OP-ED CONTRIBUTOR

Protecting Direct Selling Would Benefit Hispanic Entrepreneurs and Consumers

Direct selling, the retail channel that relies on an independent sales force to sell products outside of fixed retail establishments, has great appeal to Hispanic Americans as consumers and potential direct sellers themselves.

Entrepreneurial attitudes and social values widely shared among Hispanics recognize direct selling as an attractive, affordable business opportunity. Hispanics are drawn to the industry’s low startup costs and low risk, and the flexibility it offers sellers to build their businesses according to their family, social, and professional priorities.

According to recent survey research, Hispanics are more likely than non-Hispanics to buy from direct sellers. They’re more likely to give the industry a higher favorability rating, and to view direct selling as compatible with their personal interests.

Almost three-quarters of Hispanic Americans are interested in starting small businesses or working for themselves — 19 percent above the national average. Hispanics looking for part-time work to make additional income are more likely to consider self-employment options. They’re also more likely to view their job as an expression of themselves and to seek opportunities that allow them to better balance their work and personal life. Given a choice of four flexible part-time work possibilities, Hispanics choose direct selling most often.

It’s not surprising then that 22 percent of direct sellers in the United States are Hispanic. There are 20.5 million Americans involved in direct selling. Almost four million are Hispanic Americans. Their number includes all types of direct sellers.

They are youngsters making a little pocket money and answering for the first time the entrepreneurial urge so common in our community. They are retirees supplementing their pensions. They are stay-at-home spouses increasing their household income. They are folks who affiliate with a company because they love its products and want to buy them at a discount. They are ambitious entrepreneurs working full time to build bigger business. All are legitimate enterprises based on the sale of valued goods or services, and all deserve the protection of the law.

Pyramid schemes that don’t sell anything of value but trick others into joining the scheme are a chronic problem confronting the industry. They might imitate certain features of direct selling, but they are an insidious threat to legitimate businesses, including, of course, to small businesses operated by Hispanic Americans. They ought to be prosecuted to the fullest extent of the law.

Unlike direct selling companies, pyramid schemes typically impose high startup costs on their recruits. They don’t repurchase unused inventory or if they do, offer only a small percentage of the original cost in return.

The principal distinction between pyramid schemes and legitimate direct selling is that compensation for the latter is based on real sales of real products to real users while pyramid fraud promises earnings only for recruiting others to the scheme.

A federal statute providing a sanctioned definition of pyramid fraud would be an important protection for consumers and honest businesses. All 50 states have anti-pyramid fraud laws, and a large body of case law in state and federal courts distinguishes pyramid schemes from legitimate direct selling.

The principles of those state laws and court decisions form the basis of legislation recently introduced by Reps. Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Tex.), H.R. 3409, the Anti-Pyramid Promotional Scheme Act of 2017. Their bill is similar to legislation they offered in the last Congress, but is strengthened by a provision added by the sponsors that further protects direct sellers from serious financial risk.

The new legislation mandates that all direct selling companies repurchase from their salespeople all unused inventory at at least 90 percent of the original net cost. That’s a protection many direct selling companies had already offered their sales forces, and it is required for membership in their trade association, the Direct Selling Association.

But making it a legal obligation will ensure fair treatment of salespeople throughout the industry, most of whom earn modest sums from direct selling. As importantly, it would further expose pyramid fraud, which cannot reimburse for unused inventory because so few sales typically occur in such schemes.

H.R. 3409 does not interfere with the authority of states attorneys general to prosecute pyramid schemes in their states. Nor does it obstruct the authority of federal regulatory agencies to bring actions against fraud masquerading as direct selling. What it does is strengthen protections for honest entrepreneurs and their customers from undeserved reputational damage and financial harm posed by pyramid fraud.

It ensures that a vibrant, growing industry continues to offer affordable business opportunities to Americans of all social and economic backgrounds. And its passage will be applauded by one of the most entrepreneurial, small business-oriented communities in America, a community culturally attuned to the features of direct selling — the growing community of Hispanic Americans.

Francisco Sanchez is the former undersecretary of commerce for international trade at the Department of Commerce. He currently serves as chairman of CNS Global Advisors and is an adviser to the Direct Selling Association.

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