The Multi-Level Marketing And Pyramid Selling (Prohibition) Act

The Act

This Act was introduced in 1973 after the Holiday Magic fiasco in Singapore. Holiday Magic was wound up for promoting pyramid selling. It had sold its cosmetic products through multi-level distributors and ended up with hundreds of distributors and few direct buyers. Franchisees paid $10,000 and got $1,200 for each new franchisee they and their recruits brought in. Furthermore, only a handful of these franchisees sold the products successfully as the products were expensive.

The Holiday Magic fiasco was not just a Singapore experience. Worldwide (including in the USA where the company originated), it defrauded people of more than US$250 million.

Under the Act, it is unlawful for any person to promote or participate in a multi-level marketing or pyramid scheme.

In 2000 the Act was amended as a result of the S888.com saga. S888.com, an e-commerce start-up used a controversial franchising scheme to attract hundreds of Singaporeans with promises of “million dollars earnings potential”. Under the “franchise scheme”, participants had to pay $27,000 for the right to be a franchisee and earned commissions directly from the promoter for every participant recruited (up to five levels). The scheme exploited the “loophole” exposed in the case of Tan Un Tian v PP which ruled that the definition of “pyramid selling scheme or arrangement” required proof of benefits among participants from different levels of the “pyramid”.

As the Act now stands, a “multi-level marketing” or “pyramid selling scheme” is defined as any scheme or arrangement for the distribution or the purported distribution of a commodity whereby –

(a) a person may in any manner acquire a commodity or a right or a licence to acquire the commodity for sale, lease, licence or other distribution;

(b) that person receives any benefit, directly or indirectly, as a result of –

(i) the recruitment, acquisition, action or performance of one or more additional participants in the scheme or arrangement; or

(ii) the sale, lease, licence or other distribution of the commodity by one or more additional participants in the scheme or arrangement; and

(c) any benefit is or may be received by any other person who promotes, or participates in, the scheme or arrangement (other than a person referred to in paragraph (a) or an additional participant referred to in paragraph (b)).

From this definition, it seems that all sorts of commonly acceptable marketing practices that involves multi-level commissions are caught by this Act. The Ministry of Trade and Industry say that the Act is to protect consumers against harmful pyramid schemes.

An illegal pyramid scheme will typically require participants to pay hefty upfront charges. In turn, the participants are promised attractive financial rewards for each additional participant recruited, as well as for all new participants brought in by their recruitees. As more salespersons are recruited, participants hope to recover their upfront charges and earn sizeable profits. Consequently, such pyramid-like structures will eventually run out of new recruits and collapse, resulting in those salespersons at the bottom of the pyramid losing all their upfront charges. Illegitimate pyramid schemes usually share the following characteristics:

 

  1. Promoters hype about how easy it is to earn money, that people can get very rich in a very short time and that the way to earn money is by recruiting others to join the scheme; 

     

  2. The commodity in question is not something one would normally buy at its price; 

     

  3. Participants are required to invest money into the scheme, whether in the form of a joining fee or buying inventory.

 

However not all multi-level marketing schemes are harmful and outlawed. The Act empowers the Minister of Trade and Industry to exclude certain schemes and arrangements.

The Exclusion Order

Insurance, franchise and direct selling schemes, which fulfill certain criteria, are exempted from the Act. Under the Multi-Level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order 2000 (which was amended on 14 December 2001 and took effect on 1 January 2002), schemes that have the following characteristics are exempted from the prohibition:-

(a) any scheme or arrangement comprising –

(i) the provision of any financial advisory service; or

 

(ii) insurance business,

or any class of such schemes or arrangements, so long as every person participating in the scheme or arrangement is registered, licensed, approved or otherwise so entitled to act under the Financial Advisers Act or the Insurance Act, as the case may be;

 

(b) any master franchise scheme or arrangement, or any class of such scheme or arrangement, whereby a person is given the right to sub-franchise a franchise, subject to the scheme or arrangement satisfying the terms and conditions in sub-paragraph (c) (ii), (iii), (iv) and (vi);

(c) any scheme or arrangement, or any class of such schemes or arrangements, which satisfies the following terms and conditions:

(i) a person shall not be required to provide any benefit or acquire any commodity in order to participate in the scheme or arrangement, other than the purchase of sales demonstration equipment or materials at a price not exceeding their cost which are not for resale and for which no commission, bonus or any other advantage will be given to any person;

 

(ii) any benefit received –

(A) by any promoter of, or participant in, the scheme or arrangement accrues as a result of the sale, lease, licence or other distribution of a commodity to any other person; or

 

(B) by any promoter of the scheme or arrangement accrues as a result of the performance of one or more participants in relation to the sale, lease, licence or other distribution of a commodity to any other person;

 

(iii) subject to sub-paragraph (ii), no benefit shall be received by any person as a result of the introduction or recruitment of one or more persons to be participants in the scheme or arrangement;

 

(iv) a promoter of the scheme or arrangement shall not make, or cause to be made, any representation to any person that benefits will accrue under the scheme or arrangement in a manner other than as specified in sub-paragraph (ii);

 

(v) a promoter of the scheme or arrangement shall, in respect of any representation relating to the actual or potential accrual of any benefit under the scheme or arrangement, maintain fair and accurate records of the maximum, minimum, median, average and mode benefits that have accrued to the promoter and participants in the scheme or arrangement, duly audited by an auditor for each financial year;

 

(vi) a promoter of the scheme or arrangement shall not, and shall take reasonable steps to ensure that participants in the scheme or arrangement do not –

(A) knowingly make, or cause or permit to be made, any representation relating to the scheme or arrangement or to the commodity which is false or misleading;

 

(B) knowingly omit, or cause or permit to be omitted, any material particular relating to the scheme or arrangement or to the commodity;

 

(C) knowingly engage in, or cause or permit, any conduct that is misleading or likely to mislead as to any material particular relating to the scheme or arrangement or to the commodity; or

 

(D) in promoting the scheme or arrangement or the commodity, use, or cause or permit to be used, fraud, coercion, harassment, or unconscionable or unlawful means;

 

(vii) the commodity shall be distributed with a full refund or buy-back guarantee that is exercisable by every participant in the scheme or arrangement on reasonable commercial terms and within a period of at least 60 days from the date of distribution of the commodity to the participant; and

 

(viii) every participant in the scheme or arrangement shall be informed in writing, at the time of the distribution of the commodity to the participant, of the existence of the guarantee and the manner in which it can be exercised.

Briefly, schemes that provide the following are not unlawful:-

(a) Safeguards – A participant cannot be required to provide any benefit or acquire any commodity in order to become a participant in the scheme, other than the purchase of demonstration equipment which are not for resale, at no more than cost price and for which no commission can be given out. A legitimate multi-level marketing scheme would not impose a financial risk on salespersons. For example, salespersons should be entitled to full refunds, under reasonable commercial terms, for any inventories kept or purchased by them which are not sold to end consumers, so long as the inventories are returned within a period of 60 days.

(b) Behavioural checks – The companies must not misrepresent the scheme as get-rich-quick opportunities, and should not use fraud, coercion, harassment, or unconscionable means to force people to join the scheme. Instead, the companies should focus their efforts on promoting the quality and features of the products. If a company wishes to show potential participants the earning potential, they must keep records of the maximum, minimum, mean, mode and median earnings of their salespeople in the past.

(c) Sharing of commission – It is all right for a salesperson to share commissions from several layers of salespersons recruited by him. However, such commissions must be generated by sale of the product or service in question, and not through the recruitment of additional participants into the scheme.

If the scheme satisfies the conditions in the Exclusion Order, no licence or permit from the government is required. Howver the government will not advice whether a scheme meets the conditions. Instead they will ask the operators of a scheme to either familiarise themselves with the regulations or to seek legal advice on it. Often, as a matter of practice, operators of a multi-level marketing scheme will seek the written opinion of a law firm as to whether any particular scheme is legitimate.

Network Marketing Companies

It is not possible to discuss multi-level marketing/pyramid schemes without also discussing network marketing. It has been touted as the marketing phenomenon of the future. By just calling a scheme a network marketing scheme does not make it legal. The scheme still has to satisfy the criteria in the Exclusion Order.

There are basically only a handful of network marketing companies (NMC) in the world. All NMCs are similar in many ways, the products are usually about health, beauty and household essentials. This is an important aspect because they need to have a product that needs constant replenishment to have a recurring income. This makes the selling ‘on autopilot’. Many companies that market their products through network marketing sell quality items at competitive prices. But some offer goods that are overpriced, have questionable merits or are downright unsafe to use.

The compensation plan, ie how marketers get paid, although sharing many similar characteristics, may differ from one NMC to another. Whether they are called Binary plan, Breakaway plan, Matrix plan or Unilevel plan, all of them do not reward for recruitment otherwise they will be illegal in Singapore and in many other countries. As a general rule of thumb be suspicious when:-

  1. you see a payout of more then 60% because, unless the product is unique, it generally indicates that the products are grossly overpriced. 
  2. qualification/quotas are ridiculously high.
  3. you can loose your network if you miss your quota.

Although there only a handful of NMCs, each NMC has many groups of marketers. The different groups are created because the successful marketers move from areas where network marketing is already well established to other areas where they are new, like in Singapore, to start their own networks. In time they may want to move into the China market. According to WTO rules, China has to allow network marketing within 3 years of its entry into WTO, ie by December 2004. Singapore and Malaysia are among the few countries in the world with an educated Chinese population that is proficient in both English and Chinese. We can become an effective bridge for non Chinese-speaking Americans and Europeans (who have developed successful networks in their own countries) to overcome the language barrier.

Network marketing has its fair share of success in every country. There are some who made it, many more who don’t. But as often stated, 9 in 10 businesses fail. Network marketing is no different. While the Government can help by amending laws and enforcing against fraudulent activities, the consumer’s best defense is to stay vigilant and not fall prey to fraudulent, ‘get-rich-quick’ schemes. When investing, consumers should always look not only at the profit opportunities but also at the risks of losses involved.