SEC reiterate need for retail sales in MLM
As part of my writing here at BehindMLM I find myself sifting through mountains of MLM related information on a daily basis. One topic I find that pops up on a consistent basis is the debate over the importance (or lack thereof) of retail sales by an MLM company.
By using the term “retail sales” in MLM one is of course referring to sales of a product or service (not a third-party offering) by an MLM company to non-affiliates. Non-affiliates can be referred to as non-participants or any other name that denotes them as not participating in the compensation plan and earn commissions.
Some MLM companies attempt to muddy the clear definition of a retail customer by claiming that affiliates who do not recruit are retail customers. It is important to note that the failure to recruit new affiliates does not preclude an affiliate from generating commissions (typically by selling the company’s products), and as such they simply cannot be defined as retail customers (who simply cannot generate commissions no matter what they do or don’t do).
Here at BehindMLM it’s no secret the vital important I place on retail sales in my company reviews. The existence of retail sales and its viability is one of the key indicators I use in my analysis of an MLM company’s compensation plan and business model.
Adopting a common-sense approach to retail sales in MLM, I use a benchmark of around 50%, figuring that if a company can demonstrate that at least 50% of its revenue is from retail sales then they’re well-clear of being a pyramid scheme.
I mean, selling products to retail customers is what MLM is supposed to be about right? So is expecting a company to be at least 50% engaged in this unreasonable?
According to some MLM proponents, very much so.
One common assertion I see used time and time again is the insistence that US regulators do not care if products are being sold to retail customers or affiliates.
‘A product sale is a product sale and so long it is being purchased on the merit of the value of the product itself and not just to generate commissions‘, or some derivative is the common reasoning used.
The problem with that is of course that you then wind up companies operating in a loophole, ignoring retail altogether and focusing on generating recruitment commissions via product sales, with an inflation in product cost masking what would otherwise be a blatant recruitment incentive.
That however is conveniently ignored.
‘So long as a company is generating revenue via product sales, who cares whether customers or affiliates or retail non-paricipants?‘
Anyone who gives a damn about pyramid schemes operating in the MLM space should care.
If there’s no noticeable difference between a pyramid scheme set up to mask recruitment commissions paid out of inflated product prices, and an MLM company that professes legitimacy despite a lack of retail because commissions are generated via product sales – then the MLM industry has a huge problem.
But hey, that’s just me with my common-sense. I don’t have a sob story to tell you… there’s no rags to riches “I lived in a van in Hawaii for a decade eating my own shit to get by” backstory to BehindMLM. I’m just a guy with a keyboard trying to make sense of an industry that is notoriously treacherous to wade through, for the uninformed and informed alike.
The hell do I know about pyramid schemes?
Following the bust-up of the multi-million dollar Ponzi scheme CKB (aka CKB168) two days ago, the Securities and Exchange Commission (SEC) published a new “investor alert” on their website.
The alert, dated the 17th of October 2013, cites CKB and Zeek Rewards (a $600M MLM Ponzi scheme shut down last August), as two prominent examples of Ponzi and pyramid scheme fraud.
Of particular note in the SEC’s alert is the following:
Pyramid schemes masquerading as MLM programs often violate the federal securities laws, such as laws prohibiting fraud and requiring the registration of securities offerings and broker-dealers.
In a pyramid scheme, money from new participants is used to pay recruiting commissions (that may take any form, including the form of securities (Ozedit: and products)) to earlier participants just like how, in classic Ponzi schemes, money from new investors is used to pay fake “profits” to earlier investors.
Recently, the SEC has sued the alleged operators of large-scale pyramid schemes for violating the federal securities laws through the guise of MLM programs.
When considering joining an MLM program, beware of these hallmarks of a pyramid scheme:
-MLM programs involve selling a genuine product or service to people who are not in the program.
-No demonstrated revenue from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), showing that the MLM company generates revenue from selling its products or services to people outside the program.
In both the CKB168 and Zeek Rewards examples cited by the SEC in their alert, both companies were primarily nailed for a lack of retail activity.
(CKB’s) promoters misrepresented CKB as a legitimate and profitable MLM company that sells web-based children’s educational courses when, in fact, CKB has little or no retail consumer sales and no apparent source of revenue other than money received from new investors.
The SEC shut down a $600 million fraud that duped approximately one million Internet customers through a complex investment scam involving a Ponzi scheme promoted as a daily profit-share pool and a pyramid scheme pitched as an MLM program for Zeekrewards, the self-described affiliate advertising division for Zeekler, a penny auction website.
The SEC alleged that, for the pyramid scheme component of the scam, the defendants promised bonuses and commissions to customers for enrolling in a monthly subscription plan and recruiting others to join the plan.
However, according to the SEC’s complaint, new customers’ funds were pooled and used to pay recruiting bonuses to existing customers because there was no substantial legitimate revenue from product sales.
That last paragraph is of particular importance as it highlights that even with product sales if the retail isn’t there (“legitimate revenue from product sales”), then the company is still a pyramid scheme, even with product sales being made to affiliates (“customer funds”).
In addition to the SEC, it’s also worth noting that the Federal Trade Commission (FTC) also prescribe similar guidelines on MLM companies. In an article titled “Multilevel Marketing“, published in November 2012, the FTC wrote
Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan.
If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.
With “the public” of course referring to retail sales made to non-participants (non-affiliates), the stance both US regulators charged with regulating the MLM industry have on retail activity within MLM companies should be crystal clear.
Offering their advice to prospective MLM affiliates, the FTC go on to advise the asking of a series of questions to potential uplines, including:
-What percentage of your sales were made to distributors?
-How much product did you sell to distributors?
-What are your annual sales of the product? (Ozedit: used to calculate the retail ratio of an affiliate’s sales after the previous two questions have been answered)
-What percentage of the money you’ve made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?
Long time readers of BehindMLM will observe that the FTC’s proposed questions above are similar to what I typically recommend prospective affiliates ask their potential uplines, usually when I’m not entirely convinced of an MLM company’s retail viability.
Although I don’t purport to be at the same level as either the FTC or SEC, or to give the impression that I work with them on any level or official capacity (I don’t), it’s great to see that those regulating the space have adopted a common-sense approach to MLM business models.
One of the more worrying conversations I had with a well-known MLM industry figure not too long ago suggested that there wasn’t a single MLM company out there that had anything close to 50% retail sales revenue.
Whether that’s true or not I have no idea, but if we entertain the idea it is, then perhaps it’s time we revisit the viability of the current MLM models altogether and re-evaluate the industry’s legitimacy.
If you as an MLM company can’t sell your products to non-participants through your affiliates, isn’t that telling in and of itself that your business model isn’t viable?
After all, if you’re not able to establish a market for your products with the general public, what’s left… other than the selling of the income opportunity to participants under the guise of affiliate product sales?
And as per the SEC and FTC above, we know where that’s likely to lead to…