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MLMIA – Legal Mentoring Bulletin One

What is MLM? and What is a Pyramid?

What is “multilevel?” First, for clarification in this document, we are not referring to a “multilevel” form of distribution. Many direct sales companies or their distributors choose to avoid the MLM (multilevel marketing) label, or deny they are MLM. One reason might be that most companies today no longer have a multilevel form of distribution, the kind where certain ranks of distributors buy direct from the company, and re-sell to lower ranks of distributors and to customers. The more efficient distribution model is for the company to directly fulfill orders to the end user consumer. This method is now the norm, not the exception. So it may be accurate to say that companies structured that way do not have a multilevel form of distribution. But most of these companies still have a multilevel form of compensation.

IF the independent contractor income opportunity is limited to the potential to RECEIVE income from the company, ONLY by purchases (for personal and family consumption and/or for resale) AND by the purchases of persons DIRECTLY INTRODUCED to the company (no matter what these purchasers are called) – the company has offered a single-level income opportunity to its independent contractors, and is NOT multilevel.

The income opportunity offered by the company becomes multilevel when the potential to receive income GOES BEYOND what is stated above. So, if the compensation plan gives an incentive and rewards a person for finding and introducing to the company more persons like themselves who generate business volume – we have a multilevel form of compensation. At this point the rewards available are for MORE THAN the business volume personally generated – and are additionally based on business volume being generated by persons a level below the first person – thus – multilevel.

What is a pyramid? By restating what is a single level income opportunity, and what is a multi-level income opportunity, we get to what is a pyramid:  When the only way an independent contractor can make money with the company is by personally generating business volume, the company has offered a single level income opportunity. If however, the company offers two ways to make money – generate business volume – and optionally – find, (sponsor, recruit, refer) other independent contractors who generate business volume – the company is offering a multilevel income opportunity. The key is that the independent contractors are empowered to find, and are rewarded for finding, additional independent contractors. That is the very definition (legal definition) of “multilevel.” BUT - The “rewarded for” above, can only be an indirect reward based on the business volume of the second independent contractor. The reward can never be an immediate reward for just finding the additional participant. Such an immediate reward is pyramidal and illegal. In an illegal pyramid, the act of finding another participant is rewarded, based on the act of recruiting, instead of based on the business volume of the recruited person. Another shortcut definition of a pyramid – Rewarding a participant for bringing in another participant.

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The above is provided as general information, and although written by MLMIA Board Member and Direct Selling Specialist Attorney, Gerald Nehra, is NOT provided as the rendering of legal advice. Readers are urged to seek the counsel of attorneys or firms with special knowledge of direct selling laws. The four firms that devote their practice exclusively to counseling corporations about direct selling legal issues are, in alphabetical order: Babener & Associates, Jeffrey A. Babener, 503-226-6600, This email address is being protected from spambots. You need JavaScript enabled to view it.; Grimes & Reese, PLLC, Kevin D. Grimes, Spencer Reese, 208-522-2600, This email address is being protected from spambots. You need JavaScript enabled to view it.; Nehra & Waak, Attorneys at Law, Gerald Nehra, Richard Waak, 231-755-3800, This email address is being protected from spambots. You need JavaScript enabled to view it.; and D. Jack Smith Law Firm, D. Jack Smith, 901-292-5225, This email address is being protected from spambots. You need JavaScript enabled to view it..">This email address is being protected from spambots. You need JavaScript enabled to view it..