Indiana Updates Their Pyramid Scheme Laws
Senate Enrolled Act 283 goes into effect July 1, 2017. It was created with the guidance of the Direct Selling Association (DSA) and authored by Sen. Mark Messmer. Mark Messmer’s wife is a Mary Kay consultant. With these two guiding lights behind this I am sure pyramid schemes are running in fear /Sarcasm.
The most common pyramid schemes that are pushed heavily on social networks and in communities are product-based pyramid schemes. A great example of this is a company like Vemma. Vemma received the 2013 Direct Selling Association ETHOS Award. Under a settlement with the Federal Trade Commission, Vemma Nutrition will end the business practices that created a pyramid scheme.
What are these business practices that created a pyramid scheme?
Vemma’s business model depends upon recruiting individuals to participate in Vemma as Affiliates and encouraging them to purchase Vemma Products in connection with such participation, rather than selling products to ultimate-user consumers. Vemma’s sales and marketing activities and their compensation plan place little emphasis on sales to consumers outside of the Vemma organization.
Affiliates do not primarily earn bonuses for actual sales of Vemma Products. Instead, Vemma rewards Affiliates for personally purchasing Vemma Products to maintain bonus eligibility, and for recruiting others who likewise purchase Vemma Products to maintain bonus eligibility.
Through their sales and marketing activities, Vemma misrepresents the nature and income potential of Vemma. They repeatedly tout that Vemma can provide anyone an easy path to financial freedom and independence.
The likelihood of Affiliates earning profits on retail sales is minimal.
Vemma’s income representations are false or misleading and constitute a deceptive act or practice.
Now lets take a look at the Indiana law and see how it stops these deceptive practices:
“Pyramid promotional scheme” means any plan or operation by which a person gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other persons into the plan or operation rather than from the sale and consumption of goods, services, or intangible property by a participant or other persons introduced into the plan or operation. The term includes any plan or operation under which the number of people who may participate is limited either expressly or by the application of conditions affecting the eligibility of a person to receive compensation under the plan or operation, or any plan or operation under which a person, on giving any consideration, obtains any goods, services, or intangible property in addition to the right to receive compensation.
A person may not establish, promote, or operate any pyramid promotional scheme. A limitation as to the number of persons who may participate or the presence of additional conditions affecting eligibility for the opportunity to receive compensation under the plan does not change the identity of the plan as a pyramid promotional scheme.
Private Actions and Proceedings
A person may bring an action against a person who establishes, operates, promotes, or assists another to promote a pyramid promotional scheme for:
(1) the damages actually suffered as a result of the pyramid promotional scheme; or
(2) one thousand dollars ($1,000);
whichever is greater.
(b) The court may increase damages awarded under this section in an amount that does not exceed:
(1) three (3) times the actual damages of the person suffering
the loss; or
(2) three thousand dollars ($3,000).
whichever is greater.
– Source SENATE ENROLLED ACT No. 283
Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. – Source FTC Division of Marketing Practices James Kohm
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. – Source FTC
Indiana Updates Their Pyramid Scheme Laws Conclusion
This law clearly allows personal consumption and does not call it out as a problem. It does not address the auto-shipment problem that Vemma had. In my opinion, this law does not address modern pyramid schemes. It also limits the amount of damages you can receive when you take private action against someone that is running a pyramid promotional scheme. I wonder who this law is really protecting? Well played DSA.