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[$] Glossary - MLM / Pyramid schemes

An MLM scheme is a plan with three or more levels (with the operator on top, and two or more levels of "down-line" participants) resembling a pyramid that promotes the supply of a product to its participants.  Monetary compensation is earned based on the supply of the product to participants and/or customers who are not involved in the MLM.  (A legitimate MLM plan focuses on the supply of products rather than the recruitment of participants, and offers products that consumers value and are willing to purchase.)

When recruiting, representations of potential earnings are often claimed, and the promoters often put emphasis on either real or fictitious best case scenarios.

A requirement of joining an MLM often involves product purchases, marketing and distribution packages (or kits), and other various sign-up fees, all of which are usually non-refundable after the amount of time required to find out if the plan works.  (When the purchase of a product is required for participation in an MLM, the product must be sold at the seller's cost, and can only be used for the purpose of facilitating sales.)

Canadian law (also see our Law Library)

Subsection 55(1) of the Competition Act defines an MLM as a plan in which a participant receives compensation for the supply of a product to another participant, who in turn receives compensation for the supply of the same or another product to yet another participant in the same MLM.  Subsections 55(2) and 55(2.1) set out certain obligations relating to compensation disclosure by operators of, and participants in, MLMs.  Failure to comply with these obligations is subject to criminal penalties as set out in subsection 55(3).

More information from the Canadian Government can be found here:

Enforcement guidelines:  Multi-level Marketing Plans and Schemes of Pyramid Selling
The purpose of this bulletin is to provide guidance on the Canadian Competition Bureau's policies and procedures relating to the administration of the multi-level marketing and scheme of pyramid selling provisions of the Canadian Competition Act.

Canadian law:  Competition Act (R.S., 1985, c. C-34)
The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.

[Stethoscope] Get-rich-quick schemes and Spam

Many get-rich-quick schemes have capitalized on MLM/Pyramid schemes over the years because this can make them seem more appealing and credible.  Since the introduction and popularization of internet eMail, many get-rich-quick and medical quackery scammers have also been using spam to promote their ill-formulated wares to a much larger potential audience, typically disguised as "exciting new business opportunities."

Incredible claims

Unscientific (because they don't eliminate things like the pacebo effect) anecdotes are a very popular marketing aid used to qualify the products and techniques being promoted.  The enthusiasm and excitement around selling such products should be considered as a warning sign -- requests for verifiable proof are reasonable and promoters with integrity will gladly provide references to peer-reviewed studies or other applicable forms of valid evidence.

The truth is usually very unexciting (although the research can be provocative at times).  One example includes fitness and weight loss products that promise fast results, yet in reality this requires many months or years of hard work.  Another example is a special drink or edible that can cure a variety of health problems, with wild claims about "big pharma conspiracies," yet there is a complete lack of proof to show that someone's kidney stones disappeared because they drank some horrible tasting drink for three years (if this was real, the inventor would be an instant multi-billionaire because the major retail pharmacies would probably be first in line to compete for exclusive rights to sell it).  There are many other examples that follow these types of themes.

See also

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