MLM Funding

Hi everybody. Kevin thompson here from themlmatorney.com I had a great meeting with Troy Dooley last week. I was in Destin, Florida. We met up for coffee. Time flew by. We met for a couple hours and we were talking. And he encouraged me to use video more, which I am doing. He also encouraged me to write less like an attorney. And I have a confession. This next post, it is the most legalese law attorney like article that I've written in a long time. So this will not be the norm. Troy's right. I need to write less like an attorney and that way it's more engaging content. But this article, in my opinion, is very important and I wanted to be technically precise. And so Troy, I appreciate the advice. This is step one going back to video. I appreciate that, but the article just bear with me on this one. This article is important and I'm going to use this video to summarize what you're about to read. So I'll try to keep it brief. But I think it's a very important subject, especially if you're an entrepreneur trying to start an mlm because it's difficult to get funds. And usually what separates winners from losers is just access to capital. And if you can just hang in there long enough to reach critical mass and to be able to hang in there, it takes capital. So fundraising is an essential element of running one of these businesses. Now, if you're going to go traditional angel investor route, venture capital route, private equity money's tough. There's a little bit of skepticism about the model. I know some companies have successfully gotten some dollars from these top firms. Stell and Dot, for example, had a huge round of funding from Sequoia Capital, one of the preeminent VC firms out of Silicon Valley. They funded Google and I think Facebook and Twitter and YouTube. They're just the best of the best. And they bet on Stell and Dot. Fantastic for Stellan Dot. And that's great for the space. A lot of startups, they don't have that kind of pull with VC firms. And Stellan Dot had demonstrated a lot of success. So kind of a different story. So with that being said, because money is tight, I'm seeing a lot of creative methods entrepreneurs are using to raise their funds. Sometimes successfully, sometimes not so successfully. But I get asked pretty much the same questions on a monthly basis. Can we do this, can we do that? And they're trying to find creative ways to bootstrap the business. In most cases, entrepreneurs will self fund their business or they'll get Together with family, friends, partners, and they'll just write checks themselves to get the thing going and then scale it as the level of interest increases. So I run into three questions. Number one, can we sell positions in the business early? For example, you pay $50,000, you get X position in the business, and you override the entire organization for five years. For example, can we do that? Number two, what if we created a profit sharing pool where 1% of the revenue goes into a pot and you sell three shares, three positions in that pot, to be shared equally between three people at 50 grand per person, assuming $15 million in revenue, 1% of that goes in the pot, breaks up three ways, you get X dollars per year, that kind of arrangement. Surprisingly, I get asked that one. I've been asked that one over the last six months, maybe four or five times. It's an elaborate program people have done in the past. It's a security. And so if you do it and you haven't registered as a security, it's illegal. Now, there haven't been any actions dealing with that, but it doesn't mean it's not going to happen. Now. There I go. Give away a spoiler. There's a spoiler for that particular way. It's illegal. The third question is, can we do a prelaunch where we solicit some enrollments from people and we sell just early enrollments, 40, 50 bucks people get in the business, but there is no business. And then we use that money to build the business. Is that legal? And a variation of that would be, can we sell enrollments and give them access to stuff? We give them some services, some products, we give them access to a beta and we take that money and we scale the business with those dollars. And so those are a lot of questions that I get. Hopefully this article gives you the law. I know there's a lot of law, but really try to chew through it and understand it because it's important, because the law, it's technical. So you can't really broad brush and give generalizations because I don't want to give you guys the wrong impression. So the authority is there. I reference all the cases in the statute that you need to understand. And then with that authority, I apply them to those questions that I give you now to get to the conclusions that first one, can you sell top positions? Well, it depends on how you define an investment contract. The supreme court in the 1940s defined it for us and they say it is where someone gives consideration, they give money with the expectation of receiving passive Income. Income based on the efforts of other people. Now, the case said solely from the efforts of other people. But there's been other cases that they've redefined the word solely. Basically, what an investment contract is, if you give money with the expectation of receiving a residual reward, $50,000 in exchange for a top position that's going to yield some results, will likely be a security. What can be argued is that that position will be maximized, will greatly appreciate based on the owner's skill and how they operate that business, their leadership skill. They're going to build a business and their income is going to be generated from their efforts. That will be the argument. Will it be successful? It depends. It's hard to say. In my opinion, it's likely to be a security because Glenn Turner, the great MLM guru from I think the 70s. Yeah, the 70s. Glenn Turner made the same argument and he said, hey, their businesses go up or down based on their effectiveness and the court didn't buy it. So be careful with that one and I wouldn't do it. Number two, selling these profit sharing positions, I've already given you the conclusion on that one. I think clearly and more clear on that one than the first one. That's a security because their income has nothing to do with their skill or performance. It's 100% driven by the performance of the company. And that's residual and passive. And that's under the Howey standard. Howey H O W E Y that's the Supreme Court case. It's a security. The third one's a little challenging, the issue of selling. Not really selling, but opening up the door for enrollments and taking money. Now there's a standard called, which is new to me, called the risk capital test. Now, at the federal level, which includes the sec, they don't use this. They just use the Howey test. That's the Supreme Court, that's the authority. Now, some states go a little bit farther than Howie and they use what's called a risk capital test. And what that test basically says is I'll give you an example and that will help you kind of understand what it's about. If I want to build a golf course and before I even raise any money, I go out there and I sell memberships to this golf course before we even break ground and say, hey, someday we're to going, going to build a golf course and your membership will be worth some money. That has been held in a case to be a security because under this risk capital test, because they're soliciting funds from these early adopters and they're taking those funds and then using it to build out the business that they're promoting. It's kind of complicated. Hopefully the article does a better job at explaining it, but that would apply when you are just selling enrollments with no business. So you're collecting 40, 50 bucks and promising, hey, someday your position will be worth a lot of money once we get this business off the ground. Don't do that. That's a bad idea. Instead, if you absolutely have to be creative to raise some cash, offer some value in exchange for the enrollment, for example, in exchange for them getting in the business, give them early access to information, give them access to perhaps a beta of your service if it's a technology company. Or give them discounted prices on certain products, give them some kind of financial benefit in exchange for that enrollment fee. In those few states that actually use this risk capital test, it's not likely to be an issue. Now, I hope you find the article informative. It's long, but just read it. Tell me what you think, because I think these issues are important. Everybody has an issue with how do we raise funds. It separates winners from losers. And so I felt compelled to kind of share some of the do's and don'ts. And if you got any insight, share it with me. You take care of.