Multi-level marketing is a relatively new and complex marketing
concept, although it has been practiced since years in
one way or another by many companies, but a
vast majority of people get it confused with pyramid schemes
and questions the legality of multi-level marketing. Now the
question is, is MLM legal? Here is the answer: Yes, it is legal.
Until 1979, multi-level marketing was usually considered as scam
or illegal as it was never tested and adjudicated in court. In 1975
Amyway Corporation was accused and sued by the US Federal Trade
commission for operating as illegal pyramid scheme and after four
years of litigation Amyway won the case and the court ruled out that
the company’s multi-level marketing program is a legitimate business
and is not an illegal pyramid scheme. Hence now it is fairly clear that
Multi-level marketing is legal and not a scam.
As by now it is clear that multi-level marketing is legal and there is
no second thought about this. Although companies who undertake
multi-level marketing programs has to strictly develop strategies that
fall under the definition of multi level marketing as there is a fine line
between multi-level marketing and pyramid marketing which is ille-gal.
Also due to the complexity of the commission structures, compa-
26 CALVIN CLARKE
nies sometimes develop if not illegal but unethical strategies that
is not beneficial for the communities and the general public.
However to legally fall under the Multi-level marketing category,
apart from using common sense the following guidelines given by
the US Federal Trade Commission (FTC) must be adhered to:
Never enter into any plan that promises commissions
for recruiting additional distributors. It is constituted
under an illegal pyramid scheme. Your compensation
must be linked to the actual sales made by you or your
downline not on the number of recruits.
Plans that ask new distributors for making an upfront
fee or to purchase expensive inventory are usually
skeptical so it is essential to be cautious of them.
These plans can collapse quickly and also may be
thinly-disguised pyramid schemes.
Also plans that claim that you will make more money
by increasing your downline are unrealistic. You are
paid commissions on sales made by the people you
recruit not only by recruiting more and more reps. So
beware of them.
Beware of shills. False or over projected references used
by companies to lure you are unrealistic so be cautious.
Remember you do not sell miracles. So engaging with
companies that claim to sell miracle products. Also
remember that as per the FTC guide lines, a distributor or a
marketer is ethically responsible for the promises he made.
So don’t promise what you can’t fulfill.
Never enter into a contract in a high-pressure
situation demanding “Now or never”. These are all
unethical tactics practice by companies to trap you.
Always take your time and take advice from friends
and other professional people like accountants,
lawyers etc to evaluate the viability of the project.
In addition to the above guidelines FTC also requires that
MLM Success Guide 27
the multi level marketing company must derive at least
70% of its income from retail sales to non-distributors. If
this criteria is not met than in several cases the courts
have concluded the MLM company is in the business of
endlessly recruiting distributors who recruit distributors,
which may turns these companies into pyramid
schemes, not sales and distribution companies.
Hence the above guidelines are important to identify whether
the MLM Company falls under the legal definition of doing
business. But this is not all; apart from being legal it is essentially
important for the multi level marketing Company to use ethical
standards and proce-dures to generate their business and profits.
Further in this text we will highlight the general scams and unethical
practices that are usually practiced by few MLM companies to
deceit their people and the ways to avoid them.
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