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Direct Selling Guidelines USA

After the dot com boom, within the first decade, direct selling has become the dark horse of the marketing industry. Stats of some largest direct selling companies like Amway reveal that how the graph of the direct selling industry is narrowing in the USA. 

This story was different a few decades ago when Amway’s growth was taking off.

Unfortunately, FTC found that Amway’s compensation plan is suspicious and Amway got in trouble. Later, in 1979 Amway won the lawsuits, and FTC’s claim of Amway is a pyramid scheme got discarded.

It was just starting of the struggle of major direct selling companies. Herbalife, Avon, Forever living most MLM companies fought some legal battles to maintain their legacy.

MLM is actually complicated and misunderstood with the fraud Pyramid and Ponzi schemes. Therefore this industry required some standard to differentiate legitimate opportunities from frauds.

Direct Selling Guidelines USA

FTC (Federal Trade Commission) handles most business activities in the USA and it also regulates direct selling related activities in the country.

FTC has provided a guide to understand direct selling aka MLM in more conventional ways.

In this post, we have shared the fundamental guidelines of Direct Selling in the USA. Anyone who is linked to this industry in either way must know them.

This guidance is available in the business center section of the FTC’s website which is www.ftc.gov/tips-advice/business-center

Table of Content

Definitions by FTC

Direct Selling

Direct selling is a blanket term that encompasses a variety of business forms premised on person-to-person selling in locations other than a retail establishment, such as social media platforms or the home of the salesperson or prospective customer.

Multi-level marketing

Multi-level marketing is one form of direct selling. Generally, a multi-level marketer (MLM) distributes products or services through a network of salespeople who are not employees of the company and do not receive a salary or wage. Instead, members of the company’s salesforce usually are treated as independent contractors, who may earn income depending on their own revenues and expenses. Typically, the company does not directly recruit its salesforce, but relies upon its existing salespeople to recruit additional salespeople, which creates multiple levels of “distributors” or “participants” organized in “downlines.”

Pyramid & Ponzi Schemes

Unlawful compensation structure exists, a participant is unlikely to be able to earn money or recover his or her costs through selling product to the public. In such circumstances, participants will often attempt to recruit new participants who will buy product, and pressure existing recruits to buy product, with little concern for consumer demand.

Actual Sales to Real Customer

FTC has repeatedly used “Actual Sales to real customer” while describing members’ commissions from MLM companies.

FTC says the compensation plan of MLM companies should provide income to direct sellers based on products sales made to real customers. It can be personal sales or purchases made by recruited downlines.

Wholesale purchases or other types of fees should not be the source of commission.

Worthy products should be sold

Pyramid schemes companies pretend as direct selling companies by using expensive and inferior quality dummy products. People become part of these hoaxes by seeing heavy commission.

FTC says products should satisfy actual consumer demands. Companies can’t force direct sellers to purchase extra products by offering advancement or more commission in the marketing programs.

Citing the FTC case against BurnLounge, BurnLounge argued that participates were interested in buying products packages they were selling. But when the MLM compensation plan was removed for these product packages, sales dropped by 98%.

It’s proved that BurnLounge had an unfair compensation structure and sold worthless products to participants by offering heavy commission.

Deceptive recruitment tactics are major red flags

MLM Companies and network marketers are not supposed to use deceptive tactics to advance their business.

Like making false promising which can’t be fulfilled or presenting testimonials of only small fractions of high earners participants while hiding the profit-loss of most participates.

FTC wants companies and network marketers should be straightforward with what they are selling and don’t lure people by unethical manners.

Companies also should have evidence of every claim they made.

FTC have case-by-case evolution procedure

Other than guidance shared, FTC staff address MLM-related legislative action through case-by-case evolution of each matter.

There are several types of compensation models and products used in direct selling. To understand the legality, FTC investigators analyse the business by independent research of commission flow and products worth.

Earlier MLM-related settlements made may be followed by other industry people as provisions to develop own practices and procedures.

Report Fraud

Any individual or organization who got scammed in the USA, can report fraud to FTC by visiting fraud.ftc.gov.

With the help of enforcement partners, FTC can resolve your concerns regarding direct selling as well other business frauds.

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