Multi-level Marketing (MLM)

“Sections 55 and 55.1 of the Competition Act are criminal provisions addressing multi-level marketing and pyramid selling. Section 55 prohibits operators or participants in a multi-level marketing plan from making representations relating to compensation without fair, reasonable and timely disclosure of the amount of compensation received or likely to be received by typical participants in the plan. Section 55.1 of the Act provides that a multi-level marketing plan that includes either compensation for recruitment, required purchases as a condition of participation, inventory loading, or the lack of a buy-back guarantee on reasonable commercial terms, constitutes a prohibited ‘scheme of pyramid selling’.  Any person who contravenes section 55 or 55.1 is guilty of an offence and liable to a fine of up to $200,000 and/or imprisonment up to one year on summary conviction, or to fines in the discretion of the court and/or imprisonment up to five years upon indictment.”

(Competition Bureau, Multi-level Marketing and Pyramid Selling)

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“In a typical pyramid scheme, unsuspecting investors are encouraged to pay large membership fees to participate in moneymaking ventures.  The only way for you to ever recover any money is to convince other people to join and to part with their money as well. People are often persuaded to join by family members or friends.  But there is no guarantee that you will recoup your initial investment.  Although pyramid schemes are often cleverly disguised, they make money by recruiting people rather than by selling a legitimate product or providing a service.  Pyramid schemes inevitably collapse and you will lose your money.  In Canada, it is a crime to promote a pyramid scheme or even to participate in one.”

(Competition Bureau, The Little Black Book of Scams (2012))

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OVERVIEW

Subsection 55(1) of the Competition Act (the “Act”) defines “multi-level marketing plan” (“MLM” plans) as a “plan for the supply of a product whereby a participant in the plan receives compensation for the supply of the product to another participant in the plan who, in turn, receives compensation for the supply of the same or another product to yet other participants in the plan.”

The Act sets out certain compensation disclosure requirements for operators and participants of MLS plans.

In particular, the Act makes it a criminal offence for operators and participants of MLM plans to make compensation claims to prospective participants unless fair, reasonable and timely disclosure is made of the: (i) actual compensation received by typical participants in the plan or (ii) likely compensation to be received, based on a number of factors set out in the Act which include the nature of the product, nature of the relevant market and the type of operator.

MLM plans that constitute pyramid selling schemes under the Act are illegal.  In other words, while MLM plans are legal provided certain prescribed disclosure requirements are met, pyramid selling schemes are illegal under the Act and the Criminal Code.

Section 55.1 of the Act defines a pyramid selling scheme as an MLM plan that has one or more of the following features: (i) requires a payment for the right to receive compensation for recruiting other participants into the MLM plan who pay for the same right (paying compensation for recruiting other participants), (ii) requiring purchases as a condition of participation, other than a specified amount of product at the seller’s cost to facilitate sales, (iii) inventory loading (knowingly suppling product to participants in commercially unreasonable quantities), or (iv) a participant is supplied with product without a buy-back guarantee or right to return the product in saleable condition on reasaonable commercial terms (or is not informed of the existence of the guarantee or right and how it may be exercised).

PENALTIES

Potential penalties for violating the MLM and pyramid selling provisions of the Act include fines in the discretion of the court, imprisonment for up to five years, or both.

LINKS AND RESOURCES

Legislation: Competition Act, Criminal CodeCompetition Bureau: The Little Black Book of ScamsEnforcement Guidelines: Multi-level Marketing Plans and Schemes of Pyramid SellingBulletins: Corporate Compliance ProgramsPamphlets: Multi-level Marketing and Pyramid SellingWritten Opinions: Written OpinionsOther consumer protection sources: Canadian Consumer Handbook – Multi-level Marketing and Pyramid Selling Schemes, Better Business Bureau (BBB) – Multi-Level Marketing/Pyramid Schemes.

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