Legal issues: MLM VS Pyramid Schemes

by admin on October 29, 2010

Lets just say it “MLM Scams”! Although not without its challenges today’s, as a general matter, legitimate network marketing companies are well received thought the US with increasing frequency, federal and state government offer assistance and guidance to the network marketing industry. The IRS releases special publications and videos and has adopted specific regulations recognizing it as a legitimate profession. As in the franchising industry, several states have also adopted specific legislation for multi-level marketing distribution companies which set forth objective standards for those companies to follow. Differencing a legitimate network marketing opportunity from a pyramid scheme should not be a difficult task for the entrepreneur when some basic and objective indicators are observed.

Any industry that offers such dramatic rewards and carries with it such a low dollar cost of entry obviously will tend to attract some of the best and some of the worst entrepreneurs. The industry has not always thrived. Over the years, it has come perilously close to extinction as a result of prosecution by regulators who claimed the industry promoted pyramid schemes under the guise of legitimate marketing. And in many cases, the prosecutors were correctly chasing and eradicating such pyramid schemes.

Other programs which were in fact legitimate have survived, however. In a classic legal decision in 1979, the Amway Corporation prevailed in such a prosecution; and , in fact, effectively received a stamp of approval of its marketing program by the Federal Trade Commission. This particular decision opened the door to many other legitimate multi level marketing companies. Thank you Amway!

Because of the abuses of the “rotten apples” these MLM scams of the industry, multi level marketing has become a closely scrutinized and regulated industry. Regulations regarding multi level marketing companies in the US are a constantly changing patchwork of overlapping laws, which lack uniformity and vary from state to state.

The basic thrust of these statutes is the marketing plans are prohibited when they require an investment or purchase by sales representatives for the right to recruit others for economic gain.

Unser these statutes, multi –level marketing companies must be bona fide retail organizations which market bona fide products to the ultimate consumer. Inventory loading and “headhunting” (remuneration for the mere act of recruiting others) are prohibited. Sales kits should be sold at actual company’s cost to sales representatives.

In the leading legal decisions, a variety of abuses have been targeted as potential elements of illegal marketing plans:

1. Products which have “no real world” marketplace
2. Products which are sold at inflated prices
3. Plans which result in inventory loading or “buy in” qualification by distributors
4. Substantial cash investment requirements
5. Mandatory purchases of peripheral or accessory products or services
6. Plan in which distributors are left with substantial unsold inventory upon cancellation of participation
7. Plan in which fees are paid to distributors for headhunting and emphasis is on recruitment rather than sale of products
8. Earnings misrepresentations or inflated earnings representations

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