The Federal Trade Commission and the Attorney General’s office can be tough points for Network Marketing and MLM Companies. Do you know how to fly under their radar?
How to Stay Under The FTC/AG Radar
The Federal Trade Commission (FTC) is the U.S Federal consumer protection watchdog. It is also responsible for competition jurisdiction across broad sections of the economy.
Attorney General departments exist in every State where it functions as the prosecuting law enforcement agency.
What actions and arrangement in your business practices would bring a representative from either agency to your front door?
We need to keep in mind that multi-level marketing employs a multi-tier sales force with multi-tier commission payments. This structure resembles outlawed pyramid schemes which is the reason why MLM companies are subject to scrutiny.
What is the worst that could happen to an MLM company whose practices in regard to commission payments are deemed illegal?
- The FTC shuts down the company.
- The Attorney General’s Dept in your State initiates an investigation into your business.
- A judge orders you to change the Compensation Plan you are using.
There is nothing alarming about this law. When you launch an MLM company, you must pay attention to the way you pay commissions to your distributors.
The jurisdiction MLM companies must observe
As an MLM company owner or a distributor with downline sales staff, you cannot require them to buy a distributor or starter kit with merchandise on which you are paid a commission, or on which you will pay a commission to the distributor who buys the kit. To repeat, if you require your distributors purchase a starter kit of products, you cannot pay commission on the sale of these products. It makes the transaction an illegal pyramid.
How you comply with the law
How do you avoid the attention of the authorities? As said, it all depends on your actions and arrangements.
The first choice
Offer your distributor or starter kits with two options:
- Offer a required kit purchase on which you do not pay commission. Set a low price for this option.
- Offer an optional purchase on which you pay commission.
The second choice
This is the arrangement we recommend, and it is legal.
Create three different enrollment options.
- A $49 – 99 starter kit on which you do not pay commission.
- A $129 – 199 starter kit as an optional purchase.
- A $299 – 499 starter kit as an optional purchase.
Options 2 and 3 are not required purchases and you can pay commission on these kits and not be in breach of the law.
The likely scenario is that 20% of people will choose Option 1, 20% Option 3, and 60% Option 2, the middle tier. These should be your selection of products that you want to sell.
In summary, you cannot require your distributors to purchase a kit on which you pay a sales commission. It is illegal.
If you stipulate your distributors purchase a starter kit, I strongly urge you to speak with an experienced MLM attorney.
I am not an attorney or paralegal but if you have any questions about this or other areas of MLM, I’d be happy to talk to you.
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