Beginning over 40 years ago and continuing to the present day, network marketing companies continue to form and operate based upon a belief that certain legal principles apply to network marketing companies. Their belief in what the law is a false belief and thus a “myth”.
As the MLM Myth #3 demonstrates, the regulatory authorities, notably some of the attorneys general in various state consumer protection offices, also have a myth of their own.
**This series of MLM Myths are not my own original, but came from a copy originating from a popular MLM Attorney.
Wednesday, January 21, 2009
MLM Myth #1
Myth: A network marketing company can require distributors to purchase a sales kit provided that it is offered to the distributor at company cost.
Truth: Approximately 10 state anti-pyramid laws permit a required distributor kit purchase at company cost, a few even allow a required sales material as long as the amount does not exceed a specified sum whether or not it’s at company cost. 40+ states do not have a permitted sales kit purchase at any price, nor does such an exception exist under the postal, business opportunity and securities laws (state or federal). There are a number of ways to have the new distributor almost always become a purchaser of a sales kit, but requiring its purchase isn’t one of them.
Truth: Approximately 10 state anti-pyramid laws permit a required distributor kit purchase at company cost, a few even allow a required sales material as long as the amount does not exceed a specified sum whether or not it’s at company cost. 40+ states do not have a permitted sales kit purchase at any price, nor does such an exception exist under the postal, business opportunity and securities laws (state or federal). There are a number of ways to have the new distributor almost always become a purchaser of a sales kit, but requiring its purchase isn’t one of them.
MLM Myth #2
Myth: It’s OK to charge a fee to become a distributor.
Truth: When you offer distributorships for a fee you are always selling an unregistered investment security under state and federal law, violating various state and federal lottery laws, and in most but not all states offering an illegal pyramid sales scheme when the distributorship has a downline commission structure.
Truth: When you offer distributorships for a fee you are always selling an unregistered investment security under state and federal law, violating various state and federal lottery laws, and in most but not all states offering an illegal pyramid sales scheme when the distributorship has a downline commission structure.
MLM Myth #3
Myth: Network marketing programs by their very nature will, if continued over a long enough period of time, exhaust the available population able to participate in the program. This is argued as a deceptive trade practice under state and federal law because it’s inherently unfair to the later joining distributor unless the company in a meaningful way tells each new distributor that their prospect for success are less than that of the people who joined before them.
Truth: As any competent statistician will confirm, in a defined geographical area the number of persons available to become distributors and to become customers in fact remains relatively stable. This is so because the “pool of people comprising distributors and customers, although reduced by active customers and distributors and by deaths of persons over 18, is continually increased by the addition of new persons reaching 18 and, critically, the ability of persons who were previously distributors or customers to renew those relationships with the company.” For the most part the state and federal regulatory authorities are aware of and understand the “truth”, but sometimes this false concept is argued by the authorities.
Truth: As any competent statistician will confirm, in a defined geographical area the number of persons available to become distributors and to become customers in fact remains relatively stable. This is so because the “pool of people comprising distributors and customers, although reduced by active customers and distributors and by deaths of persons over 18, is continually increased by the addition of new persons reaching 18 and, critically, the ability of persons who were previously distributors or customers to renew those relationships with the company.” For the most part the state and federal regulatory authorities are aware of and understand the “truth”, but sometimes this false concept is argued by the authorities.
MLM Myth #4
Myth: Network marketing companies can require new distributors to buy the company’s product to become a distributor and/or to become commissionable as a distributor.
Truth: A required product purchase is no different than a required fee or required sales kit purchase. It’s illegal under most states’ anti-pyramid laws and also results in the offer and sales of an unregistered investment security. There is one exception, however, carved out in the 1978 case of FTC v. Amway. Periodic consumer product purchases at a bona fide wholesale price may be required of distributors on a periodic basis as a commission qualification provided a number of other conditions are met.
Truth: A required product purchase is no different than a required fee or required sales kit purchase. It’s illegal under most states’ anti-pyramid laws and also results in the offer and sales of an unregistered investment security. There is one exception, however, carved out in the 1978 case of FTC v. Amway. Periodic consumer product purchases at a bona fide wholesale price may be required of distributors on a periodic basis as a commission qualification provided a number of other conditions are met.
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