Is Your Party a Pyramid?

Is Your Party a Pyramid?

Home party businesses have been popular for decades. The lure of generating income while working on your own schedule, from home or in a “party” atmosphere, is enticing for obvious reasons. What many people don’t realize, however, is that these types of businesses can easily run afoul of laws like the Michigan Pyramid Protection Act, the Michigan Consumer Protection Act, and even federal statutes like the Racketeer Influenced and Corrupt Organizations Act (“RICO”). The problem arises when “multi-level marketing” organization plans are used inappropriately and businesses cross the line into pyramid schemes.

In multi-level marketing businesses, independent representatives are hired to sell products and/or services. The representatives earn a commission from their sales and also from any retail sales made by other people that they recruit. Legitimate businesses focus on generating profit from product/service sales, and the number of representatives that can sell the business’s products and services in a given region is usually limited.

On occasion, however, a business that claims to be selling products or services under a multi-level marketing plan is using goods and services as a front for its real source of profit: the “entry fees” charged to newly enlisted sales representatives. These entry fees are often marketed as the cost of training, inventory, or start-up services for product sales; but, in reality, the product sales actually only comprise a small portion of the business’s actual revenue. While newly engaged representatives are given products or services to sell, they are urged to spend considerable time and effort recruiting additional representatives for the sales “team,” with the promise of earning commission on their recruits.

Pyramid scheme businesses generally promise unlimited sales potential to new reps when, in fact, they are saturating the market area with many more sales people than that market can reasonably bear. The business’s profits from the sale of goods or services are of little importance to its profitability because the income from the “entry fee” is the primary source of revenue. As the focus shifts from product sales to recruitment profits, the business’s risk of being found to be an illegal pyramid scheme increases. And the catch is that there is potential legal liability at every level of the scheme, not just for top executives.

Because sales representatives are independent and most likely working as sole practitioners without the benefit of the corporate veil, each representative can potentially bear personal liability for false claims made about the business, its products and/or services, and the business opportunities it offers. This is true even if the representative is simply repeating information disseminated by the company.

It’s very important to thoroughly research any home party business before you decide to become involved. Watch for pyramid scheme warning signs such as the opportunity for an unlimited number of representatives permitted to sell the business’s goods or services in a market area, corporate focus on recruitment over product sales, earning potential linked to recruitment of other sales “team” members, and promises of unlimited earning potential, early retirement, or life changing income streams. And of course, if you have questions or concerns, please consult an experienced attorney.

For more help distinguishing multi-level marking businesses from pyramid schemes, please see the Michigan Attorney General’s Consumer Alert.

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