FTC Guidance on Business Opportunity Claims
In January of 2018, the Federal Trade Commission of the United States released guidance on how multi-level marketing companies and participants should talk about business opportunities. The FTC is one of the government agencies which regulates all kinds of businesses, including multi-level marketing companies.
Why should we care?
The FTC works to make sure that things are fair, there is no fraud, and to protect consumers. These guidelines lets us know what the FTC has decided to be bad and why. Companies that violate these guidelines are bad for consumers, business, and in some cases could end up in trouble with the government.
If you are recruiting participants, these guidelines are a great way to think about the best way to share an opportunity. New recruits will be well informed and on their path to success with no regrets. These guidelines from the FTC are not the law but they are help to understand the law and to follow it.
FTC Guidelines on Sharing Business Opportunities
The FTC explains that, to follow the law, you must tell the truth and not be misleading to recruits and participants about the opportunities. A company violates the law if they say or show things that are false or misleading about the business (including about how much you can earn). This includes making claims when there isn’t really proof or evidence for them.
“An MLM’s representations and messaging concerning the business opportunity it offers must be truthful and non-misleading to avoid being deceptive under Section 5 of the FTC Act. An MLM’s representations about its business opportunity, including earnings claims, violate Section 5 of the FTC Act if they are false, misleading, or unsubstantiated and material to consumers.” (FTC Business Guidance Concerning Multi-Level Marketing)
This all seems great. When evaluating an opportunity, you want to make sure that the things you learn about it are true and accurate. Claims that are false or fake shouldn’t be allowed. The FTC makes deceptive practices illegal.
Must be a “reasonable basis” for claims
The first guiding principle (here under #13) says that companies must have objective evidence that supports the claims they share. If you are evaluating a business opportunity you can (and should!) ask for the evidence.
Claims to get rich are deceptive
“Some business opportunities may present themselves as a way for participants to get rich or lead a wealthy lifestyle. They may make such representatives through words or through images such as expensive houses, luxury automobiles, and exotic vacations. If participants generally do not achieve such results these representations would likely be misleading to current or prospective participants.” (FTC Business Guidance Concerning Multi-Level Marketing)
The FTC gives other example claims that are misleading unless they are “generally” achieved. These are just examples and similar claims could also be misleading.
- Making income that is similar to a career or job
- Earning thousands of dollars each month
- Become a stay-at-home parent
- “Fire their boss”
The FTC says that if participants don’t generally get these things then claiming participants could is misleading.
Many companies and leaders will share their own success. The guidance says this is okay only if they include information about how much is earned or lost by most participants.
When talking about business opportunities, talk about real results of most participants. Our research has shown that vacations, big paychecks, quitting a job, and free cars are usually very rare. Check out our income disclosure analysis pages for some examples. Ask for these disclosures. The disclosures we’ve looked at do not include expenses or losses which makes it hard to tell how many people lose money and how much they lost.
Examples should tell the whole story
People sometimes explain an opportunity with a hypothetical: “if you recruit this number of people” then you will get a big commission check. These examples need to include any assumptions for the “typical participant.” That means, for example, if any people you recruit also need to sell a certain amount of product that requirement should also be shared.
If assumptions and additional requirements that make the earnings example true for most people are not included then it’s misleading. This is the 5th principle listed under #13 in the Business Guidance Concerning Multi-Level Marketing.
This, again, is pretty common sense. It is important to get the whole story when hearing about a business opportunity. It would be bad to invest and do a lot of work and then learn there were extra requirements. That would be misleading and unfair.
The company should tell participants not to make false claims
Most MLMs will pay people to recruit new distributors and that gives them a good reason to make false claims. MLM companies should have rules and check up on participants to avoid false claims.
“[An] MLM should (i) direct its participants not to make false, misleading, or unsubstantiated representations and (ii) monitor its participants so they don’t make false, misleading, or unsubstantiated representations.”
Usually, a good place to look for these rules is in the contracts that new recruits sign. Sometimes they will be in “Rules and Regulations” or “Guidelines and Procedures.” You can ask for these documents. Participants often violate on social media, during opportunity meetings, or in one-on-one conversations. Some companies are very strict but others allow a lot.