Is
This a Pyramid or a Legitimate MLM?
by
Jeffrey A. Babener
MLM Legal Attorney
©2003
The
Inevitable Question
OK, you have either been recruited for a network marketing opportunity or
you are the one doing the recruiting. Inevitably, this question will come
up: Is this a pyramid scheme or a legitimate business opportunity?
This Tuna's
for Selling
Although this is a complex legal area, a simple story draws a clear line in
the sand. Party No. 1 sells Party No. 2 a case of cans of tuna fish for $10.
Party No. 2 sells the same case to No. 3 for $20 and so on until No. 9 sells
the case to No. 10 for $500. No. 10 opens the case and opens one of the cans,
which turns out to be rancid. He goes back to No. 9 who refers him to No.
8 and so on until No. 10 goes to No. 1 to complain.
"I have major problem," he says.
"So, what's your problem?" says No. 1.
"Well," says No. 10, "the tuna is rancid, it's inedible."
"So, what's your problem," No. 1 says again.
No. 10 says, "Like I said, this tuna is no good."
"Well," says No. 1, "the way I see it, you don't really have a problem."
"What do you mean?" says No. 10, "this stuff is worthless."
"You don't understand," said No. 1, "this tuna is for selling, it's not for eating!"
And there lies the difference. Distributors in a network
marketing program that are merely buying product to buy into the deal as opposed
to an intention of really making a market for it, are really working a pyramid
scheme, not a legitimate direct selling business. Remember, when you offer
this opportunity to your next-door neighbor or your best friend, it's your
credibility that's going to be on the line for years to come.
What to
Look for - A Checklist
So, what do you look for with respect to legitimacy vs. pyramid? Here's a
good checklist to consider.
1. Product
and Price
Does the company offer a high quality product for which there is a strong
demand in the real world marketplace? Is the product fairly priced and priced
competitively with similar products? Can the product be demonstrated, and
does it stand out when you show it to friends? Is the product proprietary
to the company, and available only through its distributors? (Have you ever
noticed that you can't buy Avon products in stores or Shaklee vitamins at
pharmacies?) Is it backed up with a customer satisfaction guarantee?
Is post-sales service or customer assistance available? Do the people who
participate in the program buy the product enthusiastically based on its own
merits, even if they don't participate in the compensation program?
2. Second,
No Investment Requirement
Can you participate in the company's program without having to make any investment
other than purchasing a sales kit or demonstration materials sold at company
cost?
3. Third,
Look at Purchase and Inventory Requirements
Can you become a distributor or sales representative without having to fulfill
a minimum up-front purchase or inventory requirement? (When you are pitched
to put thousands of dollars of inventory at the very beginning, run fast in
the opposite direction.) Does the company's compensation plan discourage inventory
loading? Garages and backrooms filled with product serve no useful purpose
to anyone.
4. Fourth,
Look at the Sales Commissions Sources
Are sales commissions paid only on actual products or services sold through
distributors in the network to the end-user or ultimate consumer? (This means
that products don't end up in basements and closets. They are used, because
they have genuine value.) Does the compensation plan avoid paying commissions
or bonuses for the mere act of sponsoring or recruiting? (If it pays headhunting
fees, it is illegal.)
5. Fifth,
Check the Buy-Back Policy
Will the company buy back inventory and sales kit materials from distributors
who cancel their participation in the program, as long as these items are
in resalable condition? (This policy is required in states that have adopted
multilevel distribution statutes.)
6. Sixth
and Very Important, Look for Retail Sales
Is there an emphasis on actual retail sales to end-consumers? Can the company
demonstrate efforts to market products to the ultimate consumer? Do the company's
distributors have ongoing retailing requirements to qualify for commissions?
What is a "retail sale?" The industry and many MLM statutes include
both sales to nonparticipants and purchases in reasonable amounts for personal
use by distributors. Some regulatory groups, including the FTC, have historically
rejected personal use as a legitimate retail sale. Stay tuned as this debate
continues. The legislative trend is definitely supportive of the industry
position.
7. Seventh, Expect an Active and not Passive Role for Distributors
Are distributors in the company required to actively participate in the development
and management of their networks? (Many of the MLM statutes require that distributors
perform bona fide, supervisory, distributing, selling, or soliciting functions
in moving product to the ultimate consumer.)
8. Eighth,
Watch Out for Earnings Misrepresentations
Do the company's literature and training materials scrupulously avoid claims
of income potential that is promises of specific income levels other than
demonstrations of verifiable income levels within its program? (The Federal
Trade Commission, attorneys general, and postal inspectors all have their
eyes on the matter of earnings representations. The acceptable approach emerging
is that there should be no earnings representations unless they are based
on a verifiable track record of the average earnings of distributors. For
instance, a company should have statistics to show the percentage of active
distributors and the average earnings of active distributors.)
9. Finally,
Look for Good Training
Does the company offer its independent distributors solid training opportunities
in sales and recruitment? Are different levels of training offered to match
the increasing levels of experience and responsibilities of distributors?
The Journey Begins
OK, is this the end of your journey? Obviously not. You have now looked at
some legal issues and its time to move on to some solid business analysis.
But it's a great start.
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad. His firm has focus on startup and emerging MLM companies. He has been adviser to such companies as Avon, Nikken, Discover Toys, NuSkin, Excel, Fuller Brush, Cell Tech, Kaire, Sunrider, Melaleuca, etc. He is editor of the industry resource internet site www.mlmlegal.com. He is a frequent lecturer and has been interviewed on the industry, and published, in many publications. Babener & Associates, 121 SW Morrison, Suite 1020 Portland, OR 97204, www.mlmlegal.com.
