers and between distributors and their newly recruited distributors.
The major exemption that has been in place since the Rule was originally enacted (in 1972) was a $25 threshold requirement. If the purchase amount was less than $25, the Rule did not apply and there was no requirement to provide the customer with two copies of the Notice of Right to Cancel.
When the FTC initially proposed the amendment, the threshold was raised to $130, which would have accounted for inflation since 1972. This change would have been a relief to many direct sellers with lower cost items and kit prices.
Ultimately, the FTC left the $25 threshold in place for transactions that occur at the buyer’s residence. For transactions that take place at other locations but are otherwise subject to the Rule, the threshold was raised to $130.
For many direct sellers, nothing has changed. A company cannot print separate contracts, order forms or sales receipts for different sales locations. Because a company will not always know the actual location of a sales transaction, the better course will be to include the Notice of Right to Cancel on all order forms, receipts, and purchase agreements. For additional information, please feel free to contact our office.
Just how well do you know the real story of MLM? Can you carry on a good defense on why Direct Sales, especially Network Marketing is the greatest profession on earth? Or have you bought into the MLM myth, that 95% plus fail at Network Marketing?
Take a look at the most current figures from the Direct Selling Association and decide for yourself if you are in the right profession. At the bottom of this article I have included the current fact sheet from the DSA.