Legality of MLM

[keycall]

Does anyone know of a source for checking out the Legality of MLM ? I just want to do a little reading before I jump on board. I am looking for Law - what you can do, can't do and specifically what makes one program legal and another illegal.
thanx

[Edgar Moreno]

Usually you can find out what makes any particular MLM legal by asking questions of current members or digging around the primary site.

In order for the MLM business to be legit it must have a product that is being sold. The MLM I am currently in sells product on a monthly basis to justify the monthly charges associated with being an executive of the company and qualifying for commissions.

[Gene Pimentel]

This is not legal advice, but my own understanding after decades in the business:

If you are required to purchase the product in order to be eligible to receive commissions, it is illegal. You must be able to enroll as a sales agent (or whatever terminology used) without purchasing something that generates commission for your upline. You must be able to sell the product to end-consumers regardless of any purchases you make.

There are many more legalities of course, but that is the major stumbling block for most programs who claim to be legitimate MLM's.

This site should help: http://www.mlmlegal.com

[Alexa Smith]

The MLM Attorney site is also often useful in this context.

[Alexa Smith]

Originally Posted by Edgar Moreno

In order for the MLM business to be legit it must have a product that is being sold.

Not only that, but there have to be retail sales made other than to people joining the business. It's not legal to sell for $200 as your "product" a little book and a CD that tell people how to run the business! Lots of "MLM" companies try that sort of thing, but eventually the regulators and courts catch up with them. They're not actually "MLM" at all, they're just scams pretending to be MLM.

[Jeff_Gardner]

Hi KeyCall,

I'm the President and Founder of a Network Marketing Company, so maybe I can point you in the right direction.

One article I recommend reading is this:

The Seventy Percent Rule by Jeff Babener MLM Attorney

In the 70's, the FTC sued Amway for being an illegal pyramid scheme. Amway won - mainly because they had instituted rules that kept their Company working as a endless pyramid.

Today, even though these aren't laws, most MLM companies follow them closely as if they were laws. The logic is that if these kept Amway safe, they'll keep us safe, too.

Jeff Babener's site has lots of good articles, but this one should give you some additional insight.

Another thing to understand is that "Network Marketing" or "MLM" as a business model is legal, BUT not all Companies that use this business model are legal. You'll need to research and study each company's products, comp plan, marketing system, etc. to see whether or not they're running a legal or illegal MLM.

This is important, because a company can be closed in a heartbeat - and if you've built up a full-time income, that can be turned off quickly if you're with the wrong company.

I hope this helps.

Best Wishes,

Jeff Gardner

[Edgar Moreno]

Jeff, great post and that link did come in very useful. Now I was hoping you could answer one more question as I am currently involved heavily in MLM but still like to learn anything new.

The 70% rule seems to apply to those who are looking to sell the product once again. Meaning the distributor should not be buying new product if 70% hasn't been sold from the previous order.

What about the case in which the distributor actually consumes the product him or herself. Do they need to simply consume 70% of the product before the next order or is it an illegal MLM if you are not actively selling 70% of the product?

[Jeff_Gardner]

Now we're getting into an area where you'd be better talking to an actual MLM attorney.

One thing to remember is that the 70% Rule isn't a law or FTC guidelines. However, because Amway won their case - because of having that in place, the 70% rule has become a standard. So NOT having the 70% rule isn't "against the law" - but it would probably put you into a little more dangerous realm.

The real key is protecting network marketers from filling their garages with product to qualify for higher ranks and bigger payouts.

Does "Personal Use" count toward the 70% rule? I've heard that it does, but I wouldn't take that as legal advice. If you want to be certain, I'd contact an MLM attorney. In my Company, we don't have that problem, because we don't sell consumables AND we don't really let our Associates to stock/ship their own products. Instead, they refer people to our site to order directly. That way, there's no worry about "consuming" products before buying more.

If you're still wondering, I'd contact Jeff Babener or another MLM atty.

Best,
Jeff

[timpears]

Jay, I hate to tell you, but every time you find a company that has sales people, and a sales manager, you have a company that is using the MLM model. The basis of MLM is duplicating and hiring more sales reps. There is nothing more to it than that, really. Each model is slightly different, but MLM is not the scam you make it out to be. A number of companies have tried the MLM model to scam people and given you and some others a bad taste for it. There are good, an bad companies that market this way. It is the company and the way they structure it, not the MLM model.

[RayAndLisaJ]

You may even want to look into a top tier Direct Sales business. I was in MLM for 4 years and switched over. The commissions are higher and not watered down from being split up 4 or 5 times maybe even more into your upline.

[seasoned]

Keycall,

Some of the advice here is WRONG! Edgar Moreno gave some ESPECIALLY wrong advice! Many MLMs don't know what is legal and their members certainly DO NOT KNOW! That is a FACT!

I learned some of THEN CURRENT US laws LONG ago, but have forgotten many, and others may have been added. Here is my critique of the posts....

1. FORGET what moreno said.
2. Gene Pimentel is right but, as he said, there is more!
3. Alexa is right also
4. Jeff Garner, Ray and Lisaj, and Jay singer gave some good advice. Purchases made by a sales rep shouldn't be forced, and overallocation of stock should be discouranged, etc... MANY MLMs have gotten in trouble for that.
5. Timpears is wrong. MLMs usually, and SHOULD, ask you to pay something or do something to become a distributor. That IS where the law gets hazy, as they can't give your upline direct profit, etc..., or really make money. If they DON'T do it though, all of your customers can become distributors, and destroy its viability. FURTHER, all distributors can recruit new people. Almost any other company either restricts hiring, and/or has no payment, etc.... Many that don't follow the normal business model ARE self limiting through licenses, etc....

Still, for the most part, if you are trying to create an MLM, here is what I would suggest....

1. Have a worthwhile product that is not easily copied.
2. Provide needed support yourself, or provide a way that the user can provide support.
3. Figure out a price that you can sell the item at and make the profit YOU want. THAT is your TOP LINE cost.
4. Figure out a retail price that is above your cost, but STILL reasonable. Everyone should sell at THAT price.
5. Figure out a reasonable and fair structure to fit the levels you want between those two prices.
6. Figure out a reasonable and fair structure to move up and break away.
7. DISCUSS WITH AN MLM Attorney!

If you do steps 1-6, there should, HOPEFULLY, be little the attorney can change. But the simplest little thing can shut you down, and trust NOBODY but a QUALIFIED MLM attorney. Even s/he is likely to make a mistake. But following 1-6 should limit the repurcussions.

BTW I once went to one MLM, that sold a physical product, and they "paid out" about 103%! They NEVER explained to me how THAT would work! They were stunned that I even did the math.

ANOTHER sold insurance, and paid out 130% of the FIRST YEAR, and 10% there after! I STILL don't FULLY understand that, but the average person probably pays about 2000%, and they had chargebacks! Also, that apparently is a standard. So the company ends up making 84%/year if people stay the term.

In most cases, you will find the MLM companies pay less than they get. The 103% company either scammed distributors, had distributors scam customers, or was a pyramid scheme.

Steve

[Tsnyder]

Steve...

If you examined the 103% company's plan closely I'm
guessing you'd find a ton of breakage and the actual
payout was closer to 50%.

Tsnyder