Legislature(2001 - 2002)
03/18/2002 01:10 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 393 - SALES OF BUSINESS OPPORTUNITIES Number 0010 CHAIR ROKEBERG announced that the first order of business would be HOUSE BILL NO. 393, "An Act relating to unfair and deceptive trade practices and to the sale of business opportunities; amending Rules 4 and 73, Alaska Rules of Civil Procedure; and providing for an effective date." Number 0015 REPRESENTATIVE GARY STEVENS, Alaska State Legislature, sponsor, said that HB 393 focuses on consumer protection, particularly with regard to several scams lately discovered. He referred to a Redbook magazine article in members' packets titled "So you want to work at home?" that details some of the scams that are taking place. He noted that advertisements for business opportunities, sometimes referred to as "biz opps," often use phrases like "Work at home - earn money"; unfortunately, many of these are not legitimate businesses. He remarked that HB 393 would have no impact on legitimate businesses, but does try to control those businesses that are really scams. "What you'll find here is a pretty comprehensive statute regulating the sale of these biz opps," he added. All sorts of these biz opps - from work-at-home schemes such as medical billing and stuffing envelopes, to the sale of vending machines, greeting card display racks, "900 numbers," and other products - promise high earnings, which rarely materialize. REPRESENTATIVE STEVENS remarked that with the adoption of HB 393, Alaska will join approximately "half of the other states" that have regulations pertaining to the sale of business opportunities. House Bill 393 requires "these companies" to register with the state, to disclose information to buyers, to use escrow accounts to assure delivery of business assets, and to provide a 30-day right of cancellation to the buyer. In addition to these consumer safeguards, he noted that HB 393 provides for civil and criminal penalties for violators. He indicated that the goal is to prevent these scams from happening to begin with, rather than spending a lot of law-enforcement resources on the problem after people have been bilked. Number 0225 REPRESENTATIVE STEVENS drew attention to Amendment 1 (Revised), which would extend the disclosure provisions to include violations of similar laws from other states and of federal securities-related Acts; Amendment 2, which would alter the provisions pertaining to escrow account requirements to include a 30-day restriction on release; and Amendment 3, which would provide an exemption for registered securities. In response to questions, he concurred that although the House Labor and Commerce Standing Committee had discussed the prospect of raising - from $200 to $500 - the exemption for business opportunities costing under that amount, it did not do so. Noting that HB 393 is not intended to impact legitimate businesses such as Mary Kay [Inc.], Amway [Corporation], or Avon [Products, Inc.], for example, he said that the exemption found on page 12, lines 20-21, excludes from the provisions of HB 393 legitimate business opportunities that are sold for less than $200. CHAIR ROKEBERG asked whether there are any statutes, currently, that regulate the sale of business opportunities. REPRESENTATIVE STEVENS said that "there are laws after the fact," but HB 393 would require these businesses [that sell business opportunities] to register with the state beforehand. He remarked that in other states, similar legislation requiring registration has stopped a lot of scams from occurring. "Certainly [there] are laws that protect the consumer ..., but the problem is [that] it takes a lot of time and you can't find these businesses - they have no address, they have no principal figures you can attach any crimes to - so these people go pretty much unscathed," he noted. CHAIR ROKEBERG asked for a description of the violations that would constitute a class C felony and of those that would constitute a class A misdemeanor. REPRESENTATIVE STEVENS asked to defer the discussion on that issue to Department of Law representatives. REPRESENTATIVE MEYER asked why a $200-cap was picked for the exemption. Number 0530 CHRYSTAL SMITH, Special Assistant, Office of the Attorney General, Department of Law (DOL), said that the $200-cap was recommended by the [Fair Business Practices] Section of the DOL. She elaborated: They looked at the kinds of scams that they saw happening and the laws in other states that ... recommended a $200 level. I know there are some states that have a $500 level, [but] ... when our consumer protection attorneys spoke with ... their counterparts in other states, many of them said, "You don't want it to be as high as $500, there's a lot of this kind of scam business that falls between the $350-$300 to $500 range, [and] a lot of pricing them at $499." At least two of the states which had a $500 level have come back ...: one, I believe, ... to a $300 level, and one to a $250 or ... a $350 [level]. But I know there's been backward movement. I know there are some interests out there who are trying to encourage us to go up to a $500 [level], and I think we just think that's too high. ... I know you had some concerns about maybe it should be $100 or $50. I think that we just kind of settled on a $200 [level], as anything under that is de minimis in terms of a loss to the consumer and we just saw it as being [a] bigger governmental burden than maybe we were prepared to take on. REPRESENTATIVE MEYER asked whether leaving the cap at $200 would, in effect, be saying that scams below $200 will be tolerated. MS. SMITH said yes, noting that the amount of an exemption cap, if any, is a policy decision that the legislature has to make. To the question of whether the amount should be lower than $200, she replied that there is a cost-benefit issue to be considered. REPRESENTATIVE JAMES asked whether businesses must obtain an Alaska business license if in Alaska they sell business opportunities. MS. SMITH said that currently, they don't have to be "registered as a business through a business opportunity and we don't need a lot of information; I'm not sure whether they need to go through the [Department of Community and Economic Development (DCED)] and get a regular business license." Number 0753 REPRESENTATIVE JAMES opined that requiring such businesses to get a business license would be a simpler process. MS. SMITH noted that one of the problems encountered is that "sometimes you can't find these people." She pointed out that HB 393 is not intended to put undue burdens on anybody. Rather, it is to scare "scammers" so that they don't try to operate in Alaska or, when they do, to allow the state to go directly after them for failure to register, as opposed to waiting for somebody to come in and complain, because scam companies often change names and locations. REPRESENTATIVE JAMES pointed out that there are provisions in HB 393 that require businesses that sell business opportunities to obtain a $75,000 bond and pay a registration fee. MS. SMITH mentioned that the registration fee would be established by regulation, and it is estimated to be between $100 and $150. REPRESENTATIVE JAMES expressed the concern that provisions of HB 393 might be too tough for valid businesses and thus would be overcorrecting the problem. REPRESENTATIVE STEVENS reiterated that it is not his intention to make it hard on legitimate businesses, but rather to "catch those that are causing the problems for consumers." He acknowledged, however, that "it's a tough line to figure out where we should be; we don't want to run away legitimate business." CHAIR ROKEBERG asked whether $75,000 surety bonds are available and, if so, what they cost. REPRESENTATIVE STEVENS remarked that the DOL has that information and could respond to that issue. Number 0959 CYNTHIA DRINKWATER, Assistant Attorney General, Fair Business Practices Section, Civil Division (Anchorage), Department of Law (DOL), said that the area of biz opps is a field that frequently exhibits unfair or deceptive business practices, and 23 other states have some kind of registration or disclosure requirements. Most [of those 23] states require registration, but not all of them. She opined that HB 393 is especially important because it protects consumers in general and vulnerable consumers in particular, because often these scams are targeted at people who don't have options to work outside the home, such as senior citizens, people with disabilities, or people with limited education or job skills. MS. DRINKWATER opined that HB 393 would provide effective consumer protection by requiring sellers of business opportunities to make very important disclosures to potential buyers. Sellers would be required to use [state-developed written] contracts; would be required "to licensure with disclosure statements" pertaining to financial and registration history; and would be required to provide details about the total amounts involved in the contracts, about the delivery dates, and about services provided by the sellers. All in all, she added, HB 393 would allow consumers to make informed decisions before they "invest" their money. MS. DRINKWATER noted that from an enforcement perspective, registration should be required and is important because it enables the state to contact these companies, should it wish to pursue actions against them. Via HB 393, the state could gather information about the nature of the biz opps, how they are being advertised, and who the sellers are. She said that she anticipates that there will be a lot of sellers of biz opps that won't register, because that is frequently the case in other states, but via the enforcement provisions of HB 393, the state can write those businesses "cease and desist" letters and, if necessary, conduct further investigations. She noted that HB 393 would provide for enforcement and protections that mere business licenses do not afford. Number 1204 MS. DRINKWATER, referring to the issue of the $200 exemption threshold, remarked that that amount is a compromise. Many states have a $500 threshold, below which sellers of biz opps do not have to register, but a number of other states - at least nine other states - have a threshold ranging between $200 and $300; in addition, she pointed out, one of the model Acts has a $250 threshold. She, too, remarked that according to an informal survey of the states with similar legislation, almost all of them recommend having a lower threshold because scam artists simply adjust the sales price so that it is below any established threshold and because anything [over $200] constitutes a substantial amount of money for many people, though even $200 is a significant amount of money in terms of a loss to consumers. She also noted that none of the states polled indicated that a $200 threshold has proven to be an administrative burden. MS. DRINKWATER, referring to the criminal penalties provided for on page 12 of HB 393, explained that the felony violations pertain to the registration requirements, the bond requirements, the disclosure statements, the escrow accounts, the use of a written contract, and untrue statements made by the seller. She noted that this penalty scheme is consistent - though not an exact match - with other states: 14 have criminal provisions, and 10 of those have felony provisions. MS. DRINKWATER, referring to the list of exemptions beginning on page 12, noted that in addition to the exemption for biz opps being sold for less than $200, there is an exemption for: "sales demonstration equipment, materials, or samples for use in sales demonstrations and not for resale, or product inventory sold to the buyer at a bona fide wholesale price". REPRESENTATIVE BERKOWITZ asked how the criminal charges proposed in HB 393 intersect with existing potential charges located in AS 11.46.710 - deceptive business practices - and in AS 11.46.180 - theft by deception. He opined that there is some intersection there that could result in some confusion based on different standards and definitions. Number 1611 MS. DRINKWATER said that only the first [paragraph] of AS 11.46.710 could apply to the sale of a business opportunity; that paragraph refers to making a false statement in an advertisement or communication to the public. She acknowledged that there may be some overlap, but pointed out that she has never seen that statute used for prosecution purposes. She noted that if the Internet is used in violating AS 11.46.710(a)(1), it is a class C felony; otherwise, it is a class A misdemeanor. She remarked that AS 11.46.180 simply allows prosecution of individuals who are involved in biz opp scams, and whether the penalty is a class A misdemeanor or a class C felony depends solely on the amount of money or property involved. REPRESENTATIVE BERKOWITZ asked whether all statutes thus far discussed would work in a complimentary fashion, rather than in opposition to each other. MS. DRINKWATER indicated that she could not foresee the statutes conflicting with each other, and that it would not be a problem to "provide for criminal enforcement" in HB 393. Turning to the issue of the $75,000 surety bond, she explained that that amount is on the higher end when compared to other statutorily required bonds. There are three other states that require a $75,000 bond, but more frequently the bond is $50,000; however, as a practical matter, she remarked, there is not a huge difference between those two types of bonds, though requiring a $75,000 bond would provide significantly more protection for consumers. She explained that the cost of a bond is roughly $20 for every $1,000 worth of bond protection; thus a $75,000 surety bond could cost approximately $1,500, and a $50,000 surety bond could cost approximately $1,000. She opined that for legitimate businesses, the difference in the cost would not create a "make it or break it" situation. REPRESENTATIVE MEYER pointed out, however, that a $75,000 bond costs 50 percent more than a $50,000 bond, and that is a significant difference. He said his concern is that some legitimate businesses will simply decide not to do business in Alaska. He asked whether requiring a written contract would be intimidating to people in rural Alaska, and whether it is a common practice in other states. Number 1870 MS. DRINKWATER indicated that requiring a written contract is a common practice in other states. She posited that doing so is important when considering how these transactions often occur. One method, for example, involves inviting people to a "seminar" on how to run an e-commerce business or how to conduct some kind of business on the Internet, and once consumers get into the seminar, they are subjected to high-pressure sales tactics and become convinced that they have to signup right then and there. And, unfortunately, a lot of them do sign up then, even though in retrospect, after they are away from that situation, they often wonder what possessed them to do so. These scam artists are very skilled at persuading people to act in ways that they might not otherwise act, had they been given a little time for reflection. Thus, she opined, a written contract is very important, especially since it would set out all the important terms. REPRESENTATIVE MEYER agreed; a written contract is just good business. He asked whether, under the provisions of HB 393, a person could be charged with both a felony and a misdemeanor. MS. DRINKWATER said yes, though not for the same conduct, just under different provisions. REPRESENTATIVE MEYER sought confirmation that a class C felony can include imprisonment up to five years, and a class A misdemeanor up to one year. MS. DRINKWATER confirmed that. CHAIR ROKEBERG mentioned that under HB 393, Alaska would be treating scam artists "tougher than moose poachers." Number 1993 MS. DRINKWATER, referring to Amendment 1 (Revised), explained that it clarifies what information needs to be disclosed, including violations of [state and federal] securities laws and violations of consumer protection laws both in Alaska and in other jurisdictions. In addition, the state would have the ability to deny, suspend, or revoke a person's registration in certain situations. Amendment 1 (Revised) reads [original punctuation provided]: Page 2, line 24: Delete "and" Page 3, line 2, following "person": Delete "." Insert "; and" Page 3, following line 2: Insert a new paragraph to read: "(4) disclosures of criminal convictions, civil judgments, orders, consent decrees, and administrative determinations involving allegations of violations of AS 45.55 (securities laws) or a law of another jurisdiction with substantially similar provisions, or violations of 15 U.S.C. 77a - 77bbbb (Securities Exchange Act of 1933), 15 U.S.C. 78a - 78lll (Securities Exchange Act of 1934), or 15 U.S.C. 80a-1 - 80b- 21 (Investment Company Act of 1940/Investment Advisers Act of 1940)." Page 5, line 20, following AS 45.66.020(b)(3): Insert "and (4)" Page 11, line 15, following "property;": Delete "or" Page 11, line 19, following "jurisdiction;": Insert "or" Page 11, following line 19: Insert a new sub-subparagraph to read: "(iii) violations of AS 45.55 (securities laws) or a law of another jurisdiction with substantially similar provisions, or violations of 15 U.S.C. 77a - 77bbbb (Securities Exchange Act of 1933), 15 U.S.C. 78a - 78lll (Securities Exchange Act of 1934), or 15 U.S.C. 80a-1 - 80b-21 (Investment Company Act of 1940/Investment Advisers Act of 1940);" Page 11, line 23, following "chapter": Insert "or a law of another jurisdiction with substantially similar provisions" Page 11, line 29: Following "45.50.561": Insert " or a law of another jurisdiction with substantially similar provisions" Following ";" Delete "or" Page 11, line 30, following "AS 45.68": Insert "or laws of another jurisdiction with substantially similar provisions" Page 11, following line 30: Insert a new sub-subparagraph to read: "(vi) violations of AS 45.55 (securities laws) or a law of another jurisdiction with substantially similar provisions, or violations of 15 U.S.C. 77a - 77bbbb (Securities Exchange Act of 1933), 15 U.S.C. 78a - 78lll (Securities Exchange Act of 1934), or 15 U.S.C. 80a-1 - 80b- 21 (Investment Company Act of 1940/Investment Advisers Act of 1940); or" Number 2082 MS. DRINKWATER, referring to Amendment 2, explained that it clarifies the escrow arrangements and allows any money held in an escrow account, which is any amount over 20 percent of the "initial payment", to be held for 30 days, which is the same amount of time the buyer has in which to cancel the contract. Amendment 2 reads [original punctuation provided]: Page 7, line 17: Delete "seller may not" Insert "escrow account holder may not" Page 7, line 18, following "(c)": Insert "and (d)" Page 7, line 19, following "shall": Insert "provide to the escrow account holder a copy of the signed contract between the buyer and the seller. The seller shall" Page 7, line 25, following "provided": Insert "in (d) of this section or" Page 7, line 26, following "until": Insert "30 days have passed since the buyer signed the contract and" Page 7, line 27, following "escrow": Insert "account" Page 7, line 29, following "escrow": Insert "account" Page 7, following line 30: Insert a new subsection to read: "(d) Upon notification by the buyer that the contract has been cancelled under AS 45.66.130, the escrow account holder shall release the money held in the escrow account to the buyer." Page 8, line 11, following "escrow": Insert "account" MS. DRINKWATER, referring to Amendment 3, explained that it merely clarifies the exemption pertaining to the sale of registered securities. Amendment 3 reads [original punctuation provided]: Page 13, line 3: Delete "regulated" Insert "registered" Page 13, line 4: Delete "regulation" Insert "registration" Number 2204 JOHN W. HESSE, II, Senior Attorney & Director, Government Relations, Direct Selling Association (DSA), testified via teleconference. He explained that the DSA, a trade association established in 1910, represents more than 150 companies that market their products and businesses to consumers. He elaborated: They're independent sales people, primarily through home parties or person-to-person sales. Our member companies include commercial names that you may be aware of - Amway, Avon, Mary Kay, Shaklee, to name a few. Our industry generates $83 billion in worldwide sales, [$25.5] billion in the United States. We have a sales force of 11 million people in the United States, and on average there are 30,000 direct sellers in every congressional district, and so we estimate that in Alaska there are approximately 30,000 direct sellers, [though] that number varies from time to time because people move in and out of our business on a monthly, if not a weekly, basis. [The Direct Selling Association (DSA)] and its members have been involved in the effort to curb fraud in the sale of business opportunities at the federal and at the state levels since the late 1970s.... We believe that business-opportunity fraud undermines vital public confidence in industries like direct selling, which utilize and depend upon individual entrepreneurship. We further believe that clear distinctions can be draw between direct selling and business opportunities because [the] investment required to participate in a direct selling opportunity is comparatively low. Number 2295 MR. HESSE continued: Our issue with the legislation before you - HB 393 - is that the dollar threshold contained in the exemption section is too low. And if I could at this time, I'll just try and address some of the concerns and [resistance] that has been raised around that number, and sort of why ... we've been involved since the late 1970s, beginning with the Federal Trade Commission's [FTC's] adoption of its trade-regulation rule on business opportunities and franchises. Largely our concern in this area is to be good corporate citizens and to support good public policies. And, in that regard, we support clear and distinct laws that are not only clear for lawyers, but are clear for individuals - normal citizens - like our Avon ladies and Mary Kay sales representatives and Amway distributors. We believe that laws should be drafted so the government authority is tailored to address a specific social law. In this case, business opportunities generally - almost all business opportunity schemes - represent out-of-state opportunities that run ads in local newspapers and then send in salespeople to subject the individuals who may have responded to the ad to a high-pressure sale; you give them a short amount of time to close the sale. The perpetrators are professionals and they appear to be legitimate companies. Most are repeat offenders [from] ... other states. The goal [for] ... these criminals is to force their victims to make a hasty decision, to tell them that they have a limited opportunity or a closed group of people involved, and they will seek a large, upfront investment, typically more than the $200, or even the $500 that we think represents good public policy in this area. Our concern, not only with the $200 figure, but with the exemption that was raised - the additional exemption that's crafted in an attempt to protect us - is that Avon ladies and Mary Kay distributors and Amway distributors not only resell the products that they purchase from the companies, but they also consume them. Some may purchase products to use as gifts, either in their circles of friends that they travel in, or among their families. Number 2390 MR. HESSE went on to say: In addition, polling other attorney generals is sort of like polling police officers on whether or not search warrants should be required. Of course they're going to say the dollar threshold should be as low as possible just like a police officer is going to complain about the requirement that they obtain a search warrant before they enter someone's house. The Federal Trade Commission regulates business opportunities beginning at $500 and up. The proposal before you proposes to regulate business opportunities, we believe, between $200 and $500, and we're not sure what scams ... are occurring in Alaska that this particular law would reach that the Federal Trade Commission rule does not reach. To be clear, only three states have a threshold as low as $200, and we believe that it might be a more useful exercise to focus on prevention efforts: consumer education, the assistance of your local newspapers in screening so-called questionable ads, and posting consumer warnings in the sections where they also post business-opportunity advertisements. It's unclear to us that that's actually occurring. In short, business-opportunity statutes contain thresholds to restrict strict compliance modes on business opportunities where people invest a large amount of money upfront. They focus limited valuable state resources on situations where people can be seriously harmed, and they reassure small businesses, like direct sellers, that they will be protected from inadvertent coverage. MR. HESSE concluded by requesting that the "dollar threshold" be changed to $500, or at least as close to that amount as possible, and moved from the exemption section and crafted into the definition of "business opportunity" so that it's clear who is covered and who is not. In response to a question, he said the DSA does not have any concerns regarding the amount of bond. TAPE 02-31, SIDE B Number 2500 MR. HESSE, in response to a question, explained that when an Avon lady signs up to be an Avon lady, for example, typically she believes in the products that they're selling, and that is a hallmark of the industry. All of the sales reps, presumably, believe in and use the products that they turn around and sell; that is how the industry markets its products, and that is what makes it a successful stream of distribution and differentiates it from mass advertisers. He elaborated: Our companies typically start with very low budgets or very small businesses. Sometimes they're fortunate enough to grow beyond that, but, by and large, they don't have the dollars to put into mass advertising that allows other manufacturers and retailers of the products to get their products known and purchased by the general public. And so they rely on a sales force that's, number one, knowledgeable and, number two, will be using these products. ... All I was merely pointing out was that if someone believes in and uses the product, they're likely to pass it on, and that person is not a sophisticated individual and they're not going to know whether or not their activities are ... within whatever legal parameters are drawn. And that's why we argue for the clear distinction, in as simple terms as we can get, which would be the dollar threshold. CHAIR ROKEBERG mentioned a concern regarding sales representatives who have to purchase a certain amount of the product - and then wind up having to use it themselves - in order to maintain their sales representative status. MR. HESSE indicated that the industry maintains several protections against burdening sales representatives with unwanted inventory; most companies that belong the DSA subscribe to a code of ethics that requires them to purchase back any remaining inventory if a distributor or independent sales consultant decides to leave the business. CHAIR ROKEBERG asked whether, under the provision regarding the exemption threshold, independent sales representatives would have to be registered and bonded if they purchased more than $200 worth of inventory. Number 2363 REPRESENTATIVE STEVENS said no. In response to further questions, he confirmed that the registration and bonding provisions apply only to the parent companies and only if what they sell to potential independent sales representatives exceeds the $200 threshold, unless what is sold qualifies as "sales demonstration equipment, materials, or samples for use in sales demonstrations and not for resale, or product inventory sold to the buyer at a bona fide wholesale price". MS. SMITH added that companies such as Avon, Amway, and others that sell kits of sample materials to sales representatives, who then order items at a wholesale price and resell them to customers, would be excluded via the aforementioned exemption - [paragraph] (5) - on page 12. She explained that the kinds of companies that would be required to be registered - and it would be the company itself, not the sales person, that is required to be registered - are those, for example, that offer to help someone find places for vending machines, or that "sell" the opportunity to stuff envelopes, or that have seminars which "teach" certain computer/Internet skills. She mentioned hearing from an individual who had bought software that was supposed to turn the individual into a medical transcriber. REPRESENTATIVE JAMES noted that the ads she has seen on television and in the paper don't mention any price; they simply say to call an "800 number." How would one know whether the initial cost is going to be under the $200 threshold? A company could just suck its victims in, $25 at a time. Scams can do damage even at a $50 level, she noted. She opined that there ought not be any threshold exemption, since HB 393 is not intended to affect the sellers of legitimate business opportunities. Number 2183 BRYAN HARRISON, Corporate Government Affairs, Alticor Inc., testified via teleconference. He explained that Alticor is the parent company of Amway and Quixtar Inc., both of which are direct selling companies. He indicated that he agreed with Mr. Hesse's comments. He added that although a $200-threshold may not pose a great administrative burden from a governmental perspective, it could prove to be too great a burden on the individual who is trying to go into direct sales. He noted that direct sales is not a get-rich-quick scheme, rather it is a supplementary income, and $1,500 for a bond could equal the entire annual income of many who participate in direct sales. He expressed the concern that HB 393, as currently written, could strongly discourage people from entering into a direct- sales type of enterprise. With regard to the dollar level at which schemes are perpetrated, he observed that most of the problem occurs at a higher level, which is why other states and the FTC set a $500 threshold. CHAIR ROKEBERG asked whether, in pyramid-type companies such as Amway, the provisions of HB 393 could affect those individuals that rise to the distributor level. MR. HARRISON opined that there is that potential in the sense that many legitimate companies have multilevel marketing, and so it's possible that the cost of entering into one of those types of businesses could break the $200 threshold. REPRESENTATIVE JAMES opined that because the $200 threshold would apply only to companies selling a business opportunity, HB 393 would not affect companies such as Amway, Avon, or Quixtar that use direct sales to market products. CHAIR ROKEBERG remarked that "there seems to be some crossover with product value." REPRESENTATIVE STEVENS assured members that any bonding requirement or administrative burden engendered by HB 393 would never be on the person doing the selling; it would never be on the Avon, Amway, Shaklee, or Quixtar distributor. He reiterated that the exemption regarding product inventory being sold at a bona fide wholesale price ensures that direct sales representatives would be excluded from the requirements of HB 393. CHAIR ROKEBERG asked whether the provisions in HB 393 would apply to those sales representatives that reach the level of wholesaler. Number 1935 MR. HARRISON acknowledged that according to the explanations given by the sponsor and the DOL representatives, it would not. REPRESENTATIVE JAMES asked whether someone going door-to-door selling meat, for example, would be considered a direct seller. MS. SMITH said yes. The sale of a business opportunity is the sale to the person who is going to market [a product]; thus it is "company bogus 'X'" - which is probably located out of state and which has been trying to sell its bogus product or bogus business scheme to people throughout the United States - that has to register as selling a business opportunity. She elaborated: If you decide that you're going to go to the seminar and buy "bogus scheme 'X,'" then you don't have to register or ... do anything, you just have to buy it, and [HB 393] is intended to protect you from being taken advantage of by "company bogus 'X.'" If they did not register, we can get them right away because they're not registered. If they did register, and then it turns out that they have violated certain things or they didn't tell us that they were arrested in four other states for ... scamming people, then we can go after them that way. But it's not the person who's coming to your door to sell you something, it's the "recruiter of those people" I guess is how you define it. REPRESENTATIVE JAMES asked whether HB 393 would apply to companies that "sell" the knowledge of how to make money from real estate transactions. MS. SMITH pointed out that industries which are already regulated under federal or state statutes, such as real estate, securities, and franchises, are exempted from HB 393. Number 1758 ANNE CREWS, Vice President, Corporate Affairs, Mary Kay Inc., testified via teleconference. She noted that Mary Kay has sales force members - independent beauty consultants - operating in Alaska, and that the Mary Kay career offers a great, casual income-earning opportunity for women, enabling them to come in and out of the business according to their personal needs. She elaborated: One of the attractions of a Mary Kay career not only is the relatively low startup costs, but also the lack of red tape. And if a Mary Kay career was ever determined to be a business opportunity - to require bonding, escrow, registration, and all the other requirements - you would probably see a mass exodus of women from the career. We want to echo [the] DSA's emphasis that we need to draw as clear a line as we can between the casual direct selling opportunities and business opportunities. I did want to emphasis that Mary Kay [Inc.] and [the] DSA and its member companies are champions of good consumer protection, and we applaud the state in trying to deal with the fraudulent schemes, which you all are grappling with. However, I think this discussion has brought out all sorts of important issues including the confusion of ... who and what this law would really cover. We think, as we read it right now, corporations like Mary Kay, as well as our independent individual beauty consultants, would be covered. You're ... working with a balancing act here: How do you catch the truly significant risks without capturing the legitimate opportunities and perhaps driving them out of the state because of all the requirements. I'd like to speak to a couple of specific things regarding the exemption, which you mentioned, [that] would exclude direct selling from the coverage. It would be a partial exemption, if you will, for direct selling. Some direct selling perhaps would charge a startup fee, some direct selling opportunities would perhaps require purchase of inventory and the purchase may not be at a wholesale sale; so, ... there's just a lot of confusion. And we respect the conversation that you all have had so far, and think that ... the solution would be to ... raise the threshold to $500, which would clearly exempt the direct selling opportunities. MS. CREWS noted that she would be faxing the committee written comments from two of Mary Kay's independent sales directors located in Alaska, both of whom support a $500 threshold. In response to the question of how a $500 threshold would benefit her cliental, she explained that it would be large enough to exclude the cost of purchasing the startup kit - a sales kit - which is required of women who want to enter into a Mary Kay career. In response to the question of whether the startup kit is sold at a wholesale price, she relayed that the kits are sold at a "not for profit" price, so there is a small markup. Number 1520 EUGENE E. DAU, State Legislative Committee, AARP, noted that members have in their packets a letter from AARP supporting HB 393. He relayed that many seniors on fixed incomes tend to be susceptible to the promise of being able to earn money while staying at home; unfortunately, when they respond, they often wind up losing money. He remarked that he has seen many of the different ads promoting fraudulent business opportunities, none of which bother to mention the name of the company. He pointed out that legitimate businesses such as Mary Kay and Avon, for example, wouldn't run that type of nameless ad. He reiterated that the AARP supports HB 393, and surmised that its passage would eliminate a lot of the misleading ads. In response to a question, he said that the ads for fraudulent biz opps don't state how much money is required as a startup fee; they just promise that those who respond will make a lot of money. He indicated that he would like to see such advertisements stopped. Number 1339 VALERIE J. DEWEY testified via teleconference, and relayed her experience as the victim of a business-opportunity scam. She explained that for the past couple of years, she has been working with the Better Business Bureau in Fairbanks and with the Office of the Attorney General, in both Alaska and California, in an effort to resolve the problems that resulted from her becoming ensnared in a fraudulent business opportunity. The business opportunity that she became involved in was touted as one in which she could make money on the Internet by purchasing bulk inventory at a wholesale price and reselling it at a retail price, with a portion of the profits going to her and the remaining going back to the company that sold her this "business." MS. DEWEY explained that she had attended a seminar in which she was led to believe that by signing up, she would receive everything she'd need to operate this business from her home, including a computer, the software with which to run it, and the training to get her started, none of which, unfortunately, actually materialized. At the seminar, she paid $300 initially and signed paperwork allowing the company to withdraw $69.95 per month directly from her bank account. Without her knowledge, however, the company actually withdrew [approximately $2,900]. As a result, her former AAA credit rating has been destroyed and she has had to deal with creditors calling her at all hours of the day and night. She concluded by asking the committee to continue funding the Better Business Bureau, particularly in the Fairbanks area. CHAIR ROKEBERG asked Ms. Dewey what the contractual obligation was that she had signed up for. MS. DEWEY said that she could not recall the specific details, but reiterated that she has lost a total of $3,200 and has had her credit rating spoiled. She indicated that her reason for testifying today is to try to help keep this sort of situation from happening to other Alaskans. CHAIR ROKEBERG asked Ms. Dewey whether she has pursued any civil action against those that defrauded her. MS. DEWEY said that that is probably going to be her next step, and although she has talked to a local attorney, she has not yet done anything formally. She indicated that she is still working on getting her credit rating cleared up. CHAIR ROKEBERG advised her to get a letter from the Office of the Attorney General so that she could present it to any collection agencies that are still seeking money from her. He added, "You have the right to have that removed from your credit record." Number 0844 PAM LaBOLLE, President, Alaska State Chamber of Commerce, said her organization feels that it is important to have legislation [regulating] business opportunities, and would like to see unfortunate situations such as occurred to Ms. Dewey eliminated. She acknowledged, however, that the direct sellers have a concern regarding the definition of business opportunities and how "it could be fixed," and surmised that the main problem revolves around clarifying the threshold issue. She referred to Ms. Crews's comments regarding the Mary Kay sales kits, and suggested that it should be clarified that such kits would be exempted from the provisions of HB 393. MS. LaBOLLE referred to comments made regarding a model Act that sets the threshold at $250, and said that currently, three states use a $200 threshold, six states use between a $250 and a $300 threshold, and fourteen states use a $500 threshold. She opined that the concerns regarding HB 393 would be resolved by adopting a $250 to $300 threshold and changing the definition of what a business opportunity is; "we're so close to having everyone be happy with this, if we could just have the definition be clearer and the threshold raised even as much as $50 or $100 above what it is now." REPRESENTATIVE JAMES said that although she is not clear how HB 393 will be implemented, it appears to her that the people who are worried about the threshold amount are not the people who are going to be affected by this bill. MS. LaBOLLE surmised that those who are worried feel that portions of HB 393 need clarification to ensure that it will not affect them. REPRESENTATIVE JAMES asked whether direct sellers are required to have an Alaska business license. MS. SMITH said that certainly the distributor - the company - is required to have a business license. CHAIR ROKEBERG mentioned that so are the individuals who are selling the products. REPRESENTATIVE JAMES surmised, then, that those people - those direct sellers - would not fall into the category affected by HB 393. Number 0450 MS. SMITH agreed. The people who are selling products to the consumer, who are selling door-to-door, who are having the Amway parties or the Tupperware parties, are not the ones who would be required to register under the provisions of HB 393. If anybody were to be required to register, she added, it would the Mary Kay corporation, for example; however, under the exemptions beginning on page 12, not even those parent companies would be required to register. To clarify, she said that the exemption states: "This chapter does not apply to a sale of or an offer to sell ... (5) sales demonstration equipment, materials, or samples for use in sales demonstrations and not for resale, or product inventory sold to the buyer at a bona fide wholesale price". She opined that this exemption already includes sales kits. In response to a question, she said that companies like Amway that advertise for sales representatives would not be required to register either, because they are selling sales kits. MS. DRINKWATER said that she concurs with that interpretation. She added that almost all the other states that have this type of legislation also have this exemption, and it is one that is supported by the DSA in comments made to the FTC. She noted that the goal of that exemption is to preclude direct sellers and their distributors from the provisions of HB 393. REPRESENTATIVE JAMES suggested if that is indeed the case, and direct sellers and their distributors are exempted via the aforementioned language, then perhaps there is no need for a threshold exemption of any amount. CHAIR ROKEBERG remarked that the current language is ambiguous and should be clarified. REPRESENTATIVE STEVENS expressed a willingness to work on a committee substitute (CS) that would include the amendments discussed and clarify the exclusion of legitimate companies such as Amway, Avon, and Mary Kay, for example. CHAIR ROKEBERG announced that HB 393 would be held over.
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