Rules of thumb to keep you safe…


As a top MLM consultant and leading MLM Software provider I get asked all the time to evaluate businesses for their legitimacy. Part but not all of a companies legitimacy is how well they meet the legal criteria and avoid anti-pyramid/ponzi and anti-fraud laws. The other parts blend into corporate strategies, capitalization, marketing/branding, product, etc. which I’ve written and spoken on numerous times before.

However, I want to give some real solid guidelines that can be followed to:

A- As an MLM Company: Help bring your existing/start-up MLM into better compliance
or
B- As an MLM Participant: Aid you in selecting an opportunity

First some basic information… the 4 major agencies/groups involved in governing and enforcing US laws (administrative, legislative, or judicial laws) for direct sales / MLM are:

State Attorney General, predominately concerned about the safety of the citizens of a particular state and enforcing state pyramid/ponzi laws

Federal Trade Commission, predominantly concerned about fair trade/commerce practices and policing federal pyramid/ponzi laws

Food & Drug Administration, predominantly concerned drug/nutritional/food products and claims that are made about these products

Securities and Exchange Commission, predominantly concerned with investment issues and claims of “returns on investment”.

Predominantly governmental agencies and officials want to ensure that the public at large are “getting what they pay for” and are “safe from fraud/misrepresentation”. They want to see that when we as US citizens spend our money on a product/service that the product/service is safe, that we pay a fair price, and receive a reasonable product/service for the price paid.

Below I’ve listed 6 starting, fundamental and important KEY items of concern that must be considered. This group of items could also be a high level litmus test on legality.

Concern #1- Someone pays to JOIN a business/program/plan, doesn’t receive a product/service in return, and IF a commission is paid, then you have cause for concern.

A company can only pay commission when a product/service is sold. Commission can only be paid on the sale of product/service to an END-USER. A company cannot pay commission on membership fees (IE. No head hunting fees).

Issues: What activity generates commission? Is it the sale of product or some other activity, like recruiting others? Pyramid and Ponzi schemes, chain letters, “pay it forward” programs, gifting programs will typically get stopped at the door on this issue. If any kind of “gift” or commission is earned/paid for “enlisting”, “recruiting”, or “selling” someone on JOINING the program/business/opportunity then this is an issue that needs to be looked at. A commission can be earned/paid on a product or service that was sold, period.

The Cycler Issue: Product must not only be delivered upon cycle. The money spent to join a cycler is what is used to pay commission, if a product is not purchased and delivered at the time of payment, this becomes an issue. If “what someone pays for” can’t be delivered or received until recruiting is preformed (as in many cyclers), then this becomes an issue.

The first question: Is commission paid on a product/service and NOT on a membership/participation fee?

If Yes, see the next question…

Concern #2– A product/service has no commercial value or is unreasonably priced or if people are asked to buy an unreasonable amount (front end loading)… and IF a commission is paid, then you have cause for concern.

Products/Services must have a reasonable value in comparison to the price paid and people cannot be asked to purchase an unreasonable amount of that product/service in conjunction with commission being paid. Obviously if there are no “strings-attached”, like a commission plan, then if someone buys a product/service way over priced, or some huge quantity… that’s their business. This isn’t the case when a commission plan is attached to that sale.

Issues: A company can’t just decide to sell the “unique” dirt from their back yard for $X amount and create a business around it. What value does it have? eBooks are gray areas: what value do they have? Is what is charged reasonable? How many eBooks will 1 person use? How many ‘positions’ in a binary or cycler or re-entry is reasonable? Subscriptions pose an issue if it’s for a one time product like “access to a group of eBooks”. Who needs $10,000 worth of website malls? And are those malls really worth $10,000? Why?

A good benchmark to hold next to any product/service is: are similar products sold by another company that is not doing a business opportunity? If so, what is the price they charge? If not, why?

Ask yourself this question: would I buy this product if I was not doing the business? If not, why buy it now? Compulsory purchase of product to participate in the business is an issue (see #5 below).

The second question: Is the product reasonably priced, have value, and sold in reasonable quantity?

If Yes, see the next question…

Concern #3– The product/service is only of value to someone doing the business, if so, you have cause for concern.

A product/service must have value to someone NOT in the business.

Issues: Training, business cards, leads, starter kits, promotional CD’s, websites, downline reporting, etc. are all “items” that are typically only of interest to someone doing the business. If I am a training company selling training that helps anyone in any company, or a business card company selling business cards to anyone in any company, or a leads company selling leads to anyone in any company… then these items become commissionable. BUT, if you are a nutritional company and offer business cards to your business members to help them promote their business… you CANNOT pay commission on the cards. Websites are the same way… no commission can be paid on any tool used to promote your business.

The third question: Does this product/service have value to an end-user/customer who is not participating in the business?

If Yes, see the next question…

Concern #4– When purchasing a product/service as a customer IF that customer is automatically put in the business, then you have cause for concern.

A product/service MUST be sold separately to end-users from the process of joining the business. This cuts 2 ways: a) someone not doing the business must be able to buy your product/ service without being put into the business and b) someone joining the business cannot be forced to buy a product (see #5 below). It may not cost anything to get into the business, but a position in the business needs to be an optional secondary opt-in process after someone buys the product.

Issues: Businesses where everyone in the business is a customer and every customer is in the business presents a problem. A company should be customer focused. A legit business is one where the sale of product, not the recruitment of new business participants is the primary focus. It is important to distinguish between end-users/customers and business participants.

The fourth question: Can a customer/end-user buy a product and not be in the business?

If Yes, see the next question…

Concern #5– Someone is required to purchase a product in order to participate in the business, if so, you have cause for concern.

Participation in a business must not be conditional on the personal purchase of product. In a business opportunity personal consumption may not be a requisite for participating in the business. However, once someone is participating in the business a purchase may be required to advance through the “ranks”.

Issues: To sell a Porches’ why would you need to personally buy one? You don’t. Many may say, which I do agree with, that the use of a product enhances ones understanding of the value of that product. We often hear in this industry, “be a product of the product.” However, while the use of a product/service may enhance our understanding of it, provide a deeper value and thus increase our passion and ability to share it with others, access to the business opportunity cannot be predicated on personal consumption.

The fifth question: Can a business participant join an opportunity without purchasing
product?

If Yes, see the next question…

Concern #6– During introduction to the business or product/service IF income claims or product/service claims are made, you have cause for concern.

Hype is deadly. Making claims of any type that cannot be proven scientifically or empirically to be applicable universally to some guaranteed degree can present massive legal challenges. Fraud and misrepresentation are major pitfalls of many who would hype their business and product/service in its promotion.

Issues: A clearly stated phrase of excitement and love or adoration for a company or something is not an issue. But to cross the line with statements of how a product/service impacted your life or how you earned $X amount pushes the envelope which might and often does result in a legal issue of fraud or misrepresentation. This is a difficult area for most to clearly grasp, but it’s one that gets more distributors in trouble than any other area.

The sixth question: Is the product/service or business opportunity explained without making claims?

If Yes, you’ve likely found a company/opportunity/plan that will remain free of legal challenges.

Every company should have retained and worked with a qualified MLM attorney and MLM consultant to put in place all solid business strategies, rules, and policies that are in line with the laws of the country and states that business will be conducted in.

MLM Consultant: http://www.melatwood.com/
MLM Attorney: www.YourSolutions.net/mlm_law.php

You should also ensure that the MLM Software company works closely with your MLM Consultant and Attorney to put in place the needed distinctions and tracking required by law and by good business strategy.

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Disclaimer: The materials available through this site are for informational purposes only and are not legal advice. The transmission of any information is not intended to create, and receipt does not constitute, an attorney/client relationship. Internet subscribers and on-line readers should not act upon this information without seeking professional counsel.

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