The Direct Selling Association Responds to Questions about the Purchase of Products by Direct Salespeople

FOR IMMEDIATE RELEASE

WASHINGTON, D.C.—As the association representing more than 200 leading firms that manufacture and distribute goods and services sold directly to consumers, the Direct Selling Association (DSA) would like to set the record straight in response to questions raised about the direct selling business.

Unfortunately, even though the direct selling industry has definitively demonstrated the propriety of internal consumption to the regulatory community, stock prices of Herbalife and other publicly traded direct selling companies fell as a result of inquiries by hedge fund manager David Einhorn.

First and foremost, the direct selling business model is solid and strong. After falling slightly in the wake of the Great Recession, total industry sales grew nearly one percent in 2010 and are expected to show even stronger gains when 2011 numbers are announced in early June. Most publicly traded companies reported strong earnings and income in 2011.

Nearly 16 million Americans engaged in direct selling in 2011, some as full-time entrepreneurs seeking to build a business and some as part-time representatives hoping to earn a little extra money. Others sign up as representatives simply to purchase products or services for their own use at a discount and never sell to anyone else. Regardless of their income expectations, almost all direct sellers use the products themselves. This is what is known as “internal consumption.”

As the Federal Trade Commission (FTC) stated in a January 2004 Staff Advisory Opinion, internal consumption is not considered to indicate impropriety. Instead, “the critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.”

In short, what the FTC watches for—and what the DSA Code of Ethics is designed to protect against—are compensation systems that are funded primarily or exclusively by payments made for the right to recruit other participants. Compensation must primarily be based on the sale of products and services to the ultimate consumer—whether or not that consumer is also a seller of the products.

Unfortunately, direct sellers have been targeted in the past by short sellers who have deliberately injected inaccurate information or rumors into the marketplace with the goal of driving down stock prices for financial gain. In the end, it is the millions of hardworking American direct sellers who suffer the results of these attacks while the perpetrators walk away with millions in profit. DSA exists to protect and promote the direct selling industry by educating policymakers, the business community and the general public about the nature of the industry and how it works; and ensuring DSA member companies behave ethically in all aspects of their businesses through enforcement of the DSA Code of Ethics.

The direct selling business model has been thriving for more than 100 years. We encourage anyone who wants to learn more about this quintessential American industry to visit our websites at www.dsa.org or www.directselling411.com, or contact us by phone at (202) 452-8866.



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