Why you should avoid every new MLM penny auction
Amidst the tidal wave of penny auction prelaunches announced over the past few months, I decided mid last month that I’d sit down early this month and put together a snapshot of where we were with each of them.
After spending some time and researching the status of a few companies, I realised things weren’t, from a sustainability and long-term viability perspective, weren’t looking good.
Sitting back and thinking about the rest of the companies on my list that I hadn’t researched yet (but most I had still been keeping tabs on), I quickly came to the conclusion that it wasn’t going to be a very kind reflection on the current state of the MLM penny auction niche.
“Why?”, I asked myself. Surely with the sheer number of penny auction companies in the works there were bound to be a few who were going to be succesful and carve out a long-term place for themselves in the MLM industry?
After thinking about it some more, here’s why you need to avoid every currently announced MLM penny auction prelaunch.
First and foremost is the nature of a penny auction as the core (or focal point) of an MLM business itself.
Traditionally (and please believe me when I tell you I’m not complaining about this “new fangdangled” penny auction technology I just don’t get), MLM products are made by a company and then marketed and sold by its distributors, affiliates or whatever else you want to call them.
Whether the product is digital, a service, something physical or a consumable – that’s how the multilevel marketing model is and has worked for some time now.
If you look at a penny auctions in MLM, the product is the bids used in the auctions themselves. And here’s where I might surprise you,
I’ve got no problems with penny auction bids as a MLM product (provided of course commissions are tied into the use of the bids).
The “use” caveat is there because if the bids aren’t used, well that’s no different to a MLM affiliate buying $50,000 worth of bottled juice or some such every month – with how much juice they buy dependent on how much of a commission they personally earn.
If the products aren’t actually being used but are being purchased by affiliate’s, we’d call that “front loading” and in the MLM niche of penny auctions, it’d be no different.
So, if the bids are being used (by customers) what’s the problem then?
The penny auctions themselves.
When you flip the switch on a penny auction site, you immediately introduce a rolling liability into the business model of the MLM company running it, in that, unless their penny auction takes off, they’re going to be hemorrhaging money through it.
Penny auctions work on the idea that the company recoups its money lost on selling an item well below RRP from all the losers who used their bids in the auction.
Theoretically the more popular a penny auction the more losers there are and (discounting the hordes of angry consumers who realise they’re spending money without winning anything and leave), the more money the penny auction makes.
As critical as I might sound about it, there are of course succesful legit penny auctions around – although they are far and few between. Quibids in the US are one commonly cited example… however I can’t recall any other names mentioned that have been around for any credible amount of time.
In anycase, for the purpose of analysis only one penny auction company needs to be successful in order prove the business model is viable.
Thus far, the only truly succesful penny auctions we’ve seen have been of the non-MLM variety. And here’s where we start to get into the meat of the problem.
Looking at the grandfather of MLM penny auctions, Rex Venture Group, unlike pretty much every MLM penny auction today, they actually bothered to research and test the viability of a penny auction on its own, before pairing it with a MLM compensation plan for marketing (Zeek Rewards).
How sucesfful their penny auction Zeekler was prior to Zeek Rewards is debatable but ultimately neither here nor there. The fact is they ran a penny auction for roughly a year before attaching Zeek Rewards to it.
Now regardless of whether Zeekler was sustainable or not without Zeek Rewards, quite clearly once they added Zeek Rewards to it, things spiralled out of control and within a few months Zeek Rewards’ internal affiliate volume far surpassed any legitimate retail volume Zeekler might have been experiencing prior to the launch of Zeek Rewards.
Over the next year and a half things only got worse and by the end of it the MLM industry had a $600 million Ponzi scheme on our hands.
But if I’m to give credit to Zeek Rewards for anything, it’s that at least they tried to run a penny auction before bringing in the marketing affiliates. Let’s not forget that if a penny auction can’t sustain itself, a boatload of marketing affiliates certainly isn’t going to help.
At the end of the day bidders need to feel there’s value in the penny auctions and thousands of affiliates hocking off “free bids” for their own vested financial interest doesn’t convince anyone (other than those participating in the business opportunity).
That of course then brings us to the style of compensation plan a penny auction company is then using. As was the case of Zeek Rewards, the more money its affiliates dumped into the program, the larger their share of the profit pool. With that profit pool being primarily (98%) made up of their fellow affiliates invested money, that of course made the entire thing a Ponzi scheme.
Right off the bat here I’m going to state that if you’re thinking of joining any MLM penny auction that has a similar model to this (the more money you put in as an affiliate the more you earn over ‘x’ amount of days), run. I do not care what anybody says, this is an effective Ponzi scheme and Zeek Rewards clearly demonstrated that.
The alternative to this is a bid focused business model where affiliates actually aim to sell bids to customers rather than simply purchase them themselves. The most notable example of this would have to be Bidify, who scrambled to change their compensation plan following the SEC investigation into Zeek Rewards, not once, but twice within the same week.
Despite Bidsson, Bidify’s penny auction being heavily marketed as “MLM penny auctions done right”, following the compensation plan change Bidify’s business plummeted and things got so dire that we’re now waiting for an official announcement confirming the company is going to revert back to the Ponzi scheme style compensation plan they were previously using.
Another MLM penny auction prelaunch Funky Shark recently announced they would be launching with an alarmingly similar compensation plan to that of Ponzi scheme Zeek Rewards.
Following consultation with their legal counsel however and presumably being told running a Ponzi scheme wasn’t a good idea, they balked at the idea of relying purely on the viability of not even launched yet penny auctions and shut the whole thing down.
Given that they’ve paid out some commissions already, currently Funk Shark appear to be in the predicament of now owing more money in refunds to their members then they have.
Other companies like Global One abandoned their plans to launch with a penny auction, but have since been sitting in never-ending pre-launch limbo with not much happening since.
Looking at the bigger picture, do both the examples of Bidify and Funky Shark mean a retail bid orientated MLM penny auction can’t work?
No.
Are we likely to find out anytime soon if one is viable?
If we take a look at the current offerings in the MLM penny auction prelaunch niche – Sadly, the answer is also no.
Why?
For some reason the MLM penny auction niche seems currently hell-bent on doing things arse over backwards. Rather than launch a penny auction first, let the business grow organically on a retail level and then introduce an MLM affiliate marketing force (sounds counter-productive I know, but Bidify has already proven the opposite approach didn’t work), they are all focused on injecting as much capital into the ventures.
They do this by charging their affiliates (founder positions, membership fees, blahblahblah), with the idea behind this appearing to be a safeguard to keep the company running until (hopefully) their penny auctions take off and sustain commission payouts.
The problem?
It’s no secret that in MLM penny auctions are marketed as some sort of ridiculous cash cow holy grail that the industry has been searching for, and that no matter how many of them launch, they’re all guaranteed to explode and bring in billions.
If this were indeed the case, Bidsson wouldn’t have died out following Bidify’s compensation plan change and Funky Shark would have gone ahead with their plans despite being told they had to rely on retail penny auction profits and couldn’t run an affiliate funded Ponzi scheme.
One could argue that without a marketing force a penny auction site is doomed from the start and thus we introduce a sort of paradox (no chicken, no egg – no egg, no chicken), however with the alternatives already proven to have failed – what choice does the MLM penny auction niche have?
Don’t get me wrong, penny auctions and MLM might very well still pan out but at the moment, to the best of my knowledge, nobody is putting in the legwork to even attempt to build a long-term viable penny auction.
Whether you try and run a “give bids away” compensation plan or a “strictly retail” bid purchase compensation plan, fundamentally you still need to have a succesful penny auction behind the opportunity.
How many MLM penny auction opportunities will need to fail before they realise this is anyone’s guess. Demonstrably however, the methodology of launching a penny auction after you’ve launched a MLM business opportunity and banking on theoretical penny auction profits to see you through does not work.
With little to nothing distinguishing the slew of third-party dropship product based penny auctions being attached to MLM opportunities these days, it’s hard not to just look at it as a convoluted effort to grab as many people who fell for Zeek Rewards and make them fall for the same type of garbage again.
Until someone puts in the time and effort to build a successful penny auction business before attaching a MLM opportunity to it, I’m pretty confident all we’re going to be left with is an even bigger mess than what we have now when the MLM penny auction niche dust finally settles.
Hello Oz,
This nutshells it very well, and the problems inherent in the core model only worsen over time. The operators try to address those problems disingenuously via disclaimer, which leads to what you’ve described as the language of “pseudo-legal” compliance.
The awkward constructions that emerge do not pass the giggle test — i.e., “We didn’t present it as a security, our affiliates did.”
Regardless, just because the “program” claims it is not selling a security does not mean securities are not being sold. (A skunk by any other name is still a skunk. Cocaine is cocaine even if you call it “powdered sugar.” A “program” with an implied or actual ROI of 300 percent+ per year (precompounding) is still offering an investment contract even if you call it a “bid” purchase or “advertising” purchase.)
Of course, the core vulnerability is the securities issue. The operators try to work around that MAJOR problem by insisting they are not offering securities, despite a return that is implicit or plainly stated.
Then there is the issue of disclaiming the Ponzi itself. The operators try to work around that MAJOR problem by insisting that “rebates (or payouts) are not guaranteed.”
At its core, the “rebates aren’t guaranteed” disclaimer is a bid by the “opportunities” to pretend there are no unfunded liabilities or to treat liabilities as assets — i.e., “We’re not on the hook for anything because participants agreed to our ‘contract’ that states ‘rebates aren’t guaranteed.’ We therefore owe nobody anything and can enforce the disclaimer language at a time of our choosing.”
Because the operators know the Howey Test of what constitutes a security will come into play, they try to duck that by creating “work” for affiliates — i.e., the placement of an ad. The theory behind that is that the operators later can claim that “earnings” were not uniquely dependent on the efforts of the company.
The “auction” model is just the “autosurf” HYIP model in a new form. The core components/occurrences are the same:
* 1 percent a day or more.
* Promoted by gleeful or joyous “network marketers.”
* MLM-style, multitiered compensation plan. (This sometimes later devolves into a meaningless discussion about whether the “opportunity” is “direct sales” or “MLM” or “network marketing.”
* Claims that “top MLM attorneys” have scrubbed the “opportunity.”
* Claims that government agencies have scrubbed the “opportunity.” (“The SEC/FTC would have taken action long ago if anything untoward was going on.”)
* Customer-service nightmares explained away as “growing pains.”
* Complaints to government agencies explained away as tiny in proportion to the number of “happy participants.”
* Efforts to sanitize and/or to “mainstream” the “opportunites” or create “social proof” of “legitimacy” via Facebook, Twitter, YouTube, etc. (A ‘No-brainer” or “So simple an idiot can make money” or “Seniors are supplementing their retirement income” or “I got paid!” etc.)
* Disclaimer language that is impossibly unfriendly to participants and yet is designed to provide legal cover to both the opportunity and promoters, including the serial hucksters on the Ponzi boards.
* The use (invariably) of “offshore” payment processors.
* A grandfatherly figure or longtime MLM figure as the owner/operator.
* Orchestrated efforts to dominate search-engine results, making it difficult or impossible for participants to find “negative” information about the “opportunity.”
* Reverse psychology: Seizing on the keyword “scam” and then explaining why the opportunity is not a “scam,” for instance.
* Stepfordian promoters in almost unlimited supply. (If asked, they will change their preference in dispensing toilet paper to demonstrate to the “opportunity” that they are coachable.)
* Loosely affiliated but core groups of dedicated scammers, both domestic and offshore.
* A “Founders Club” or equivalent whose members receive a disproportionate share of the proceeds. (Willfully blind hucksters.)
* A presence (invariably) of people who trade on religion or antigovernment sentiment, including “sovereign citizens.”
* When a scheme goes south, bids surface to switch the discussion away from the challenged business model to politics — i.e., the banks are corrupt, the Fed is corrupt, the government is corrupt, the receiver is corrupt, the judge is corrupt, the investigator is corrupt, the “media” are corrupt.
* Organized efforts — postseizure or postcomplaint — by founders, winners or silent partners to gather money to “fight the evil government” and advance a cover story: “We bought ‘bids'” or “We bought ‘advertising,'” for instance.
* Black comedy (invariably) that often involves manufactured or severely distorted realities: “The evil government doesn’t understand the business model”; “Our attorney is Perry Mason; the government has Gomer Pyle”; “The government investigator/attorney was too stupid to work in the private sector”; “By the time we expose the government attorney/investigator, he or she won’t be able to find work at McDonald’s”; The government is picking on an old man with a sick wife, and the old man had an attorney who was a stooge and/or government plant who is in on the antibusiness conspiracy,” etc.
With ASD, it was about $119 million. Zeek demonstrated that $600 million could be put on the table.
These “programs” all require magical thinking and supremely disingenuous wordplay — and that’s BEFORE the mind-bending, reality-distortion field presents itself AFTER a seizure/complaint.
One of these days, a program operator or sponsor is going to be questioned in public or a deposition will be made public. It will include this question, and a chill will spread over the world:
“How much did [insert terrorist or terrorist group’s name] make in your ‘program’ before [he/it] blew up [insert target’s name] and killed [insert body count] or maimed [insert nonfatal casualty number/number of human beings, including children, who lost a limb or their eyesight]?”
The “programs” are obvious risks to national/international security. On that basis alone, MLMers should reject them.
Keep up the good work, Oz.
PPBlog
To be honest, I think Funky Shark died because it started off wrong: it was selling “founder positions” which is clearly illegal as they are not registered securities. Though its comp plan is highly suspicious as well.
Every penny auction starts at a net loss, as they need a flood of people to buy bids and spend bids on the items. A brand spanking new penny auction, as you said, hemorrhages money until it achieves that breakeven point, which may or may not come.
That makes the “raising money from members” angle even MORE sinister, as it’s basically venture cap, without selling it as venture cap. The more people they can convince to join and buy bids and sell bids, the more likely they will survive, but the only really to buy bids is to enjoy a payback later.
THAT makes it an effective Ponzi/pyramid scheme, even though it may not have STARTED as one.
@K. Chang
That’s precisely why I think these penny auction startups need to make it as penny auctions themselves (so that they are indeed proven sustainable) before introducing a MLM affiliate marketforce.
Otherwise it’s just the affiliates propping up the scheme and once they stop pumping money in it’s dead (Bidify).
Note that even with the penny auction running before the MLM opportunity, if they allow members to earn based on how much they invest into the scheme, it doesn’t take any time at all for a MLM company to find that their MLM opportunity far exceeds the volume of their penny aucton (Zeek Rewards).
If an MLM company cannot run a penny auction independent of a MLM compensation plan then, and can’t introduce a MLM compensation plan without hindering the auctions themselves, then the simple conclusion to draw is that penny auctions and MLM don’t appear to be compatible.
Of course we won’t know this for sure until someone does it right, and that doesn’t look to be happening anytime soon. There’s far too much “gimme money now!” in the MLM penny auction niche after Zeek Rewards went down.
Thanks for the insight, it’ll make a great reference point for anyone reading.
My in-laws jumped to Blue Bird Bids within maybe a week or two after Zeek went down. My mother-in-law has won a few auctions and received the goods, so it must be up and running instead of just in prelaunch.
Of course, after I voiced my concerns about the Zeek ponzi with them, with this new venture they’re not saying much about it. At least I haven’t heard of any recruitment meetings, and they’re not asking my wife & I to join. So I don’t know if they’re making any money from it yet or if they’re still waiting for a big payoff.
At any rate, with the lessons learned from Zeek I sure hope they hold onto that money and don’t spend it before it collapses or the SEC shuts it down and comes around looking for their winnings.
I remember when Zeek was in full swing that we were discussing how there’s only ever going to be a limited customer base for penny auctions in the first place. You’ll only ever be able to get a certain number of people to buy bids and play in the auctions, and as we’ve seen there is a high turnover rate of customers.
There’s just no way penny auctions with an MLM compensation scheme attached can be profitable enough to make everyone rich, despite the wild claims of infinite growth and billion dollar business from the penny auction investors.
IMO the few in Bidify that are making any serious money are obviously the ones at the top (as with most ponzie schemes).
More than likely these top ponzie recruiters are the same faces you can see on the corporate videos, where they have all won a free trip or cruise on behalf of all the suckers that paid them money to join this scam.
What most are not aware of is that these so called top recruiters have already been working hand in hand in many past ventures (most ventures who were documented and proven as being scams) and when Bidify was to launch, all these buddy buddies were given top placements in order to capitalize on all the money flow to come.
These top recruiters have been in the ponzie game a long time and I am positively certain that they do not have problems getting paid their owings even though it appears most members cannot withdraw any of their own earnings.
Bidify’s reputation has quickly been going down the drain, and this is really not surprising considering that many of the key players are known fraudsters. I am always amazed at how people can easily be convinced that these fraudsters have changed!
And here is the top fraudster:
According to the “About Us” page of bidify.com (bidify.com/index.php?page=about) Frode Jørgensen (who is apparently now released from prison) is running the scheme together with an Icelandic former carpenter and vacuum cleaner seller, called Larus Palmi Magnusson.
Frode Jørgensen was founder, part owner and CEO of the pyramid/ponzi scam Plexpay Network, which was raided and shut down by Norwegian police on 20th September 2005.
In December 2007 the local court in Trondheim, Norway sentenced Frode Jørgensen to 2 1/2 years prison and confiscation of certain assets, for establishing and operating an illegal pyramid scheme.
On 15th September 2009, after appeals, the Norwegian Supreme Court confirmed the prison sentence (1 year was made a suspended sentence) against Frode Jørgensen, as well as the asset confiscations.
For those who can read a Scandinavian language, a summary of the ruling can be found at:
http://www.domstol.no/DAtemplates/Article____21792.aspx?epslanguage=NO
The complete Supreme Court ruling can be found at:
http://www.domstol.no/upload/HRET/Avgjørelser/2009/saknr2009-1255_anonymisert_.pdf
Before Plexpay, Frode Jørgensen was involved in the pyramid and ponzi schemes “The 5 percent Community”, World Games Incorporated (WGI) and PIPS.
After Plexpay, Frode Jørgensen has operated the pyramid and ponzi schemes AmityFunds, YouGo, and now Bidify.
According to the online presentation of bidify.com, the official “product” of the scheme appears to be an online auction site. However, most of the presentation focuses on “affiliates”, pyramid selling of memberships in the scheme, and related bonuses. So this is obviously a pyramid scheme camouflaged as an internet auction site.
To put money into any financial scheme operated by Frode Jørgensen, is utter idiocy!
I wrote a blogpost on this, analyzing how suitably matched is MLM to penny auctions any way. The answer is same as Oz’s… don’t bother.
http://amlmskeptic.blogspot.com/2012/11/genre-analysis-mlm-and-penny-auctions.html
That’s just like the question I brought up when Zeek was in full swing: Why does a wildy successful and profitable penny auction need an MLM attached anyway? What CEO in his right mind would share 50% of the profits with people advertising the business on the internet?
I’m firmly convinced (and have been even before Zeek got shut down) that any MLM attached to a penny auction is a ponzi scheme which is just using the penny auction as a front.
The penny auction was “wildly successful” BECAUSE of MLM…or so the story went. Except that it wasn’t.
More like it was “wildly successful” because the MLM affiliates were told to buy up the bids.
Ha. That’s right.
BidXCel seems to be the same way. You can purchase a particular package and instantly start earning in what they call the bonus pool.
There are several pools to choose from depending on what you’re willing to invest. You qualify as long as you give a certain amount of bids away and they are used or you purchase something in the auctions.
Someone tried to recruit me and said as long as you can find customers to use the bids & do your daily task, you will earn in the bonus pool. He said just find a family member or friend to use them and it can be the same people each month.
He tried to convince me that they were legal and all lawyered up, but I see this being no different than Zeek.
i put in 10,000 dollars all my saving a week after they got shut down my husband is in the army for the last 23 years as you well know we are not in the military for the pay thats for sure!!!!!
we have 3 children ages 14, 12, ans 10 my husband came back from AFGHANISTAN where he lost 28 men the most ever to die in that year 2009. We as a family have not had a family vaction since before he left in 2008.
i am a GOD FEARING WOMEN and believe and didnt tell my husband what i was doing because the man who was my sponsor was also a very good frind ofmine and a christian as as well so i trusted him.
the only reason i didnt share this BIG life changing decision with my husband is because i was trying to do something right for the first time for my familyand then use it to have a long well deserved vacation with my husband who now sufferes with PTSD.
HE CAME HOME WITH ALL HIS LIMBS but his mind will never be the same. then he received the BRONE AND TRUSTME THAT DONT GIVE US MILITARY WIVES A MANUEL on how to fix our husband when they return from war. then i HAD TO TELL HIM WHAT I DID AND HOW I LOST OUR 10,000 dollars which almost cost me my marriage.
i have suffered great PAIN AND WENT I WENT TO THE BANK I FOUND OUT MY CASHIERS CHECK HAVE NEVER BEEN CASHED WHERE IS MY MONEY I JOINED IN JULY I WEEK AFTER THEY WHERE SHUT DOWN WHY CANT I GET MY MONEY BACK.
I NEVER MADE 1 PENNY I WORKED SO HARD FOR THAT WHAT DO I TELL MY CHILDREN THE BACK SAID I WOULD HAVE TO WAIT 90 DAYS NOW THEIR SAYING BECAUSE THE FEDS ARE INVOLVED THEY HAVE NO IDEA.
DO THESE PEOPLE REALIZE WHAT THEY HAVE DONR AND HOW MANY PEOPLE THEY HAVE AFFECTED A MARRIAGE 3 INNONECT CHILDRENS LIVESAND TO TOP IT OF MY MOHER JUST DIED 4 WEEKS AGO. BUT I STILL HAVE MY FAITH IN THE GOOD LORD.AND HE WILL PROVIDE.
I QUESS THIS CHRISTMAS I WILL JUST HAVE TO COME CLEAN AND TELL THEM THE TRUTH AND LET THEM KNOW THEIR MOMMY TRIED TO MSKE THEM A GREAT CHRISTMAS AND TRIED A GET A VACTION LONG OVER DUE BUT KNOWIT WILL NOT NOW HAPPEN. A FAMILY THAT HAS BEEN TORNH APART, SINCVERELY, DEBORAH SERRA
@D.S.: while I sympathize with your story with Zeek, this is a story you should share with the receiver and/or the judge, and over at the Zeek topic, rather than this catch-all position of various existing (and still running) penny auctions.
A sad story, but: When one puts one’s savings into a “get rich quick” / “too good to be true” scheme, those savings will be usually lost.
Why? Because such schemes are always frauds!
Unfortunately, if a person professes to be religious or uses religious type language, that is not a guarantee that he/she is honest.
In fact, many fraudsters prey on religious people and religious, and their favourite purposes are Ponzi schemes, pyramid schemes and collecting money for fake benevolent purposes.
Why are religious people/groups favourite victims for fraudsters?
– A religious community is a useful group for spreading a pyramid/Ponzi by ‘word of mouth’.
– Religious people are likely to trust figures of authority, and not to check if they are lying.
– Although the Bible states that all people are sinners, christians often assume that other (claimed) christians are good and honest.
– Religious people are likely to donate to (claimed) benevolent causes.
The cashiers check obviously has been seized by the SEC, together with a lot of other objects.
The important queation is how a seized, uncashed check will be regarded in a Ponzi fraud investigation by the SEC:
a) The uncashed check may be deemed as *not* having been paid into the scheme. In that case, it should be possible to have the check anulled if not cashed after 90 days.
b)The uncashed check may be deemed as having been paid into the scheme. In that case, the money will go into the large pool of money paid into the scheme. In the end, when the SEC has finished its enormous job of redistributing the Ponzi money, you will be refunded some percentage of what you have paid in.
I don’t know which of these alternatives will happen.
On the other hand, be glad that the ZeekRewards Ponzi scam was stopped by the authorities;
If the scam had been allowed to run itself into the ground (which was close to happening), you would have lost everything.
I find it surprising your check has not been cashed after this long but if so, you should report it as lost. That’s the first step. The second step is wait and see. Take care.
The SEC receiver for Zeekrewards have already answered this question ( http://www.zeekrewardsreceivership.com/FAQ.html#4 ):
Thus, in case of an uncashed cashiers check issued to ZeekRewards, this money will go into the total pool of ZeekRewardy pay-ins, and Ms. Serra will have to wait for the SEC receiver finishing the claims/payback process, and she will have to accept the payback percentage which is determined by the receiver.
However, it is important to monitor the receiver web site, and to file a claim. A claim form will probably be made available when the receiver starts invting claims.
The uncashed check should not be reported as lost, because this could result in legal action from the bank or the receiver.
Assuming that the cashiers check has been made out to ZeekRewards shortly before the shutdown, the bank will know that the check is probably impounded by the SEC/receiver (the shutdown has been well published in news media), and will not accept a report that the check is lost. The bank may even regard a ‘lost’ report as a fraud attempt.