Networkers Meet Business Opportunity Statutes

By Jeffrey A. Babener
© May, 1995

Not long ago, few states had a business opportunity statute. The trend today is that most states will have adopted business opportunity statutes by the end of the 1990's. There is no question but that this new legislation will impact the multilevel marketing industry.

It is no surprise, however, that most network marketers are unfamiliar with this new wave of legislation. These statutes have already been used to prosecute companies in California and South Carolina. In South Dakota, a business opportunity statute was implemented to replace South Dakota's onerous multilevel distribution company statute. By and large, business opportunity statutes bear no resemblance to traditional legislation for the direct selling industry, such as multilevel distribution statutes, pyramid, endless chain, referral sales or lottery statutes. Business opportunity legislation has been proposed in a variety of forms, many of which are inconsistent with one another. The FTC has its own rules and interpretative guidelines on business opportunity ventures. In 1984, the North American Security Administrator's Association adopted a Model Business Opportunity Sales Act for consideration by states. To date, California has perhaps enacted the most rigorous business opportunity statute, entitled the Seller Assisted Marketing Plan Act and generally referred to as the SAMP Act. Numerous other states have adopted similar but local homegrown versions of business opportunity statutes.

Since these business opportunity statutes can result in both civil and criminal penalties, and since some aspects of direct selling activity can trigger their application, it is worthwhile to be familiar with them.

Since the California market is such an important market for direct selling activity, the SAMP Act is a good example to look at. By and large, the California program, as other states' legislation, is oriented to the sale of in the home business opportunities, such as "grow worms in your spare time," or "grow chinchillas in your spare time." In addition, the legislation is aimed at programs which convince individuals to buy vending machines, display racks, video games, with the representation that individuals will be able to earn a living by strategically placing these machines or paraphernalia in their local community. Contained in the preamble to the SAMP Act is a specific finding by the California Legislature regarding its concerns about purchasers of business opportunities:

"Often purchasers of seller assisted marketing plans are individuals inexperienced in business matters who use their life savings to purchase the seller assisted marketing plan in the hope that they will earn enough money in addition to retirement income or salary to become or remain self-sufficient. Many purchasers are the elderly who are seeking a way to supplement their fixed incomes. The initial payment is usually in the form of a purchase of overpriced equipment or products. California purchasers have suffered substantial losses when they have failed to receive full and complete information regarding the seller assisted marketing plan, the amount of money they can reasonably expect to earn, and the previous experience of the seller assisted marketing plan seller."

Some of the business opportunity legislation also includes programs in which seller provides that there is a marketing plan for the marketing of product. Most business opportunity statutes have a threshold amount for their application in the range of $250 to $500, but some states go as low as $25 for application of their statutes. Several states specifically exempt sales materials and demonstration equipment sold at company cost in determining whether or not the threshold amount has been reached which would trigger application of the business opportunity statutes. Some states also exempt reasonable purchases of initial start up inventory when calculating the amount spent for purposes of application of the business opportunity statute. It should be noted that California exempts neither "initial start up inventory" nor "at cost sales materials." Conceivably, in California, it can be argued that the purchase of sales kit materials at company cost, together with inventory purchases, the total of which exceed $500 for the first six months of participation in the program, would trigger application of the SAMP Act. It was contended in the lawsuit that the SAMP Act is triggered by the opportunity of Herbalife distributors to "buy in" for $4,000 at the "supervisor" level or for $800 at the "senior consultant" level. The outcome of this litigation resulted in a permanent injunction and $850,000 penalty, but was inconclusive on SAMP Act issues.

Both inside and outside of California, network marketing companies should be concerned that business opportunity statutes have been triggered for such items as registration fees, training fees, data processing fees, and large initial inventory purchases. Companies should be particularly in tune with those states that have a low dollar amount for triggering their business opportunity statutes. Companies that wish to use founder's programs or regional distribution centers or mini-warehouses, may also find business opportunity statutes triggered. Ironically, company buy-back policies, which are mandated by several states with multilevel distribution statutes, may also trigger application of business opportunity statutes.

Assuming that the SAMP Act or business opportunity statutes are triggered, what impact will this have on the company? First of all, the seller of the program must register the program with the state. The seller must post a bond. In California, the minimum bond posted is $50,000. Specific disclosure statements and information sheets must be provided similar to franchise offering circulars which provide information regarding the financial background of the seller, including the financial statement, as well as indication that the seller has been the subject of previous civil or criminal legal action. The contracts are stringently regulated and purchasers are provided specific cancellation rights. Earnings representations are prohibited unless the seller has facts to substantiate claims of income or earning potential.

Business opportunity legislation is relatively new. It is distinctly different from franchise legislation, multilevel distribution legislation and pyramid legislation. Nevertheless, it overlaps with much previous legislation regulating direct selling companies. It is clear that, in the future, business opportunity statutes, of a variety of sorts, will be attempted to apply to the activities of direct selling companies. It is important that direct selling companies monitor existing legislation, proposed legislation, model legislation, etc. in the near future. Certainly it is not legislation to be ignored or dismissed.

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