Philip Reitcheck | greentrees

Is My MLM Program Legal or Not?

Jul 26th 2013 at 2:47 PM

If you have read my previous blog post on reviews of different MLM programs, you have noticed some MLM programs I have RED FLAGGED as not being legal in the United States.  So how do I determine if a MLM program is legal or not? I compare the MLM program and its comp plan to the "guide lines" that are put fourth by both the United States FTC and SEC agency's as follows:

Most government agency's focus mostly on the conduct of the MLM company and its affiliates to determine if they are "engaging in unfair or deceptive consumer practices" in their sales and marketing techniques.  These deceptive practices include posting pictures/videos of "large" commission checks, citing "guarantee" earnings, making unproven earning claims like "make $1,000 per week doing nothing", making unproven product claims like "increase your car's mileage by 300%", making false or unproved earnings/product testimonials, and programs that recruit affiliates by leading them to believe that they will earn money without doing anything.

Government agency's require all MLM programs to have a complete and proper "disclosure statement".  If your MLM program (company) does not have a proper "Disclosure Statement", posted on their website, that includes the company name, address, phone number, and non-deceptive earnings claims, then your MLM program is operating "legally", under FTC and SEC laws.

For a MLM program to survive a FTC and/or SEC investigation, it must be involve in "the sale of a real products or services".  A MLM program that offers earnings yet offers nothing that one could call a product or service are consider by government agency's as nothing more then a money game and will be "shut down" as a security, lottery, pyramid, gifting, or chain letter scheme.  True most MLM programs state that they offer products or services, but to be sure you should ask yourself one question, "would you purchase this product or service without the programs affiliate comp plan?"   If you answer truthfully NO then it is a good change that your MLM programs product or service will not pass a FTC test either.

To pass the FTC product test,  a MLM programs products or services must be "both retail-able and retailed". This means the product or service must have real value to some market segment of end-use consumers who are not affiliated with the MLM program's comp plan.  Further, the product or service "must actually" be sold by either the program or program affiliates, to non-affiliate buyers, who are not purchasing the product or service just as an way to become a participant in the MLM program's comp plan.

For your MLM program to past the Pyramid scheme test, it has long been provided that, earnings paid to affiliates in a program must be “primarily from the sale of goods, services, or intangible property" by program affiliates, rather than from money received from new referral sign ups just to participate in the comp plan (known as a headhunting fee).  Regulatory authorities have established enforcement policies requiring that around 40 percent or more of a company’s total commissioned sales revenue be from sales to non-affiliates (real customers).  But many MLM lawyers however dispute this set percentage, with dozens of articles written about the underlying element of this legitimacy test.

A MLM program charging "headhunting fees" are almost always found to be "illegal".  Headhunting fees are mostly connected to MLM programs in which a high percentage of new affiliates enter the comp plan at an advanced award level just by paying additional sign up fees or a program that requires new affiliates to makes a large start-up purchase or payment (exceeding $200), that is not subject to a 100% refund.

Finally there is the SEC securities regulation on what is considered an "investment MLM program".  In situations where repeat sales of products or services is insignificant to the company’s com plan affiliate earnings, the program may be deemed by the SEC or state securities regulators, to be a investment MLM.  Or an MLM program that offers earnings without requiring anything in return from their affiliates, except new or additional seed money, will also be considered a investment MLM program by securities regulators.  That said investment MLM programs themselves are not illegal (take bonds, stocks, CD's, and savings accounts for example), but if a investment MLM is not licensed in all countries and states that they have affiliates, then that is consider an "illegal" investment MLM program.   The consequences of such a determination will always be the "shut down" of said MLM program as a Ponzi scheme, by securities regulators.

Despite a MLM having passed the fair marketing, Disclosure Statement, marketable products & services, retail customer, headhunting, and investment tests, many MLM programs has been "shut down" by government agency's, because of a failure to maintain standards of business practice. These standards are not unique to MLM programs, but applies to all US businesses.  They include;
(1. Not filing IRS income tax information (1099's) on affiliates/employees
(2. Selling non-approved FDA, FCC, or USDA products or services
(3. Selling illegal or banned products or services
(4. Not meeting compliance to agency's like OSHA, EEOC, FLSA, and ERISA covering safety
(5. Not meeting the different state agency's compliance, in the states it operates in

One of the things that people ask me is "Are all profit sharing MLM programs illegal?"  And the answer is NO, not at all.  A company sharing a percentage of their overall profits: either annually, monthly, or even daily; with affiliates is not illegal if the following is met.  The MLM program first must pass all the above FTC and SEC agency tests, plus all affiliates must sell a minimum volume to  non-affiliate customers in order to qualify for said "profit sharing", and a affiliates "profit share" reward must be based on the affiliates true non-affiliate customer sells performance.  Many large companies have offer employee profit sharing, using overall customer sells performance, for many years now.    

A careful review of a MLM program's website is often sufficient to reveal likely legal problems, but a lack of genuineness in many company’s website information sometimes makes good reliable determination regarding a MLM programs legality very hard to determine, meaning additional investigation is needed.  But this process is now complicated by the numerous variations of comp plans which have developed as a consequence of the competitiveness in the MLM marketplace.  And unfortunately, many of these variations are merely cleverly masked Pyramid or Phonzi schemes.

Luckily, a lot of useful information is available on the Internet, from blogs, forums, and in public records of enforcement agencies.  I always try to cross-reference multiple sources of information to build a more complete and reliable case of a MLM programs adherence to government agency's legal practices or not.  But basic common sense is the best key.  For example, if a large MLM program is facing regulatory shut-down or civil lawsuits, it maybe is in serious jeopardy even if the comp plan is legal and it has passed all the above tests.  To prove this look at the demise of Mark Nutritional and its Body Solutions weight loss product, which began in 2002.  The program had generated nearly $200 million in sales in just a few years, but ended up in bankruptcy after facing several private class actions, as well as complaints filed by the FTC, and several state Attorney Generals, all alleging fraudulent weight-loss claims.  Remember the gold rule in evaluating any MLM program, "if it sound to good to be true, it probably is".

Remember, you can never be totally sure that a MLM program is 100% legate, just take ZeekRewards for example!  But these are the MLM programs that I have found that SEEMS to have passed all the above  legal tests?

JubiMax - A "profit sharing" MLM program with "real products" and "real customers". And passes the number one test of any MLM profit sharing program, in that it requires all affiliates sell a minimum monthly volume to non-affiliate customers in order to qualify for "profit sharing", and the "profit share" reward is based on each affiliates retail customer sells performance.

BannersBroker-  A banner marketing program, where you make commissions on the "purchase" and "sale" of advertising space on "non-affiliate" real customer web pages (web pages not owned by the program owner).  NO referral commissions and NO matrices.  NOTE-Though it is currently going through a hard time with late affiliate withdraw payments, it is one of the only Online programs that have been investigated by a government agency (Montreal Securities Commission) and passed their Online program legal tests.

Emmetec - Sells "cloud based" antivirus software.  True basic MLM program with "real products" and "real customers".  Over 90% of all affiliate commissions are paid from direct non-affiliate customer sales.  No membership fees, only renewal monthly product subscriptions.

BigCrumbs - Online shopping rebate program site.  No membership fees and NO matrices.  100% of commissions are paid out from direct referred real customers purchases.

Free&Powerful - Online marketing advertising program.  No membership fees.  All commissions are paid from non-Free&Powerful programs.  All commissions are from direct referral product purchases.

iWowWe - Video email, i-phone, and webinar software.  All commissions are paid from both non-affiliate and affiliate software purchases.  Includes affiliate matrix commissions.

Now I am sure there are many other "good" and "legal" MLM programs out there, but these are the ones that I like, have joined, and made my money with.

Your Friend,
Philip Reitcheck

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