Crowdfunding and Network Marketing: Part II

Thomas Ritter Explains Title III Of The JOBS Act For Direct Selling

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. 


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.

MLM Legal Alert By The MLM Attorney: FTC’s Disclosure Guidelines for Online Marketing: How to get it right (Part 1)

Jake Perry is an associate of the MLM legal team over at Thompson & Burton. He is collaborating with MLM attorney Kevin Thompson, writing a series of articles on the FTC’s disclosure guidelines. For those who wish to review a disclosure page you can reviews ours here at MLM Help Desk.


The world we live in today is changing at a rapid pace. Technological developments have revolutionized the way we communicate and live. We can now complete our Christmas shopping lists from the comfort of our recliners. But while these technological advancements bring great convenience, they also create serious problems for marketers. Bottom line: technology is growing faster than the law can keep up. It was easy to regulate marketers back in 2000 when the original guidelines were written. Few people had the ability to publish…anything. But today, it’s a different ballgame. We all have the means of production in the palm of our hands with our mobile devices. With communication tools such as, Facebook, Twitter and WordPress, it’s been really difficult for network marketing companies to create clear policies for their salespeople. Luckily, the Federal Trade Commission clarified much of the confusion. The FTC has recently published Disclosure Guidelines (fully included below). Essentially, the guidelines provide a “how to” guide for giving adequate disclosures in online advertisements. This is a good thing. The FTC has recognized that this area of the law is fuzzy, blurry, and every other synonym for “unclear” you can find in Merriam-Webster.

These guidelines are extremely helpful and a step in the right direction for our industry. But….the document is over 50 pages long. This is why I have decided to boil them down in a way that makes sense for you all. The purpose of this series is to give you specific instructions on how to stay within the boundaries of these guidelines. While the guidelines never referenced any MLMs, I’ll be providing examples using fact patterns that are common to our industry.

Before we get into those fact patterns, it’s important to understand the basics of these guidelines. There are several key themes to keep in mind when providing “adequate disclosure.”

1) Required disclosures must be “clear and conspicuous.”
A clear and conspicuous disclosure is:
i. One that is within close proximity to the relevant claim in question.
ii. One that is not hidden in a bunch of senseless words.
iii. One that is prominent and easy to spot i.e. clearly visible.
iv. One that is in plain language that your target audience will understand.
v. One that is not accompanied by other distractions in the advertisement.

In other words, do not bury the disclosure in the fine print. It needs to be seen. Period. Keep in mind, the manner you communicate the relevant claim should also be the manner you communicate your disclosure. Therefore, a YouTube video should contain a disclaimer in both video and audio formats.

2) Do not partake in “unfair or deceptive acts or practices.”
While this should go without being said, it’s important to remember that “honesty” is always the best policy. Never try to hide the ball or position your product or service in a way that’s inconsistent with reality. Transparency with customers is actually good for business long term.
If the claim is untrue, there is no amount of disclosure or substantiation that can “sanitize” the statement. For example, an advertisement states that an individual lost 100 pounds taking a new weight loss supplement when in reality she only lost 75 pounds. In this scenario, no disclosure or amount of substantiation can qualify or limit the claim being made because the claim is blatantly false. Therefore, in this scenario, the claim itself must be modified, i.e. individual X lost 75 pounds using the dietary supplement.

3) Claims must have “substantiation,” regardless if they originate from the company or the field.
Substantiation refers to evidence that backs up your claim. The FTC states in the guidelines that before distributing an ad, advertisers must have “appropriate support for all express and implied objective claims that the ad conveys to reasonable consumers.” In other words, if a company or its sales people make aggressive marketing claims, those claims need to be backed up with reliable data. Research studies, expert opinions, and other types of data must be used to support any type of claim you make.

With MLM companies, distributors are also required to provide substantiation when promoting a product or service. As made clear in the Endorsements and Testimonials Guidelines published in 2011, the company can be held responsible for any false or misleading claims made by its distributors. Therefore, it’s vitally important to ensure the field is educated on ways to properly market the products and services. It’s crucial that the field understands when and how to provide substantiations and income disclosures. This is where compliance training becomes a key factor. If you care about the longevity of your business, you’ll make the investment to make sure your reps are adequately trained.

4) Would your disclosure give a “reasonable customer” notice of the information?
A reasonable customer is a hypothetical person who contains the necessary intelligence, judgment, attention, knowledge, and experience required to function in our society. For example, where a disclaimer is located at the bottom of a website in 30 lines of small text titled “LEGAL TERMS AND CONDITIONS,” a reasonable person would never expect to find a disclosure about the product they are buying buried there. A reasonable person would expect to find the disclosure somewhere within close proximity of the statement in question. When you’re creating promotional materials, use common sense when figuring out the location and form of your disclosures.

5) Research and follow-up on the effectiveness of your disclosure.
The FTC states that the ultimate test to determine the adequacy of a disclosure is whether the information intended to be disclosed is actually conveyed to consumers. While this is not a requirement made by the FTC in making an adequate disclosure, be forewarned that you will run the risk of having your disclosure declared inadequate. The FTC recommends conducting controlled side-by-side research experiments to determine where the average consumer does and does not look on a computer screen to test the effectiveness of your disclosures. The FTC also recommends assessing the effectiveness of a disclosure via hyperlink by monitoring the link’s click-through rate and make adjustments accordingly. If you know of an analytics geek that’s good with tech, it’s time to pay him or her. That data is going to be very important.

6) If you cannot follow the FTC guidelines in your advertisement, do not make the claim in question.
Where it is not possible to follow the FTC’s guidelines in giving adequate disclosure to customers, the claim in question should NOT be disseminated. This further reiterates point #1 and #4. A disclosure is not adequate simply because it is the best you can do under the circumstances. The disclaimer must actually convey the qualifying or limiting information to the ultimate consumer.

A perfect example of when it is not possible to ensure compliance with the FTC’s guidelines is when a distributor makes an income claim via Twitter. The character count allowed per “tweet” is simply not high enough to ensure that adequate disclosure is given to the consumer. As an example, a proper disclaimer could take up half of the tweet: “the average person can expect to earn between $300 and $500 per month.” While it’s true that a hyperlink may be included within a tweet, a reasonable consumer will not likely realize that “” leads to a disclosure of the statement made. Therefore, it is best to completely avoid making income claims on Twitter altogether.


Be careful. With companies that exercise tight control over their marketing efforts, complying with these standards will be easy. But for network marketing companies that rely on the creativity of a volunteer army, it’s going to be incredibly to walk this tight rope. Compliance training is going to be incredibly important to ensure sales leaders really understand how to do things right. Proper behavior in the field is not going to happen by sending out a single newsletter once a quarter or referencing the “C” word (compliance) at an annual convention. It’s going to take commitment. In Part 2 of this series, I’ll provide you with specific instruction on ways to do this right. I’ll be sure to use fact patterns that are common in the MLM industry.



Jake Perry is a Summer Associate at Thompson Burton PLLC.

Jake is a rising second-year law student at the University of Tennessee. After ranking at the top of his class during his first year of law school and after a rigorous interview process, Jake was asked to join Thompson Burton’s summer associate program. Jake will assist with document review, case analysis and research this summer. He is not licensed to practice law in any jurisdiction at this time.

Prior to joining Thompson Burton, Jake organized and managed a number of philanthropic events at Tennessee Technological University including a benefit that raised over $2,000 for the Prostate Cancer Foundation.

Jake is from McMinnville, TN. Jake enjoys spending time with his family in McMinnville and his girlfriend, Emily, who resides in Lebanon. His hobbies include jogging, golfing, and playing guitar.


  • University of Tennessee College of Law, Candidate for J.D., 2015
  • Tennessee Technological University, B.S. Political Science, magna cum laude, 2012