MLM LEGAL MYTHS

Beginning over 40 years ago and continuing to the present day, network marketing companies continue to form and operate based upon a belief that certain legal principles apply to network marketing companies. Their belief in what the law is may be a false belief and based upon a legal myth.

As the third Myth below demonstrates, the regulatory authorities, notably some of the Attorneys General in various state consumer protection offices, also have a myth of their own.

MYTH #1

Myth: A network marketing company may require distributors to purchase a sales kit provided that it is offered to the distributor at company cost.

Truth: Approximately 10 state anti-pyramid laws permit a required distributor kit purchase at company cost, a few even allow required sales material purchases so long as the amount does not exceed a specified sum, whether or not it's at company cost.  Forty (40) U.S. States and most countries worldwide do not permit a required sales kit purchase at any price, nor does such an exception exist under U.S. Federal Postal, Business Opportunity and Securities laws. There are a number of ways to have the new distributor almost always become a purchaser of a sales kit, but requiring its purchase isn't one of them.

MYTH #2

Myth: It's OK to charge a fee to become a distributor.

Truth: When a network marketing company offers distributorships for a fee, they are always selling an unregistered investment security under U.S. State and Federal law, violating various State and Federal lottery laws, and are offering an illegal pyramid sales scheme in the U.S. and other countires.

MYTH #3

Myth: Network marketing programs by their very nature will, if continued over a long enough period of time, exhaust the available population able to participate in the program, This is argued as a deceptive trade practice under U.S. State and Federal law because it's inherently unfair to the later joining distributor unless the company in a meaningful way tells each new distributor that their prospects for success are less than those of the people who joined before them.

Truth: As any competent statistician will confirm, in a defined geographical area the number of persons available to become distributors and to become customers in fact remains relatively stable. This is so because the "pool" of people comprising the prospective distributors and customers, although reduced by active customers and distributors and by deaths of persons over 18, is continually increased by the addition of new persons reaching 18 years of age and, critically, the ability of persons who were previously distributors or customers to renew those relationships with the company. For the most part the state and Federal regulatory authorities are aware of and understand the "truth", but sometimes this false concept is argued by them against MLM companies.

MYTH #4

Myth: Network marketing companies may require new distributors to buy the company's product to become a distributor and/or to become commissionable as a distributor.

Truth: A required product purchase is no different from a required fee or a required sales kit purchase. It's illegal under most states' anti-pyramid laws and also results in the offer and sales of an unregistered investment security. There is one exception, however, created by the 1978 case of FTC v. Amway.  Product purchases at bona fide wholesale prices may be required of distributors on a periodic basis as a commission qualification provided a number of other conditions are met.