From the Federal Trade Commission:
http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv12.shtm
Facts for Consumers
Multilevel Marketing Plans
Produced in cooperation with the North American Securities Administrators Association
Multilevel marketing plans, also known as "network" or "matrix"
marketing, are a way of selling goods or services through distributors.
These plans typically promise that if you sign up as a distributor, you
will receive commissions -- for both your sales of the plan's goods or
services and those of other people you recruit to join the
distributors. Multilevel marketing plans usually promise to pay
commissions through two or more levels of recruits, known as the
distributor's "downline."
If a plan offers to pay commissions for recruiting new distributors,
watch out! Most states outlaw this practice, which is known as
"pyramiding." State laws against pyramiding say that a multilevel
marketing plan should only pay commissions for retail sales of goods or
services, not for recruiting new distributors.
Why is pyramiding prohibited? Because plans that pay commissions for
recruiting new distributors inevitably collapse when no new
distributors can be recruited. And when a plan collapses, most people
-- except perhaps those at the very top of the pyramid -- lose their
money.
The Federal Trade Commission cannot tell you whether a particular
multilevel marketing plan is legal. Nor can it give you advice about
whether to join such a plan. You must make that decision yourself.
However, the FTC suggests that you use common sense, and consider these
seven tips when you make your decision:
[ Really read the first 3 here and see if this doesn't sound familiar.]
- Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.
- Beware
of plans that ask new distributors to purchase expensive inventory.
These plans can collapse quickly -- and also may be thinly-disguised
pyramids.
- Be cautious of plans that claim you
will make money through continued growth of your "downline" -- the
commissions on sales made by new distributors you recruit -- rather
than through sales of products you make yourself.
- Beware
of plans that claim to sell miracle products or promise enormous
earnings. Just because a promoter of a plan makes a claim doesn't mean
it's true! Ask the promoter of the plan to substantiate claims with
hard evidence.
- Beware of shills -- "decoy"
references paid by a plan's promoter to describe their fictional
success in earning money through the plan.
- Don't
pay or sign any contracts in an "opportunity meeting" or any other
high-pressure situation. Insist on taking your time to think over a
decision to join. Talk it over with your spouse, a knowledgeable
friend, an accountant or lawyer.
- Do your
homework! Check with your local Better Business Bureau and state
Attorney General about any plan you're considering -- especially when
the claims about the product or your potential earnings seem too good
to be true.
For More Information
The FTC works for the consumer to prevent fraudulent, deceptive, and
unfair business practices in the marketplace and to provide information
to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov
or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY:
1-866-653-4261. The FTC enters Internet, telemarketing, identity theft,
and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
November 1996
Kenneth R Sword Jr