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        FTC Advertising Regulations for MLM and Small Business

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        Another AHBBO Article
        Not Just 6 Lines, 65 Characters

        If you've placed advertising in an ezine, you've no doubt been
        advised by the publisher of his or her advertising guidelines.
        Typically these guidelines go something like this: "Six lines,
        65 characters per line plus URL/email.  No adult, hate,race." 

        Unfortunately, the publisher's guidelines typically don't go on
        to require that the ad conform with the U.S. Federal Trade
        Commission ("FTC") guidelines for advertising on the Internet. 
        As a result, many of the classified ads you see in ezines, on
        classified ad sites and wherever else such ads appear are,
        simply put, unlawful.

        In this article, we'll take a look at what the law requires in
        this area as amplified by the FTC's published guidelines on
        the subject.  And if you're not located in the U.S., don't
        think they don't apply to you.  The laws on deceptive and
        misleading advertising are very similar from country to country
        so this discussion probably applies to you too.  Even if
        your country's laws are different, if your ad is going to
        readers in the U.S. that may be enough to catch you
        anyway.


        GENERAL PRINCIPLES

        The basic legal principles that apply to advertising generally
        apply equally to advertising on the Internet.  There are three:

        1.  advertising must be truthful and not misleading;

        2.  advertisers must have substantiation for their claims; and

        3.  advertisements must not be unfair.


        TRUTH IN ADVERTISING

        In its policy statement on deception
        (http://www.ftc.gov/bcp/policystmt/ad-decept.htm)
        the FTC notes that there are three elements that underlie all
        deception cases:

        1.  there is a representation, omission or practice that is likely
        to mislead the consumer.  For example, "false oral or written
        representations, misleading price claims, sales of hazardous or
        systematically defective products or services, without adequate
        disclosures, failure to disclose information regarding pyramid
        sales, use of bait and switch techniques, failure to perform
        promised services, and failure to meet warranty obligations";

        2.  the perspective of a consumer acting reasonably in the
        circumstances or, if the representation or practice is directed
        to a particular group, the perspective of that group acting
        reasonably; and

        3. the representation, omission or practice must be a "material"
        one. This means it must be likely to affect the consumer's
        conduct or decision with regard to the product or service.

        In short, therefore, the Commission will find deception if "there
        is a representation, omission or practice that is likely to
        mislead the consumer acting reasonably in the circumstances,
        to the consumer's detriment".

        => Role of Disclosures and Disclaimers

        The FTC places particular emphasis on disclosures and
        disclaimers when considering whether an advertisement is
        truthful and not misleading.  Now, obviously, in your ezine ad
        you don't have room to go into all the ins and outs of your
        product or service.  But that's OK because the ad is not
        really your sales pitch, it's what you use to try and generate
        a click through to your sales pitch. 

        That's not to say that anything goes in your classified ad
        and that it's only your sales letter that you need to be careful
        with.  Try using a headline like "MAKE $60,000 IN 60 DAYS"
        when the product you're promoting sells for $20 a pop and you
        yourself are lucky to make one sale a week and see how
        far that gets you with the FTC. 

        But most "reasonable" consumers recognize puffery when they
        see it and will not be deceived into believing a product or service
        referred to in an ad with a headline like "CHANGE YOUR LIFE
        TODAY!" is, in fact, a magic wand.

        But when it comes to your salesletter or website, watch out. 
        This is where you need to be very careful about your
        representations, and include appropriate disclaimers and
        disclosures where necessary.  Here's the FTC's guidelines for
        effective disclosures:

        "Disclosures that are required to prevent an ad from being
        misleading ... must be clear and conspicuous.  In evaluating
        whether disclosures are likely to be clear and conspicuous
        in online ads, advertisers should consider the placement
        of the disclosure in an ad and its proximity to the relevant
        claim.  Additional considerations include the prominence
        of the disclosure, whether items in other parts of the ad
        distract attention from the disclosure; whether the ad is so
        lengthy that the disclosure needs to be repeated; whether
        disclosures in audio messages are presented in an adequate
        volume and cadence and visual disclosures appear for a
        sufficient duration; and, whether the language of the disclosure
        is understandable to the intended audience."


        => Content of Disclosures and Disclaimers

        Advertisers are required to identify all express and implied
        claims that the ad conveys to consumers and, when doing
        so, focus on the overall impression of the ad and not just
        individual phrases or statements.

        If those claims are likely to be misleading to the "reasonable"
        consumer, then the advertiser must disclose qualifying
        information to remove any possibility of deception.  Such
        qualifying information must be disclosed clearly and
        conspicuously in a place where the reader of the claim will see
        either the qualification itself or a prominent link to it.

        Note also that a disclosure only qualifies or limits a claim to
        prevent it creating a misleading impression.  It CANNOT cure
        a false claim.  If the disclosure contradicts the claim, the claim
        itself must be modified for it is deceptive.

        For a full copy of the FTC's "Dot Com Disclosures" guidelines,
        visit
        http://www.ftc.gov/bcp/conline/pubs/buspubs/dotcom/index.html.


        SUBSTANTIATION OF CLAIMS

        If you claim that by purchasing your new viral marketing
        product, the consumer can generate $50,000 in 60 days in
        additional revenues, you'd better have a reasonable basis
        for doing so.  In other words, when you get an informal access
        letter from the FTC asking for substantiation (or, if you fail
        to respond, a formal civil investigative demand), be prepared
        to produce documents and records that provide support for
        your claim that your consumer's revenues will increase
        $50,000 in 60 days as a direct result of purchasing and
        using your product.

        If you could not provide, if asked to do so, substantiation for
        a claim you intend to make in your online ad, it is misleading
        to include it.

        The kind of evidence needed for substantiation depends on
        the claim.  A claim such as "9 out of 10 women lost an
        average of 10 pounds in two seeks while taking ABC-
        Metabolizer" will require competent and reliable *scientific*
        evidence.  Letters from satisfied customers do NOT
        constitute adequate substantiation for this purpose.


        FAIRNESS IN ADVERTISING

        According to the FTC's policy statement on unfairness, to
        justify a finding of unfairness, the injury to the consumer
        must satisfy three tests:

        1.  it must be substantial;

        2.  it must not be outweighed by any countervailing benefits
        to consumers or competition; and

        3.  it must be an injury that the consumer him or herself
        could not reasonably have avoided.


        => Substantial

        "Substantial" means more than trivial or merely speculative.
        As the FTC notes, "In most cases a substantial injury involves
        monetary harm, as when sellers coerce consumers into
        purchasing unwanted goods or services".

        On the other hand, "emotional impact or other more subjective
        types of harm ... will not ordinarily make a practice unfair."
        So, the mere fact that an ad is sexist, for example, and as a
        result offends some members of the community, will not, without
        more, render the advertisement "unfair" for the FTC's purposes.


        => Countervailing Benefits to Consumers or Competition

        It is possible for an injury to be outweighed by higher interests.
        An example the FTC cites is a case in point: "A seller's failure
        to present complex technical data on his product may lessen a
        consumer's ability to choose, ... but may also reduce the
        initial price he must pay for the article.  The Commission is aware
        of these tradeoffs and will not find that a practice unfairly
        injures consumers unless it is injurious in its net effects."


        => Injury the Consumer Could Not Reasonably Have Avoided

        There is a fine line between freedom of choice and regulatory
        intervention.  Consumers are expected to survey the market
        and the available alternatives and to make an informed
        purchase decision.  The Commission will generally only get
        involved where certain sales techniques operate to interfere
        with the consumer's ability to effectively make his or her own
        decisions. 

        FTC examples of these types of sales techniques include
        exercising undue influence over highly susceptible classes of
        purchasers such as promoting fraudulent "cures" to seriously
        ill cancer patients or dismantling a home appliance for
        "inspection" and refusing to reassemble it until the consumer
        signs a service contract.

        For a full copy of the FTC's policy statement on unfairness,
        see http://www.ftc.gov/bcp/policystmt/ad-unfair.htm .


        OTHER ISSUES

        => Refunds

        Refunds must be made to dissatisfied customers if you promised
        to make them.

        => Franchises and Business Opportunity Rule

        If you are selling a franchise or a business opportunity, you must
        give consumers a detailed disclosure document at least 10 days
        before the consumer pays any money or commits to a purchase.

        => Multi-Level Marketing

        MLMs should pay commissions for the retail sale of goods or
        services, NOT for recruiting new distributors (pyramid schemes).

        => Free Products

        If a product is advertised for free if another product is purchased,
        the consumer must pay nothing for the one item and no more than
        the regular price for the other.  Such ads should describe all the
        terms and conditions of the free offer clearly and prominently.

        => Jewelry

        The FTC has a Jewelry Guide about how to make accurate and
        truthful claims about jewelry you offer for sale.

        => Mail and Telephone Orders

        Under the Mail or Telephone Order Merchandise Rule, you
        must have a reasonable basis for stating or implying that a
        product will be shipped within a certain period of time.
        If not, you are implying that you can ship within 30 days and
        you must have a reasonable basis for such implication.

        There are various other rules that may impact on your business
        including 900 numbers, telemarketing, testimonials and
        endorsements, warranties and guarantees and the like.

        For more information on these and other topics, see the FTC's
        publication "Advertising and Marketing on the Internet: Rules of
        the Road" at
        http://www.ftc.gov/bcp/conline/pubs/buspubs/ruleroad.htm .


        PENALTIES

        The penalties imposed by the FTC against companies or
        individuals (via state mirroring legislation) that run a false
        or deceptive ad depend on the nature of the violation.

        Here are the possibilities:

        =>      Cease and Desist Orders

        These are legally binding orders that require the company
        to stop running the offending ad or engaging in the deceptive
        practice, to have substantiation for claims in future ads, to
        report periodically to the FTC about such substantiation and
        to pay a fine of $11,000 per day if the company violates the
        law in the future.

        =>      Civil penalties, consumer redress and other monetary
                remedies.

        =>      Corrective advertising, disclosures and other informational
                remedies.

        =>      Bans and bonds.


        One effect of the prevalence of spam on the Internet that I have
        not heard mentioned before is that it desensitizes us to
        outrageous advertising claims.  We EXPECT to see claims such
        as "make $60,000 in 60 days" even though we have conditioned
        ourselves to ignore them. 

        The danger, though, is the fact that we ARE so desensitized that
        it's almost second nature to "reach" when writing our own ads.  It's
        easy to gild the lily, to make our opportunity, product or service
        sound a bit bigger and better than it really is.  That's the nature of
        advertising after all. 

        But on the Internet, we have to be more careful than the offline
        advertiser.  Only on the Internet it seems, has hype been elevated
        to such an art form, so much so that we begin to think that we
        must do the same if our ad is to be noticed. 

        The challenge for us all, then, is to write winning ads that draw the
        attention of the reader while at the same time refraining from making
        claims that the reasonable reader may be misled by and by being
        fully prepared and able to substantiate any claims made.

        By following these, in essence common sense, principles, we will
        go a long way to ensuring that OUR advertising practices don't
        attract the attention of the wrong people!


        More About How to Market, Promote and Sell Your New Business

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