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Pyramid Selling and Consumer Protection PDF Print

Printed in the "Business Monday" newspaper on June 29, 2009.

At some point in time, many of us can say that we were approached on what seemed to be the perfect “get rich quick” early retirement plan. We have attended the meetings and decided that this is the key to true financial liberalisation. All we have to do is sign on the dotted line, tell a few friends and “kazam” – financially free for life, while at the same time, become our own boss. Only to realise with the clearing of the haze that none of it was true. Yes, we did convince our family and friends to join but the continuous recruitment finally becomes one of our greatest challenges.

This quest for financial liberalisation by consumers has given practitioners of these schemes leverage over us, but "do we have any protection or redress?".  The answer to the question is yes and the Consumer Protection Act is the legislation in place to protect us.Section 23 of the Consumer Protection Act CAP.326D, distinctly states:

"A person shall not promote or operate a pyramid selling scheme."

What constitutes pyramid selling? According to the Act, it is a scheme that provides for the supply of goods or services or both for reward; that, to many participants, constitutes primarily an opportunity to sell an investment opportunity rather than an opportunity to supply goods and services; that is unfair, or likely to be unfair, to many of the participants in that

           i.        The financial rewards of many of the participants are dependent on the recruitment of additional participants; and

          ii.        The number of additional participants that must be recruited to produce reasonable rewards to participants is either not attainable, or is not likely to be attained, by many of the participants.

A person or business operating a scheme in the manner mentioned above is in contravention of the Consumer Protection Act CAP.326D and is therefore exposed to prosecution.

Another question you may find yourself asking is "what is wrong with pyramid selling?". The answer can be summed up in one phrase: sustainability of recruiting participants. Essentially, the foundation upon which the scheme is built is the problem. Any plan that offers commissions for recruiting new members will inevitably collapse. The real casualties in the collapse are always the people at the bottom, with the people at the very top of the pyramid protected.

Consider the outcome if each investor pays $300 to the promoter and is told to build a "downline" by recruiting three new members, who then each should recruit three more members. The investor is told that he will be paid $100 for each of the three members whom he enlisted at the first level. The investor is also promised $20 commission for each recruit at the next three levels. Thus the investor should receive commissions for four levels of recruits below him, each of whom must recruit three more members. 

The aptitude to recruit members often seems effortless, but the reality is, there is not an infinite number of people in the population and sooner than later, you will run out of people to recruit.  Therefore, the persons at the bottom will not get an opportunity to obtain reasonable returns on their investment. 

Consumers must therefore be very vigilant and do much research. There are defining characteristics of legitimate muti-level marketing that differentiates it from pyramid selling.    Multi-level marketing programs have a real product to sell, they sell to the general public without requiring the consumers to pay extra or join the marketing system.

The Federal Trade Commission in the United States suggested that these seven tips be considered when making a decision about whether to take part in any multi-level marketing plan:

  • 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 may also 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 your sale of products.
  • 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 that it is true! Ask the promoter of the plan to substantiate claims with hard evidence.
  • Beware of "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.
Remember, if the sale of goods or services is the primary objective and the commission paid is based on those sales, then the Consumer Protection Act is not contravened. However, if the avenue for earning money is solely based on the number of people recruited, rather than on sales, then the Act is contravened. If you have been affected by such a scheme, contact the Fair Trading Commission and we will investigate the matter.
 
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