Memberships and Training Products - Multi-level Marketing and Scheme of Pyramid Selling

A multi-level marketing company distributing memberships and training products sought an advisory opinion in July 2005 on whether a proposed multi-level marketing plan would raise concerns under the Competition Act.

The Competition Bureau provided a negative opinion on the basis that the operator failed to make reasonable and timely disclosure of the earnings of typical participants as required by subsection 55(2) of the Act, and on the basis that the plan was deemed to constitute a scheme of pyramid selling as defined in subsection 55.1 of the Act.

• The plan provided participants, who paid to join the plan, with the right to receive compensation for recruiting other participants into the plan, who had also paid to join the plan. Prospective participants were entitled to participate in the plan at the introductory level for free or pay a fee to participate in the plan at a higher level. The plan provided prospective participants with significant incentives to pay the fee and join the plan at the higher levels of participation through substantially higher levels of compensation. Participants at the higher levels were required to recruit other prospective participants as a condition of receiving compensation. These new participants also had significant incentives to pay the fee and join the plan at the higher levels of participation. This was considered to be compensation related to recruitment and the plan was deemed to constitute a scheme of pyramid selling as defined by paragraph 55.1(1)(a).
• The plan also provided for training bonuses when participants recruited other participants into the plan. The training bonuses were considered to be compensation related to recruitment and the plan was deemed to constitute a scheme of pyramid selling as defined by paragraph 55.1(1)(a).
• As a condition of participating in the plan, the plan required prospective participants to pay for a specified amount of products. In this case, prospective participants could not participate in the plan at the higher levels without purchasing the product. This was deemed to constitute a prohibited scheme of pyramid selling as defined by paragraph 55.1(1)(b) of the Competition Act. Compensation should be based on product sales, not on required purchases.
• Furthermore, the business plan did not contain any information about the compensation a typical participant could actually or likely receive, as required by section 55(2) of the Competition Act.

For the above reasons, on August 31, 2005, the Bureau provided a negative opinion.

(3099292)