There are lots of scams to entice you into thinking you can make big money -- fast. Here are a few of the most common.
It's exciting to think about starting your own business and you don't have to look far to find offers for business opportunities. Many offers involve multilevel marketing plans. These are business plans that offer you a chance to sell products or services as part of a distributor system. The promoters claim it's a chance to become involved in a "new way to market" or "unique new idea" that will result in financial success. Unfortunately, the opportunity is seldom as easy, or as financially rewarding, as the promoter would like you to believe.
Classified Ads Promote Offers
Promoters use classified advertising and direct mail to solicit investors and distributors. The most common opportunities involve vending machines that dispense food, juice, personal care items, laundry products, stamps, newspapers, or an endless variety of other products. Other plans relate to real estate ventures, retail sales operations, telephone services, farm supplies, magazine sales, and loan brokering, to name just a few.
Be cautious of advertisements with:
- No company name or address.
- Only a telephone number (especially if it is a hotel number).
- Income promises that sound too good to be true (that's because they are).
- Vague phrases that leave you wondering what the business really involves.
As a result of investigations associated with multilevel marketing and business opportunity plans, that state has identified some common problems. These include:
A major problem with multilevel marketing and business opportunity advertising is the overstatement of earning potential - claims that you can make more money than possible. Many business promoters use hypothetical income projections - income that could be possible, rather than amounts really being made. Actual income examples that are provided usually do not reflect the income experience of most distributors or investors.
Much of the income to be earned is derived through commissions on your own sales, plus a share of the commissions earned by your sales team. However, you must first recruit a sales team. The more people you recruit, the greater your earning potential.
Another problem is the overstatement of market potential for the service or product you're interested in selling. In other words, the promoter usually tells you you'll be able to sell more products or that more people will be interested in your service than is realistic.
Denying the Offer Involves a Pyramid Scheme
Pyramids or chain distributor schemes are used to describe marketing plans which involve recruiting participants in order to create "levels" within an organization. Sometimes that plan involves selling merchandise or services, but the emphasis is primarily on recruiting other participants. For instance, you make money by recruiting four other people to join the scheme, and additional money if they each recruit four people, and on and on (the number of people being recruited spreads like a pyramid). Wisconsin Administrative Code ATCP 122 prohibits the promotional use of chain distributor schemes as an unfair trade practice.
Claiming the Plan is New
Multilevel marketing plans are not a new way to market. A plan may have unique features, but if it is based on an incentive to recruit members or distributors, it is not a new way to market.
Claiming No Selling is Involved
If the company has a multilevel marketing plan, there is selling involved, because recruiting others to sell is still considered selling.
Conflicting Oral Statements
Frequently the promoter will make oral statements which differ from written material. All oral statements should be accurate. There should be no discrepancies between what is written and what is said.
Approval or Endorsement Claims
Some promoters claim the Bureau of Consumer Protection, Better Business Bureau, Chamber of Commerce, or other organization or government agency endorses or has approved the marketing plan. None of the above agencies endorses or approves any specific marketing plans. To represent any affiliation, connection, approval, or certification by any agency or organization when there is no connection or approval is illegal.
Check All Promises
Before you invest in a business opportunity or multilevel marketing plan, do the following:
1. Obtain the names of at least 10 other investors and discuss with these investors their experience in the plan or with the promoter. It is worth the money spent on telephone calls to check with 10 persons who have entered into, for at least one year, the same type of distributorship or plan you are considering.
2. Obtain specific proof of income representation. Ask what percentage of people actually achieved the level of income, the time period it represents, and how long it took to achieve the level of income.
3. Obtain specific proof that you will have a good market. Get all verbal promises in writing. Ask how many other distributorships will be sold or are already operating in the area.
4. Ask for copies of the company's business and financial statements. Who are the principal investors or owners? Do the owners and officers have prior business experience? Where is the company incorporated? If the amount of money you intend to invest is large, you might consider hiring a private investigator to look into the company and its officers.
5. Determine all costs you must pay. Do startup fees pay for such things as training, sample products, literature, or display materials?
6. Find out if the company will buy back your inventory if you decide to quit. It's a good idea not to invest in more inventory than you think you can sell. A common scheme, however, requires salespeople to make a large initial inventory purchase.
7. Talk to local business people who are familiar with the product and the market before you decide to invest.
8. Find out if any special licenses or permits are required. For instance, in Wisconsin, certain food vending machines require an operator's permit and approval from the state. Other vending machines may not be required to be licensed by the state, but may be required to be licensed at the local level. For more information on state vending machine licensing requirements, contact the Department of Health and Family Services, Division of Public Health, 1 W. Wilson St., Madison, Wisconsin 53702, 608-266-2835.
9. Check for complaints on file with the Bureau of Consumer Protection or Better Business Bureau. Be cautious. Don't decide to do business with a company just because no complaints have been filed.
10. Always consult with a private attorney or certified accountant regarding the specifics of the plan or concerns about the contract. Do not rely on the advice of company representatives who will benefit by your decision to invest. Get all promises in writing.
The state of Wisconsin has no registration requirements for multilevel marketing plans. The Bureau of Consumer Protection does review business opportunity and multilevel marketing offers in its role of enforcing the state's deceptive advertising and unfair trade practices laws (section 100.18 and 100.20 of the statutes). Wisconsin trade practices laws generally prohibit unfair practices and misrepresentations. The deceptive advertising law prohibits representations that are untrue, deceptive, or misleading. Violations of sections 100.18 and 100.20 are subject to civil forfeitures of not less that $50 nor more that $200 per violation.
Wisconsin Administrative Code ATCP 122 prohibits "the promotional use of a chain distributor scheme" as an unfair trade practice. However, there is no legal definition of the term's multilevel marketing or pyramid plan. Wisconsin Administrative Code ATCP 116 regulates contracts and disclosure requirements regarding offers of employment.
The Seminar Pitch: A Real Curve Ball
What a pitch! You may have received a letter or seen an infomercial promoting a seminar or conference that promises to help you make a lot of money. Seminar hucksters say they'll give you valuable information about how to invest successfully or operate a profitable business. Their "success stories" and testimonials seem to show that anyone who attends the seminar can make money from the investment and business program they're selling. Some promoters may even claim to have gotten rich from their own investment in the program.
If you attend one of these seminars, you'll hear a series of sales pitches for a variety of business opportunities and investments. Consumers who invest in these "opportunities" frequently find that the pay-off isn't as promised and they can't recoup the money they spent.
The Bureau of Consumer Protection wants to alert you to the secrets of the seminar squeeze. Be wary of promotional materials or sales pitches that make these claims:
- You can earn big money fast, regardless of your lack of experience or training.
- The program or business opportunity is offered for a short time only.
- The deal is a "sure thing" that will deliver security for years to come.
- You'll reap financial rewards by working part time or at home.
- You'll be coached each step of the way to success.
- The program worked for other participants, even the organizers.
Don't Get Hit By the Pitch
Promises of quick, easy money can be a powerful lure. If you buy into a business opportunity at a seminar, you may find that the products and information you purchased are worthless and that your money is gone.
You can avoid getting hit by the seminar pitch. Here's how:
Take your time. Don't be rushed into buying anything at a seminar.
Avoid high pressure sales pitches that require you to buy now or risk losing out on the opportunity.
Remember, solid opportunities are not sold through nerve-racking tactics.
Investigate the business you're considering investing in. Talk to experienced business people and experts in the field before spending your money.
Be wary of "success stories" or testimonials of extraordinary success.
The seminar operation may have paid "shills" (some pretending or making up a story in order to lure onlookers into participating) to give glowing stories.
Be cautious about purchasing from seminar representatives who are reluctant to answer questions, or who give evasive answers to your questions. Remember that legitimate business people are more than willing to give you information about their investment or sales opportunity.
Ask about how much money you need to qualify for the investment or sales opportunity, and ask about the company's refund policy. Get this in writing. Keep in mind that you may never recoup the money you give to an unscrupulous seminar operation, despite the operator's stated refund policies. Taking precautions before you invest is a more effective way to safeguard your money than trying to get a refund after the investment's been made.
To File a Complaint
If you've been victimized by a seminar promoter or want to check out a program, contact the Bureau of Consumer Protection or call the toll-free hotline of the Wisconsin Department of Agriculture, Trade and Consumer Protection: 1-800-422-7128.
Avoiding Vending Machine and Display Rack Scams
You may find newspaper advertisements like this appealing, especially if you're looking for part-time employment to supplement your income. But be cautious. While some business opportunities servicing vending machines or display racks are legitimate, many are not. These are risky investments, for which there are no guarantees.
Some companies have been charged with misrepresenting the earnings potential and the ease and speed with which machines can be delivered, maintained, located, and repaired. Companies have also been charged with providing phony references and failing to provide key pre-investment information the agency requires.
There's no mystery to how vending machine and display rack business opportunities work, what you should look for when you consider such an investment, and how you can avoid unscrupulous business opportunity promoters. And several organizations can help if you think you've been defrauded.
What is a vending machine or display rack business opportunity?
A business opportunity may involve food vending machines, fax machines, amusement games, or racks with items for sale such as small toys, greeting cards, or cosmetics. The machines or racks may be in malls, airport terminals, bowling alleys, or other public facilities.
Typically, your responsibilities involve cleaning and restocking the machines or racks, making sure they're in good repair, and collecting the money from the machines. You may earn a portion of the proceeds from the products or services. Some promoters may tell you that you'll earn a specific level of income or guarantee a minimum revenue. Others may claim their income projections are averages based on incomes of current distributors.
Promoters may promise to help you operate the business opportunity. For example, they may:
Provide vending machines or display racks already in established locations, or find locations for you; Offer repair services to fix damaged machines, or replacements for damaged racks; or Relocate the machines or racks to more profitable locations at your request.
What problems may come up?
Some consumers have had problems related to misrepresentation of earnings and support services. Consider the following complaints received about some vending machine and display rack business opportunities.
After investing thousands of dollars in vending machines, display racks, and products for resale, some investors discovered that the promoters did not deliver the equipment they promised. Some promoters did not provide support services as represented in their sales pitches. For example, some promoters did not make good on their promised locations for vending machine routes; others relocated machines to different but not more profitable locations. Some promoters would not hire a repair service to fix broken machines or were not willing to replace damaged racks. In these instances, investors paid for repairs or bought new display racks with their own money. Some investors did not earn the promised level of income. Some promoters refused to honor requests for promised refunds.
When is a business opportunity a franchise?
A business opportunity is considered a "franchise" if:
- You will sell or distribute goods or services that are supplied by either the company or a designated supplier.
- The company will help you by securing locations or sites for the vending machines or display racks.
- You are required to pay the company $500 or more when you sign the contract or within six months after you begin operations.
If the company's business opportunity constitutes a franchise, the company must give you a disclosure document before you sign an agreement or invest any money. Required by the FTC Franchise Rule, the Franchise Disclosure Document provides important information about a business. Pay special attention to the sections detailing:
- the business experience of the company and its directors
- any lawsuits brought against the company or its directors by franchisees, and suits alleging fraud
- fees you will have to pay and the conditions under which any fees or deposits will be returned to you
- the total number of franchises, the names and addresses of franchisees in your area, and the number of franchises
terminated or not renewed during the previous year
- the company's balance sheet for the most recent fiscal year and an income statement and statement of changes in financial position for the three most recent fiscal years
- and substantiation for any claims about your potential earnings or the earnings of existing investors.
This information may help you decide whether the company is likely to stand behind its promises. It also may help you determine the probability of your success.
How can I protect myself?
Taking certain precautions can minimize your risk of investing in a fraudulent vending machine or display rack business opportunity:
Check out the company with the Bureau of Consumer Protection and the Better Business Bureau where you live and where the business is headquartered. These organizations can tell you if there are unresolved complaints about the company representing the business opportunity. While complaints may alert you to problems, the absence of complaints does not necessarily mean the company is legitimate. Unscrupulous companies may settle complaints, change their names, or move to avoid detection.
Try to verify claims made by the company and the company's references. Visit existing locations and the anticipated locations for your machines or racks. You may be able to determine from conversations with shop owners and managers whether the machines and racks are, or will be, successful. Ask them how many people come through their establishment daily and what these customers are interested in buying. Ask other investors in your area about their experiences with the company.
Call the Secretary of State where the company is headquartered to determine how long the company has been in business.
Ask the company to substantiate in writing all earnings claims. Be aware that investors' incomes vary with location, usage, products sold, and demand for the products. The fact that investors have earned a "high" income in one community or state is no guarantee that you'll do as well in your territory.
Entering into any business opportunity may require a substantial financial investment. You may wish to consult an attorney, accountant, or other business advisor before you sign any agreement or make any upfront payments. Your attorney can review the company's contract and advise you on how best to proceed. If the company requires a deposit, you may want your attorney to establish an escrow account where the money will be maintained by a neutral third party.
Where can I complain or get more information?
If you think you've been defrauded in a vending machine or display rack business opportunity, contact the company and ask for your money back. Let the company know that you plan to notify officials about your experience.
Keep a record of your conversations and correspondence. If you send documents to the company, make sure you send copies, NOT originals. Send correspondence by certified mail, return receipt requested to document what the company received.
For more information contact the Division of Consumer Protection at 800-422-7128 or file a complaint.