Enforcement Crackdown on Internet Business

by: Cary Christian

For those of you who haven't heard, the Federal Trade Commission, SEC, and other Federal and state law enforcement agencies filed criminal and civil charges against 45 alleged Internet scammers and deceptive s p a ^ m e r s this week. Additionally, the FTC and 21 other U.S. and international agencies launched an initiative to get organizations in 59 countries to close the open relays s p a m ^ e r s use with such impunity.

Historically we have seen this level of enforcement only against the largest pyramid schemes online.  The big difference here is that smaller business opportunities have been targeted and there is a very real indication that more enforcement activity is on the way that will include not only the owners of these programs but those who promote them as affiliates as well.  This could affect many of you.

At this time, the FTC and other federal and local enforcement agencies are looking very closely at business opportunities that make unrealistic promises of income, depend on recruiting other members to make the amount of money promised, and do not contain adequate disclosures related to the promises made. 

Also of note is their crackdown on those who sell prescription drugs online without a prescription.  As you know, those programs are all over the place.  If you're in one of those, get out now!  There is nothing else I can tell you to help you protect yourself.  No amount of disclosure or adherence to fair and non-deceptive business practices is going to help you with these types of programs.

But getting back to the crackdown on business opportunities, let's take a look at the allegations leveled against Instant Internet Empires as an example.  Before I start, however, let me make it clear that the charges against this company are allegations that have not been proven in court.  They are merely in the complaint stage at this point.  They do, however, offer a good look at what the enforcement agencies are looking to prosecute.  I'll refer to this company as IIE from this point on.

For those of you who are not familiar with IIE, the company sold a product that included five, ready-made Internet sites to sell ebook products.  You pay the fee, set up your sites, sell ebooks and recruit others to buy the IIE package.  This is fairly typical of 90 percent of online business opportunities.  It is important to note that it was NOT an MLM program.

Here is a summary of the four counts alleged by the FTC in the complaint:

Count 1 - In their advertising the company represented, either directly or by implication, that consumers who purchase their product are likely to  realize substantial income from those products.  The FTC alleges that in truth and in fact many consumers who purchase those products are not likely to earn substantial income from those products.  Therefore, the representations are deemed false and deceptive.

Notice that the deceptive representations include implied representations. 

Count 2 - This allegation builds on the first.  The FTC cites again that the company represents that consumers who purchase their product are likely to earn substantial income.  Count 2 deals with the fact that the company did not tell consumers that the nature of their products and the nature of the marketing structure ensure that many people will not earn substantial income and that this information would be material in helping a consumer decide whether or not to buy the product.  This failure to disclose is deemed to constitute a deceptive act and practice.

Count 3 - The company solicits payment from consumers by promising financial gains based on payments from future participants.  The consumer's ability to realize financial gains is dependent on the consumer being able to recruit additional participants.  The structure of the program ensures that the majority of participants will be unable to achieve those financial gains.  This type of scheme is known as a chain marketing scheme and constitutes a deceptive act or practice.

Notice that while IIE is not MLM, it can still be characterized as something very similar since a substantial amount of participant's income is dependent on recruiting.

Count 4 - IIE provides participants in the program with copies of their website advertisement to be used in recruiting new participants.  As described in Counts 1 and 2, the website contains false and misleading representations.  By providing participants with a copy of their website, defendants have provided others with the means for commission of deceptive acts and practices.

Count 4 should send shivers up and down your spine as you read it.  The FTC is clearly stating that business opportunity promoters who use false and misleading representations in their websites and allow you to use those websites to recruit or sell are making you an accomplice in their scheme.  Therefore, you could be charged with the same illegal acts!

You should note that IIE's bank accounts and assets, and the bank accounts and assets of the OWNER have been frozen.  For those of you who are unfamiliar with government's ability to freeze bank accounts, let's just make it real simple: you wake up one morning and have no access to your money.  And you won't have access for, usually, quite a long time if ever!  Once you are targeted there is a very large and real possibility that you could be absolutely ruined financially.

Is it worth the risk?  I think not.

If you are interested in reading the entire complaint against IIE, and I think you should to get the full flavor of the case, you can find it here:

http://www.ftc.gov/os/2003/05/k4globalcmp.pdf

Now is the time to take a good hard look at the programs you promote as an affiliate.  Ask yourself these questions:

1.  Does the program make claims of income that seem unreasonable?  What does it take to earn the income claimed to be possible?  Is recruiting a large part of the income potential?  Programs that rely on recruiting for income are going to be hard targets.  Most, if not all, will be deemed to be false and misleading because basic mathematics dictates that the majority of the affiliates will be unable to participate profitably.

2.  Does the program attempt to sell people by showing examples of bank statements, PayPal statements, etc. to demonstrate how much money the owner is making?  This will nearly always be deemed a false and misleading representation because it is.  The first person to sell any product will always make more money than those who follow.  As more and more affiliates are added, there is much more competition for the already limited market which means that it will be nearly impossible for any affiliate to earn the type of income the owner is representing as possible.

3.  Do you see the program being advertised by s p a m ^ e r s?  If it is advertised in this manner, it will be a more high profile target.

4.  If the program does include some claims on its website that seem unrealistic, does the site also include proper disclosures with respect to these claims that could limit potential enforcement action? 

For example, if the program states that it is possible to $20,000 per month with the program but then includes disclosure that only the top producers with access to effective targeted marketing will make that amount and that most others will make much less, then the disclosure might protect the program from prosecution. 

But the disclosure must be near enough to the claim, easy to find and read, and must not negate the claim in order to be effective.  If the disclosure has the effect of totally reversing the claim, then the claim must be modified.  The disclosure would not help.

Additionally, you and I probably do not have the legal expertise to determine if the disclosures are adequate.  If the program must rely on disclosures to modify its unreasonable claims, I would pass on it.  You have too much at risk to take chances.

If you find yourself getting too many negative answers to the above questions as you evaluate the programs and products you represent, you should seriously consider dropping your affiliation with that product or program immediately.  The most important point I can make to you in this article is that YOU could be held responsible if you are promoting the program or product even though you are not the owner.

I hate to say it, but probably 90 percent or more of all the business opportunity programs online are going to fail the test miserably.  That's one reason why I constantly counsel you to get your own products and run your own business.  That way, you have control.  There are still many requirements to be met to keep your site legal, but at least you are not relying on someone else for compliance.

If you have questions or reservations about a particular program you belong to and need help with your evaluation, send me an email.  I'll be happy to help you with the analysis.

(c) copyright 2003