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?
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.
Kevin Grimes – Partner at Grimes & Reese – Income & Earning Representations
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?
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”)
220.127.116.11. statements of average earnings,
18.104.22.168. statements of non-average earnings,
22.214.171.124. statements of earnings ranges,
126.96.36.199. income testimonials,
188.8.131.52. lifestyle claims, and
184.108.40.206. 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.