Pyramid Schemes And Scams In MLM
We never want to be involved in a pyramid scheme and scams. Despite that MLM is good, there are many scams masquerading as a legitimate MLM company . Some are very difficult to recognize, and they have given the industry a black eye. This has left many immediately think a scam when they hear the letters MLM.
Pyramid Schemes and Scams: The History.
Direct selling has been around for a very long time. This is where a person gets a commission on any product, they sell for a company.
In the 1950s, some companies started not only paying a commission to the initial seller, but also to the people who are above the actual seller. This allowed people to get paid not only on their work (or sells), but also the work on those they recruited into the company.
There were really no problems legally with this, until the 1970s. Many companies, including the pyramid programs started during this time. One of the most famous is the “Dare To Be Great” program by Glen W. Turner. This and other pyramid schemes prompted the FTC to start take a hard look at MLM companies.
In the mid 1970s, the FTC did attempt to make the case that Amway was a pyramid scheme. This went on for a few years in the courts and lead to the landmark ruling that said that MLM is a legitimate business opportunity. This case did establish the “Amway Safeguards Rule.”
Pyramid Schemes And Scams: The Amway Safeguards Rule
The ruling judge pointed to three rules that Amway had in place that saved Amway from being an illegal pyramid scheme.
Rule 1, Amway representatives had to make 10 sales to retail costumers to qualify to receive commissions and bonuses on sales and purchases made by those in their personal sales organization.
Rule 2, Representatives must sell a minimum of 70% of previously purchased products before placing a new order.
Rule 3, Amway had an official “buy back” policy. This was for all unsold and unopened products. This was protection for representatives who closed to end their relationship company and did not want to be stuck with unused inventory.
The above criteria gave the MLM companies an outline for legal protection and has been used numerous times since the 1979 ruling. Much of the disagreement between MLM companies and the government is over the meaning of a retail sale. Does it mean a product purchased for personal use or product purchased by someone not in the company?
Pyramid Schemes and Scams: A Checklist
The following is a checklist of red flags that law agencies use when they investigate a MLM company on charges of an illegal pyramid scheme. So if you see a MLM has some of these characteristics, there is a good chance that it is a pyramid scheme. This checklist is from Jeffrey A. Babener a MLM lawyer and can be found at MLMLegal.com.
- The business opportunity is the product. The company has no legitimate product or service.
- Product s sold at an inflated price. The product sold should be at a competitive price.
- It requires product “loading”. This is when you must buy an unreasonable amount of inventory to start the business.
- It requires a substantial startup investment. Anything over $500 for an upfront investment tends to draw the attention of law enforcement.
- It has a mandatory purchase of training or demonstration materials. Many times the start-up kit is inexpensive, but then you are required to buy expensive items like training.
- Company does not have a buy back program. Of course there may be some restrictions, but there should be a buy back program for unused product in place.
- It pays fees on recruiting. The compensation plan should be based on product sales, not on recruiting.
- Recruiters who misrepresent potential earnings. If it is sold as a “get-rich-quick” scheme is a good sign that it is a pyramid scheme and scam.
Even with all the Pyramid schemes and scams, MLM is a thriving industry. Currently, in the US 1 in 10 households has someone involved in a business opportunity. Worldwide there are about 50 million people involved in MLM, and this generates almost $100 billion per year. (Stats taken from MLMLegal.com).
By using the checklist above you can get a good idea if a MLM company is legitimate, or if it is part of the Pyramid schemes and scams. If you know of any other flags that maybe a signal that a MLM company is a pyramid scheme leave a comment below.
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