Ponzi schemes are not only illegal; It is a waste of money and time. Because pyramid schemes rely on recruiting new members to make money, schemes often collapse when the pool of potential recruits dries up (market saturation). If the plan falls apart, most people, except for a few at the top of the pyramid, lose their money. Well, that`s the most important thing. This is where the tip of the spear is today, as opposed to 30 years ago. The Federal Trade Commission investigates a person`s intent when ordering products. If that intention is to consume the product, it`s probably legal. When it comes to selling the product to a customer, it`s probably legal. When it comes to earning commissions, then it`s probably illegal. If the intent is motivated by the compensation plan, meaning sales reps only buy products to earn a commission, it`s probably illegal. What do we mean by Comp-Plan-Drive? In some compensation plans, they motivate a person to buy the inventory to earn commissions that will cross a line because your intention in buying that inventory is not to consume or sell it, but to earn more commissions, and that`s where it gets dubious.
The Federal Trade Commission doesn`t like that. But the truth is that 99% of people who participate in MLMs lose money, according to the Consumer Awareness Institute, as they struggle to resell products and recruit members for network marketing companies, which often tiptoe borderline illegally, hiding the real cost of participation from participants. The Federal Trade Commission (FTC) has even openly stated that “some MLMs are illegal Ponzi schemes.” Nevertheless, the MLM industry is far from defeated. It accounted for $35.2 billion in retail sales in 2019, according to the latest available data from the Direct Selling Association, an MLM lobby group. There were about 6.8 million distributors during this period, and the DSA says they earned an average of $5,176 per year. Multi-level marketing (simplified Chinese: 传销; traditional Chinese: 傳銷; Pinyin: chuán xiāo; “Spread selling”) was first introduced by US, Taiwanese and Japanese companies in mainland China after China`s 1978 economic reform. This rise in popularity of multi-level marketing has coincided with economic uncertainty and a new shift towards individual consumption. Multi-level marketing was banned by the mainland government in 1998, citing social, economic and fiscal problems. [60] Another “Chuanxiao Prohibition” regulation (where MLM is a type of Chuanxiao, was published in 2005, clause 3 of Chapter 2 of the regulation states that downlines are illegal). [11] O`Regan wrote: “With this regulation, China is making clear that direct sales are allowed on the mainland, but multi-level marketing is not.” [10] I hope this has helped you clarify a bit what makes a business legal or illegal. Amway, the world`s largest MLM, sells health, household and beauty products.
Distributors earn commissions on retail sales and sales to their downstream recruits, who turn around and sell the products at a higher price to people outside the Amway organization. This is at odds with the FTC`s earlier decision, but thanks to some legal loopholes — such as the fact that dealers are required to buy back unused products from recruits if they decide to resign — Amway gave the green light in 1979. Remember that you are on a mission to examine a potential business that requires your time and money. The information you learn can help you decide if it`s really a deal, a failure, or just an illegal act. If it`s the company`s policy to charge high membership fees, this company is probably a Ponzi scheme. When you join a network marketing company, it usually ranges from $25 to $50 to become a representative. It is not a big contribution. Another expense when you`re just starting out in a network marketing business is trying the products in person. Everyone would want to try a product before embarking on this venture, right? If it costs between $1,000 and $2,000 or something like that, that`s an amount that makes sense for your personal use, but if it`s expensive enough for you to try the product, then that`s another story and could point to an illegal business. The large membership fee allows for an initial load, so if the company allows people to load products worth $5,000 to $10,000, then it`s probably a pyramid. Multi-level marketing gives this idea a slightly different twist.
Also known as MLM or network marketing, multi-level marketing is a distribution system in which independent sellers or distributors sell consumer goods provided by a particular company. Distributors are paid based on what they sell and are encouraged to build their own sales force by recruiting, training and providing others to sell products, earning a percentage of those sales. Well done, it`s completely legal; Poorly done, it is an illegal Ponzi scheme. The answer to the question of whether MLM is an illegal Ponzi scheme or a legal and legitimate business model is based on a 2018 Federal Trade Commission document, which I`ll go through step by step in this post. The U.S. Federal Trade Commission (FTC) states: “Avoid tiered marketing plans that pay commissions for recruiting new distributors. These are actually illegal Ponzi schemes. Why is pyramiding dangerous? Indeed, plans that pay commissions for recruiting new distributors will inevitably collapse if new distributors cannot be recruited.
And when a plan falls apart, most people – except perhaps those at the top of the pyramid – leave empty-handed. [44] This consistent jurisprudence makes the structure of multi-level marketing (payment at more than one level) legal today. If you decide to become a distributor, remember that you are legally responsible for any claims you make about the company, its product, and the business opportunities it offers. This is true even if you`re just repeating claims you`ve read in a company brochure or flyer. If you decide to recruit new distributors, know that you are responsible for any claims you make about a distributor`s revenue potential. Make sure you present the opportunity honestly and avoid unrealistic promises. If these promises fail, remember that you could be held accountable. MLMs are designed to generate profits for the owners/shareholders of the company and some individual participants at the higher levels of the participants` MLM pyramid. According to the U.S. Federal Trade Commission (FTC), some MLM companies already constitute illegal Ponzi schemes, even through existing narrower legislation that exploits members of the organization. [21] MLM companies have tried to find ways to circumvent China`s bans or have developed other methods, such as: direct selling to bring their products into China via retail. The direct selling regulation limits direct sales to cosmetics, diet foods, hygiene products, weight training equipment and kitchen utensils.
And the regulations require Chinese or foreign enterprises (“FIEs”) intending to conduct direct selling activities in mainland China to apply for and obtain a direct sales license from the Ministry of Commerce (“MOFCOM”). [61] In 2016, 73 companies, including domestic and foreign companies, obtained the direct sales license. [62] Some multi-level marketers have circumvented this prohibition by establishing addresses and bank accounts in Hong Kong, where the practice is legal, while selling and recruiting on the mainland. [10] [63] Fast forward to 2018, when the FTC issued “Business Guidance for Multi-level Marketing,” detailing what is legal and what is not or a Ponzi scheme. “Network marketing” and “multi-level marketing” (MLM) have been described by author Dominique Xardel as synonyms, which is a type of direct selling. [6] Some sources point out that multi-level marketing is only a form of direct selling rather than direct selling. [23] [24] Other terms sometimes used to describe multi-level marketing include “word-of-mouth marketing,” “interactive sales,” and “relationship marketing.” Critics have argued that the use of these and other different terms and “buzzwords” is an attempt to distinguish multi-level marketing from illegal pyramid schemes, chain letters, and consumer fraud. [25] MLM companies operate in all 50 U.S. states. Businesses may use terms such as “affiliate marketing” or “home-based business franchise.” Many Ponzi schemes attempt to present themselves as legitimate MLM companies. [7] Some sources say that all MLMs are essentially Ponzi schemes, even if they are legal. [4] [19] [20] Four people tried to get me to participate in Ambit Energy, and I just can`t imagine how they are allowed to operate legally.
They also had the so-called “70%” rule, which says you can`t order more inventory unless you`ve sold at least 70% of your previous inventory. This is not a retail rule. This is an inventory rule, and it should prevent people from stockpiling products and keeping too much inventory. So Amway had some of these best practices and they won their case, which was the precedent for the legalization of network marketing. Brooks pointed to a court decision, the FTC`s Koscot decision, as a widely accepted precedent for determining what an illegal MLM looks like. In that 1975 case, a judge ruled that MLM companies should base distributors` compensation on actual retail sales to customers, not on the number of new employees they hire or the amount of inventory they wholesale to those recruits.