In every state across the country, research tells us that hardworking men and women involved in direct selling (DS) play an important role in supporting their local economies, particularly in under-served areas. For some, DS offers access to discounted products used at home, while for many others it provides an opportunity to build and grow their own business with an active customer base and sales teams that work under them. Last year alone, DS had an estimated direct retail impact of over $35.5 billion nationwide, the second highest level in history, despite growing competition from online shopping.
DS’s important economic impacts on the American economy remind us of the balancing act policymakers in Washington often face when seeking to punish the bad actors while supporting the good ones. To be clear, aggressive marketing ploys have allowed some to infiltrate DS under false premises and dupe otherwise unsuspecting friends, neighbors and strangers. They do this by setting up pyramid schemes that are disguised as legitimate DS firms, but fail to offer valued products and business opportunities to those who enroll.
Most important, the legislation clearly defines an illegal pyramid scheme as a plan offering participants compensation for recruiting others without regard to sales. It distinguishes legitimate DS firms not only on this compensation element but also through a requirement to repurchase unsold distributor inventory and a clear prohibition on inventory loading.
With these provisions, and contrary to the opinions held by some long-time critics of the DS industry, the bill’s classification of a participant’s personal consumption as an “ultimate user” sale makes perfect economic sense. It is commonplace for people to join DS companies as distributors after first trying and enjoying the products. Their purchase and consumption of products is no less an “ultimate sale” the day after becoming a distributor than it was the day before. In 2004 the Federal Trade Commission (FTC) also agreed with this economic logic, noting that the amount of personal, voluntary consumption of products by a DS distributor is not a useful metric for pyramid scheme status determination.
The reality is that DS firms use an economically sensible go-to-market model. A compensation plan that motivates hard work while controlling economic risk is offered equally to all distributors. Every DS firm makes costly investments in product design/development, manufacturing, branding and packaging, shipping, IT systems development, compensation management, and distributor training and education, relieving the DS distributor of these entrepreneurial costs. It offers a low or zero cost of trying out an entrepreneurial business opportunity by holding enrollment costs to a minimum, offering inventory returns with refunds to distributors who discover they do not want to pursue the business, and requiring neither inventory investments nor any specific financial or time investments of its distributors.
Given the negative impact of the few pyramid scheme operators and the economic opportunity provided by legitimate DS firms, it will likely surprise many to learn that there is no current federal definition of a pyramid scheme, despite such laws on the books in virtually every state. That’s why it’s important that the provisions in the Blackburn-Veasey legislation are consistent with the content in 21 existing state laws on pyramid schemes. The bill is also consistent with past guidance by the FTC, which recognized the economic benefit created by DS firms and their channels when it certified Amway as a legitimate DS firm rather than a pyramid scheme in 1979, noting its “substantial manufacturing” operation, “efficient distribution system,” and attendant benefits to consumers.
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