Network Marketing and the SEC

This is what we talk about Security regulations This is an interesting topic for me because I'm always intrigued by the ways entrepreneurs can go about raising funds for their businesses. Business owners can take out bank loans, which is a lot harder these days. They can self fund their company with their own cash, or they can sell pieces of their business, referred to as selling shares. It's the last option of selling shares that we'll be discussing during this segment. The SEC and their equivalents at the state level have the authority to prosecute and shut down companies, arguing that those companies are selling unregistered securities. Legitimate MLMs can be determined to be unregistered securities largely by how the program is promoted by the field. In very rare cases, the compensation plan itself violates security statutes. This occurs when a pay plan specifically provides financial incentives for people to spend more money on product or service in an effort to qualify for passive returns from company profits. As an example, suppose a company says buy our premium pack and immediately qualify to earn a spot in our profit sharing pool. The more you spend, the more you earn. Now again, very few companies make this sort of a mistake, and when they do, they're not in business for very long. The issues typically occur on the fringes, where the field promotes the subtle workings of the plan. So what makes up a security? One of the landmark cases that sheds a lot of clarity on the subject came from a case involving a network marketing company. A security is defined as an investment of money in a common enterprise with profits to come largely from the efforts of other people. Let's break that down into smaller pieces. There are basically three elements involved. There needs to be an investment. This is where you part ways with something of value. Two in a common enterprise and three There needs to be an expectation of profit that comes substantially from the efforts of other people. It really all hinges on the last two elements. Basically, if your pay is largely dictated by the performance of the entire company, and therefore mainly outside of your control, odds are you're dealing with a security. Using an example from a legitimate network marketing company, if someone were to sell two cases of juice to customers and build a downline of people to do the same, his or her pay is going to be pretty much identical month in and month out, regardless of how the network marketing company is doing. Overall, if the company is doing poorly, those distributors will still get paid as specified in the pay plan. In a security involving a common enterprise, the payout is largely outside of the distributor's control. Make sense? Sometimes, though, a security analysis is not always so black and white. If the field promotes the program in a way that implies passive returns with minimal effort or something for nothing, courts can conclude that the program is operating like a security where people rely primarily on the efforts of others. This is really important to understand because this is where you come into play. Success in this business requires hard work. Period. To promote the business in any other fashion would be misleading and inconsistent with security regulations. If that's not clear enough, here are a few examples of what not to say. Our company shares its profit with us and all you have to do is buy our amazing product. We provide you all with all the leads you'll ever need. Just enroll, buy our product and we'll take care of the rest. By purchasing more of our product, you can qualify to earn more from a profit sharing pool. There's no need to sell anything in this program. Do you get the idea? Good. Let's refresh your memory on what you've just learned. The Basics A security exists when people spend money with the expectation deriving income from the efforts of other people. It's a passive thing. It's very important to communicate very clearly that success in the business requires hard work and good sales skills. Again, it's really important to communicate to each prospect that success depends largely on their own personal efforts. There are no shortcuts in this business. While you can certainly offer training, support and product education for the members in your downline, it's important not to oversell that role. At the end of the day. Each individual is the master of his or her own destiny in this business. Now, we covered a lot in that segment, so it's time for a quick quiz. Good luck and I'll see you at the turn.