September 01, 2017
Legislation to Combat Pyramid Schemes
by Joseph N. Mariano
I wouldn’t be surprised if most people reading this article will have, at some point, engaged in the “how direct selling is not a pyramid scheme” conversation. I certainly have. As steward of the direct selling business model, DSA works tirelessly to protect direct selling companies, salespeople and consumers from the harm caused by pyramid schemes. These schemes seek to mislead and defraud by masquerading as bona fide direct selling companies and create confusion about what are legitimate and illegitimate business practices. Over the years, DSA’s job of educating and protecting consumers has not been made easier by the lack of statutory definition of a pyramid scheme in federal law. We hope this will change with passage of H.R. 3409 by the United States Congress.
H.R. 3409, the Anti-Pyramid Promotional Scheme Act of 2017, is bipartisan consumer protection legislation introduced by Reps. Marsha Blackburn (R-TN) and Marc Veasey (D-TX) just prior to the August congressional recess. The legislation will help consumers avoid illegal scams and will also provide definitive guidance to direct selling companies on acceptable, ethical business practices. DSA has long worked with member companies to promote strong consumer protection legislation, including supporting laws banning pyramid schemes in all 50 states. Legislation to define pyramid schemes at the federal level is the natural next step.
Far from interfering with the Federal Trade Commission’s (FTC) existing enforcement authority against pyramid schemes, we believe H.R. 3409 strengthens the FTC’s ability to prosecute bad actors. The legislation provides clarity by drawing a clear line of delineation between legitimate direct selling companies and pyramid schemes, and makes clear that:
- Evidence of a pyramid scheme exists when participants are compensated primarily for recruiting other participants, as opposed to retail sales.
- It is a legitimate business practice, not evidence of a pyramid scheme, when participants purchase reasonable amounts of products for their own use.
- Individual direct sellers are protected from risk by requiring all direct selling companies to repurchase unused, marketable inventory at 90% of the original net cost. (Of note: this provision is already required of all DSA member companies under the Association’s rigorous Code of Ethics. This legislation would make non-compliance a federal offense, an unparalleled consumer protection not seen outside of the industry.)
In the last Congress, the previous iteration of the bill—H.R. 5230—garnered support from more than 30 members of Congress, including members of the Congressional Hispanic Caucus, Congressional Black Caucus, Direct Selling Caucus, and Energy & Commerce Committee. Please visit DSA’s Direct Selling Advocacy Center at DSA.org under the Advocacy tab for information on how to appeal to your Members of Congress to support H.R. 3409. I also urge you to encourage your company executives and salesforce members to do the same.
Our entire industry and everyone involved, be they the direct selling company, salespeople, or consumers, needs to be protected from the reputational and financial harm caused by pyramid schemes, but nowhere in federal statute is it clear what constitutes a scheme. H.R. 3409 serves to do just that. This is why the Direct Selling Association supports the Anti-Pyramid Promotional Scheme Act of 2017. Please visit DSA.org or blog.dsa.org to learn more about this vital consumer protection legislation, and thank you for your support.
Joseph N. Mariano is President of the U.S. Direct Selling Association and the Direct Selling Education Foundation.