Hispanic entrepreneurs are a powerful engine of growth in the American economy. Their continued success is crucial for the Hispanic community, and the entire nation. Hispanic-owned small businesses are the fastest-growing segment of small businesses in the United States.
Direct selling is a viable enterprise for many Latinos, who gravitate to companies that use independent salespeople to sell goods and services outside fixed locations. Latinos find direct selling appealing for numerous reasons, especially the autonomy it affords them to balance work and family. Like most entrepreneurs, they need clarity, particularly on what constitutes ethical business practices. This is critical in today’s economy where pyramid schemes masquerade as legitimate direct selling companies.
Representatives Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Texas) recently introduced legislation to clearly identify and punish pyramids in federal law and distinguish these illicit schemes from legitimate direct selling businesses. H.R. 3409, the Anti-Pyramid Promotion Scheme Act, establishes in federal statute a sanctioned definition of pyramid fraud based on existing case law and model legislation adopted by 21 states.
The bill gives guidance to direct selling companies on best ethical practices, and includes a new provision to protect independent contractors with inventory they can’t sell and can’t afford. A minimum 90 percent refund for unused inventory (which is already mandatory for members of the Direct Selling Association, the main trade association for direct selling companies) would now be a requirement for all legitimate direct selling companies.
The Blackburn-Veasey bill also clarifies that the personal use of products by people who affiliate with a direct selling company, because they want to buy its products at a discount, is a legitimate business practice as long as salesforce compensation is based on real sales to real end users of a good or service.
Some people work full time building their own direct selling businesses. Many others engage in direct selling part time, hoping to supplement family incomes with modest earnings. For some, such as Joanna G., who left Colombia for Florida to escape an abusive relationship, direct selling represents the embodiment of the American dream. After years of hard work, she is now a full-time direct seller, and gives back to her community by mentoring others on leadership and providing business training.
The Blackburn-Veasey bill protects all legitimate direct selling salespeople and their customers from pyramid fraud. Again, legitimate companies pay their salesforce for the actual sale of goods or services to an end user. That’s true for high sales volume transacted by networks of salespeople or for personal consumption. They are all real sales to real end users.
Pyramid schemes compensate primarily for recruiting others, not for real sales. The sale and use of the products are incidental to the scheme.
Pyramid schemes do not permit salespeople to return unused inventory, much less require it. The Direct Selling Association has required its members to repurchase unused inventory at 90 percent of the original net cost for more than 20 years.
Pyramid schemes posing as direct sellers do considerable reputational and financial harm to the marketplace. They harm the ability of honest businesses to build salesforces and earn the confidence of consumers, and they should be prosecuted to the full extent of the law.
Direct selling is thriving because of attributes that make this retail channel unique and appealing for a variety of economic, social and personal reasons. Operating your business on your own terms is, perhaps, its greatest appeal. A federal statute to protect legitimate enterprises and their salespeople from a pernicious form of fraud is long overdue. It will help Latino entrepreneurs increase their impact on the American economy.
Hector Barreto is the Chairman of the Latino Coalition, one of the largest Latino advocacy groups in the nation, and was administrator of the Small Business Administration from 2001 to 2006 under President George W. Bush.
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