What are the key MLM compliance guidelines that must be followed for businesses to engage in Direct Selling?
Key Direct Selling Regulations
The Federal Trade Commission’s regulations regarding Direct Selling are generally well-known by people in the field. All persons or organizations who engage in e-commerce are participants in a form of Direct Selling. However, most e-commerce sellers have only one “tier” of distributors. As a result, they don’t fall under the umbrella of a multi-level marketing business. The principles at the foundation of Direct Selling are based on a simple mathematical formula: additive growth vs. exponential growth. While most ecommerce businesses seek to advance sales along only one tier creating additive sales growth, the concept of multi-level marketing is based on the notion of increasing sales by exponentially growing the sales organization. Simply put, direct selling companies are constructed on the notion that if ten sales people grow their direct sales by ten percent per month, a certain level of revenues will be generated based on sales. Despite the soundness of the concept, some Direct Selling companies subordinate product and services sales to organizational growth. In other words, there was a greater focus on growing a massive base of distributors rather than sales growth. This practice led to the Federal Trade Commission establishing requirements as listed below.
Key MLM Compliance Requirement #1 Income Disclosure
Whether the direct sale occurs online, in person, and or by other means, the FTC requires that the income statement reveal that the primary revenue streams of the company are generated by the sale of goods and services to external buyers who are not organizationally connected to the company. It’s called an Income Disclosure Statement or IDS.
Key MLM Compliance Requirement #2 Customers Required
An audit of the financial rewards must also reveal that the compensation paid to Distributors is a result of the actual sale of goods and services to external buyers rather than fees paid for the expansion of the sales team.
Key MLM Compliance Requirement #3 Testimonials
Direct Selling companies, in recruiting their sales team, must not directly and/or by implication and/or images or testimonies, generate an inflated image of the earnings associated with Direct Selling participation. The testimonials and/or other marketing materials used should generate realistic images of potential earnings that have been calculated as the mean of earnings that occurred based on past participation.
Key MLM Compliance Requirement #4 - International:
If your company sales its goods and services in different states and/or worldwide, an array of other compliance guidelines are operational.
If your Direct Selling Company sells through e-commerce, other compliance rules exist. As mentioned, because e-commerce or online sales have now become a primary venue for direct sales, regulations to protect buyers in the e-commerce space must also be strictly observed.