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How Multi-Level Marketers Dodged a Bullet

Scott Eells | Bloomberg | Getty Images

How's this for irony: Early last year the Federal Trade Commission enacted the new so-called Business Opportunity Rule that covered such business pitches as operating vending machines, jewelry display racks or making extra cash by working at home.

Notably absent from the definition of business opportunity: multi-level marketers, whose products are sold through a network of distributors (many of whom work at home) that get paid by selling products as well as recruiting other distributors. (Read More: How Multi-Level Marketers Dodged a Bullet.)

You might say this is the ultimate in dodging a bullet, considering that multi-level marketers were a key target of the rule when it was originally proposed in 2006.

The rule would have required a number of onerous disclosures, including prior legal action against the company and earnings claims. In response, Herbalife, one of the largest publicly traded mutli-level marketers—which sells weight loss shakes and nutritional products—warned in its 2006 10-K, "The proposed rule, if implemented in its original form, would negatively impact our U.S. business."

(Read More: From High Energy Clubs to Dashed Dreams: Herbalife Tales.)

Herbalife's lobbying dollars skyrocketed, hitting more than $800,000 in 2007, from virtually nothing in 2002, according to Open Secrets.org, which tracks the amount of money companies pay to lobbyists and politicians. (Read More: Activist Investor Dan Loeb Takes 8% Stake in Herbalife.)

The powerful Direct Selling Association, the industry's trade group and lobbying arm, turned up the heat as well: drumming up 17,000 letters complaining about the inclusion of multi-level marketers in the rule. (Read More: Multi-Level Marketing Critic: Beware 'Main Street Bubble'.)

Their lobbying worked, and the exclusion of multi-level marketers was such a big victory that pro-industry attorney Jeffrey Babener wrote on his blog: "In March 2012, the direct selling industry has occasion to celebrate what a united industry, companies and distributors, can achieve if everyone pulls oars together in the same direction. The fruits of their labor are apparent in a newly-forged, positive relationship with the primary federal agency that regulates a channel distribution..."

He added: "In its final FTC Business Opportunity Rule, the FTC stated its clear intention to relieve companies and distributors from what might have been very onerous conditions of recruitment that would have dramatically impaired the ability of distributors to build their businesses. "

Which gets back to the irony of it all: That something called the Business Opportunity rule doesn't every apply to a "business opportunity" like Herbalife, whose "business opportunity" is promoted at the top of its website. (Read More: Herbalife Disputes Ackman's Claim of 'Pyramid Scheme'.)

My take: One of the finest examples of what the best in lobbying dollars will buy.

—By CNBC's Herb Greenberg; Follow him on Twitter: @herbgreenberg and Google

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  • Herb Greenberg is the editor of Herb Greenberg’s Reality Check, a subscription newsletter for investors focused on risk.