The MLM industry has, during the last 20 years, developed positive working relationships with regulatory agencies such as attorneys general and the FTC (Federal Trade Commission). There was a time, however, back in the 1970s, when the FTC challenged the legitimacy of the direct selling industry as being a pyramid scheme. They accused Amway of operating illegally and Amway prevailed in a very famous 1979 case [below] where it was held that the network marketing industry is a legitimate business model and the business opportunity is not a pyramid scheme.

No legal ruling has been more impactful on the direct sales industry than The Landmark Amway Case.

Afterwards, regulatory agencies and the industry went quiet until the 1990s when it was questioned whether or not product-using consultants were a legitimate end-destination for products or whether consultants were simply retail customers. There has been an ongoing tug of war between the MLM industry and the FTC in terms of determining whether or not personal use should have an impact on a company’s legitimate operations. The industry, with the cooperation of attorneys generals in more than a dozen states, were able to amend legislation in those states to recognize that personal use of product by distributors is a legitimate end-destination, just as if it were a retail sale.

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It is very illegal to pay headhunting fees, i.e., paying commissions merely for distributors to recruit other distributors.

We are often asked by executives starting a network marketing company if they can have consultants earn income by referring others and if it’s legal.

Effectively, multilevel marketing is the sale of products through person-to-person, “referral” marketing. It is very illegal to pay headhunting fees, i.e., paying commissions merely for distributors to recruit other distributors. However, if a distributor builds a sales organization and receives override commissions on the sales activity of those in his or her downline, this is the essence of multilevel marketing, and is quite acceptable, assuming all other elements of legitimate direct selling (vs. pyramiding) are in place.

MLMLegal.com has launched the Innovation Campaign for its February 2014 MLM Startup Conference. Read how to get your two free tickets by clicking HERE!

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The emergence of online penny auction companies have recently been under analysis in the direct selling industry. The Federal Trade Commission (FTC) has recognized the difficult and complex circumstances of online penny auctions. The FTC offers the following consumer information, stated verbatim, line-by-line, released in 2011 (http://www.consumer.ftc.gov/articles/0037-online-penny-auctions):

How does a penny auction work?

In a penny auction, the site owner posts items and you pay to bid for them. Unlike a traditional auction, where only the winner pays, penny auctions require you to pay before – and as – you bid, win or lose.

You may have to pay a fee just to register for the site, and sometimes, it’s substantial. Then, you have to buy a “bid package.” For example, you may “buy” 100 bids for $50. Additional bids cost more money, often between 50 cents and a dollar per bid.

The price of auction items usually starts at zero, and each bid bumps the price of the item up a penny. Each bid also adds time – from 10 seconds to 2 minutes – to a countdown clock. The goal is to be the high bidder when the clock runs out. But because the clock resets with each bid, the auction process can be unpredictable and take time to complete.

What does “winning” mean?

Winning the auction doesn’t mean you’ve won the auction item: It means you’ve won the right to buy the item at the final price. For example, your $50 winning bid for a camera might seem like a bargain, but if you placed 200 bids that cost $1 each, your cost will actually be $250 – plus shipping and handling, and possibly a transaction fee.

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This blog post is the companion post to the video: How to Tell if a Company is a Pyramid or a Legitimate MLM.

You may have been recruited for a network marketing opportunity or you are a recruiter. Inevitably, this question will come up, is the company a pyramid scheme or a legitimate business opportunity?

Although this is a complex legal area, let me share a simple metaphor that draws a clear line in the sand.

The metaphor is about a gentlemen, will call him Party #1, and he sells a case of canned tuna fish to Party #2 for $10. And, Party #2 sells it to Party #3 for $20, and Party #3 sells the case of canned tuna fish until it gets to Party #10, who buys the case of canned tuna for $500. And, Party #10 opens up the case of tuna fish and it’s rancid. It’s inedible.

He goes back to Party #9 and complains, “I bought this case of tuna for $500 and it’s rancid.” Party #9 tells him to take it to Party #8, and Party #8 tells him to take it to Party #7, and so on until Party #10 goes all the way back to Party #1 and says, “You’re the one who started all of this! I have a problem!”

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