Zeek Rewards admit business model is illegal
Despite all the talk about compliance and reassurances that Zeek Rewards is not an investment scheme, at the end of the day members could purchase VIP bids, give these bids back to the company (effectively serving as an investment) and receive a 90 day return on their points (the investment).
This happened regardless of whether or not the company gave bids away or not and despite the company claiming otherwise, functioned as an investment with Zeek Rewards paying a daily return.
The problem was that with members re-investing their returns back into their point balances, it was completely unrealistic to imagine that Zeek Rewards would continue to experience infinite customer growth to give the daily bids being handed back to it to real customers.
Indeed it is common knowledge that this did not happen in real-time, with the company drowning in excess points it could not give away, a point queue was formed with Zeek Rewards giving away points as it acquired customers.
Despite member’s points having not been given away however, the company continued to pay members a return. With points not given away, this fuelled speculation that the Zeek Rewards daily returns were infact generated by the money being invested by members, rather than via customers using bids in the Zeekler auctions.
If your points haven’t even been given away, how do they generate revenue to share around?
The above has consistently been one of my major criticisms of Zeek Rewards and changing the business model so that bids are actually given away to real customers before returns are paid out was suggested on BehindMLM roughly a month ago now.
A month later Zeek Rewards appear to have taken that suggestion on board and yesterday the company put out a press release acknowledging their business model was illegal.
Citing Federal laws, Zeek Rewards state that:
federal law has changed and we have been informed that we are no longer legally allowed to provide customers or leads for purchase.
The federal law changing is cited as being the ‘Federal Trade Commission’s Business Opportunity Rule‘.
Mostly it seems this rule is being changed to ensure that businesses are more upfront about any income claims they make, revealing a list of those who have previously bought into the business and an increase in transparency so that the end customer is able to make a more informed decision.
Regarding MLM however,
The Commission (has) determined to continue to challenge unfair or deceptive practices in the MLM industry through law enforcement actions alleging violations of Section 5 of the FTC Act and not through the Business Opportunity Rule.
I haven’t gone over the rule in any great detail, but if I’m understanding correctly, the FTC has gone to great lengths to make sure this new rule doesn’t unfairly ‘sweep in‘ the MLM industry.
If Zeek Rewards are worried about it, is that even more evidence that the business opportunity is not MLM but rather a dressed up investment scheme?
Regardless, the problem was never so much that Zeek Rewards was charging for leads, the problem was that members were investing money and earning a return without they themselves selling anything.
The money being pumped into Zeek Rewards effectively served as an investment as those who invested did not they themselves acquire customers. They just gave the bids they were assigned back to the company and sat back as Zeek Rewards paid them a daily return. How much of a return received being entirely dependant on how much money they had invested.
Furthermore with Zeek Rewards refusing to cite how much of the daily profit share was made up of member investments, it was pretty obvious that with the company paying out returns before it had even given bids away that this meant the majority of the profit share had to be coming from member investments.
Nonetheless, in order to address this problem, Zeek Rewards went on to announce that
Zeek will stop all customer purchases through the 5cc as of midnight est tomorrow night as that is when the law goes into effect. Midnight March 1st, 2012.
The 5cc of course being the ‘dump VIP bids on Zeek Rewards and earn a return on them, regardless of whether they have been given away to real customers or not’ scheme.
In its place, starting March 1st Zeek Rewards are launching a preferred customer scheme.
The preferred customer scheme instead requires Zeek Rewards members to personally enrol two preferred customers a month. Upon doing so, the company then promises to provide any additional customers needed for that month (to dump VIP bids on) for free.
With the 5cc, there was no monthly requirement to acquire actual customers and members were simply charged $2.50 per “customer” they purchased from Zeek Rewards.
Preferred customers are basically Zeek Rewards members who don’t participate in the daily profit share. In exchange for a monthly fee, preferred customers receive VIP bids from Zeek Rewards (presumably bids ZR members have dumped with the company) and their own replicated retail storefront.
Oh and of course they are entitled to VIP bids the Zeek Rewards member who recruited them passes their way (subject to the limitation per customer depending on the Zeek Rewards member’s membership level).
After meeting their monthly two preferred customer recruitment requirement, Zeek Rewards members can then place customer orders with Zeek Rewards and dump their bids with the company as they previously did under the 5cc.
What’s interesting is that this will be a major change for the bulk of Zeek Rewards members. Previously those using the scheme as a passive investment opportunity are now they themselves going to have to recruit at least two preferred customers a month if they wish to continue doing so.
How this sits with the Zeek Rewards memberbase is of course yet to be seen. The company has vowed to uphold existing customer purchases but once these expire (which might take a few months), it is only then that a true reflection of the 5cc changes will be measurable.
Legality wise it appears Zeek Rewards are trying to tackle not only the fact that prior to March they were running a passive investment opportunity, but also the FTC 70/30 rule.
Before March 1st, 100% of the purchases made within Zeek Rewards were by members (VIP bids).
Following the introduction of preferred customers, Zeek Rewards are essentially setting up an autoship member option and by excluding preferred customers, hoping to count their purchases towards the 70/30 rule.
The problem of course is that under the 70/30 rule, 70% of the purchases must be made by non-members. Preferred customers are still members of Zeek Rewards and that’s still a problem for Zeek Rewards.
As far as the 70/30 rule goes, even with these changes they are still hopelessly failing to meet the FTC’s requirement.
I congratulate Zeek Rewards for coming clean and admitting that their opportunity was illegal but I’m a bit concerned over the manner in which they’ve chosen to do it.
The changes to the FTC’s Business Opportunity Rule do give them somewhat of a convenient scapegoat to cover the change to the business model, but at the end of the day it appears that the FTC rule change wouldn’t cover them anyway if they were a bona fide MLM company.
If Zeek Rewards wasn’t a legit bona fide company then that leaves them being an investment scheme, and when you consider the ‘passive investment’ model of the 5cc, a presumably illegal one at that.
It’s no secret that in the last few months Paul Burks and the rest of Zeek Rewards management have scrambled to hire lawyers to help them navigate the mess they’ve created, and if I didn’t know any better I’d say the timing of this announcement (just two days before the deadline seems rather abrupt to me), appears to be a hastily put together interim solution.
Indeed when you consider the company announced that ‘additional qualifiers will be put into place for April‘ it certainly seems like Zeek Rewards themselves haven’t finished addressing the company’s legal problems.
It’ll certainly be interesting to see what happens when the reality of the new preferred customer program hits Zeek Rewards members over the next few months.
I imagine failing to recruit 2 preferred customers a month is going to have some pretty dire consequences to member’s VIP point balances, especially when you consider the potential disruptions as a result of the rolling 90 day point expiration.