Multilevel marketing plans, also known as “network” or “matrix” plans, can be legitimate distributor networks designed to sell products and services. But some plans may be illegal “pyramid” schemes.
In a “pyramid” scheme (see below), a person pays for the right to recruit, for profit, others who pay for a similar right. The scheme promises an ever-growing “chain” or “pyramid” of recruits, in which new recruits fund payments to those already in the plan. But the exponential growth cannot be sustained and the “chain” inevitably breaks. When it does, newer recruits (those forming the broad base of the “pyramid”) lose their investment.
Multi-level marketing plans typically offer commissions based on (1) your sales and (2) sales made by distributors that you recruit. Some plans may promise commissions based on sales by distributors further “downline” (those recruited by your recruits, and so on). A multi-level marketing plan may be a thinly disguised “pyramid” scheme if, for example:
- It offers commissions based on distributor recruitment, not product sales.
- It offers commissions based on growth of your “downline” distributor network (even if commissions are nominally based on product sales by the “downline” network).
- It requires new distributors to make expensive investments that go toward commissions to “upline” distributors.
- It promises huge returns based on the growth of the distributor network.
Wisconsin law prohibits unfair and deceptive practices by multi-level marketing promoters. Beware of:
- High pressure tactics at “opportunity meetings” and elsewhere.
- Claims of miracle products and huge earnings.
- Shills or “decoy” references paid to describe their fictional earnings from the marketing plan.
- Failure to disclose initial investment requirements.
For more information about unfair and deceptive sales practices, see Consumer Law topic, Advertising and Sales Claims.