According to the Section 55 of the Competition Act, if operators of a multi-level marketing (“MLM”) plan wish to make financial representations to a prospective participant, fair, reasonable, and timely financial disclosure must also be disclosed. At its core, this requirement ensures a prospective participant will be presented with easy to access financial information which is based on accounting, not marketing.
This sound simple enough, but in practice, what does this mean for operators of a direct sales company in practice? There are a few aspects to be considered here, namely Form, Placement, and Content.
Form: The financial disclosure given should be easy to understand, and obvious to the reader. It should not be buried away in a footnote, or obscured by any images.
Placement: The financial disclosure should be placed near, either spatially or temporally, to a financial representation. For example, if presenting a slideshow, financial representation slides should be followed up by financial disclosure.
Content: Financial disclosure requires monetary values that are accurate. Simply put, an MLM business needs to be able to complete the following sentence accurately if it wants to be able to make financial representations:
“The typical participant earns between ($sum in Canadian dollars) and ($sum in Canadian dollars) annually.”
The statement should be simple, sober, and steer clear of any marketing jargon, or business “puffery”. In addition, this statement should be updated at least yearly, and sometimes as frequently as six months.
This begs the question, what is a “typical participant”? In simplified terms, the typical participant is the median, but not the average, participant who has participated for at least one year. By way of example, if an MLM plan has 100 participants ranked by income, the income of the 50th participant would be used as the typical participant. You would not find the typical participant by adding up all of the revenue of the 100 participants and then dividing this sum by 100. This is because the average can potentially be skewed by only a few very high income earners
When using classes of earners by title or rank, the typical participant must be represented by the smallest class which includes at least half of the number of participants.
What if I am not able, or do not want to make this type of financial disclosure?
If an MLM business is unable to make this disclosure, there are significant practical consequences. If an MLM cannot determine what a typical participant can expect to earn, it cannot make any representations relating to compensation to a prospective participant. This means an MLM cannot make representations about obtaining luxury goods (i.e. cars, watches, vacation destinations, couples enjoying their vacation on a yacht), or allusions of opportunities to earn big bonuses, lucrative commissions. Furthermore, profiles of successful participants and their testimonials are not allowed. There are however exemptions and solutions to this issue, in particular if you are just entering the Canadian Market.
My MLM has all of this information publicly available already. Is that not enough?
No. It is of paramount importance for operators to proactively educate and remind participants of their financial disclosure policies. Beyond being a best practice, this helps MLM operators protect themselves if a participant (for whom they may be liable) is accused of breaking the financial disclosure laws.
Siskinds MLM group assist new and established MLMs in reviewing and writing documentation for the distributor, including sales kit materials, distributor agreements, and policies and procedures. If you have questions about financial representations and disclosure, please contact a member of our multi-level marketing practice group, who will be happy to assist you.