New Jersey OKs Criminal Penalties For Operating Pyramid Schemes

The New Jersey State Senate voted 37-0 on 3/13/2017 to pass Assembly Bill A-2004, which would allow penalties of up to 10 years for the leader and 18 months for any recruiters in a pyramid scheme.

Here are the details of the bill and how MLM scams are able to avoid these laws:

This bill establishes criminal penalties for promoting and participating in “pyramid promotional schemes.” A pyramid promotional scheme requires participants to recruit other individuals into the scheme in order for the original participants to receive any compensation. The scheme is designed to compensate only those participants who initially join the pyramid, while later participants lose money.

The bill makes it a crime of the third degree to knowingly promote or sell a pyramid promotional scheme. Under the bill, a “pyramid promotional scheme” is defined as any plan or operation in which a participant gives consideration for the right to receive compensation that is derived primarily from the recruitment of other persons as participants in the plan or operation, rather than from the sales of goods, services, or intangible property by the participant or by participants to others. “Consideration” is defined as the payment of cash or the purchase of goods, services, and intangible property, and does not include the purchase of goods or services furnished at cost to be used in making sales and not for resale.

The bill also provides that knowing participation in a pyramid promotional scheme is a crime of the fourth degree, unless the amount the person contributed to the scheme was $100 or less, in which case it is a disorderly persons offense.

The bill specifically exempts plans or operations in which consideration is given by participants in return for the right to receive compensation based on their sales or personal use of goods, services, or intangible property. The bill also exempts plans and operations that implement an appropriate inventory repurchase program and that do not promote inventory loading.

1. a. As used in this section:

“Appropriate inventory repurchase program” means a program by which a plan or operation repurchases, upon request at the termination of a participant’s business relationship with the plan or operation and based upon commercially reasonable terms, current and marketable inventory purchased and maintained by the participant for resale, use or consumption, and plan or operation clearly describes the program in its recruiting literature, sales manual, or contracts with participants, including the manner in which the repurchase is exercised, and disclosure of any inventory that is not eligible for repurchase under the program.

“Commercially reasonable terms” means the repurchase of current and marketable inventory within 12 months from date of purchase at not less than 90 percent of the original net cost to the participant, less appropriate set-offs and legal claims, if any. In the case of service products, the repurchase of the service products shall be on a pro rata basis, unless clearly disclosed otherwise to the participant, to be within the meaning of “commercially reasonable terms.”

“Compensation” means payment of any money, thing of value, or financial benefit.

“Consideration” means the payment of cash or the purchase of goods, services, and intangible property, and does not include the purchase of goods or services furnished at cost to be used in making sales and not for resale or the time and effort spent in pursuit of sales or recruiting activities.

“Current and marketable” includes inventory that in the case of consumable or durable goods, is unopened, unused, and within its commercially reasonable use or shelf-life period; and in the case of services and intangible property, including Internet websites, represents the unexpired portion of any contract or agreement. “Current and marketable” does not include inventory that has been clearly described to the participant prior to purchase as seasonal, discontinued, or special promotion products not subject to the plan or operation’s inventory repurchase program.

“Inventory” includes both goods and services, including company-produced promotional materials, sales aids, and sales kits that the plan or operation requires independent salespersons to purchase.

“Inventory loading” means that the plan or operation requires or encourages its independent salespersons to purchase inventory in an amount that unreasonably exceeds that which the salesperson can expect to resell for ultimate consumption, or to use or consume, in a reasonable time period.

“Participant” means a person who joins a plan or operation.

“Person” means an individual, a corporation, a partnership, or any association or unincorporated organization.

“Promote” means to contrive, prepare, establish, plan, operate, advertise or to otherwise induce or attempt to induce another person to be a participant.

“Pyramid promotional scheme” means any plan or operation in which a participant gives consideration for the right to receive compensation that is derived primarily from the recruitment of other persons as participants in the plan or operation, rather than from the sales of goods, services, or intangible property by the participant or by participants to others.

b. A person commits a crime of the third degree if he knowingly promotes or sells a pyramid promotional scheme. It is a crime of the fourth degree if a person knowingly participates in a pyramid promotional scheme, except that if the amount of consideration which the person contributed to the pyramid promotional scheme was $100 or less, it is a disorderly persons offense.

c. Nothing in this section shall be construed to prohibit a plan or operation, or to define a plan or operation as a “pyramid promotional scheme,” based upon the fact that participants in the plan or operation give consideration in return for the right to receive compensation based upon purchases of goods, services, or intangible property by participants for personal use, consumption, or resale, and the plan or operation does not promote inventory loading and implements an appropriate inventory repurchase program.

2. This act shall take effect immediately.

– Source njleg.state.nj.us

How MLM Scams Avoid These Laws

I am going to use the Vemma policies and procedures to show you how it is done. Vemma has been shutdown for being a MLM scam and reopened after changes were made to their compensation plan.

Two key elements that allow MLM scams to avoid being classified as pyramid promotional schemes are a buyback program and compensation based on personal consumption combined with retail sales of products.

The Vemma buy back program looks legitimate on the surface:

Any Vemma Team Member who resigns and wishes to return product to the Company should notify Vemma of his or her intention by calling Member Services or sending a letter to the Company. Vemma will repurchase the products that are in restockable and resalable condition at a price equal to 100% of the original sales price, minus shipping and handling, provided that the Member has complied with all the terms and conditions contained in these policies. The US Member has 30 days from the date of resignation in order to return product. The Asia Member has 60 days from the date of resignation in order to return product. The European Member has 14 days from the date of receipt of the Vemma Nutrition Pack. The letter must list all the items to be returned, the quantities of each item and the sales order number(s) under which each of the items was most recently purchased. Products will not be considered resalable if they are unusable (i.e., shelf life has passed, the product has been opened or the product or version of the product is no longer carried by Vemma). – Source Vemma Policies And Procedures

It looks like you will get back most of the money you have spent with the above policy.  Let’s look a little deeper at the Vemma inventory loading policies:

In order to insure that no inventory loading occurs, each Member wishing to receive commissions under Vemma’s compensation plan must certify that seventy percent (70%) of products previously purchased have been sold to or consumed by end users, and keep accurate records of monthly sales to specific Customers. These records will be subject to inspection by the Company upon reasonable notice. Each order placed by a Member constitutes the Member’s certification to the Company of the foregoing. Each Member acknowledges that Vemma is relying on such certifications in paying such Member commissions. Vemma will not repurchase products or issue refunds on products certified as having been consumed or sold. Falsely representing the amount of product sold or consumed in order to advance in the compensation plan shall be grounds for termination. – Source Vemma Policies And Procedures

Since there are few retail sales in a MLM scam, the vast majority of product is consumed by their distributors or stored in their homes.  Either way this policy makes it so that 70% of the product purchased to qualify for commissions is NOT returnable.

MLM scams are able to hide the fact that the vast majority of product sold to distributors for resale is consumed by them and not sold to retail customers. They combine personal consumption sales to their distributors with retail sales to hide this reality. This is an old trick that has been going on for decades.  You will find that the vast majority of MLM scams will not provide retail sales figures for their products.

Here is what the FTC has to say on this issue:

…many MLMs have structures that are unfair or deceptive because they are not focused on real sales to real customers.

A legitimate multi-level marketer must be focused on, and must pay compensation that is based on, real sales to real customers, not wholesale purchases by its sales force.

Simply put, products sold by a legitimate MLM should be principally sold to consumers who are not pursuing a business opportunity.

“Real sales” are sales that are both profitable and verifiable.

An MLM that pays compensation based on claimed sales that do not generate a net profit for the individual making the sale, or that cannot be verified as sales, cannot reasonably be characterized as based on “retail sales.”