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Why I'm Not Going to Jail

by kindsvater
14 replies
I get an interesting variety of PMs in the forum, but one today caught my attention and I've decided to make this instructional post.

Question: Will a person go to jail for running a closed affiliate program (one only available to paid members) because it is a pyramid scheme?

In particular, this Warrior wanted to know if the affiliate program for the Internet Marketing Law Center will put me in jail because you have to be a member to participate. He was concerned this is the same as the Going Platinum MLM scheme, where the only way to make money was to sell a membership to others.

Answer: No problem, thanks for your concern, and I don't mind using myself as an example.

All I know about the Going Platinum MLM pyramid scheme comes from reading the SEC complaint here: Complaint: SEC v. Going Platinum, Inc. and Alan H. Catalan

Basically, for a $25 investment one could make up to $160,000 per month from a 10 position multi-level marketing scheme where one earned money from their recruits' investments.

Payments to new members came from prior members' investments, which resulted in a problem - a point came that payments could not be made because there were not enough new suckers.

By comparison, the Internet Marketing Law Center offers numerous legal guides, forms, and information for a one-time regular fee of $97. Members can participate in an affiliate program earning a 70% commission. And yes, some big bucks are being paid out in the affiliate program.

Here are some key differences:

1. Multi-level versus single level.

2. Revenue promises being made versus no revenue promises.

3. The core 'product' is selling memberships to earn money from the memberships versus a referral program being adjunct to a legitimate and primary separate product.

4. Affiliate participation is optional. There is no reduction in the value of the membership if one decides not to promote it to others.

5. Investment versus no questions asked full refund policy.

---

That said, there is a concern in the IM niche (selling products about how to make money online), in particular, about closed affiliate systems.

That is because IM is not legal products, auto products, beauty products, etc. In IM you're making money by selling how to make money.

If you're not careful, and the product becomes how to make money selling THE product, instead of learning how to make money selling YOUR OWN product, then you can have a problem.

The most important issues, in my opinion, are the marketing pitch and whether there is a legitimate independent product being sold. Usually they go hand in hand. If you consider those issues you probably will not have a problem with your program.

Finally, if you're wondering why the IMLC affiliate program is only currently available to members, it's because (1) otherwise you'd just buy through your own affiliate link and this thus lets me set a higher commission rate, (2) it lets me set a reasonable WSO, (3) it avoids the scams and spams we get all the time where people are pitching products they know nothing about just to get a commission, and (4) ahem, I haven't figured out how to use the JV option of the Simple Member Pro Script.

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#jail
  • Profile picture of the author Andyhenry
    Yeah - you're right it does sound similar to the pyramid scheme....
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    nothing to see here.

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    • Profile picture of the author snapcontent
      Originally Posted by Andyhenry View Post

      Yeah - you're right it does sound similar to the pyramid scheme....
      I'd agree. What are they actually selling?
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  • Profile picture of the author GarrieWilson
    Isnt it also because you didn't make the affiliate program a benefit for buying?
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    • Profile picture of the author kindsvater
      Originally Posted by Andyhenry View Post

      Yeah - you're right it does sound similar to the pyramid scheme....
      I'm packing my toothbrush right now. (Gonna spend a few days in the Big Apple.)

      Originally Posted by GarrieWilson View Post

      Isnt it also because you didn't make the affiliate program a benefit for buying?
      I think it would be fairly said being able to participate in the affiliate program is a benefit for buying.

      The issue would be on the sales page the affiliate program is only mentioned in one sentence, which is the 4th P.S. at the bottom. The other 99.5% of the of the page is about all the cool legal stuff one gets.

      The problem with many online MLM programs is 99.5% is about making money reselling the program to others, with .5% about free ebooks and other sketchy digital products which only exist to try and avoid being considered a pyramid scheme (offering independent value other than a reseller opportunity.)

      .
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      • Profile picture of the author Floyd Fisher
        Originally Posted by kindsvater View Post

        I'm packing my toothbrush right now. (Gonna spend a few days in the Big Apple.)
        Off topic, but any way you could drive up to Syracuse NY while you're at it. It's only 4 hours.
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      • Profile picture of the author GarrieWilson
        Originally Posted by kindsvater View Post

        The issue would be on the sales page the affiliate program is only mentioned in one sentence, which is the 4th P.S. at the bottom. The other 99.5% of the of the page is about all the cool legal stuff one gets.
        PayPal froze lots of people for that simple PS.

        The reason I brought it up, another attorney said making it a benefit in the sales letter was a no no.

        G.
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        • Profile picture of the author kindsvater
          My recollection is PayPal was cracking down on MLM, get rich schemes, and anything they considered a pyramid program.

          The reason so many Warriors had problems is because they were promoting IM progams that either fit those categories, or were questionable.

          Similar reason why so many Warriors had their Adwords accounts whacked last year.

          I had a chat last year with eBay's counsel. They know what you buy through PayPal and what you sell, and you can have your account closed for being involved with 'disapproved' activities or products. It's a good idea for a topic to add to IMLC this month.

          Garrie - as I indicated, an important factor is the sales pitch and whether there is a legitimate product. The MLM, where you're selling a membership with the goal getting a downline and making money from their members, I've always had a problem with that.

          But, your points make me think of something else I should do, and recommend others do, is make sure explicit marketing limitations are in the affiliate agreement. When I get back from NY to take another look at this. It's one thing to say 'I'm fine.' It's another to have a risk from some overeager affiliate.

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          • Profile picture of the author secrets2010
            So is GDI legit? they have been on business for a long time already...
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  • Profile picture of the author Johnny Slater
    If you need any help with Simple Member Pro just let me know. I no longer own it but since I created it I know the script better than anyone.

    Originally Posted by kindsvater View Post

    (4) ahem, I haven't figured out how to use the JV option of the Simple Member Pro Script.
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  • Profile picture of the author System Wide Solutions
    great post. thanked.
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  • Profile picture of the author seasoned
    A LONG time ago, AMWAY(A popular MLM in the US) got in some trouble for some things, and some laws were passed that made things pretty complicated. Basically, NOBODY could make a business out of just recruiting people, etc.... They USED to tell everyone to recruit everyone and stock up.

    But this shows how narrow a person's vision can be sometimes. They see the affiliate system and miss the real purpose. And HOW can you be an affiliate for a company if you don't know what their customers are buying?

    Global Domains International DOES look ok, from what I can see. They ARE selling domains, even if they DO imply something that isn't true. They explain THAT in the VERY FIRST item in their FAQ, and the history, and I think the price is high, considering. OH WELL... Still, it would be better to recruit people on the promise that they can offer the services at a profit, rather than to get filthy rich.

    Steve
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    • Profile picture of the author SageSound
      I got into a spat with an attorney in another forum I participate in who flatly asserted that "affiliate programs limited to "customers only" are illegal and prohibited by most states and countries' laws". He also claimed that PayPal's AUP states that as well, and quoted a section.

      All of the stuff he quoted, however, was written in such a way that it was clearly responding to situations where the promoter was using the affiliate program as an "inducement" to buy the product being offered -- in other words, they were using the product to sell the "opportunity".

      "If you want to make money with this, then you need to purchase something else first." That's how most MLMs used to be set up, and most states now require MLMs to have a business kit and ability to become a "rep" that's free or minimal cost without requiring someone to purchase anything else.

      Every one of the legal quotes he used to support his assertions (from cases in several different suits) used the words "inducement", "incentive", and other terms that directly implied they were targeting situations exactly like this.

      I was arguing that it seems incredulous to me that anybody could consider a situation where there isn't a single mention of the affiliate program on the sales page as constituting an "inducement" or "incentive" to buy the product. Specifically, if there's no mention of the affiliate program until AFTER they've made their purchase, then what court anywhere would call that an "inducement"?

      "inducement" comes from the latin root "in-ducere" meaning "to lead, bring in or towards something".

      In my mind, if someone is not "introduced" (from the same latin root) to the affiliate program until AFTER the purchase is made, then there's no way to say they were "induced" or "incentivized" to make the purchase in order to "lead to" the affiliate program.

      The only way that could happen is if some overzealous affiliate started promoting the affiliate program independently of the product.

      -David
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  • Profile picture of the author Chris Q
    Banned
    I have been in this game before when I was 19 to 20. I joined an MLM company that sells coffee, shampoo, soap and health supplements. My parents were very angry at me after I invested more than $10 to join a company which I was referred by someone. A few days later, my friend joined under me and we both struggle to market the products to local customers even if we have been trained.

    I'm also given the floor a few times to be the "speaker of the house" on convincing the customers to join the company in our seminar room. I explained the history, the real situations, our products and the marketing plan for them. In the end, I only have a total of 5 downlines. Two on my first level, one on second level and one on third. After a few months, three of my downlines have given up and quit. It leaves me and my friend as the only ones left on my network. My friend got paid by check four times, while I was only paid once due to financial problems and they have a required monthly quota by points for us to be eligible in receiving payments.

    My mom won't give me any money to buy products, instead I save my own money from my dad's allowance to buy their products. After one year, I didn't get my return on investment and I've given up along with my friend. Lesson learned for me to know the real game of multi-level-marketing. It is a tough challenge for all of us, especially in motivating our members within our network way down below.

    For my own MLM experience, it has "crushed the beans, not spilled".
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    • Profile picture of the author secrets2010
      I think paypal doesent allow to set up 2nd, 3rd tier affiliate programs...dont know the real reason....but i guess these mlm like gdi...must be legal otherwise I dont understand how they can be on business for so long....maybe a lawyer could give his opinion...
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