MULTI-LEVEL MARKETING PLANS AND SCHEMES OF PYRAMID SELLING OVERVIEW
Multi-level Marketing Plans
An MLM
plan is a plan with three or more levels (the operator and at least two
levels of participants) that promotes the supply3 of a product4 to
participants of the plan. Compensation is earned by participants in the
MLM plan based on the supply of the product to participants and/or
non-participants of the MLM plan. A legitimate MLM
plan focusses on the supply of products rather than the recruitment of
prospective participants into the MLM plan and offers products that
consumers value and are willing to purchase (certain terms used in this
section are defined below).
To prevent the deception of prospective
participants, if an operator or a participant makes any representation
about the compensation that is or may be earned under the MLM plan, the
operator or participant making the representation must disclose the
compensation received by typical participants in the MLM plan.
Often a product purchase, such as a
distributor kit, is required to participate in an MLM plan. If the
operator of an MLM plan requires a person to purchase a product to
participate in the MLM plan then the product must be sold at the
seller’s cost and only for the purpose of facilitating sales.
Definition of a Multi-level Marketing Plan
MLM plan as a plan in which a participant
receives compensation for the supply of a product to another
participant, who in turn receives compensation for the supply of the
same or another product to yet another participant in the MLM plan. Set
out certain obligations relating to compensation disclosure by operators
of and participants in MLM plans.
Schemes of Pyramid Selling
A scheme of pyramid selling is a form of
an MLM plan focussed primarily on generating earnings through
recruitment. These schemes may offer products, however the products may
have very little value or the plan may offer limited incentives for
their sale. Income in the scheme is derived primarily from the money
prospective participants pay to join the scheme and not from the sale of
product.
Often schemes of pyramid selling promise
huge wealth and financial security to their participants. They usually
require the participant to pay to join. This payment may be described as
an enrollment fee, a membership fee or an investment into a
money-making enterprise.
In addition to payment, participants are
typically told that they must recruit others into the MLM plan, who in
turn must recruit others before they are able to earn any money. Given
the finite pool of potential recruits, pyramid schemes are inherently
unsustainable and eventually collapse. Although a small number of
participants at the top of the pyramid may make money, the overwhelming
majority of participants lose their money.
