Are Short Sellers betting on the FTC Business Opportunity Rule?
In a very interesting story, Charles Duhigg wrote, on November 13th, 2006 in the The New York Times about Why Short Sellers Want to Crash the Tupperware Party. The story was repeated at Kim Klaver's Network Marketing Blog and also at Ty Tribble's MLM Blog.
Mr. Duhigg reports that a number of short sellers are apparently betting that the FTC Business Opportunity Rule will become law and the resulting disclosure requirements will cramp recruiting.
"Analysts say the companies' real concern is that the new rules will undermine their ability to attract new sales representatives.
"If companies have to tell recruits that the average income is only $1,400 instead of the $50,000 advertised on their Web site, or that the average salesman only lasts two months, a lot fewer people are going to sign up," said Mimi Sokolowski, an analyst with Sidoti & Company who follows Tupperware Brands, Nu Skin Enterprises and other publicly traded multilevel marketing companies. She said that if the proposed rules pass without modification, recruitment in the United States could fall by as much as 40 percent."
The full story is a bit more complicated. Take for example Tupperware. For at least seven or eight years, Tupperware was regulated as a franchise in the United States, which required considerably more disclosure than the FTC wants with the new business opportunity rule. So, you would think that Tupperware's recruiting stock would improve with the more minimal business opportunity disclosure.
But Tupperware has been losing its sales force, according to its SEC filings, for almost five years in North America. Tupperware has simply failed to convince the public that their product is worth more than the plastic from the local dollar store, in my opinion. This accounts for their failure in North America better than the possibility of a new disclosure obligation.
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