*This article was originally published in Business Mirror on February 22, 2016 but was updated to reflect current dates.
Whenever the terms “Multi-Level Marketing” or “MLM”, also known as “network marketing”, is mentioned, most people cannot help but conjure up images of cunning scam artists, swindlers or estafadores in the likes of Ponzi or Madoff. We cannot blame the masses though because many unscrupulous people do indeed use these terms in presenting their illegal pyramiding schemes in order to pass it off as valid business models or at least give it some semblance of legitimacy. It has been part of my advocacy in spreading financial literacy to expose these sham companies that have been victimizing many Filipinos, especially overseas workers. In fact, just a few years ago, a popular registered financial planner and I were sued by one of these illegal business organizations for exposing them in our respective Facebook pages by sharing an advisory published by one of the top mutual fund investment companies here in the Philippines denying an alleged partnership with that sham company. It was a criminal complaint for libel. However, unlike my friend and colleague, I did not have to spend money by hiring a lawyer for my defense, being a lawyer myself. Anyway, as expected, the case was dismissed much to our delight.
Nevertheless, the MLM business model, which is a more sophisticated form of direct selling, is in and of itself definitely a legitimate one. It is characterized by face-to-face selling to the consumers through independent distributors, who in turn can recruit other distributors from whose sales the upline sponsors derive override commissions. It has been in existence in America since the 1970s but has only started to gain ground in the early 1990s. It democratized entrepreneurship and the business world which, until recently, used to be the sphere of only for the elite upper class of society. According to former Trade Undersecretary Ernesto M. Ordo, “Direct Selling necessitates the employment of a considerable number of people to effectively carry out the marketing and production activities of these companies. Consequently, not only will additional sales personnel be hired but factory workers as well. As a result, the direct selling sector has the potential to bring additional revenues to the government.” In any case, I will no longer belabor the history of the development of MLM in this article as good books have already been written on that subject such as the ones of Richard Poe entitled Wave 3: The New Era in Network Marketing and Wave 4: Network Marketing in the 21st Century. As for its viability as a legitimate business venture, famous author and celebrity financial coach Robert T. Kiyosaki also wrote the book The Business of the 21st Century. Now you know where I got the idea for the title of this article!
On the other hand, a pyramiding or Ponzi scheme is an illegal money scam where people are convinced to pay money for a chance to profit from the payments of others who might join later. Interestingly, in spite of the proliferation of scammers and the flak the network marketing industry has been getting, we still nonetheless see an unprecedented growth in the number of legitimate companies being established along with entrepreneur hopefuls who join their ranks. Albeit, one important question remains in people’s minds, i.e. “How can we distinguish the legitimate MLM companies from the scams?”
For the uninitiated, it would seem quite confusing because most, if not all MLM companies, including the scams, are duly registered corporations with the Securities and Exchange Commission (SEC). Such being the case, the first and easiest way to verify whether an MLM company you are interested in joining is a legit business or not is by keeping tabs on the public advisories issued by the SEC warning the public about dubious and unauthorized activities that are being carried upon by certain companies. The said advisories are periodically published in its website and in major newspapers. Of course, even though the SEC is a reliable government agency tasked to protect the investing public, its employees and officers are not omniscient being humans just like us. So, we also have to do our part and be aware of certain “marks of a scam” so as not to be duped into investing our hard-earned money into one of those companies.
The second way we can make use of the SEC is by verifying if the company that is soliciting investments through its officers or agents possesses a secondary license because only those, such as mutual fund representatives and stock brokers, are legally allowed to solicit investments from the public by selling securities.
To be sure, before joining an MLM company, ask yourself the following questions:
• Is there a real, good quality product that can be differentiated from others in the market and not just for the sake of having a product?
• Are commissions paid on sales of products and not on registration or joining fees?
• Is the intent to sell that of a product and not a position?
• Is there no direct correlation between the number of recruits and compensation?
• If recruitment were to be stopped today, will the distributors or members still make money?
• Is there a reasonable product return policy?
• Do products have fair market value?
• Is there a compelling reason to buy the product/s?
If the answer to all the questions is YES, then the company being evaluated is a legitimate company; but if the answer is NO, then there is a high probability that it is a pyramid scam or Ponzi/Madoff scheme. For guidance and consultation, I may be reached me thru my email adress firstname.lastname@example.org.