Direct Sales and MLM

MLM Special Deals: Disclosure Requirements (Part 2)

By
Kevin Thompson

Specific Strategies

In Part 1 of our MLM Special Deal series, we covered the basic concepts about the need for disclosures when it comes to business development agreements. In this article, I provide specific strategies to help companies and distributors navigate the water.

When does a deal need to be disclosed?

In their FAQs, the FTC provides some practical tips for when to disclose and how. Note, after my original article was published in December of 2014, the FTC has since updated their website with more content specifically for network marketers (which means they're paying attention). The page is titled The FTC's Revised Endorsement Guides: What People Are Asking. On this page, the FTC writes, "If there’s a connection between the endorser and the marketer of the product that would affect how people evaluate the endorsement, it should be disclosed." The main question: In a network marketing context, when does a "connection" affect how people would evaluate the networker's endorsement of the company? The answer, in my opinion: When the connection involves EXTRA COMPENSATION that's not available to average participants considering the program.

It's a point worth repeating: Disclosure is required when the connection involves EXTRA COMPENSATION that's not available to average participants considering the program. This brings up another question...how is "extra" defined? If a networker was flown in by the company, is this extra? If a networker is given a monthly budget to fly around America to recruit leaders, is this extra? If a networker purchased a position and is given a serious advantage by way of the placement, is this extra? In the FAQ document, the FTC offers a little guidance by writing, "[W]hat’s clear to you may not be clear to everyone visiting your site, and the FTC evaluates ads from the perspective of reasonable consumers." When in doubt, the FTC recommends disclosure. In my opinion, "EXTRA COMPENSATION" should be defined as additional revenue opportunities that are not available in the general pay plan.

It's another point worth repeating: "EXTRA COMPENSATION" should be defined as additional revenue opportunities that are not available in the general pay plan. This would include being given volume in a leg, signing bonuses, additional pay on gross volume points, extra cash for travel, being able to work multiple positions, etc. This would not apply to a corporate fly-in, free convention tickets or even being given free product (in my opinion). It boils down to a simple question: What fact, if known by a reasonable consumer, would affect the endorsement? If those being recruited knew of the existence of a special deal, they'd be in a better position to make a decision. The FTC views marketing from the perspective of a "reasonable consumer." If a reasonable consumer would be intrigued to know the existence extra incentives, disclose

The FTC provides another example to give us guidance on when disclosure is required. The FTC writes, "A famous athlete has thousands of followers on Twitter and is well-known as a spokesperson for a particular product. Does he have to disclose that he’s being paid every time he tweets about the product? [Answer] It depends on whether his readers understand he’s being paid to endorse that product. If they know he’s a paid endorser, no disclosure is needed. But if a significant number of his readers don’t know that, a disclosure would be needed. Determining whether followers are aware of a relationship could be tricky in many cases, so a disclosure is recommended.

Now What?

This is where the rubber meets the road. I have written ad nauseam about the requirements for disclosure. I have even shed some light as to WHEN disclosure is required. It's now time to discuss HOW the disclosures should happen.

The FTC specifically has a section on its page titled "How Should I Make the Disclosure?" The FTC writes, "It’s always been the law that . . . if an endorser has been paid or given something of value to tout the marketer’s product – the ad is misleading unless the connection is made clear." What does "clear" mean? In the FTC's disclosure guidelines, they require "Clear and Conspicuous" disclosures and explain that disclosures need to be "as close as possible to the triggering claim." When it comes to the definition of "clear," it boils down to readability.

This likely raises the question: How often does a networker need to disclose that he or she received additional compensation? Is a networker required to constantly disclose this fact every time he or she recruits someone? Remember, disclosures need to be close to the triggering claim. So the unfortunate answer is "yes." In its FAQ, the FTC posed a question about whether a single disclosure on a website would work when there were several "triggering claims" throughout the site. The FTC writes, "A single disclosure doesn’t really do it because people visiting your site might [see individual statements] or watch individual videos without seeing the disclosure on your home page." This rule is consistent with the FTC's position with income claims. If a fact would weigh into a prospect's decision to join, it needs to be disclosed.

Am I naive enough to think that networkers will constantly disclose their special deals? No. But if these deals are going to continue, and if there's a company out there that really wants to disclose the existence of deals, I would recommend the following: they create a special designation for deal recipients. We can start with a simple symbol, like a Plus sign i.e. Bronze Plus (or Bronze+). They should list all of their + people on a separate page on the website. The + distributors could promote their presence on the page as a badge of honor. This would remove pressure from the networker to constantly disclose and transfer pressure to the company. It can also be added to the enrollment process where the prospect checks a box, confirming that they understand their sponsor is receiving compensation beyond the traditional pay plan. The company will need to make it clear that the "+" is a sign that signifies payment terms beyond the compensation plan. The specifics of the deal, though material in my opinion, need not be mentioned. The message will spread and prospects will be in a position to discover the existence of deals. This simple measure would be a large step forward in the right direction. Candidly, I'm hopeful the DSA takes measures to end the practice completely. We'll see.

Conclusion

Is it perfect? No. Is it better than nothing? Yes. Is it easy to implement? Absolutely. There's no need to make it complicated. In fact, the FTC has said that simple is good. They wrote, "What matters is effective communication, not legalese. A disclosure like “Company X sent me [name of product] to try, and I think it’s great” gives your readers the information they need."

It's that simple.

This is a word for prospective distributors: DO NOT JOIN A COMPANY THAT YOU KNOW CUTS DEALS, BUT REFUSES TO DISCLOSE. DO...NOT...JOIN!! It's a symptom of cancer.

What do you think? Do you have any suggestions?

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