Facts of the Case

Best Life, Inc. is a company that sells, biodegradable skin care products, priding itself on showing "how beauty can save the environment." Best Life grew through a "professional networking" model, marketing to the network members: "With Best Life, all you need is an entrepreneurial spirit become economically independent. You can save the environment and achieve your dreams!"

The company bases its success on its "Best Life" sales model, which is comprised of three levels of independent "dealers." Professionals at the entry level are called Local Dealers, while those at the middle level are titled "Direct Dealers." Those at the third and highest level of attainment are called "General Dealers." Any Best Life Dealer can sell Best Life products anywhere in the United States.

Most professionals with Best Life start their businesses as Local Dealers. After signing up with the company, they purchase a $250 startup kit from their sponsoring Direct Dealer at Best Life in order to sample the products and receive a web link and access code to online video tutorials to train the professional in selling Best Life products. After these training videos, the Local Dealer becomes eligible to sell to the public retail prices. To obtain the products for resale, Local Dealers purchase the product from his or her Direct Dealer at "discounted wholesale prices." When Local Dealers purchase the products, they typically spend $600 per order. Local Dealers receive a commission on their sales of these products to the public, which is represented by the difference between the discounted purchase price and the retail price given to the public. Local Dealers may market through social media and "get togethers" at local establishments and homes, but they are required to use prescribed sales techniques and promotional scripts provided by Best Life in the startup kit and tutorials.

Best Life's message to prospective and existing distributors that their earning potential is unlimited. When selling the product, Local Dealers are free to set the retail price to the public as high as they wish. Best Life does require, however, that the markup must be at least 89%. (So, if the Dealer sells the entirety of a $600 order from the Direct Dealer, then the retail sales must be at least $1,134.) While Best Life appreciates the fact that these consumer prices can be steep, it suggests that Local Dealers remind their customers that they aren't just purchasing personal beauty, they are "investing in the environment." After one year of being a Local Dealer, the dealer is required to purchase at least $750 in product from his or her Direct Dealer per month.

In addition to selling products, Best Life affords Local Dealers the opportunity to become Direct Dealers. To qualify, the Local Dealer can either successfully sell $7,500 of Best Life products in any one-week period or join Best Life's "Being Best" program, which grants a Direct Dealership Candidacy for an "environmental donation" of $7,500.

Once becoming a Direct Dealer candidate, he or she will be granted a Direct Dealership by pre-purchasing at least $1,500 of Best Life products and sales aids to qualify for the position and to engage in their new opportunities. These new opportunities include the right purchase Best Life products at a greater discount than the Local Dealers and the right to "build an organization" of Local Dealers. Direct Dealers receive commissions based on the sales of their current and future Local Dealers below them. After the first three months of being a Direct Dealer, Direct Dealers must purchase another $1,500 of products each month.

By large margins, the most substantial economic gain for Direct Dealers comes from recruiting new Direct and Local Dealers. Successful recruitments contribute toward a Direct Dealer's candidacy for the position of General Dealer and to receive additional monetary bonuses or rewards. Direct Dealers are required to attend a yearly "Direct Distribution Academy." For a $750 environmental donation, the Dealers receive some of Best Life's recruitment secrets through a confidential strategy called, "Be the Best by Doing Nothing."

The "Be the Best by Doing Nothing" strategy including a technique entitled the "Curiosity Technique." In this technique, Local and Direct Distributors solicit prospects to attend "Your Turn to Be Best" meetings at which the prospects are introduced to the "Best Life Dream." All distributors are prohibited from mentioning the details of the Best Life business before the prospect attends the meeting. The Best Life manual describes the reasoning behind the approach and its operation in the following manner:

DON'T GO INTO DETAILS. Never explain the program to a prospect before bringing him to an Opportunity Meeting. Do not mention Best Life or give any particulars, as many people will prejudge the program and decide it is not for them before they see the presentation.USE THE CURIOSITY TECHNIQUE. When you invite a prospect to a Your Turn to Be Best meeting, arouse their curiosity. Tell him you have discovered a wonderful financial opportunity that will fit him like a glove! Or, tell him you have found a money tree and would like for him to take a look at it.

Once a prospect attends a meeting, Best Life employees, sometimes in conjunction with the directors, inform prospects of the "virtues" of being part of Best Life. The meeting is conducted with scripts prepared by Best Life. Best Life distributes a bulletin which states: "...this program is to be presented verbatim from the script that Best Life has created for you. We strongly recommend replacing any individual who does not present the program verbatim." The meetings tend to exude affluence to the attendees. All distributors and Best Life employees are instructed to drive to meetings in luxury cars, to dress expensively, and display various signs of wealth. At the meetings, if a prospect agrees to join Best Life as a Local Distributor and purchases starter kit, the recruiting distributor earns $1,000.

A General Dealership can be attained only by someone who (1) is currently a Direct Dealer, has satisfied certain recruitment requirements during his or her tenure as a Direct Dealer and makes an environmental donation of $10,000 or (2) simply makes an environmental donation of $50,000. General Dealers have the right to purchase Best Life products at the greatest available discount and "build an organization" of Direct Dealers and Local Dealers beneath them. General Dealers can profit by selling products to their subordinate dealers; yet, their most meaningful earning potential comes from recruiting new Local and Direct Dealers and recruiting existing Direct Dealers to be General Dealers. General Dealers also have a mandatory annual "General Dealer Academy," which includes an environmental donation of $2,500 and a manual for "successful" general dealerships," which involves a prescribed recruiting technique called, "The Best Is Yet to Come: The Secret to Being Better Than the Best By Doing Nothing But Living The Best Life."

Finally, Best Life has never (1) submitted registration filings with the SEC, which must be filed if a business sells securities to the public or (2) filed financial disclosures with the SEC about its governance and financial condition.

Problem

The SEC has informed Best Life that it intends to start an action against it for committing fraud and for violating the '33 Act's requirements to submit the SEC registration filings and financial disclosures (referenced above). Best Life's position is that it doesn't need to make the SEC filings because it doesn't sell securities and that there is no evidence to establish the elements of the crime of fraud.

Based on the facts available in the scenario, determine whether (1) Best Life has violated the '33 Act as alleged and (2) Best Life has engaged in fraud.