Coupons, Vouchers, Gift Certificates, and Down Payments in MLM

by louabbott on June 19, 2010

Payment of multilevel commissions on these creates “unacceptably high legal risk”

This article was published a few months ago by Gerry Nehra, one of the few attorneys in the world who has focused their whole career on network marketing, multilevel marketing legal issues.

It is information that professional networkers should really be aware of in order to make well-informed decisions about the kinds of companies they promote.

Coupons, Vouchers, Gift Certificates, and Down Payments
appears in Network Marketing Business Journal, February 2010, Volume
25, Issue 2, beginning on page 15 and continuing on page 16.

by: Gerald P. Nehra, Attorney at Law

The title of this article lists names of pieces of paper and business transactions that are perfectly legal. Even paying commissions to the person arranging the transaction can be structured so as to be perfectly legal.

So why am I writing about it? Because the payment of multilevel commissions on JUST that kind of paper CREATES HIGH—read that as UNACCEPTABLY HIGH—LEGAL RISK. The reason is that the multilevel commission is being paid on the movement of money, WITHOUT the delivery of a product.

In the simplest form, one pays money and gets a piece of paper that evidences a promise to deliver a product or a service at a later date, if certain specified conditions are met. Sometimes the conditions are as simple as showing up and presenting the coupon as an exchange for the product. Sometimes you must buy a burger, present the coupon, and then get free fries.

In direct selling, the conditions can get more complicated. In a famous example, one form of “condition” (to ultimately receive the product for which you only made a down payment) was to sponsor a given number of additional persons who make more “down payments.”  That has been tried. It has been found to be illegal and pyramidal. You (the company) CANNOT pay multilevel commissions simply on the movement of money, and you (the distributor) CANNOT receive multilevel compensation based upon your downlines’ movement of money. Multilevel compensation, to be legal, MUST be based on completed sales of products or services to end user consumers. One state’s anti-pyramid statute specifically uses the words “bona fide sales to consumers.” An excerpt is below:

In Florida the following is Prohibited Activity:

. . . any sales or marketing plan. . . whereby a person pays. . . in excess of $100 and acquires the opportunity to receive a benefit. . . not primarily contingent on. . . goods (or) services sold in bona fide sales to consumers, and which is related to the inducement of additional persons. . . to participate in the same sales or marketing plan. . . .

“Consideration” Exclusion: …goods or services furnished at cost for use in making sales. . . .

Attorneys and investigators in the Office of the Attorney General of Florida have told me personally that they interpret the above language as prohibiting the payment of multilevel compensation on just the movement of money, without the sale and delivery of a product or service. They have said they are willing to litigate their position in the Florida courts. If that isn’t enough, the following regulatory actions make the point very emphatically: In the past, the voucher- and down payment-driven programs of AuQuest, Gold Unlimited, and International Metals & Trade were shut down, and corporate officers and distributors were arrested.

So—bottom line—do not design, and do not work, a program where e multilevel commissions flow ONLY FROM the movement of money and BEFORE a product or service is delivered to an end user. When in doubt, consult a direct selling skilled attorney for guidance.

Gerald P. Nehra is a private practice Attorney at Law. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing legal issues. He began his legal career in 1970, and from 1982 to 1991 he was the Director of the Amway Corporation Legal Division. He can be reached at Nehra & Waak, Attorneys at Law, 1710 Beach Street, Muskegon, Michigan 49441, 231-755-3800. His e-mail address is GNehra@mlmatty.com GNehra@mlmatty.com . You are invited to visit his web site at www.mlmatty.com.
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