We invite any recipient of our newsletter who plans to attend the ANMP conference or who will be in the Dallas area during the March 27 – 30 period and would like to get some free face time with one of us, to email or telephone Rick to see about arranging a personal meeting.
Last month, the network marketing industry lost a valued and popular service provider when Jim Richmond passed away unexpectedly. For many years, Jim had been this firm’s “go-to” guy when referring clients who needed sophisticated direct selling sales tax guidance. We take solace in learning that Jim’s son, Jeremy, a gifted expert in his own right, will carry on the family business. Jeremy can be reached by telephone at (616) 669-2954. His email address is firstname.lastname@example.org. He provides us with the following message:
The direct selling community recently lost a trusted advocate and advisor in Jim Richmond. Jim provided state and local tax consulting services to numerous direct selling companies over the years. The guidance that Jim provided helped assure compliance with the many state and local tax laws throughout the country.
The tax consulting practice that Jim built will be carried on by his son, Jeremy Richmond. Jeremy has a Master of Taxation degree and brings to the practice his experience as both a government tax auditor and most recently as a senior sales and property tax analyst for a Fortune 500 company. Jeremy also possesses a certification, Certified Member of the Institute, in sales tax. Professional Tax Services will continue on the tradition of expert state and local tax consulting for direct selling companies.
About a year ago the Nehra & Waak firm quietly began a transition in its internal operations by announcing the change of its primary address to the Delton, MI, office address of Rick Waak. At the same time our letterhead was modified, without announcement, to reflect Rick’s new role as Principal Attorney, and Gerry’s designation as Of Counsel.
Maybe we should have explained the adjustment. Some of our business associate contacts apparently have misconstrued this style change to indicate that Gerry has retired. NOT SO. Gerry remains very much engaged and is actively pursuing the firm’s practice. He continues to service all clients for whom he previously had been lead direct selling counsel. He also continues to provide ALL trademark work requested by any of the firm’s clients.
As Principal Attorney, Rick has taken on much of the management and administrative responsibility for firm operations. He also serves as lead counsel on the accounts of all new firm clients.
A concluding note: Mail sent to Gerry’s Muskegon, Michigan address will NOT be lost or go unanswered. Also, the phone and fax numbers, and email addresses for both Rick Waak & Gerry Nehra remain unchanged.
Founders programs are a sort of corporate jump-start for network marketing companies. They are often, but not always, used at start-up and may be called “pre-launch” programs. Though rare years ago, such programs have become increasingly common in the last decade or so. When properly designed, they can be effective at getting the company off to a strong and legally compliant start. But unfortunately many such programs are not properly designed.
In too many cases, the programs are designed and intended to compensate for slow cash flow in companies that are struggling to start with limited capital. These types of programs tend to incorporate features that press (or exceed) the regulatory limits on allowable business practices. The abuses may include: excessive income claims, required product purchase or front-end loading, and passive investment and/or common enterprise pay features. It’s a laundry list of risk elements that historically have caused ventures to be shut down as pyramids, unregistered business opportunities, or unregistered investment securities.
One recent example of a pre-launch effort that came to such an unfortunate end was the Funky Shark program that was shut down by the Montana Commissioner of Securities and Insurance (reported in this firm’s December 2012 newsletter). That case resulted in the Company’s owner being fined $40,000.00 and refunding more than $270,000.00 to the program’s participants.
So what can a company do to avoid such problems while trying to boost its chances on start-up? Some options to consider are:
Expect and Plan for slow growth;
Don’t launch before you are ready – Proper development and promotion of a VIABLE RETAIL CONSUMER PRODUCT IS CRITICAL;
Find an angel investor/partner;
Consider making a private share sale. See a securities specialist lawyer regarding a private offering; and
If all else fails, develop your Founders Program ideas and take them to your MLM specialist lawyer. Discuss the risks and consider adjustments to make the program legally acceptable.
The Montana legislature recently passed, and the Governor signed into law, a rewrite of the statute requiring registration of mlm companies operating in that state. The new law became effective immediately upon approval. It makes some minor administrative amendments to the prior law and one substantive change. That is the creation of an exemption from the registration requirement for companies that are members of the Direct Selling Association. The Nehra & Waak firm has been a Supplier member of DSA for several years and has always encouraged its clients to support all industry trade associations..
The following is a condensed and edited version of an article that appeared in a newsletter published recently by our firm’s “go to guy” for direct selling company compliance investigations and consulting, Greg Caldwell, CEO of White Hat Solutions, LLC. It’s a cautionary report of a scenario that frequently leads start-up companies into troublesome and very costly relationships. You can contact Greg and learn more about White Hat Solutions at www.whs-pi.com or at www.direct-sales-compliance.com
We were recently contacted by a Direct Sales Company looking for some compliance assistance. We obviously referred them to Direct Sales Compliance Management (“DSCM”), White Hat Solutions’ division which handles that business.
During the intake interview, the client mentioned he was also considering our competitors. Since our compliance services have been unique to the industry for over thirteen years, we were naturally curious about any new competition.
It turns out, the client had been approached by two gentlemen, both allegedly with “years of experience” in network marketing. They offered to bring their “vast compliance experience” to help this startup company. The client said they appeared to know of what they spoke and their “price” seemed reasonable, especially for a startup’s limited budget.
After speaking with our DSCM representatives, the client soon realized that had he “hired” these two men, it may have proven to be a costly mistake. Why?
The men had offered their services but only if they were given a top-tier position in the genealogy. And, they reserved the right to continue doing this with other clients as well!
Now we don’t know these two gentlemen, nor do we know anything of their experience or backgrounds. What we do know is how a compliance department should work. It should be autonomous, independent and impartial; we know that all complaints should be investigated and resolved without regard to the income production of the representative or the situation being investigated.
What these consultants were proposing, on its surface, would give rise to the appearance of a serious conflict of interest.
While we can’t speak to the motives of these two individuals we believe a warning is appropriate. In light of these individuals demanding a position in a client’s genealogy as payment and not being exclusive to that one client sends up red flags for White Hat. Proceed with caution.
The primary mailing address for Nehra & Waak, Attorneys at Law is now:
11300 East Shore Drive
Delton, MI 49046
This change was effective 1/1/2013.
NOTE: Mail sent to the Muskegon, Michigan address will NOT be lost or go unanswered. Also, the phone and fax numbers, and email addresses for Rick Waak & Gerry Nehra remain unchanged.
Filing of Briefs
The parties have begun filing their briefs in the appeal of the federal District Court’s decision and order in the widely followed FTC vs. BurnLounge, Inc. et.al. case (see March Business Associate Advisory for a summary of the case and Order).
The case generated widespread concern in the direct selling community when the District Court found that the BurnLounge mlm program was an illegal pyramid scheme, and ordered the Company (by then defunct), its founder, and two of its top independent distributors to pay nearly $17 million in redress. Of particular concern to many is language in the Court’s final decision and order defining a “Prohibited Marketing Scheme” as one in which participants “…receive rewards for recruiting other participants into the program, and those rewards are unrelated to the sale of products or services to ultimate users. For purposes of this definition, ’sale of products or services to ultimate users’ does not include sales to other participants or recruits or to the participants’ own accounts.” (Emphasis supplied).
The defendants’ brief argues the district court’s judgment should be reversed for several reasons, including:(1) The court did not properly apply the test for determining the existence of a pyramid; (2) It improperly shifted the burden of proof from the FTC to BurnLounge; (3) It relied on inadmissible and incompetent “expert testimony”; (4) It ordered damages which were unauthorized by statute, not restitutionary in nature, and which were excessive in any event.
An Amicus Curiae (Friend of the Court) brief has been filed by the Direct Selling Association taking no position on the merits of the case but urging the appellate court not to allow an overly broad application of the definition language highlighted above or to otherwise endorse the conclusion that legitimate direct-selling companies that base compensation at least in part on product purchases by direct salespersons for their personal consumption and use are unlawful “pyramid schemes.”
Other briefs, including those of The Federal Trade Commission and the individual defendants are scheduled for filing at various times up until April 15, 2013. Oral arguments have not yet been scheduled but probably will occur sometime during the fourth quarter of calendar 2013. Absent further requests for extensions of time, we might expect a decision from the Court of Appeals in the Spring of 2014.
At the Marriott Desert Ridge – Phoenix – June 9 – 10 – 11
Both Gerry & Rick will be there. The firm booth number is 606. Please stop by and say “Hello.”
The following information is condensed and edited from http://www.mlmwatchdog.com/ and is used with permission of the Owner and Editor, Rod Cook. I recommend you subscribe to the MLM WATCHDOG newsletter by clicking on “Free Newsletter” at the upper left of the opening page of the web site.
Montana Commissioner of Securities and Insurance Monica J. Lindeen recently fined Bozeman, Montana resident Scott Wacker and his company, Funky Shark, $40,000 for illegally selling investment opportunities. It wasn’t killed because it was a Ponzi – It never quite got to the point where it could take off. Little known to most MLM leaders, Founders programs, if not properly structured, can be deemed a form of an unregistered security to fund new MLM Companies. They are hardly ever registered with State Securities offices as many should be.
A common way of raising funds for small new MLM – Network Marketing companies is to get MLM Distributors (known as Founders) to invest $500 to $10,000 to provide the money to start the new company. To avoid criminal prosecution the owner Wacker agreed to pay back more than $834,000 to the MLM Founder investors to resolve a restraining order Lindeen’s office filed against him in state court.
The restraining order stopped Wacker from soliciting new investors or spending any of the investment money he had already illegally raised from Founders through his Illegal founders program for Funky Shark
Last September, Wacker began recruiting investors for his penny-auction website, FunkyShark.com. By the end of October, Wacker had raised over $1 million from MLM Founder investors across the world. The quick growth in the Funky Shark bank accounts from Founder’s deposits alone were ready to cause problems for owners and MLM Founders both.
As can be expected: The flurry of high dollar transactions in Wacker’s personal and business accounts led his bank to file a a State and Federally required suspicious activity report, which was referred to Lindeen’s office. After a quick review, investigators suspected Funky Shark was a pyramid scheme. They quickly requested a restraining order to prevent additional investors from getting involved.
On Oct. 30, 2012 Wacker posted a notice on Funky Shark’s website explaining that it’s investment program “may violate certain securities laws in the United States.” That was a nice way of saying that it was illegal without a full court decision.
In the two months it operated, Funky Shark paid nearly $378,000 in commissions to Founder participants who recruited new members. Those commission payments left Funky Shark unable to repay all of its participants in full, so Wacker agreed to pay $270,000 out-of-pocket to make investors whole. These MLM Founders were lucky, as there have been cases where government regulators have done “Clawbacks” and taken all the money back from MLM Founders Groups.
“Mr. Wacker stepped up to the plate and repaid his investors,” said Lindeen. “Often when we handle these types of cases, there’s simply no money left to repay participants. But for a number of reasons, this case is unique. Mr. Wacker didn’t understand what he was getting into using illegal MLM Founders groups, and he has expressed his commitment to setting things right.”