Consumer Tips - Multi-level Marketing and Pyramid Selling Schemes
Multi-level marketing (MLM) is a system for selling products whereby participants in a plan are paid for selling products to other participants who, in turn, are paid for selling the same products to yet more participants.
This type of marketing is legal in Canada when the plan does not contravene any requirements of the Competition Act.
Referral selling, matrix marketing and binary systems are all similar types of marketing plans, though some may be illegal under the Criminal Code, the Competition Act and some provincial and territorial laws.
Under the Competition Act, MLM plans that make representations relating to potential compensation must also disclose the amount of compensation earned by typical participants in the plan.
Pyramid selling is an MLM plan that incorporates the following deceptive practices, which make it a criminal offence under the Competition Act:
- paying money to those who recruit new members (who also pay money for the same right);
- requiring new recruits to buy products as a condition of participation;
- selling unreasonable amounts of inventory to participants; and
- having an unreasonable product return policy.
Anyone who wishes to set up a MLM plan may approach the Competition Bureau to obtain additional details.
Pyramid selling is also a criminal offence under the Criminal Code.
When considering getting involved in a MLM system, ask yourself the following questions:
- Is this type of MLM illegal? You may want to seek independent legal advice before signing any documents or committing funds.
- How much of a financial and time commitment will this system require? Legitimate programs don't require you to commit substantial sums of money upfront or ask that you purchase a large inventory of their product.
- Are you aware of the legal and fiscal considerations of becoming a seller? You must observe consumer protection laws and, in some provinces and territories, obtain a seller's permit. Both federal and provincial revenue departments will also probably require you to collect GST or HST and provincial or territorial sales taxes.
- Are the profit levels claimed for top earners representative of the earnings of typical participants in the plan? In some cases, when the amount of time spent selling the products, following-up with customers and recruiting new members is considered, the resulting "hourly wage" can be quite low. Most participants in MLMs make less than $2,000 per year.
For more information about multi-level marketing and pyramid selling schemes, contact the Competition Bureau at 1-800-348-5358.
