By Teresa Craighead
In new approach, regulators go after long-accepted direct sales compensation methods.
“The FTC wants to encourage good behavior without clearly stating what ‘good behavior’ is. They want to see ‘real sales to real customers’ but won’t say how much because they can’t.”
—Kevin Thompson, partner, Thompson Burton
In the past, wholesale purchases of products by distributors were the only transactions that mattered to the company. The distributor was the customer. But times have changed.
“The company should have a sense of how much product has been sold versus how much is still out there, possibly stored in garages and closets.”
—Kenny Rawlins, CIO, InfoTrax
Even though the concept originated with the SEC, the FTC applies the pyramid scheme definition to a direct selling company when it appears to perform similarly by emphasizing and rewarding recruiting over selling products, and by overpromising financial rewards available with little work.
Washington State Attorney General (AG) Robert Ferguson has brought the latest lawsuit against California-based clothing company LuLaRoe. The suit—filed on Jan. 25—claims the company is operating as an illegal pyramid scheme in violation of state laws concerning pyramids and consumer protections. Though this isn’t a new tactic against direct sellers, what’s surprising here are the concepts used to support the allegations. Going further than actions in the past, this suit strikes at the foundations of the entire business model—namely, team building and the resultant commission structures.
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