BBB in Louisiana gets it right about MLM vs. Pyramid Schemes

by louabbott on February 1, 2010

It’s nice to see that this Louisiana chapter of the Better Business Bureau knows at least some of the difference between a legal network marketing company and an illegal pyramid scheme.

Many business writers and even some so-called experts do not.

Carmen Million, BBB President, is warning consumers to be aware of the difference between a “multilevel marketing plan” and an “illegal pyramid plan”. During these harsh economic times, consumers need to be more vigilant in investigating a company or plan before getting involved.

Multilevel marketing plans, also known as “network” or “matrix” marketing, are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you will receive commissions — for both your sales of the plan’s goods or services and those of other people you recruit to join the distributors. Multilevel marketing plans usually promise to pay commissions through two or more levels of recruits, known as the distributor’s “downline.”

If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as “pyramiding.” State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.

Why is pyramiding prohibited? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people — except perhaps those at the very top of the pyramid — lose their money.

The article points out that the Better Business Bureau does not make the determination as to whether a company is a “multi level marketing” or an “illegal pyramid”.  The BBB does, however, offer the following tips:

• Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.

• Beware of plans that ask new distributors to purchase expensive inventory. These plans can collapse quickly — and also may be thinly-disguised pyramids.

• Be cautious of plans that claim you will make money through continued growth of your “downline” — the commissions on sales made by new distributors you recruit — rather than through sales of products you make yourself.

• Beware of plans that claim to sell miracle products or promise enormous earnings. Just because a promoter of a plan makes a claim doesn’t mean it’s true! Ask the promoter of the plan to substantiate claims with hard evidence.

• Beware of shills — “decoy” references paid by a plan’s promoter to describe their fictional success in earning money through the plan.

• Don’t pay or sign any contracts in an “opportunity meeting” or any other high-pressure situation. Insist on taking your time to think over a decision to join. Talk it over with your spouse, a knowledgeable friend, an accountant or lawyer.

• Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you’re considering — especially when the claims about the product or your potential earnings seem too good to be true.

• Remember to use common sense.  If the offer sounds too good to be true, it probably is.

What’s even more difficult than determining whether a particular company’s offer is a legal MLM or an illegal pyramid?  Determining whether the company will last long term and really provide a reasonable chance for ANY of its distributors to realize the ultimate goal–reliable, long-term, leveraged residual income.

Shameless Plug: To determine that, you need my Special Report and course, MLM The Whole Truth. In it, you will learn the 12 Critical Success factors, the criteria that I use to judge MLM companies.

This post, thanks to KPLCTV.com in Lake Charles, LA

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{ 1 comment… read it below or add one }

pete cole November 8, 2011 at 5:38 pm Thumb up 0 Thumb down 0

Interpretation of law as to whether a MLM company is legal.
In a case involving a company called Koscot, the “ultimate user” was critical in determining legality of MLM. The distributor was found to be an end user if they were buying and consuming the product.

Recently, the attorney generals of many states have changed the interpretation to basicly state that a distributor must sell at least 70% of the inventory he buys to people outside the organization, or to the general public to make it a legal MLM company.

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