Multi-level Marketing and Pyramid Selling Schemes
Multi-level marketing (MLM) is a system for selling products in which participants get 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 the Competition Act.
Referral selling, matrix marketing and binary systems are all similar types of multi-level 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 claims about potential compensation must also disclose the amount of compensation typical participants in the plan earn.
Pyramid selling is an MLM plan that incorporates the following deceptive practices, which make it a criminal offence under the Competition Act:
- participants pay money for the right to receive compensation for recruiting new participants
- a participant is required to buy a specific quantity of products, other than at cost price for the purpose of advertising as a condition of participation
- selling unreasonable amounts of inventory to participants
- having an unreasonable product return policy
Pyramid selling is also a criminal offence under the Criminal Code.
When considering getting involved in a MLM plan, ask yourself the following questions:
- Is this type of MLM plan 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 require? Legitimate plans don't require you to commit substantial sums of money up front or ask that you purchase a large inventory.
- What are the legal and fiscal implications of becoming a seller? You must observe consumer protection laws and, in some provinces and territories, obtain a seller's permit. Federal and provincial or territorial revenue departments will also probably require you to collect GST or HST and provincial or territorial sales tax.
- 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 "hourly wage" can be quite low. Most participants in MLM plans make less than $2,000 per year.
Anyone who wishes to set up a MLM plan may ask the Competition Bureau for a written opinion about whether the proposed plan will comply with the law. The Royal Canadian Mounted Police (RCMP) website also contains helpful tips.