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        Flushing Out Frauds, Scams and Pyramid Schemes in MLM and Home Business Opportunities

        Another AHBBO Article
        Flushing Out Frauds

        © 2014 Elena Fawkner

        "... ALWAYS carry out your own due diligence!  Remember,
        if it sounds too good to be true, it probably is."

        Regular readers will recognize the above language.  It comes
        from the "Caveat Emptor" section which appears towards the
        end of each issue of A Home-Based Business Online.

        Good advice to be sure (even if I do say so myself).  But
        what does "due diligence" mean and how do you do it? 
        Basically, it means to be diligent in researching your proposed
        business opportunity so you can be as sure as you can be
        what you're getting into and why.

        All very well and good, but how do you actually do it

        Stock-standard advice includes:

        1.  Check with the BBB about whether your opportunity
        has any complaints filed against it.

        2.  Do a Dun & Bradstreet search to find out about its
        credit history.

        3.  Check business references.

        4.  If practical, visit the place of business.

        Only one problem with this approach.  Although it's a good
        start for researching a legitimate opportunity, it won't flush
        out a fraudulent one.

        A newly formed company won't have any complaints filed
        against it with the BBB.  D&B won't be much help since scam
        artists will generally keep their trade creditors in good
        standing until immediately before they pull up stakes and
        vanish into the night.  Business references are invariably
        nothing but shills (associates of the scammer paid for their
        recommendation services).  And few potential purchasers
        living in New York are likely to travel to California just to
        lay eyes on the so-called corporate headquarters of their
        opportunity.  Even if they do, a serviced office gives just
        the right professional impression.

        So, how do you flush out a fraudulent business opportunity?
        Well, there's a hard way and there's an easy way.  The
        hard way (which is oh so easy at the time) is to fork over
        your money and then watch as it flies away.  The easy way
        (which is oh so difficult at the time, at least compared to
        just handing over your money) is to use your state's and/or
        the FTC's disclosure laws for business opportunities (if
        available) and then methodically work through the information
        available to you until you have enough information to make an
        intelligent decision.

        There are 23 states in the United States with business
        opportunity laws on their books.  Most prohibit sales of business
        opportunities unless the seller gives prospective purchasers
        disclosure documentation that has been filed with the state. 
        The 23 states are: California, Connecticut, Florida, Georgia,
        Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland,
        Michigan, Minnesota, Nebraska, New Hampshire, North Carolina,
        Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah,
        Virginia and Washington.  (See
        http://www.ftc.gov/bcp/franchise/netbusop.htm for links
        to more information.)

        In addition, if the business opportunity falls within the
        definition of a franchise or is a vending machine or display rack
        opportunity, the FTC's Franchise & Business Opportunity Rule
        mandates detailed disclosures such as identifying information
        about the franchisor (the person offering the business
        opportunity), the franchisor's business experience, litigation
        history, bankruptcy history, initial funds required, recurring
        funds required, financial information about the franchisor and
        much more .  A franchise is defined broadly and just because
        it's not referred to as a franchise doesn't mean it isn't.  See
        http://www.ftc.gov/bcp/franchise/16cfr436.htm for the full
        text of the Rule.

        The point of all of this is that many, perhaps most, opportunities
        you'll come across will either fall within the FTC's definition of
        a franchise and thereby trigger the federal disclosure
        requirements (or, if the franchise offer is made in California,
        Illinois, Indiana, Maryland, Michigan, Minnesota, New York,
        North Dakota, Oregon, Rhode Island, South Dakota,
        Washington or Wisconsin, state franchise disclosure
        requirements) or, if not technically a franchise, the opportunity
        may very well fall within the scope of the state business
        opportunity disclosure laws of the 23 states listed earlier.

        So, when considering a particular business opportunity, take
        this approach:

        1.  Determine whether it is being offered in one of the
        13 states with franchise disclosure laws.  If so, determine
        whether the opportunity is a franchise as defined under the
        state's law.  If so, check whether the state requires the
        disclosure document to be filed with the state.  If so, check
        whether it has been.  If not, assume the opportunity's a fraud
        until proven otherwise.  If the state in question doesn't require
        the disclosure document to be filed with the state and you're
        not provided with such a document from the company when
        you ask for it, assume the opportunity is a fraud until proven

        2.  If the opportunity is not being offered in one of these 13
        states, determine whether it falls within the definition of
        a franchise under the FTC's Franchise & Business Opportunity
        Rule.  If so, check whether a disclosure document has been
        filed with the FTC.  If not, assume the opportunity's a fraud
        until proven otherwise.

        3.  If the opportunity doesn't fall within the federal or state
        definitions of what constitutes a franchise, if it's being offered
        in one of the states with business opportunity laws on its books
        which requires disclosure documents to be filed with the state,
        check that it has been.  If not, assume the opportunity's a
        fraud until proven otherwise.  If the state doesn't require filing,
        and the company doesn't provide you with a disclosure
        document when you ask for one, again assume the opportunity's
        a fraud until proven otherwise.

        Also, bear in mind that just because your state may not have
        business opportunity disclosure laws, other states do.  Many
        business opportunities are offered nationally.  Where that's the
        case, make enquiries of the states that do have business
        opportunity disclosure laws to see if the company has complied. 
        If it has, that should provide some comfort (all other things
        being equal).

        The above approach is kind of an initial disqualifying round. If
        the opportunity is required to provide some form of disclosure
        and fails to do so, that's a big red flag.

        Of course, just because you receive the disclosure document
        doesn't necessarily mean that this is a good business
        opportunity for you.  All it does is (theoretically) provide you
        with enough information from which you can make your
        determination.  At the end of the day, you must still exercise
        your own good judgment.

        There are still going to be situations where a disclosure
        document is not required to be provided though, simply because
        the opportunity is not a franchise and it's not being offered in a
        state that has business opportunity disclosure laws.

        So, here's a 10-point checklist of things to do and check when
        you have nothing else to rely on.  In fact, they're a good idea
        even if you do have a disclosure document to review.  Any
        inconsistency between the disclosure document and your own
        investigations gives you another question to ask.

        1.  Check with the BBB in the city in which the company is
        based.  Although no complaints don't necessarily mean
        anything, complaints that have been filed do. 

        2.  Check with D&B.  Again, although a good report doesn't
        necessarily mean anything, a bad one does.

        3.  Check with the Chamber of Commerce in the city in which
        the company is based.  Whether the company is a member or
        not doesn't mean anything but you can still ask about their
        reputation or whether there's any reason why someone
        shouldn't do business with them.

        4.  Check with your state's Attorney General's office and
        Secretary of State for any complaints or pending

        5.  Ask for a list of references of previous local purchasers
        including name, address, telephone number and when they
        entered into the opportunity.  Make it clear that you want
        a list of people you can meet face to face.  If the company
        is reluctant to provide this, be suspicious.

        6.  If your opportunity is being presented on a web site,
        check to make sure there is a physical address (not just
        a post office box) and contact telephone numbers.  And
        check them out.

        7.  Look carefully at the business experience of the
        management behind your opportunity.  If they leave a trail of
        short-term ventures in their wake this could be a sign they're
        either not particularly good at what they do or they have to
        move on frequently (if you get my drift).  Also, look for
        specifics - names, dates, places.  Vague statements like "10
        years experience in the widget industry" are meaningless.  Ask
        for details.  Who, what, when, where and why (did you leave?).

        8.  Beware vague, generalized or evasive answers to due
        diligence questions that require simple factual answers.  You
        want to hear "123 Main Street, Suite 405, Your Town" in
        response to the question, "What is your corporate address?". 
        If you get a "Why do you want to know?" instead, move on.

        9.  Beware policies that require payment for product and/or
        supplies by check or money order only.  By not accepting credit
        cards, the ability dispute charges for defective or non-existent
        product is eliminated.

        10.  Most important of all, trust your gut instinct.  If it all just
        sounds too good to be true, it probably is.


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        Elena Fawkner is author of AHBBO Home-Based Business Online Magazine. Offering information and articles to help people start and manage a successful home based business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Monday, 25-Jan-2021 21:06:30 CST