By: Herb Greenberg | 02/21/14 - 03:11 PM EST
Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from the purchase of goods that are not simply incidental to the purchase of the right to participate in a money making venture.As it turns out, Vander Nat and Keep reference the letter, too, but a different part of the letter. According to their paper:
The Advisory continues by characterizing an MLM pyramid scheme as an organization whose primary purpose is recruitment and is funded by monthly product purchases that are qualifiers for recruitment rewards. This part of the Advisory is often ignored." Also ignored is the court's warning in Omnitrition; i.e., the firm's permission that its "70% rule" can be satisfied by a distributor's purchase for personal use is certainly not a meaning consistent with Koscot. The court directly states: "Plaintiffs have produced evidence that the 70% rule can be satisfied by a distributor's personal use of the products. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to ultimate users" (Omnitrition, Part II C, 1996).Omnitrition and Koscot are two ground-breaking legal cases that have set precedence for subsequent multi-level marketing lawsuits. They conclude (emphasis mine):
Without a significant external customer base, internal consumption by an ever-churning base of participants resembles neither employee purchases nor a buying club. The MLM industry now appears to be heavily reliant on selling to itself - raising the retail question to ever greater urgency.Reality: The industry can spin this paper any way it wishes -- and I'm sure it will work overtime doing so, as will many bulls on the stock. But given that one of the authors is among the foremost experts on pyramid schemes at the FTC -- whose declarations have been included in the agency's most recent cases -- it would be foolhardy for investors to dismiss this as just another attack by short-sellers. If for no other reason -- it's not! Regulators and lawmakers may never lift a finger on the multi-level marketing debate, but as this paper shows, the risk is always there that they may have good reason to. P.S: I'll be doing a live meet and greet and Q/A at TheStreet's New York headquarters this Wednesday. It's in conjunction with my new Reality Check newsletter. It's invitation only. For more information contact ChairmansRSVP@thestreet.com.
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