The prevalence of false earnings claims is not the only similarity between pyramid schemes and business opportunity frauds covered by the current Franchise Rule. Many induce new recruits with the promise of an ongoing commercial relationship that will enable recruits to operate their own business selling various products or services. Typically, they promise to provide recruits with promotional assistance.76 Some also offer training. Few, however, reveal their high drop-out rates, much less the fact that the vast majority of those who have joined the program—often 90 percent or more— will not recoup their investment.
Further, since 1990, the Commission has brought 20 cases against pyramid schemes under section. These matters have involved a wide range of purported product sales or investments, ranging from the mundane (nutritional supplements, beauty aids, weight-loss products, and water filters) to the unusual (auto leasing, charitable giving, unsecured credit cards,83 credit repair, travel agency credentials, Internet malls, and Internet access).
In response to the ANPR, state regulators argued for a broad rule covering a wide array of opportunities. For example, in its ANPR Comment, NASAA recommended that the disclosure requirements for business opportunity ventures include business opportunity formats such as multilevel marketing plans, seller-assisted marketing plans,...
In response to the ANPR, DSA and its members argued for additional exemptions that would keep multilevel programs, in particular, from falling within the proposed Rule’s purview.
DSA asserted that pre-sale disclosures are unnecessary in the context of direct selling where the risk of financial loss is low. To that end, DSA and its members recommended that the Commission preserve the inventoryexemptions from the minimum payment requirement.249 In addition, they contended that a Business Opportunity Rule should not cover opportunities with a repurchase or buy-back plan. They also suggested that the minimum payment threshold should be raised from the current $500 to at least $1,000,251 in order not to impose significant costs on small direct sellers.
In short, DSA and its members asserted that any regulation of the multilevel marketing industry is likely to impose significant costs on small proprietors. Rather, in DSA’s view, the problem in the industry is not from multilevel marketers, but from fraudulent pyramid schemes, which the Commission can address through current law.
We note, however, that DSA’s position on raising the minimum payment threshold was opposed by many other commenters. Several commenters noted that the purpose of the Rule is to prevent fraud, regardless of the amount at issue.
Others asserted that a monetary threshold simply provides scam operators a means to circumvent the Rule, noting thatbusiness opportunities frequently charge $495 to skirt the current Franchise Rule’s disclosure requirements.
For example, NCL stated that the: $500 minimum investment ". . . leaves many consumers without the disclosures and other protections that they need. Nearly one-third of the consumers who reported to the NFIC last year that they had lost money to fraudulent or deceptive business opportunities paid less than $500. . . . "
Whatever minimum amount might be set, fraudulent operators will price their services below it, and consumers will be victimized.
