subject: Multi-Level Marketing Challenges - Pyramid and Endless Chain Objections [print this page] In this article, we take a look at claims made by several MLM industry "experts" who believe that most MLM/network marketing companies operate as endless chain or pyramid schemes. We wanted to look into this and see what is behind it. If true, does apply "carte blanche" to the MLM/network marketing industry or just some companies in particular?
In one particular example, Robert Fitzpatrick, author of "False Profits" has lately accused various companies of operating based on the "endless chain" recruiting vs. product sales mode, including Pre-Paid Legal, USANA, ACN and Herbalife. MlmWatchdog.com investigators have revealed that Fitzpatrick works closely with Barry Minkow's Fraud Discovery Institute, which has a history of short selling companies under their "investigations." So, is this just an example of stock manipulation, or is it truly investigative work? MlmWatchdog.com also points out that Minkow is a convicted felon who has served jail time for former fraudulent activities.
What does the law say about it? State law seems to govern activities in this area, although the FTC and SEC have had considerable involvement. In primary decisions, there have been a range of abuses targeted as possibly illegal:
1. Products with no "real world" marketplace
2. Products that are sold at inflated prices
3. Required purchases of company product
4. Plans which result in inventory loading distributors
5. Large cash investment upfront
6. Plans where products are totally or substantially used by distributors
7. Plans where fees are paid to distributors for headhunting
8. Plans in which commissions are not based on retail product sales
9. Plans which contain elements of a lottery; rewarding based on chance
State laws differ on key points, including, primarily, the question of whether distributor personal product usage counts as "retail sales." Three states have recognized personal distributor use as legitimate "retail sales:" Oklahoma, Texas and Louisiana.
When evaluating the bottom line whether a particular company meets legitimacy tests may be a down-to-earth question: Would you honestly buy the product if there was not an income opportunity attached? Keep in mind that your answer may be "colored" by a natural tendency to "justify" an emotional buying decision. If the answer is "yes," you've found a good company.
Multi-Level Marketing Challenges - Pyramid and Endless Chain Objections
