What Differentiates a Legitimate Direct Selling/Network Marketing Company
from an Illegal Pyramid Scheme?
By Jeffrey Babener, © 2012 / 2013
It is true that, from time to time, because of the structure of network marketing plans, there has been confusion in
the marketplace as to legitimate businesses versus illegal pyramid, headhunting, recruitment schemes.
The basic thrust of existing regulations is that direct selling/network marketing companies must be
bona fide sales organizations which market bona fide products to consumers.
Pyramid Schemes: Bad News...
Some pyramid activities which are prohibited or restricted include:
• Requiring excessive purchases at the time of enrollment. This practice is known as "Front-End Loading."
"Excessive" is defined as being more than is necessary to fulfill existing or anticipated orders.
• "Headhunting" or recruiting. Companies are prohibited from rewarding distributors solely for another’s
enrollment – their agreement to participate in the company commissions or their remuneration must be paid only on
actual purchases of goods or services. Purchases made by distributors at the time of enrollment and thereafter for
their own use or resale are generally considered commissionable sales.
• Excessive charges for training materials, including "starter kits" and other sales support materials.
A variety of additional abuses have been identified by state and/or national laws and statutes as potential elements
of illegal marketing plans or activities:
• Products which have "no real world" marketplace, i.e. the marketing program is a facade for a scam.
• Products which are sold at inflated prices.
• Substantial cash investment requirements. Prohibited are:
1. Payments in excess of the fair market value of the goods and/or services being purchased at the time of
2. Excessive enrollment fees.
• Mandatory purchases of peripheral or accessory products or services, including educational or training
materials and workshops, conferences, etc.
• Plans in which distributors are left with substantial unsold inventory upon cancellation of participation. This is
one of the bases for requiring companies to have a "buy-back” policy.
• Earnings misrepresentations (of existing or past members of the sales force) or inflated income potential
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