Latino entrepreneurs need federal protection from pyramid schemes

Hispanic entrepreneurs are a powerful engine of growth in the American economy. Their continued success is important not only to the vibrant, growing Hispanic American community, but to the prosperity of the entire nation.

Hispanics are the fastest growing ethnic group in the United States. There are 57 million Hispanic Americans today, the largest minority group in the country. They will number over 100 million by 2050. They’re the youngest ethnic group in the country, too. The median age of Hispanic Americans is 27.

{mosads}More Hispanics are buying homes, going to college, and making over $50,000 a year than ever before. Their purchasing power has increased by 167 percent since the start of the century, and it is expected to reach $1.7 trillion this year.

Little wonder that this dynamic population is producing a rapidly increasing share of small businesses. Hispanic-owned businesses in the U.S. are opening at a rate 15 times faster than the national average. Hispanics make up about a quarter of all new entrepreneurs, and their annual revenues exceed $660 billion.

Many Hispanic entrepreneurs, like generations of entrepreneurs before them, sell goods and services of every type and quantity face-to-face, neighbor-to-neighbor in their communities. They work as independent contractors in the direct sales retail channel, attracted to an opportunity with low start-up costs and comparatively low overhead and risk. Hispanics comprise a fifth of all direct sellers in the U.S. 

Twenty million Americans run legitimate direct-selling businesses in association with, but independent of, the companies whose goods and services they sell. Direct sellers set their own schedule and manage their own business plan according to their own needs.

They might be young adults just getting started, stay-at-home moms earning a little extra money to boost the family income, or an early retiree keeping active and supplementing a pension.

They might be full-time entrepreneurs building large businesses, recruiting a salesforce of independent sellers with plans to earn more substantial income from the sales to a growing market of customers. However, they are all threatened reputationally and financially by fraudulent pyramid schemes masquerading as direct sellers.

The principal difference distinguishing a legitimate direct seller from a pyramid scheme is how they compensate their salesforce. Pyramid schemes compensate the act of recruiting others into the scheme. Sales are incidental to the compensation. Direct selling compensates their distributors primarily on the sale and use of their products by end users. 

Pyramid schemes typically impose high costs on their victims and offer scant opportunities to return unused inventory. They harm the ability of legitimate direct sellers to build their salesforces and earn the confidence of their customers. They should be prosecuted to the fullest extent of the law.

Forty-nine states have anti-pyramid scheme laws on the books, and 18 states enacted laws modeled on recommendations by the Council of State Governments. Extensive case law in state and federal courts has further clarified what does and does not constitute a pyramid scheme. As yet, there is no federal law defining and punishing pyramid schemes. That needs to be corrected.

In the last Congress, Representatives Marsha Blackburn (R-Tenn.) and Marc Veasey (D-Texas) introduced the Anti-Pyramid Promotional Scheme Act, which provided a sanctioned definition of pyramid schemes based on existing case law and the model legislation enacted in 18 states.

The bill gave guidance to legitimate direct sellers on the best ethical practices to follow and clarified that personal consumption of their products by direct sellers is a legitimate activity and constitutes a real sale. 

Many direct sellers, like sales clerks in retail stores, choose to consume their products. For some, the primary reason they became involved in direct selling is to buy products they enjoy at a discount and perhaps sell modest amounts to family and friends. Their integrity and the integrity of the companies who sell to them should not be called into question by falsely associating them with pyramid schemes.

Efforts are underway to reintroduce legislation in the new Congress, and Hispanic leaders in both parties should support it. It will offer much needed support to the growing ranks of Hispanics involved in direct selling — honest entrepreneurs and their customers — and protect them from bad actors in the marketplace.

Business ownership is the dream of millions of Americans, and no less so in the proud, aspiring, hardworking Hispanic community. Hispanic entrepreneurs are an asset to the country, and our nation’s political leaders should defend their aspirations.

Hector Barreto is the chairman of The Latino Coalition and was administrator of the Small Business Administration from 2001 to 2006 under President George W. Bush.

The views expressed by contributors are their own and not the views of The Hill.