The growth of the Internet, together with a trend toward more and more people working at home, has resulted in a proliferation of "business opportunities." These are offers by companies (or scammers) who claim they can set a consumer up in a small business, usually run out of the consumer's own home.
on this page:What the Law Says Disclosure Requirements Precautions Multi-Level Marketing vs. Pyramid Schemes Tips to Help You Evaluate MLMs
attorney general columns:Email Business Offers Pyramid Schemes Work-at-Home Scams
consumer alerts:Government Grants Nigerian Advance Fee Fraud Phony Job Offer
federal trade commission:FTC on Business Opportunities
Some business opportunities are real, and in fact these opportunities are regulated by state law in Texas. But you should be aware that some such opportunities are rip-offs plain and simple. If you are going to consider an offer of this sort, you need to know the difference between a real offer and a scam. It is not always that easy to tell.
Indications that an offer is BOGUS include the following:
- You receive the offer as spam, unsolicited email from a person or company you know nothing about. Consider it highly suspect!
- The opportunity involves a very high income for little or no work or effort on your part. High-paying jobs for little effort are pretty hard to find.
- The "business" involves the transfer of large sums of money, of which you will supposedly get a percentage. These offers may involve sharing your bank account, or providing your bank account number or other sensitive financial information.
An "opportunity" that fits any of the above three descriptions is very likely to be a rip-off.
What the Law Says
Under the Texas Business Opportunity Act, a business opportunity is regulated by the law if (1) it requires you, the buyer, to pay $500 or more to start the business, AND (2) the seller promises you will earn or are likely to earn a profit exceeding the initial investment, AND (3) the seller promises any one of the following:
- the seller will provide locations or help you find locations on property not owned by either you or the seller for the use of or operation of the products, equipment, supplies, or services the seller is leasing or selling;
- the seller will provide a sales, production, or marketing program; this does not apply if the arrangement is defined as a "franchise" under federal regulation and certain requirements are met;
- the seller will buy back any products, supplies, or equipment purchased, or any product made, fabricated, grown or bred by the purchaser using equipment or products sold or leased by the seller.
A business opportunity meeting these criteria must be registered with the Secretary of State before the seller advertises it or offers it for sale. So your first step in evaluating a business opportunity offer is to see if it meets these criteria. If it does, contact the Secretary of State's Office to see if the business is registered as it is required to be under the law.
The Business Opportunity Act includes a list of eight exceptions which are transactions that do not classify as "business opportunities" under the statute, and are not regulated by the Business Opportunity Act.
Under the Texas Business Opportunity Act, the seller must provide you with the following information at least 10 days before you sign a contract or turn over any money to the seller:
- The names and addresses of all persons affiliated with the seller in this particular business;
- A copy of a current financial statement of the seller;
- A complete description of the actual services the seller agrees to perform for the purchaser;
- If training is promised, a complete description of the training, length of training, and cost of travel or lodging during the training;
- If services are promised in connection with placement of equipment or products, the full nature of the services and the nature of agreements to be made with the owners or managers of business locations;
- If the seller or his or her representatives have been adjudged bankrupt or have been subject to a judgment in a civil suit involving fraud or embezzlement during the past seven years, he or she must tell you;
If the seller makes representations about sales or earnings potential, he or she must disclose both the total number of people participating in the business opportunity for the past three years and the total number of people who have actually achieved the represented sales or earnings within the past three years.
The seller must give you the following statement in writing as part of the disclosure requirement: If the seller fails to deliver the product, equipment, or supplies necessary to begin substantial operation of the business within 45 days of the delivery date stated in your contract, you may notify the seller in writing and cancel your contract.
The foregoing cancellation policy might seems reassuring, but keep in mind that actually collecting a refund from an unscrupulous operator may be very difficult in reality. This is why it is so important to ensure that the business is registered and has posted the required bond.
Promises are frequently made as a "come on" to sell the business opportunity by giving it the appearance of a no-lose proposition. But it is not that easy to set up a new business and make money. The more money the seller says you can make, the more you should investigate those claims for accuracy.
A legitimate seller will want to ask you many questions to see if you have a good opportunity for success. A legitimate seller will not be offended if you ask questions about successful participants in the business opportunity he or she is offering for sale. Many people have lost their entire investment by not checking first.
If the business opportunity seller promises purchasers that they are assured of making profit, he or she is required to secure a bond or trust account of $25,000 in favor of the State of Texas. Before buying a business opportunity, check with the Secretary of State to see if the company is registered and whether such a bond has been filed.
Multi-Level Marketing vs. Pyramid Schemes
Today, a popular type of sales program is "multi-level marketing" (MLM) or "network marketing." Many of these programs do not fall within the guidelines of the Texas Business Opportunity Act, so the sellers do not have to register with the Secretary of State or comply with the disclosure requirements. Such plans do make claims that people can earn money by signing up and participating, and they should be evaluated just as closely as any other type of business opportunity.
Generally, MLM plans allow you to recruit salespeople for your own sales team, who then recruit additional members. You receive commissions from sales made by your team. Team members down the line also get commissions from members below them.
There are legitimate MLM businesses where consumers who sign up can earn money by selling products. However, it is a field in which there are many shady operators and questionable sales programs. Some are nothing more than pyramid schemes.
A pyramid scheme is a plan or operation in which a person receives compensation primarily for bringing in additional participants rather than for selling a product. When you join a pyramid scheme, you pay (promoters may call it "investing") to join. The people you recruit pay you to join. People who get in on a pyramid scheme early might make money in the beginning, but the schemes inevitably collapse, victimizing the recruits at the base of the pyramid.
For an MLM plan to be legal, you must earn more from sales of products than from introducing others to join. Also, the company marketing the plan must have a refund policy that lets you return unused product within one year of purchasing the product. You should be able to get a refund of not less than 90% of what you paid for unused product that is in resalable condition.
Under the Texas Deceptive Trade Practices Act, it is illegal to promote a pyramid scheme. Besides being a civil deceptive trade practice, pyramid promotion is a state jail felony punishable by imprisonment in a state jail for up to two years and by a fine of up to $10,000.
Tips to Help You Evaluate MLMs
- Be skeptical of programs that can only be successful if new recruits continually join the sales organization. Are you required to recruit new people as a condition of joining the organization or can you earn money simply by selling the product?
- Before you join, be sure the product offered is something for which there is a market. Ask what the average monthly retail sales are per salesperson. Be wary of anyone who tells you that you do not have to sell anything to make money. For it to be legitimate, commissions must come from the retail sales of goods, so at some point someone will have to sell something.
- If the program you are considering does not provide distributors with a contractually enforced right to a 90% refund of commercially resalable product within one year of the purchase of the product by the distributor, the program may be an illegal pyramid, not a multi-level distributorship.
- Be extremely careful and wary of buying business opportunities out of weekend seminars given in local hotels, restaurants, or people's homes. Watch out for get-rich-quick plans advertised on late night television infomercials, by email or in the classified ads. If you buy from a seminar at a hotel, restaurant, or other place that is not the business's location, you must be given notice of a three day right to cancel.
- Be wary of a sales pitch that includes promises of high rewards with little effort.
- Be wary of job offers where you are told when you get to the interview that you have to pay money to get the job.
- If you have access to the internet, search on the name of the business and the product being sold to see if people are reporting complaints or problems.
- Be wary of opportunities marketing products purported to cure diseases. These claims are regulated by the U. S. Food and Drug Administration (FDA) and can only be made with proof that meets FDA standards.
- Be wary of business opportunities where you are told you can lease items to help you make the business successful. Look carefully over any leases or financing agreements. Some of these agreements require you to pay for the leased item even if it does not work or if the company that sold it to you goes out of business.