SEC shuts down Zhunrize, assets frozen
It’s the way in which Zhunrize pay out commissions to their affiliates which drags this opportunity into murky pyramid and potential Ponzi scheme territory.
Within the company themselves there’s no retail, as Zhunrize themselves only sell affiliate membership fees.
Put all of it together and, as an MLM business opportunity, Zhunrize leaves a lot to be desired.
–BehindMLM Zhunrize Review, December 2013
The SEC has shut down Zhunrize, revealing it to be a $105 million dollar Ponzi scheme in the process.
A civil injunction was filed in the Northern District court of Georgia against Zhunrize and CEO Jeff Pan.
The SEC allege
that Zhunrize, an Atlanta-based multi-level marketing company, and Pan have been operating a fraudulent pyramid scheme that has raised over $100 million from investors worldwide.
Almost a year ago BehindMLM reviewed Zhunrize and concluded as much, with the SEC’s injunction conclusion reading near identical to my own:
According to the Commission’s complaint, Zhunrize purports to be a legitimate multi-level marketing business by which members purchase online stores and then sell merchandise through them, while earning commissions on products purchased by their customers and through store sales to other members and hosting fees paid by those members.
In fact, the company is operating as a pyramid scheme because its commission structure is based on the continual recruitment of new members, with the most lucrative returns dependent on the downline recruitment of other members through store sales irrespective of any product sales.
To date, the company has taken in approximately $105 million from approximately 77,000 investors since 2012.
Zhunrize has close to 40,000 stores in Korea and 1,000 stores in China.
As usual, the problem is there is no significant retail activity taking place:
The Commission’s complaint also alleges that Zhunrize does not disclose, however, that to date substantially all of its revenue has comes from the sale of memberships (referred to as stores) and the corresponding monthly internet hosting fees associated with operating those stores, rather than the sale of products.
During two years of Zhunrize’s operations, beginning in July 2012 through late July 2014, virtually none of the $105 million in revenue received by Zhunrize was derived from product sales.
Zhunrize received a total of approximately $105.07 million in revenue from all sources during this period.
Of this, Zhunrize earned $103.66 million, or 98.66% of its revenue, from membership sales, the initial monthly hosting fee paid by a new member in connection with the purchase of a store, and the membership fee and initial hosting fee associated with an existing member’s purchase of an upgraded membership.
The amount of revenue earned from merchandise sales, which is calculated as the total amount of revenue less that earned from membership and initial hosting fees ($105.07 million minus $103.66 million), was only $1.41 million, or 1.34% of the total revenue received during the same period.
These revenue figures do not include the subsequent monthly hosting fees. If they were included, revenue from merchandise sales would be even a smaller percentage of total revenues.
Zhunrize has admitted that in 2014, the company has paid $340,000 in commissions to its members based on product sales and almost $51 million in commissions based on the sale of new stores (i.e. new memberships) and the hosting fees associated with those stores.
Pan (right) himself has testified that
the company currently derives 80-90% of its revenue from selling online stores and the monthly internet hosting fees for them, as opposed to actual products from these stores.
But in typical Ponzi scheme fashion,
a Zhunrize promotional video differentiates Zhunrize from other on-line multi-level marketing plans, claiming that Zhunrize has “sustainability.”
According to the video, the Zhunrize “model will sustain itself because we will have millions more customers than distributors.”
Later, the narrator in the video claims “we have the Vendor Relationships, the Logistics, the Payment Gateways to reach millions of new customers each month.”
And Ponzi players wonder why nobody takes their claims seriously. Once again, it is demonstrated that common-sense logic will always trump baseless marketing PR spin.
Thus, contrary to the representations to potential investors, Zhunrize is actually a fraudulent pyramid scheme.
The Commission’s complaint, filed in the United States District Court for the Northern District of Georgia, alleges that each defendant violated Sections 5(a), (c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 thereunder, and seeks against each defendant permanent injunctions, disgorgement with prejudgment interest and civil monetary penalties pursuant to Section 21A of the Exchange Act.
The Georgia court granted the SEC the requested injunction, and at the time of publication Zhunrize and Pan’s known assets are frozen.
E-commerce MLM’s pretending to have customers when infact most of your revenue is being derived from affiliate fees, you’ve been put on notice.
Dubli, who charge affiliates up to $12,000 to participate in their e-commerce scheme, might very well find themselves in Zhunrize’s position some point in the future.
Pan projected $90 million per month in product sales by December 2014. There is no basis for this projection given the company’s past performance.
Marketing spiels like the above should be intimately familiar to anyone currently promoting Dubli’s latest incarnation.
The SEC’s complaint charges Zunrize and Jeff Pan with three counts of fraud and the offering of unregistered securities.
A hearing to decide whether or not a preliminary injunction should be granted against Pan and Zhunrize is currently scheduled for October 6th.
Footnote: My thanks to the BehindMLM readers who sent in a heads up.