International Law

What is an Illegal MLM or an Illegal Pyramid in Canada?

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From the Competition Bureau's website:

"A multi-level marketing company sought an opinion in April 2003 as to whether a proposed plan to sell memberships would raise concerns under the Competition Act.

Under the plan, a membership costing $2,995 before taxes would give members the services and benefits of a traditional hotel concierge at preferred rates, from various vendors or suppliers.

Members could also take advantage of a no-cost option to earn commissions as sales agents by recruiting new members at the rate of $2,995 each.

Sales agents would earn $500 on their first two membership sales, before graduating to senior agent and earning $1,500 on all subsequent sales.

The Competition Bureau examined the proposal under the multi-level marketing and pyramid selling provisions of the Act, sections 55 and 55.1.

Based on its understanding of the facts, the Bureau determined that if the company implemented the plan as proposed, the Commissioner would have sufficient grounds to commence an inquiry for the following reasons:

• The proposed membership presentation contained several claims about the level of compensation available to participants, but only one reference to the amount an average member could expect to earn. It was felt that this one reference to average income was not enough to avoid contravening subsection 55 (2) of the Act. This provision requires plans that make representations related to compensation to also include fair, reasonable and timely disclosure of the compensation received or likely to be received by a typical participant in the plan.
  
  
• The plan would likely constitute a scheme of pyramid selling under subsection 55.1 (1)(a) of the Act, because commissions would be paid to current paying members for recruiting new members who would also pay to join in order to obtain the same compensation. Subsection 55.1 (1)(a) prohibits multi-level marketing plans in which participants give compensation for the right to receive compensation when they recruit new participants who pay for the same right.
  
  
• The plan would likely violate subsection 55.1 (1)(b) of the Act because the $2,995 membership cost, on which commissions are paid, would constitute a purchase requirement other than a starter's kit sold at cost.

As a result, the Bureau provided the opinion on May 21, 2003, that the proposed plan if implemented would give the Commissioner grounds to commence an inquiry under both the multi-level marketing and pyramid selling scheme provisions of the Act.

Full post as published by Misleading Advertising Law on January 30, 2009 (boomark / email).