Understanding network marketing legal requirements is essential to identifying and participating in network marketing business opportunities that operate within the law . . . mlm companies that do not run the risk of being shut down by the appropriate government consumer protection agency.
The truth is this . . . the laws regulating the network marketing industry is very strict. And it is that strict because network marketing is a business model where fraudsters can easily trick unsuspecting members of the public into joining a ponzi scheme masquerading as a genuine network marketing company.
Therefore, the laws are setup to protect the general public against such fraudsters.
Why do people easily fall prey to fraudulent companies peddling pyramid schemes?
Simple. The companies promise participants that they offer a get-rich-quick opportunity.
Since most people desire to get rich quick, especially in poverty ridden African countries, they easily fall prey to ponzi schemes.
So, what are the network marketing legal guidelines you need to understand to be able to identity a ponzi scheme?
How do you differentiate a genuine network marketing company from an illegal pyramid scheme?
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The following are some of the network marketing legal guidelines for identifying a genuine network marketing company.
1. Real Product or Service: A genuine network marketing company offers a real product or service for sale. Any mlm company that does not offer a product or service for sale that adds real value to buyers is an illegal pyramid scheme.
2. The 70-30 Rule: The product or service offered by the mlm company must be sold to people who are participants and non-participants of the revenue sharing of the company.
In addition, the bulk of the sales must be to customers. That is, non-participants in the revenue sharing of the company who buy the product or service because it meet their needs or provides value for money spent.
A network marketing company is classified as a pyramid scheme (or ponzi scheme) if the products or services of the company are bought mainly by members (or if commissions paid to members are largely from sales to members).
To avoid breaking this rule, at least 70 percent of a company's sales must be to customers. That is, actual people who buy the company's products or services without financial rewards attached.
Can a product based network marketing company be accused of being a pyramid scheme by the regulatory authorities?
Of course, yes.
If they violate the 70-30 rule discussed above or if they violate rules 3, 4, 5 and 6 discussed below.
A classical example of a product based network marketing company that was once accused of being an illegal pyramid scheme by the FTC is the case of Vemma versus the FTC.
3. Pay-To-Play: One of the signs that a network marketing company could actually be a ponzi scheme is if it practices what is called pay-to-play. That is, a requirement that members (or participants in the mlm opportunity) must pay a certain amount of money (or purchase a certain quantity of products) before they can earn in all of the different ways available to be paid as specified in the company's compensation plan.
Do not promote this type of mlm opportunity if your retirement planning strategy includes network marketing.
Otherwise, your chosen mlm company risk having problems later on with the regulatory authority. And you risk losing the passive income stream you have built over the years.
4. Inventory Loading: Some network marketing companies offer members an opportunity to purchase more products from the company . . . products much more than they need or can sell.
The mlm companies that practice this method of increasing sales often entice members to do so by rewarding those who do with juicy commissions.
The end result is that a sizable number of participants start buying those large packages because of the expected incentives. And most cannot sell off this unwanted inventory.
Dissatisfied members eventually begin to file complaints against the company to regulatory authorities. And the company soon begin to face problems.
5. Deceptive Income Disclosures: Many network marketing companies attempt to demonstrate to the public that they have a superior compensation plan that makes it easy for participants to become millionaires within a short period of time by showcasing their highest earners.
However, this often amounts to deceptive income disclosure because majority of participants in any given business opportunity (whether in network marketing or outside) fail to make money.
Therefore, parading the outstanding results of a few individuals as a show of what the average person might make is down right dishonest. And this often gets many network marketing companies into trouble with the regulatory authorities.
6. Business Versus Investment Opportunity: Many dubious mlm company promote their mlm opportunity as an investment opportunity instead of purely as a business opportunity that requires active work by participants to earn commission.
This immediately raises a red flag with the securities and exchange commission (SEC) because businesses need SEC license to sell investments. And these mlm companies often do not have a license issued by SEC. So, they get shut down within a couple of years.
Want to build your retirement plans around network marketing business opportunity?
Want long-term retirement income?
Make sure you're associated with an mlm company that adhere to the network marketing legal guidelines discussed above (and any additional ones you find on the web sites of regulatory authorities like the Federal Trade Commission (FTC) or the consumer protection agency in your country).
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