Binary mlm scheme

MLM vs. Pyramid Scheme. Fraudulent pyramid schemes &mdash like Ponzi schemes &mdash are illegal but often try to disguise themselves as MLM (multi-level marketing) programs. Traditional MLM programs are legal because there is a real product that is being sold through the channel. Contents. Definition of MLM and Pyramid schemes. Multi-level Marketing (MLM) is a marketing method designed to promote their product by through distributors, offering multiple levels of compensation. Pyramid schemes are, however, fraudulent schemes, disguising as an MLM method. The difference between a pyramid scheme and a lawful MLM program is that there is no real product that is sold in a pyramid scheme, and commissions are based only on the number of new individuals one introduces into the scheme. The main idea behind the MLM method is to promote maximum number of distributors for the product and exponentially increase the sales force. The promoters get commission on the sale of the product as well as compensation for sales their recruits make Thus, the compensation plan in multi-level marketing is structured such that commission is paid to individuals at multiple levels when a single sale is made and commission depends on the total volume of sales generated. In the case of pyramid schemes , money is charged simply for enrolling other people into the scheme and no real product is actually sold. Only a few people (those who are involved in starting the scheme) make money, and when no new individuals can be recruited, the scheme fails and most of the promoters, except the top ones lose their money. The Federal trade Commission (FTC) has set guidelines that help consumers discern legitimate plans from illegal ones. The difference between MLM and pyramid schemes under these guidelines are as follows: Sales of actual product or services to consumers, MLM offers products whereas Pyramid schemes do not Commissions are paid on sale of products and not on enrolments MLM has a hierarchical commission set up on the sales of products, whereas pyramid schemes are based solely on new enrolments. Company buys back inventory from participants at the time of termination, pyramid schemes do not have any inventory.

Regardless of legal status, it is very important to note that a lot of people have lost money participating in MLM companies. Even for MLM companies that are legal, the bulk of the profits (if any) come not from selling products but from recruiting other members. This was covered well in this segment of HBO's Last Week Tonight : As reported in that segment, chances of success are remote and most distributors receive no commission from the MLM company. As an example, 93% of Nu Skin distributors received no commission in a given month. Before joining a multi-level marketing company, you should try and meet former membersdistributors and learn from their stories. The Internet is full of these stories and there are also support groups where people meet to warn other potential members. Compensation Plans and Models. MLM Compensation Plans. MLM method has different compensation plans which differ slightly based on how the commission is distributed among promoters. The plans include Unilevel, Stairstep Breakaway, Matrix, Binary and Hybrid plans. The Unilevel model is the simplest one. The design is such that a person can recruit unlimited “frontline” distributors for the product. The frontline distributors are encouraged to recruit more distributors, and thus the cycle continues. Commissions are paid up to seven levels deep.

The Stairstep Breakaway model is designed to encourage individuals as well as group sales. In this model, a group leader is assigned with multiple recruits under them. The goal is to achieve as set of volume of sales in a set time. Once that it achieved, the distributors move to a higher commission level. This pattern continues up to a certain limit, after which the distributor breaks away and this pattern of commission ceases. From this point onwards, other commissions and incentives are provided to the representative. Matrix models are similar to the first type, except that a limited number of distributors can be sponsored at any level, and once that preset number is reached, another matrix can be started. Binary models allow only two distributors to be sponsor in the frontline, and if there are more sponsors, they spill over to the next level. So at any level, only two distributors are required to complete the compensation plan. Also, the compensation has to be balanced between the two distributors at any level, such that the volume of sales does not exceed a certain percentage of the distributor’s total sales. Hybrid models, as the name suggests, combine any of the above mentioned compensation plans. Pyramid scheme compensation models. The models include in the Pyramid Scheme include 8-ball model and Matrix scheme.

In The 8-ball model each person has to recruit two people into the scheme. These people have to pay a sum to enter the scheme called a “gift sum”. The captain or the person at the top receives the gift money from 8 people before exiting the scheme. The remaining people move up the scheme, and this pattern continues as more people are recruited into the scheme. Matrix scheme is also a pyramid scheme except that people are required to pay for a product in advance and wait in a queue in order to enter the scheme. When the recruited person further recruits a certain number of people, he or she receives a product like a camcorder or television that is worth much less than the money paid, and exits the scheme. This scheme collapses when no more people are willing to pay and join. One of the recent examples of a pyramid scheme is Malaysian SwissCash. Examples of MLM companies include Amway, Mary Kay, Max International, Herbalife, Kyani, Le-vel, Nu Skin and Jusuru. Binary Compensation Plans. Binary compensation plans have become the darling of startup multilevel marketing. companies. From the distributors’ standpoint, binaries have a lot of sizzle. They are.

relatively simple to understand and offer fast-paced growth opportunities. Companies find. them attractive for the same reasons. In addition, several companies utilizing binary plans. have recently entered the market and generated eye-popping sales and profits. This, of. course, has led to an influx of programs modeled after the highly successful plans. Unfortunately, not all that glitters is gold. In the last 24 months, the multilevel. marketing industry has seen a dramatic increase in regulatory actions. These actions. have come in the form of joint efforts between the states and the Federal Trade. Commission (notably Project TeleSweep in 1995 and Project Missed Fortune in 1996), as. well as numerous individual and joint state actions. Companies utilizing binary.

compensation plans have been hit particularly hard in these actions. As a result, those. companies that have been hit have had stringent limitations placed on their programs. These limitations oftentimes strike at the heart of their method of doing business and. require significant changes to their marketing approach. (2) So what is the problem with binary plans? Why have states attacked them with so. much more vigor than companies utilizing other compensation plans? I have many people. ask me if binaries are “legal.” The short answer is the proverbial and oh-so-lawyerly “Yes – but” response. Yes, they can be designed to operate legally, but in addition to proper.

design, companies must properly implement their programs so that they accurately follow. the design. Several relatively new MLMs that entered the industry using binary plans. simply failed to adhere to the legal principals governing the MLM industry in implementing. their plans. Unfortunately, these companies were quite visible, and consequently there. have been highly publicized actions brought against them. Naturally flowing from these. actions is a great deal of bad press that has tarnished the image of binary plans, including. those that are operating legitimately. Fortunately, solutions are available, but they require companies to carefully analyze. their programs and make some painstaking changes. This article will discuss several key. areas of law applicable to the multilevel marketing industry and apply these legal principles.

to the operation of binary compensation plans. In conducting the analysis, it will focus on. a common binary format utilized by companies selling prepaid long distance telephone. cards. Although not all binary plans follow this format, it is a blueprint that has been. frequently copied by new companies entering the marketplace. Moreover, since. companies selling prepaid telephone cards utilizing this format have been among the. hardest hit by regulatory agencies, these plans provide an ideal case study for legal. analysis. Bear in mind however, that the principles apply to all binary programs regardless. of the product or service that is being offered. The plans used by the prepaid telephone. card companies are simply an illustration of problems that can arise in any program. What is a Binary Compensation Plan?

A binary plan is a multilevel marketing compensation plan which allows distributors. to have only two front-line distributors. If a distributor sponsors more than two distributors, the excess are placed at levels below the sponsoring distributor’s front-line. This. “spillover” is one of the most attractive features to new distributors since they need only. sponsor two distributors to participate in the compensation plan. The primary limitation is. that distributors must “balance” their two downline legs to receive commissions. Balancing. legs typically requires that the number of sales from one downline leg constitute no more. than a specified percentage of the distributor’s total sales.

A unique attribute of binary plans is that distributors are allowed to operate multiple. positions, or “business centers,” under the umbrella of a single distributorship. A business. center is simply a position within one’s own marketing organization. When a distributor. enrolls, he is automatically assigned his first business center. The distributor may then. purchase additional business centers and place the centers at strategic locations within. his downline organization. The typical cost for each business center is $100.00, which.

gets the distributor the position and an inventory of phone cards to service the center. Each business center must independently meet their two person enrollment requirements. Historically, Distributors have been allowed to purchase up to seven business centers, but. the current trend is to allow only three centers. A common component to binary plans is a three phase sales and compensation. cycle. In the first phase, a distributor joins by paying $100.00 for an initial inventory of. phone cards and a business center. Because the distributor receives an initial inventory. of phone cards for this payment, it constitutes a “sale” which is commissionable to his. upline.

The distributor then enrolls two new business centers for $100.00 each. One. business center is placed on his right downline leg and the other on the left leg. After 12. business centers have been enrolled (i. e., 12 “sales”), the distributor is entitled to a. $100.00 commission (assuming the proper balance is achieved between legs). After a. total of 50 sales, the distributor is entitled to a $500.00 commission. Fifty sales completes. the first phase of the compensation plan. Upon completing the first phase, a distributor can re-enter phase one by paying. another $100.00 and receiving additional inventory. This re-entry again qualifies as a. commissionable sale to the distributor’s upline. Rather than stay in phase one, the.

distributor may elect to enter phase two by paying $300.00, which may be automatically. deducted from the distributor’s phase one $500.00 commission. This $300.00 sale gets. the distributor additional inventory and promotes him to phase two. Under phase two, the. distributor receives a $500.00 commission after 12 sales, and a $2,000.00 commission. after 50 sales. This completes phase two. Phase three requires the distributor to pay $1,000.00 for additional inventory. This. is again deducted from his $2,000.00 phase two commission.

In phase three, the. distributor receives a $2,000.00 commission after 12 sales and a $7,000.00 commission. after 50 sales. After completing phase three, the distributor again re-enters phase three, with the required $1,000.00 inventory purchase being deducted from his previous. commission. In addition to phase three income, the programs usually allow distributors to. participate in phases one and two concurrently with phase three. Multilevel pre-paid telephone card companies have adopted the binary plan as the. program of choice. Until recently, most programs were strikingly similar to one another, right down to the prices charged for the products. Upon each entry into phase one of a. program, distributors received an inventory of phone cards with a total of 60 minutes of. long distance time for their initial $100.00 payment. Upon cycling into phase two, companies charged $300.00 for phone cards totaling 300 minutes of time.

The $1,000.00. charge as a distributor entered phase three netted 960 minutes of phone card time. Recently, companies have begun lowering their prices as they have recognized the. necessity of becoming more price competitive. The Legal Framework Governing Binary Compensation Plans. Amid the confusion and concern over the legality of binary plans, many people have. lost sight of the fact that binary plans operate under the same laws that govern other. multilevel compensation plans. There is no law stating that operation of a binary. compensation plan constitutes a consumer fraud, or a company using a binary plan is a. pyramid. Thus, so long as the implementation of a binary plan complies with the laws.

governing the operation of multilevel business, it will be legal. However, because of their. structure, binary plans have unique challenges to implementing their programs within that. Four principal areas of law governing the multilevel marketing industry are: 1) anti-pyramid laws 2) business opportunity laws 3) securities laws and 4) lottery laws. A. comprehensive discussion of each of these areas of law is properly the subject matter of. its own article. However, a brief overview will assist us in examining which aspects of a. binary plan present the greatest risk of running into legal problems. Pyramids are illegal in every state as well as under federal law. It would be. convenient if these laws were uniform and cohesive unfortunately, the industry is not so. lucky. The application and enforcement of the laws varies from state to state, so the best. we can do in the limited space of this article is generalize about what actions will cause. a company to violate pyramid laws. The fundamental question that must be asked in every pyramid analysis is “What. must a distributor do to earn a commission?

” If a company pays its distributors based on. the recruitment of other distributors (headhunting) rather than for legitimate sales to end. consumers, it is a pyramid. This rule appears straightforward, but its application can be. difficult because most pyramid operators are not so foolish as to blatantly pay a. commission based on recruitment of other participants. Rather, they typically disguise the. program as a legitimate multilevel marketing business by offering a product or service that. the distributors can sell. The question then becomes, “How do you determine if a company is simply offering. a product or service that is merely a facade for a pyramid?” In a nutshell, a legitimate. program will incorporate and enforce policies which effectively deter and prevent inventory. loading. But on this point, industry and law enforcement officials diverge on what. constitutes “inventory loading,” and what measures are appropriate to deter it. Ever since. the Federal Trade Commission’s decision in The Matter of Amway Corporation, Inc.

, (3) industry has taken the position that so long as a company is willing to repurchase. unwanted inventory at a rate of at least 90% of the net cost to the distributor for those. individuals who elect to cancel their participation in a program, the company is not. engaged in inventory loading. Law enforcement officials have, however, seized upon. dicta (4) contained in the recent Ninth Circuit Court of Appeals decision in Webster v. Omnitrition International, Inc. (5) which states that “Inventory loading” occurs when. distributors make the minimum required purchases to receive recruitment-based bonuses. without reselling the products to consumers. (6) The focus of regulators is therefore on retail sales of product. If the products or. services are being purchased and used primarily by individuals who are participating in. the compensation plan, or who are purchasing in order to qualify for compensation, they. contend that the sale is not a true retail sale. Following this line of reasoning, they have. attacked programs (not just binary plans) as pyramids.

If, on the other hand, distributors. are retailing the goods or services to persons who are not involved in, or trying to become. involved in, the compensation plan, regulators consider a legitimate retail sale exists. Industry takes strong exception to this approach because it dramatically restricts. companies’ ability to pay commissions on products and services that are consumed by its. distributors. Although this debate between industry and law enforcement is not settled, we. are clearly seeing a trend in states with aggressive attorney generals directed at ensuring. companies require their distributors to incorporate retail sales quotas in their programs. (7) The degree to which true retail sales are occurring within a company’s program is. difficult to monitor. Since actual distributor surveys presenting data on retail sales levels. are generally not available at the investigatory stage, there are several factors which. regulatory officials consider evidence that a program is not offering a true retail sales. opportunity. Principal among these are: 1) excessive inventory requirements 2) overpriced products 3) a primary emphasis on recruiting rather than product sales.

A court or regulatory body will look skeptically on programs that generate sales. through excessive inventory requirements. These purchases, whether a front-end load or. a monthly maintenance requirement, will be viewed simply as a participation fee from. which commissions are paid. Of course, it is common for multilevel companies to require. monthly production quotas of their sales force, so the mere fact that a maintenance. requirement exists does not prove that no true retail opportunity exists. The amount. distributors must spend must also be taken into consideration. Programs with high. mandatory purchase requirements will be scrutinized much more closely than programs. with modest requirements.

Although there is no magic number as to what constitutes a. monthly maintenance quota that is too high, a strong dose of common sense is in order. Clearly, the danger of inventory loading is dramatically decreased if production quotas are. $75.00 per month rather than $1,000.00 per month. Binary plans are closely watched by law enforcement officials because they require. significant investment in inventory as distributors progress through the phases of the. program. For example, if a distributor is participating concurrently in phases I, II, and III. of a program, the cost of his inventory may easily be $1,400.00 each time he cycles. through the three phases. It is unlikely that a distributor will be able to use or resell.

$1,400.00 worth of product before repeating each cycle and is again forced to purchase. yet another $1,400.00 in merchandise. This danger is magnified even further if the. distributor operates multiple business centers. If a person has seven business centers in. phase three of a cycle, he will have $7,000.00 worth of inventory for that phase alone (if. he has cycled through and re-entered phases one and two, he will have more inventory. than that). Clearly, the danger that a distributor will be loaded with unsaleable. merchandise is significant under this scenario. Because retail sales are so important in the eyes of regulators, multilevel. companies must ensure their products are priced competitively. Distributors simply will not. be able to retail goods and services that are too expensive. Regulators recognize this, and therefore those programs whose products and services are excessively priced will be. subject to greater regulatory scrutiny. Indeed, if a product is priced so high that no. reasonable person would purchase it, it is evident that the only reason distributors are.

buying the product is to participate in the company’s compensation plan. In this case, regulators and courts will consider the product simply a disguised recruiting fee. Many companies operating binary plans have found themselves under the. regulatory microscope partially as a result of excessively priced products. In the pre-paid. phone card example, the price per minute for phone time runs from 96 per minute to. $1.60 per minute. This is dramatically higher than the price of phone cards offered. through retail channels, which typically range from 20 to 50 per minute. Based on the. difference in price between the retail cards and those offered through binary plans, there. is no reason for a consumer to purchase a phone card through a binary plan other than. to participate in the compensation plan.

Thus, the likelihood of these goods being retailed. by distributors is slim to none. Because excessive prices precluded any meaningful retail sales opportunities, distributors often simply gave away excess cards as a means of garnering the interest of. prospects. Whether or not this was done at the urging of company officials will be. disputed. Regardless of the source, however, the practice cast a negative shadow on. those programs that engaged in it. Regulators take the view that if a product must be. given away, it has little or no legitimate economic value. Absent any inherent economic. value attached to the product, the price paid by distributors is simply a masked head-hunting fee, and the program will collapse without a constant supply of new recruits. If a program primarily focuses on recruiting new distributors rather than sales of. products or services, law enforcement officials will attack it as a head-hunting operation. Legitimate programs are driven by the sales of products and services, not by recruitment. of new people. This is not to say that companies should not train distributors in. recruitment techniques, for clearly, recruitment is an essential component to building a. multilevel business.

However, companies must strike a balance between emphasizing. recruitment and product sales. On this point, there is no magic formula to determine. whether excessive emphasis is placed on recruitment, as this is a very subjective. determination. Companies should be advised, however, that attorney generals will attend. their meetings incognito, and will literally put a stopwatch to the duration of the product. discussion and the compensation plan discussion. This is oftentimes an unfair practice, as a compensation plan may be much more difficult to explain than is a product or service, but it is nonetheless a common practice. The design of binary plans arguably focus on enrollments rather than sales in two.

key ways. The first is classifying the enrollment of a business center as a “sale.” Calling. an enrollment a “sale” is asking for trouble because there is a direct one-to-one correlation. between enrollments and distributors’ commissions. This problem is easily resolved by. requiring distributors to balance the sales volume in each of their legs rather than to. balance the number of enrollments in each leg. If for example a program required. distributors to have at least one-third of their total sales volume in each leg to qualify for. commissions, the direct relationship between enrollments and commissions is diluted. The second design aspect of binary plans which results in an emphasis on. recruiting over sales arises from the practice of selling multiple business centers. This. format lends itself to the argument that the companies are more interested in head-hunting, or “selling positions” rather than moving products to end consumers. For example, if a. company allows each distributor to enroll seven business centers, the value to the.

company of each distributor who takes the seven center plunge is $700.00 rather than. $100.00. It is true that there is never a “requirement” that a distributor operate more than. one business center. However, if in actual practice distributors are “strongly urged” to. open multiple business centers, law enforcement will consider the emphasis to be on. acquiring bodies for the program rather than product sales to end consumers. Moreover, the $700.00 initial fee, although “optional” will be attacked as a front-end load or initiation. The Federal Trade Commission and many of the states regulate the offering of. business opportunities. Although the F. T.C. and state definitions of a business opportunity. differ, they share a common goal of ensuring that persons who invest significant sums of. money in a business opportunity have the benefit of full disclosure of information. surrounding the opportunity so the investor can evaluate potential risks. Therefore, if. classified as a business opportunity, the promoter must make detailed disclosures about. the program, its finances, the history of the business, the personal history of the.

promoters, the identities of other distributors, and other detailed information. In some. states this information must simply be filed with the state, whereas other states require the. promoter to provide each prospective distributor with a copy of the disclosure statement. ten days before the distributor can be enrolled in the program. In addition, some states. require the promoter to secure a surety bond before doing business in the state. These. onerous requirements will suffocate any multilevel marketing opportunity. The drafters of business opportunity statutes recognize that not every investment. of money constitutes a significant sum which requires regulatory intervention. The. business opportunity laws therefore exempt programs which require an “initial investment” below a specified dollar figure from the definition of a business opportunity.

These. thresholds limits differ between states, and range from $200.00 to $500.00. The “initial. investment” is most often defined as all payments that are required within the first six. months of entering a program, or the total of all payments that are required pursuant to the. terms of a contract. Required payments for sales aids and training materials are usually. not applied to the initial investment if they are sold to distributors at the company’s cost. Prudent multilevel companies seek to avoid being classified as business. opportunities by keeping required purchases below the initial investment threshold limits. Close analysis of many MLM programs reveals that although distributors must meet. monthly quotas, these quotas can usually be satisfied by purchases made by their direct. retail customers. In this way, companies can claim that these purchases are optional, and.

therefore are not properly allocated to the initial investment column because the purchases. This position, while within the letter of the law, will not necessarily stop an attorney. general from attacking a plan. They will take the position that although technically. “optional,” in reality the program works because the overwhelming majority of distributors. personally purchase their own monthly quotas rather than meet them through the. purchases of their personal direct customers. They will then tally distributors’ monthly. purchases to determine if the applicable initial investment threshold has been satisfied. Under this approach, a modest monthly quota can result in the institution of an. investigation or enforcement action. While this position does not follow the letter of the.

law, it is nevertheless largely within the regulators’ prerogative to institute an investigation. or action. To date, states have had success in negotiating settlements based on this. argument. Unfortunately, very few companies have been inclined to go so far as to allow. a court to decide whether the attorney generals’ position is proper. (8) Programs that encourage distributors to purchase multiple business centers are. always suspect as business opportunities in the eyes of regulators. If the emphasis is on. purchasing seven centers at $100.00 each, the initial investment will be $700.00, which. is over the $500.00 F. T.C. threshold as well as that found in most states. Even if a. company only allows three business centers, a $300.00 investment will surpass the. threshold in several states.

Regardless that these purchases are optional, if the company. or its field force place an emphasis on the purchase of multiple centers, regulators will. argue that these purchases are in reality required initial investments. Moreover, mandatory inventory purchases will also be added to the total. Thus, as a distributor. cycles into subsequent phases of a plan and is automatically charged for inventory, it is. impossible to stay below the $500.00 threshold under the attorney generals’ interpretation. Multilevel marketing programs are often attacked as offering a type of security. known as an “investment contract.” These securities are subject to the registration and. disclosure requirements of the Securities Act of 1933 and the Securities and Exchange Act. of 1934, as well as a number of similar state securities laws. Selling an unregistered. investment contract security is a serious issue for multilevel companies, for there are.

significant criminal and civil penalties that can be imposed. Neither the Securities Act of 1933 nor the Securities and Exchange Act of 1934. define an investment contract. Rather, the definition has been supplied by a series of. United States Supreme Court and Circuit Court of Appeals decisions. These decisions. have established a three part test to determine if an investment contract exists. These. elements include: 1) an investment of money 2) in a common enterprise and 3) the. investor is lead to anticipate profits primarily from the efforts of the promoter or some third. party. Of these three elements, courts and regulators focus most keenly on the third. element. While this is not a technically correct application of the law, you are probably.

getting the idea by now that in the real world, the law is not always applied in a technically. correct fashion, particularly at the administrative investigation stage. While all multilevel companies must be careful to avoid promoting their programs. as securities, binary plans must be especially cautious due to the inherently rapid spillover. rate which results from each distributor having only two front-line positions. Unfortunately, since the spillover is one of the most attractive features to binary plans from a marketing. standpoint, companies have been anything but bashful about trumpeting the downline. building power of the system. A very common field pitch is “All you have to do is get your. This is precisely the pitch which courts and securities regulators have a problem.

with. The message is that all a distributor need do is enroll two people. The rest is done. by the system, either through the efforts of the distributor’s upline or the two whom the. distributor enrolls. In any event, the managerial efforts which a distributor must put forth. to be successful are minimal, and therefore the income stream is largely a passive. investment because it is generated primarily from the efforts of others. To avoid this pitfall, distributors must engage in true managerial activities to build. their businesses and promote sales. Most companies have a policy that requires. distributors to continue to train, supervise, and motivate their downline, as well as ongoing. sales requirements. These policies should be taken seriously as they impose ongoing.

managerial requirements on distributors so that their income is not primarily dependent on. the efforts of others. Under no circumstances, however, should a program be promoted. as “get your two and your done.” The next obvious question is “how much downline management is required to. satisfy the law?” Unfortunately, there is no bright-line test to determine how much is. enough. However, we do know that promoting a program through reliance on spillover, without personal involvement by upline distributors, will dramatically increase a company’s. securities exposure. Ultimately, the question of “how much is enough?” will be answered. on a case-by-case basis as companies negotiate with law enforcement officials following.

the institution of regulatory action. Lottery issues always follow on the heels of securities issues. A lottery exists when: 1) an individual pays consideration (i. e., money) 2) to receive a prize and 3) the prize is. awarded based on the element of chance rather than on the skill or effort of the participant. In a multilevel marketing analysis, regulators will argue an enrollment fee or mandatory. product purchase satisfies the first element of the test, and that the “prize” is the. commissions from downline purchases. They will further argue the element of chance. (luck) exists if a distributor’s downline can be built with little or no effort on her part. Because binary plans place a heavy emphasis on the spillover effect of their. programs, and because they have been promoted by companies and distributors as. “simply get your two and you’re done,” the element of chance can play a significant role. in the success of distributors. If a distributor need only get two enrollees, law enforcement.

officials will argue they must be relying heavily on luck that a productive downline will be. developed below them because the distributors are putting forth only minimal effort to. personally contribute to its success. Companies must remove the element of chance from their programs to avoid falling. prey to lottery laws. As with the securities analysis, this is done by requiring participants. to engage in bona fide management responsibilities and ongoing sales and marketing. efforts. Again, how much is enough will be determined on a case-by-case basis as. individual programs are analyzed. In addition, the mandatory purchase of product to activate a business center and. to re-enter a phase provides ample support for the position that the consideration element. of the lottery test is satisfied. By removing all mandatory purchase requirements from a. program, companies will be able to argue that the consideration element is not satisfied.

Binary plans definitely have their place among multilevel compensation plans. If. operated properly, they are a classic example of a “people helping people” multilevel. program. There is no question that they can be designed and operated legally. However, companies using the plans have had more than their fair share of law enforcement actions. brought against them. But the battles that have been fought are teaching the industry a. lesson, and industry is listening. We are seeing companies that have been attacked by. regulators changing their plans to diminish the potential for inventory loading and to. increase the ability of distributors to engage in bona fide retail sales of merchandise. Similarly, new companies that adopt binary plans are not all following the standard format. of the prepaid phone card companies that have run into so much resistance from. regulators. The current trend is to allow only three business centers rather than seven, to balance legs based on sales volume rather than enrollments of new business centers, and to require distributors to engage in retail sales activities before allowing them to collect. commissions or cycle into subsequent commission phases. Is it too little too late?

Certainly binary plans have been tainted in the eyes of many. regulators, and they are now viewed skeptically. While regulators’ skepticism does not. make a plan illegal, it does raise the probability that companies using binary plans will be. investigated. The negative press that follows a regulatory investigation is sufficient to. cause serious problems for a company. To address this problem, it is up to the companies. using binary plans to teach regulators how they differ from plans that have been attacked. in the past. Those companies that cling to the old ways of the binary plan may prosper in. the short term. However, given the recent barrage of regulatory action we have seen. against companies using this format, it is a safe bet that those who do not voluntarily. change will have changes forced upon them through regulatory action. 1. Spencer Reese is a partner in the law firm of Reese, Poyfair, Richards PLLC. He is a graduate of the Washington University School of law and is a member of the Idaho, Missouri and Colorado bars.

He was formerly in-house counsel for Melaleuca, Inc., a multilevel marketing company with sales in excess of $260. million. Mr. Reese’s current practice includes representing and advising multilevel marketing. companies on all aspects of their business, including consumer protection issues, advertising law, litigation, contracts, marketing plan design, regulatory compliance, trademark law, FDA law, policy development and distributor compliance. Visit the firm’s website at. 2. Some well recognized companies appear on the list of those attacked by regulatory agencies. On. February 4, 1997 the Arizona Attorney General entered into a settlement agreement with Tele-Sales, Inc. wherein the company was required to pay a $25,000 settlement fee. More importantly, however, the. Arizona A. G. also sent letters to the company’s top distributors in the state, accusing them of violating.

the state’s pyramid law. The letters demanded that the distributors enter into a settlement agreement. and that each individual distributor pay a $25,000.00 fine, otherwise, the A. G. would sue them. individually. On February 28, 1997, the Alameda County Prosecutor and the California Attorney General. entered the offices of Destiny Telecom and seized business records to be used in actions against the. company. The same day, they filed a $20,000,000.00 civil suit against the company, alleging it was. promoting an illegal pyramid. Two weeks after the suit was filed, Destiny settled the case for $1.6. million. In 1996, Strategic Telecom Systems, Inc. was investigated by the states of Pennsylvania and. Florida, which resulted in fines against the company, and the imposition of sales requirements which. required the company to dramatically change the way it conducted and promoted its business.

4. “Dicta” is a legal term that refers to the opinion of the judge who authors a judicial decision, but which. does not constitute a statement of law. 5. 79 F.3d 776 (1996) 6. 79 F.3d at 783, note 3. 7. Despite the position of some regulators that commissions are not properly paid based on products. or services consumed by distributors, there is a movement among industry to pass legislation reversing. this position. Texas and Oklahoma have passed such legislation, and Direct Selling Association is. working on introducing similar legislation in other states. 21 Okl. St. 1072 Tex. Bus. & Com. Code. 8. One company, Travel Max, recently did take this issue to court in Kentucky. The state requested that.

the court impose a temporary restraining order on Travel Max operations based on the arguments that. Travel Max was operating a pyramid and an unregistered business opportunity. The judge denied the. state’s motion for a TRO on the business opportunity claim because distributors’ purchases, other than. an initial $25.00 sales kit, were optional. What Our Clients Say. Reese, Poyfair, Richards PLLC. Spencer M. Reese, Steven A. Richards, D. J. Poyfair. 1275 East Fort Union Boulevard, Suite 115, Cottonwood Heights, UT 84047. Tel. (801) 981-8281.

Before using the information found on this site, please see our disclaimer. 19 Popular MLM Scams In Malaysia That You Should Beware Of. We apologize in advance for any misrepresentation in regards to the information listed here. Information for this piece is sourced from drazwan. blogspot. my and belongs to the third party’s opinion. We’d like to note that this content is not comprehensive. If there’s any info we’ve missed or should attend to, please let us know at email protected! There is nothing more annoying than listening to someone pitch their MLM to you, often times a product they don’t even really use or they are forced to use it because of the continuity aspect of the program. Every MLM members are hustlers as you are constantly told to “recruit your friends and family”, “talk about it every day”, “use social media to mention something every day”, “encourage your downline” or “boast about how great the product is”. Why? Because once you PAY for something, it’s a natural instinct to defend or make the most out of your purchase.

We all know its a stupid feeling to realize that you have been ripped off which is why every MLM members are hard-headed and persistent. Most of you would have probably been talked into joining one of them at a point of your life, so here’s a list of the most popular MLM scams in Malaysia that you should know. As a general rule of thumb, “If something seems too good to be true, it probably is”. Island Red Cafe collects members RM6,000 each and promised a 5% return every month. They’ll also give you a name in the ROC as a shareholder but what’s the point when they run away? Stevens Corner, the famous mamak also opens up investing opportunities due to a drop in their business. They would collect RM3,000 per member and promise returns of RM150 monthly with plans to open up a new franchise cafe called Stevens Tea Garden. It is heard that they will make you sign an agreement that will allow them the rights to NOT pay you anything in future. If you really wish to join, ask for a copy of their agreement and consult your lawyer BEFORE paying them. This licensed and legal company has an impressive office at the ground level of KUB building along Jalan Yap Kwan Seng, near Menara Public Bank and AmBank building. They also have a showroom office on the ground level in the next building.

Previously, Singapore’s Straits Times and The Paper published big news reminding their people to be careful and NOT to believe in them. As expected, they’ve STOPPED paying back their members and all investments are burnt. The news published that the founder, director and group president is someone named James Phang. However, it is strange that he said he wasn’t the owner. At the end of the day, James Phang just disappeared from the company and claimed that he was just “employed”. According to Straits Times, the investment plan which was offered was nothing more than a Ponzi scheme. James was eventually sentenced to 9 years in jail and $60,000 fine for breach of trust. Not too bad for duping investors of over millions of SGD. This company is owned by 2 young men, Stanley & Rey Gan and they occupy an office in Queens Avenue Park. They have collected multi-millions over the past few years. They claimed that they have partnerships with Telekoms, Utility Board payment like Water & Electricity bills, and even Maybank was fooled by them. Advertisement billboards was once very common throughout the country. However, they eventually STOP paying their members and the victims are unable to do anything as they silently CHANGE their terms and policies, in which they have initially signed upon during registration.

Oxygenated and alkaline water products – Some of these are bottled water and some are filters or equipment that claimed the trick. One of the better known Company that sold “oxygen” water is SITO (supposed to stand for Selangor International Trading Organiszation and claimed that the Selangor State Government owned some share in it). The key person and founder is Dato Robert Ong from Rawang but his name is no longer in the business now. Their products are sold for RM2 to RM3 for a 350ml bottle and now concentrates mostly in the Indian market. Their Chinese and Malay targets were never successful. Their customers are made to believe that their water has more oxygen and is able to give miraculous benefits to the body. “Water is H2O, how do we put more O into it ? Also do you know how much oxygen we breathe into our body everyday free of charge? Latest news is that this SITO Company is going to create new label to market under a new Company since the SITO name has already been tarnished. Someone informed that this Company is owing a lot of money(due to refunds) to ex-stockists but just refuse to pay them.” SITO has then shifted industry and their MLM business has closed but planning to start again with a different name, so beware guys! The famous scam MLM Company that sold strange items from the footpatch TAKARA, “cock-ring” and petrol-saving pills. It got so popular that even some grocery shops are selling them.

Many of the cars who had used the pills are often sent to the workshops to clean the residual that causes malfunction. Few months ago, another MLM Company launched a fuel booster gadget, claimed that it saves up to 20% fuel and is conveniently attached to the cigarette lighter. Started off well as a binary plan but business begin to die once users find the products NOT effective. Lampe Berger used to be the trend among high-school and college students with hundreds of victims enrolling every month in Malaysia. Some membersteams even have beautiful girls as “recruiters” to lure those “dry” young boys . This perfumery product from France with over 100 years of history are just bottles and fragrances. However, the company’s marketing plan in Asia is to claim them as “aromatherapy” products. Hong Kong TVB also aired a program that exposed their scam but their members claimed that HK’s TVB already apologised to them for the misinformation (without evidence, of course). Bel-Air have been closed in Malaysia. Note that the biggest strength in a MLM Scam is their members will go all the way to lie in order to defend for their Company. The reason is simple these members fear that they will not be able to make their money back if the Company collapsed.

Knowing that the Lampe Berger products are moving slow, they add a line of skincare products named Estebel which was proclaimed to also have over 100 years history in France. Their targets are mainly the Malays in Malaysia and their most active members are mostly Bumis. 7. Energy Products – stone pendants, bracelets, mattress and pillows. They would use all sorts of gimmicks and demonstration to make you into believing them. They will do tricks and demos to prove that these products really produce positive energy BUT are there any tricks in their demo or could it be just science? Also, if there really produce energy is it good or strong enough to help the body? Are those simple products really worth RM300 to RM3000 each? Most of the time, it is actually just PLACEBO effect taking place (capitalizing on the power of believing). These are bio-tech and nano-tech products which claimed to have millions of dollars of research involved in them. They will associate their products with a professor behind them and use words like “U. S.A. formula”, “German Technology” or “Nanotechnology” but without further details. If you ask were to ask for more details such as the professor profile or the research factory’s address, they will either beat around the bush or simply state it as “trade secrets” (so they are unable to reveal the details).

9. Investment Schemes – Swisscash. Swisscash is over now but there are many similar and smaller businesses that are still operating. Many members are left unpaid when the company shut down. 10. EnergyCommodities Products. Energy and commodities MLM businesses have on the rise in the recent years due to the growing knowledge of Forex trading. Typically the modus operandi is to get individuals to invest in real gold or silver, or on an energy harvesting zone which can never be physically accessible, promising a fixed returns after every period. Members are then able to expand their profits by recruiting more ‘downline’ to invest similarly. Certain company claims to have a prestigious background with many years of positive history which is NOT true. Their people or associates may be long in business but MLM program is handled by separate departments. New members are told to pay a sum of money (up to RM1000) and you get NOTHING for it. All that you get is only get a membership pass that allows you to enjoy all sorts of promotions and discounts when you have medical check-ups in their health centres. They would claim that those check-ups would cost much more if done elsewhere. However that isn’t true and only those who aren’t aware of the market rate for medical check-ups will fall victim to them. Most members who paid the money ended paying even more for the check-ups at the end of the day. Their company is located in Taman Maluri, Cheras.

They will ask you to invest a few thousand ringgit to grow seaweed in their farms in East Malaysia and you’ll be guaranteed returns after harvest. To gain your confidence further, they will claim that your investment is secured by “insurance” or “unit trusts” & “trustees”. However, when you ask for further documents to prove, they will give all sorts of excuses or just ignore you because they know that there was never one in the first place. The Seaweed scam is pretty prevalent in Malaysia, so warn all your friends about it before they are victimised. This company is founded by a few people from Hong Kong and has been in Malaysia for over 10 years. However, their business have both flopped in Hong Kong and Malaysia due to a product scam and poor management. They’ve used a prosecuted American named Dr Jeffrey Bland which was found guilty for falsely promoting their products claim. Ever since this case was known in the US, many Malaysians got to find out that the real boss in Hong Kong is Steven Tang (an infamous conman that cheated Malaysians in another scheme over 20 years ago). Since then, their business crashed down all the way. They claimed that their Malaysian partners cheated them and started another new MLM company in Malaysia. 14. Arowana Fish Breeding and Oora from Germany. These scams are quite recent.

Arowana Fish will ask people to invest money in breeding fishes and they’ll give you fixed return continuously and Oora from Germany which markets bio-chips and gadgets that claims to give you energy and therapeutic effects of acupuncture, tai-chi and yoga depending how you wear the gadget on your body. There was only so much as to doctors claim and paperworks, but they could never really provide any case studies to prove their actual effectiveness. This is easily one of the largest MLM scams in Malaysia which is owned by Dato Yeap. Members are tricked to invest up to RM40,000 with a false promise that the company will use an e-commerce or online selling platform to transact their goods and eventually make profits beyond means. It never happened, of course. 16. GRI (Global Royal International) The owner behind this scheme is non other than multi-billionaire James Pang, the guy ‘behind’ the Sunshine Empire scam. Before Sunshine Empire, he also operated NOP and SwissCash. He operated this business remotely using a lot of representatives and MLM leaders since his passport is held by the Singapore government and cannot come to Malaysia. Those who are bold enough to call themselves a MLM leader in Malaysia can visit his rep in Malaysia or Singapore to market the company. 17. English-Learning Program Online. This scheme is targeted mostly to high school and university students where members are asked to pay RM100 for one or 2 years usage of online learning. Some programs like these changed names at least 2 or 3 times since they started due to poor responses and “technical problems” on their website. Their membership includes nothing tangible but instead, you’ll receive all materials online. 18. Genius Theme’s vacation and rewards package.

Such holiday packages are being sold for RM499 to RM599 and you are promised a few nights stay in Thailand or Bali. Started by a company named Max Generation, Genius Theme sells their products to other MLM companies and also famous companies like Sen Heng. Previously Sen Heng gives the package away for free if you purchase products over RM2,000. Of course, there are other hidden costs to be paid and it’s never really free unless you pay MORE upfront. Forex MLM is the new trend among youngsters as they target those who are eager to make fast money with little to no effort. Most common targets are Chinese high school, college or uni students. The promise is that they can make huge amounts of money in USD within a few trading sessions. While that is true with or without the MLM scheme in place, trading Forex in general possesses a significant risk to your invested capital. It is common for such MLM business to organize free forex classes, promoting easy money by trading to lure prospects. Editor’s note: This content is not comprehensive and if there’s any info we’ve missed or should attend to, please let us know at email protected! The Guide Every Malaysian NEEDS for Shopping This Christmas.

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