New report details how a move by the FTC could put multi-level marketing scams in danger

New report details how a move by the FTC could put multi-level marketing scams in danger

In November 2011 — when Barack Obama was serving his first term as president — the United States' Federal Trade Commission approved changes to its Business Opportunity Rule, a set of legal requirements for companies that are offering business opportunities to others. How multi-level marketing schemes should be affected by the Business Opportunity Rule has been a subject of debate, and journalist Emily Stewart addresses this topic in an article published by Vox this week.

"Earlier this year," Stewart reports, "then-FTC Commissioner Rohit Chopra — who was recently confirmed as director of the Consumer Financial Protection Bureau — put out a statement urging that MLMs and gig-economy platforms be included in the (Business Opportunity) Rule. Now that Chopra's at the CFPB, the other commissioners — including FTC Chair Lina Khan, a protégé of Chopra's, and Noah Phillips, a Republican-appointed commissioner who has criticized MLMs in the past — are expected to take a look at the issue."

The FTC defines MLMs as: "Businesses that involve selling products to family and friends and recruiting other people to do the same are called multi-level marketing (MLM), network marketing, or direct marketing businesses." It also notes: "Some MLMs are illegal pyramid schemes."

Stewart opens her article by discussing a hypothetical business that sells bananas, using that example to explain how the FTC's Business Opportunity Rule works and how multi-level marketing schemes have been getting around it.

"Say I've got a business selling bananas, and I want you to sell bananas, too," Stewart explains. "Presumably, you'd want to know some details about this banana business opportunity, such as whether I've ever been sued for lying about my business, whether the amount of money I say you would earn is accurate, and what happens if, after selling for a while, you want to quit. Perhaps you'd want to take a week to think about it before signing on. For most business opportunities in the United States, that's the legal standard I would have to follow to get you on board. It doesn't apply to multi-level marketing companies (MLMs), though. They're exempt — at least for now."

Recently, Stewart notes, "anti-MLM sentiment" has "been on the rise" as more people are speaking out about "the pitfalls of the business model." And according to Stewart, MLMs are not happy about Chopra's recommendations and are "certain to push back against their inclusion" in the Business Opportunity Rule.

"One lawyer I spoke to, who asked to withhold their name because they have clients in the industry, told me that the rule would be 'disastrous' for MLMs and likely 'decimate' the industry," Stewart reports. "Whether the FTC actually makes any changes to the rule is uncertain, and the process could take months or even years. But it's a start."

Read the full report.

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