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What Is a Legitimate MLM Company? Protect Yourself By Knowing The Facts

Not being able to distinguish between what is a legitimate MLM company versus what is a pyramid scheme, can be one of the biggest MLM mistakes you’ll ever make. It’s pretty much MLM suicide, and it can sometimes be difficult to tell, as you’ll soon see.

WARNING: Don’t think that you know everything there is to known about want a legitimate MLM company is. I can definitely assure you that you don’t know everything there is to know on the subject.

If you’re an experienced Network Marketer, you should already know some of this information, but the third category of company listed below should be very enlightening, and might just save you from financial disaster.

I want you to know that I am in no way offering you legal advise. If you need legal advice, you should seek the services of an Attorney. The information I’m going to provide you here is intended to be educational, and provide you with a basis for your own further research if you wish to evaluate a specific opportunity.

Of the large number of MLM companies to choose from, you need to be able to figure out which ones to stay away from.

So, when is MLM illegal? There are 3 basic categories of companies that fit into the illegitimate MLM company model, and I’ll list them for you below.

Here Are The 3 Different Categories Of
Illegitimate MLM Companies:
1) "Gifting programs" that are just outright “pyramid” schemes, and prey upon the new and ill informed “opportunity seeker”. There is no product, just a “chain letter” that asks you to send money to a few people, with the promise that when your turn comes in the “pyramid” to receive money, hundreds or thousands of people will send you cash or money orders.

2) “Pyramid schemes” that are disguised as MLM companies. These are the ones that are typically perpetrated by direct mail, or sometimes via the Internet, and offer some sort of a product in an effort to differentiate them from a “Gifting” program. These are usually just outright Network Marketing scams.

3) Seemingly legitimate MLM companies that look no different than the most prominent and successful companies in the Industry, but are at risk of being closed down at some time in the future simply because they are missing one thing in their manner of operation.(See below for this vital information)

Categories #1 and #2 Explained
“Gifting” programs and “Pyramid Schemes”, categories #1 and #2 above, are not usually promoted by MLM heavy hitters, but by fringe players and con-men. Pyramid schemes never die, they just get reborn in a different body. The new twists currently employed by the perpetrators unfortunately make these programs very attractive to the Network Marketing new comer or to some income opportunity seekers.

They are sometimes difficult to spot by the uninformed because they look like MLM programs, they sound like MLM programs, and they claim to be MLM programs, but look out, they're just masquerading as the real thing, and they are ILLEGAL..

I'm sure you've seen them. They promise great wealth if you simply purchase the usually semi-worthless product being offered and mail a few sheets of paper or a postcard to a list of opportunity seekers telling them to do the same." You can earn $250,000 in 90 days" they claim or some other equally deceptive statement.

Some will quote a federal law that they claim makes their program legal. Don’t believe it! When you’re contacted by the fraud division of the Postmaster General’s office or by the local or state District Attorney’s office, quoting that law will not help you.

So, how do you spot these disguised pyramid schemes? Simply go through this check list to avoid making any MLM blunders:

  • If they promise a 5% response, or greater, from mailing a few cheaply printed pieces of paper, beware.
  • If they promise you large amounts of money in a very short time, beware.
  • If you would not buy the product on its own merit without the promised earnings, beware.
  • If they promise to build a downline for you without any effort on your part, beware.
  • If they don’t have a contact phone number that is answered live, beware.
  • If they promise to have “cash” payments overnighted to your front door, beware.
Here’s The 3rd Category That Might Greatly Surprise You:
The 3rd category mentioned above, the seemingly legitimate MLM company, that looks just like the top MLM companies, is more difficult to detect, and most of the time they will be able to “fly under the radar” for quite a while before they’re uncovered. So if you want to protect yourself, you still need to ask, “When is MLM illegal?”.

The problem lies in the fact that many, otherwise totally legitimate, companies do not sufficiently emphasize the retail selling of their products, but instead pay commissions mostly on personal consumption by distributors. Some companies have virtually zero retail sales by their distributors, and rely exclusively on distributor consumption.

If you don’t think this is a problem that warrants your attention, and can cause you great financial harm, think again. I can assure you that YOU’RE DEAD WRONG, and I’ll prove it to you shortly. If your company relies almost exclusively on personal consumption by distributors, that may cause problems for them in the future, as you’ll see below, and that means you could suffer serious financial loss as a result.

I personally feel that these companies are NOT doing anything morally or ethically wrong, but the law seems to be contrary to my thinking. It is a common occurrence in the Industry for a company to be going along just fine, and to be left alone, until they begin to be a bit more successful and well known, then the Attorney Generals from the various States and other government lawyers start looking at them more closely, and before you know it, they are being ordered to shut down because of the lack of retail sales.

It is safe to say that most companies know the answer to the question “when is MLM illegal”, and practice due diligence when it comes to interpreting what the law requires Network Marketing companies to do in order to remain”legal”. But that does not seem to have stopped the government from causing them to close their doors for not making any “retail” sales. I’ll list a few examples for you in a short while.

It would appear that the two main cases that have the most bearing on this matter are the 1979 ruling in the Amway Corporation v/s the United States Federal Trade Commission case, and the 1994 decision by the United States Ninth Circuit Court of Appeals in the Omnitrition International case.

Here are the essential legal precedents that the decisions in these two cases have set, and that government lawyers use to determine what is a legitimate MLM company, and they then put companies out of business that do not comply. . . . . . . . . . .

In the Amway case, three main criteria were established:
(1) The ten retail customer policy, requiring ongoing sales to be made to retail customers.
(2) The 70% rule, requiring that distributors sell 70% of previously purchased product before reordering.
(3) The buy-back policy for the inventory of terminating distributors.

The first two are the ones mainly used against companies. There has been some inconsistency in the interpreting of this precedent by various States, but what seems to be a common thread is that they all have demanded that there be some amount of retail sales to people not participating in any way in company compensation or the business opportunity. What has been interpreted differently by various States is whether or not personal consumption by distributors counts towards the retail requirement, and if so, how much does it count.

It has been reported that a couple of States, California and North Carolina have come right out and said that personal consumption does NOT satisfy the retail rule, and that no commissions or bonuses can be paid to distributors on personally consumed product. A few other states, Texas, Oklahoma, Louisiana, and Kentucky (that I an aware of), have been reported to have passed specific laws recognizing “personal use” as a legitimate “retail sale”. All the other States seem to have some interpretation that lies between those two extremes.

In the Omnitrition International case, the Court of Appeals main contention was as follows:The Court leveled charges against Omnitrition of being a pyramid scheme, because the majority of the product sales were to distributors for personal use. The Court made it quite clear that commissions paid to distributors must be directly tied to retail sales.

I’ll list below a few of the many examples I uncovered in my research, of companies that have been put out of business using the above cases as a precedent.

(a) Jewelway was properly and legally designed on paper. Their rules and regulations followed the retail requirement criteria, but the F. T. C. investigators attended a Jewelway opportunity meeting at which the Jewelway representatives had people believing that they could make money just through personal consumption. (Result, the end of Jewelway)

(b) Renaissance (the Tax People) was accused by the Kansas Attorney General of being a “pyramid”, but did not actually sue them under that State’s pyramid statute. Instead they sued under the State’s “sales referral law”, which made it a deceptive practice in a consumer transaction to induce consumers to buy products or services by promising rewards if they find other consumers to do the same, and the rewards are solely contingent upon those other consumers purchasing with the same promise and intent. (Result, the end of Renaissance)

(c) Destiny Telecom was required by the State of North Carolina to verify, on a monthly basis, that a certain percentage of all wholesale orders by distributors were being retailed to non-distributors. They further demanded that “Should a North Carolina retail customer subsequently establish such a connection by becoming an ‘Independent Representative’,...any prior sales made to that customer shall be considered an internal sale from the time of sale, and shall not be considered a retail sale for any purpose at any time”. (Result, the end of Destiny Telecom)

(d) AuQuest had a consent decree issued against it by the State of California, ruling that “commissions may only be paid on sales to the ‘ultimate consumer’, the definition of which shall be ‘persons’ who are not part of the AuQuest Marketing Plan.” (Result, the end of AuQuest)

You might find it very revealing that one of the most knowledgeable, experienced, and well respected Attorneys in the country, in the areas of Direct-Selling and Network Marketing issues, and who in the past was also the Director of the Legal Division of one of the oldest and largest Network Marketing companies in the country, had this to say about the potential legal problems facing some companies in the Industry on the matter of “retail” sales.
(1) “...should in no way imply that there is anything wrong or illegal about personal consumption, it is just that it alone cannot be the sole basis for a business opportunity”.
(2) For a MLM operation to continue for the long term it MUST include “a product or service....that is retailable, and is being retailed”.
(3) “If the product or service is retailable, but little corporate or field focus is placed on retailing... the risk of being deemed illegal greatly increases”.

So, . . . . . .

  • If your company does not provide the opportunity for sales to customers who are not distributors, and/or
  • If your company does not pay commissions on such sales, and/or
  • If your company does not emphasize retail sales to non-distributors in their literature and training, and/or
  • If your company does not have a “reasonable” amount of retail sales to non-distributors, they could find themselves in trouble with State or Federal authorities in the future, who could determine that they are not a legitimate MLM company. If that happens and they’re shut down, you’ll be out of business.

  • You can draw your own conclusions and make your own decision about which company is a legitimate MLM company, but I can at least feel that I have done the right thing by alerting you to this potentially serious problem that could wipe out your entire business in the blink of an eye, and leave you holding an empty bag after years of hard work.

    There is also other information you should know, and other skills you should learn, so click below to continue your MLM education.

    The 7 Great Lies of Network Marketing