A legal pyramid scheme?

MLM business opportunities are deemed illegal pyramids, according to Gerald P. Nehra, if the only way to make money is by sponsoring (signing someone up in your down line).
Gerald is a private practice attorney, including 9 years with Amway Corporation.
Just because an income producing program sells a product does not mean that it is not a pyramid scam. The original Ponzi scheme, the world's second most famous pyramid scheme, used stamps as the product, and investors lost fortunes.

When considering income opportunities, look at the plan design and structure, this is very important. Question the way the plan is being implemented by the prospective sponsor and its associates.

If using the multi level marketing system consists only of buying for personal use and sponsoring more participants, with "no provision for sales to customers, the design is flawed".
Investigate if you can make income just by selling products of the system in question (not only Amway). By income, we specifically mean profits after all expenses and taxes. Products you purchase and use in personal use do not contribute to income!

What good is 1 million dollars if it takes 2 million in advertising and 30 years with no other income? Don't forget to subtract cost of your time put into the business. Any real business expert / guru / mentor worth their weight should and would explain when you start a business the number one rule is to pay yourself a salary first. It might seem nice to make ten thousand dollars profit in a scheme, but what if it took 80 hours a week for a year?

As a rule, you should be able to make money only by making sales to customers. That is, legally designed and implemented reputable multi-level income opportunities provide a money making opportunity single level to participants who make the choice choose not to sponsor.

In the Network 21 seminar I attended I recall them making no mention of expenses and costs involved in producing the income. I felt this was irresponsible and deceptive, among many of the statements made that night that were deceptive and misleading. I was given no risk disclosure at all, not even a suggestion that not everyone will become rich implementing their proven system.

The only fine print in the seminar presentation actually says:
"These figures are a balanced representation of potential Amway sales and marketing plan income, potential income levels can far exceed those shown". Far exceed!? Is that not deceptive? Where is the disclaimer to say "actual figures may drastically fall short of these figures, in fact 99% of you will be lucky to make a profit"?
Even a simple: "Actual results may vary" would provide some hint that not everyone will become wealthy, let alone the standard investment results disclaimer that reputable investment and financial related companies normally use.

In a previous post, we discussed the basic plan advertised by Network 21 at their presentation, and the difficulties you may face selling overpriced products of 400 dollars worth of "value" a month, with no downline to help you.

When the Federal Trade Commission (FTC) sued Amway many years ago the case resulted in several decisions and findings. One prohibited the company from misrepresenting the amount of profit, earnings or sales its distributors are likely to achieve with the business. Amway avoided the official legal label of pyramid scheme by (1) not having a 'headhunting' fee; (2) making product sales a precondition to receiving the performance bonus; (3) buying back excessive inventory (4) requiring that products be sold to consumers. Amway's buy­back, 70% and ten customer rules deter unlawful inventory loading.
The order was violated with a 1986 ad campaign, resulting in a $100,000 fine.

Ask yourself, could you make money without sponsoring someone to be in your downline. If the answer is no, not only may that particular MLM system be illegal, it is much more difficult to make money, and to convince others to be sponsored underneath you if you yourself can not make money. If this is the kind of business you are interested in you should investigate another direct marketing business opportunity to find the best one for you.


Tex said...

An MLM is illegal if a major source of profit is from paying for the RIGHT to join, not if the major source comes from product volume, regardless of whether from IBO's or customers. However, the "customer test" ensures the products are marketable, or in other words, proves the product price does not include the equivalent of the "right to join" funding source.

Joecool said...

It would be interesting to see the FTC reinvestigate this with the buy from yourself philosophy.