Direct Selling / MLM / Network Marketing - Legal or Illegal?
Direct Selling / MLM / Network Marketing -
Legal or Illegal?
Yesterday, when I read that Amway India CEO was arrested again, I couldn't postpone writing about it
anymore. Until and unless Indian people become aware of the truths about this industry, even legitimate
Direct Selling companies and their distributors will keep facing legal problems. And that's bad news for
common people. Oh! By the way I am not associated with Amway in any way, never has been. But I am with
this industry for last 7+ years, as a distributor and also as an industry advocate and educator. And the way this
industry has impacted my life, I feel it as my obligation to stand beside any legitimate company in this
industry, in such troubling time.
In no way I am challenging our law or judicial system, or disrespecting the country's constitution. Neither I am
giving opinion on whether Amway India and/or its CEO is guilty or not. I am writing this article to make people
aware about the truths and legal aspects of this industry. From my last 7+ years of experience, I have seen
many legitimate MLM companies and distributors being accused for no valid reason. Purpose of this article is
to prevent such instances. As all major new agencies like Investing.com, Wall Street Journal, Financial Times,
Money Life, The Hindu, Times of India, Bloomberg, Indian Express, NDTV, Economic Times, Zee News has
covered the story of the arrest, but I didn't find anyone ever reflecting anything positive about the industry, I
had to write this. You can't imagine how new distributors in this industry feel during these phases! Family,
friends everyone point finger at them "Didn't I tell you that Network Marketing is an illegal scheme?". I want
this article to be a solid foundation of confidence for all those people.
What is Direct Selling / Network Marketing / Multi Level Marketing
Before proceeding any further, first I need to clarify what Direct Selling/ Network Marketing / MLM really is.
It is a relatively new marketing method / business concept/ distribution channel.
Direct Selling companies sell their products &/or services direct to the consumers, removing the
traditional distribution channels in between.
Normally Direct Selling companies focus more on word-of-mouth advertisements by its consumers
than traditional advertisements. (Most Direct Selling companies don't do traditional advertisements at
A person can be:
o Consumer: Who only uses the products and services from the Direct Selling Company.
o Distributor: Who is a consumer, but also sells the products and services directly to people and
earns retail commission for that.
o Network Marketer: Who is also a distributor and must sell products and services directly. But
also recruits and trains other distributors to sell the products/services and build their own
businesses. Now this person not only earns retail commissions, but also commissions for the
sales volume generated by their entire Network.
Now this facility allows people to leverage other people's effort and earn residual income.
To explain it in simplest manner - As a Direct Seller/ Network Marketer; you are being paid for sharing
(and hence selling) products/ services you like. Also, as you are investing your time and effort in
training other distributors joining your team and helping them to get started, you are being paid a
percentage from the sales volume generated by them. Fair and square.
Who am I to write about MLM legality? I don't have any knowledge of law. But I know about this industry. I am
working in this industry as a distributor for 7+ years now. I am continuously learning and researching about
this industry. I learned from and in touch with most of the top successful leaders in this industry, from
different parts of the world. I've read countless books, articles, magazines, journals from experts in this
industry. I've also studied various legal cases related to the industry. And I am teaching all these to countless
people from various companies in this industry. So I guess I am little bit eligible to share my view on this topic.
Difference Between Illegal Pyramid Scheme / Money Circulation / Ponzi Scheme/ Prize
Chit and Direct Selling/ Multi Level Marketing / Network Marketing
Now every time any legitimate Direct Selling company or its distributors, land up in trouble, you can bait that
someone not understanding the above difference is the root cause of it. And unfortunately, not only most
common people don't understand the difference, but also many legal advisers and Govt. regulators don't
understand it either.
The lack of clearly defined law regarding Direct Selling industry, is the root cause of all confusion.
THE PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978
This is the legal act in India, most regulators refer to while investigating any Direct Selling or MLM companies.
I'm embedding it here. Source:
http://www.dif.mp.gov.in/Prize_Chits_Money_Circulation_Sch_Banning_Act_1978.pdf (assuming it is
Honestly I don't understand the legal terminologies. And lot from the above document went over my head.
But few points I could understand was:
Conventional Chit is Defined as:
"Conventional chit" means a transaction whether called chit, chit fund, kuri or by any other name
by or under which a person responsible for the conduct of the chit enters into an agreement with a
specified number of persons that every one of them shall subscribe a certain sum of money (or
certain quantity of grain instead) by way of periodical installments for a definite period and that each
such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other
manner as may be provided for in the chit agreement, be entitled to a prize amount. Explanation.-In
this clause "prize amount" shall mean the amount, by whatever name called, arrived at by deducting
from out of the total amount paid or payable at each installments by all the subscribers.
Money Circulation Scheme is Defined as:
"Money circulation scheme" means any scheme, by whatever name called, for the making of
quick or easy money, or for the receipt of any money or valuable thing as the consideration for a
promise to pay money, on any event or contingency relative or applicable to the enrolment of
members into the scheme, whether or not such money or thing is derived from the entrance money
of the members of such scheme or periodical subscriptions.
Prize Chit is Defined as:
"Prize chit" includes any transaction or arrangement by whatever name called under which a
person collects whether as a promoter, foreman, agent or in any other capacity, monies in one lump
sum or in installments by way of contributions or subscriptions or by sale of units, certificates or
other instruments or in any other manner or as membership fees or admission fees or service
charges to or in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement
by whatever name called, and utilizes the monies so collected or any part thereof or the income
accruing from investment or other use of such monies for all or any of the following purposes,
namely :- (Read from the PDF)
Finally Govt. Bans Such Illegal Schemes
3. Banning of prize chit and money circulation schemes or enrollment as members or participation
therein. No person shall promote or conduct any prize chit or money circulation scheme, or enroll as
a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money
in pursuance of such chit or scheme. 4. Penalty for contravening the provisions of section 3.
My Summary of "THE PRIZE CHITS AND MONEY CIRCULATION SCHEMES (BANNING) ACT, 1978"
If I summarize from my limited intelligence, what I understand is:
With the above act Govt. legally ban schemes:
That Promises quick & easy money. Or where people can earn quick and easy money.
Where members are paid to enroll new members only.
Where there are no significant products or services to buy and sell.
Where Considerable amount of money is collected from people just in exchange of promise of future
I absolutely support Indian Govt. for passing this law for protecting general public from being cheated.
However, what I don't understand is how can any legitimate Direct Selling / MLM / Network Marketing
company be accused of being illegal prize chit or money circulation schemes?
Direct Selling Doesn't Offer Quick and Easy Money:
Ask (or investigate) any top earner of Direct Selling industry, you won't find a single one who are earning huge
money overnight and very easily. If you find someone claiming otherwise, that person is a fraudster.
It takes time to learn different skills and develop the mindset to succeed in this business.
One needs to stay atleast 3-5 years in this business, before expecting huge residual income.
One needs to talk to many people about the products/services & the business opportunity to find
considerable number of consumers and distributors that can generate great income from them.
Training and keeping your team focused isn't easy either.
The advantages over other professions are:
Lowest startup cost.
Step by step proven system that can be followed to succeed in this industry.
Great support system from company and uplines (people who have you in their Networks).
Working properly for 7-10/week and for 3-5 years, one can generate a 6 or 7 figure residual income (
the income which doesn't stop even when you stop working). That's very unlikely in other professions.
But in no way, it's quick and easy money.
Direct Selling Companies Pay Only for Products/Services Sales not For Recruiting
All legitimate Direct Selling companies sell meaningful products and services.
And they pay their distributors for selling their products and services, not for recruiting new
If your group doesn't produce required sales volume in certain month, you won't be paid a single
Direct Selling Companies Aren't Investment Schemes
No legitimate Direct Selling company claims that
"Join us with xyz amount and sit at home sipping your coffee. You'll double your amount within n
Because it is not an investment scheme or lottery ticket. To earn money in Direct Selling one has to actively
participate in this business. To get retail commission, a distributor has to continue selling products and
services to consumers. And to build a business with residual income producing capability, a distributor has to
create a well-trained Network of active distributors.
So work hard, build business, and enjoy the benefit - just like any other business model.
Why There is No Clear Law Regulating This Industry
Because, this is a relatively new industry just like Internet.
If you want an idea about how and when this industry was born, let me share the brief history:
History of Direct Selling / MLM / Network Marketing
It's very difficult to exactly pinpoint the moment when this industry was born, but can be said roughly around
1934- 1945. So it's not even 100 years old industry yet.
1934 - Carl Rehnborg started the California Vitamin Corporation selling what today are known as
vitamin supplements. In 1939 the company changed its name to Nutrilite Products Company, Inc.
1945 - Nutrilite contracted with Mytinger & Casselberry to become the exclusive American distributor
of Nutrilite products. Mytinger & Casselberry created the first documented MLM compensation plan
Source: The History of MLM : How MLM (Network Marketing) got started and grew to meet the needs of
the customer and the entrepreneur. It’s fascinating (Read it for the complete history and yes it's really
Amway Safeguard Rule
In 1975, the FTC accused Amway of operating as an illegal pyramid. After four years of litigation, in 1979,
Amway prevailed. An administrative law judge ruled that Amway's multilevel marketing program was a
legitimate business opportunity as opposed to a pyramid scheme. In case you want to study, here is the
complete legal document for the case.
This decision has become known as the "Amway Safeguards Rule," which is currently one of the most
significant sets of legal standards by which courts and regulatory agencies determine the legitimacy of an
MLM/network marketing/direct sales company.
Source: MLM Legality: The Amway Safeguards Rule : A Twenty Year Standard by Jeffrey A. Babener | MLM
Summarizing MLM Legality
Let me just summarize the points for legally differentiating a legitimate Direct Selling Company and an illegal
money circulations scheme:
Image Source: How to Build a Multi-Level Money Machine by Randy Gage
If the business plan focuses on rewarding participants for recruiting rather than for selling
products/services to the end customer, then it's illegal.
If any distributor makes money from things other than selling products/services (personally + group
volume), then it's illegal. Earning from event tickets, earning from selling training materials etc are
Legitimate Direct Selling companies doesn't require large upfront investment or buying large quantity
Any program offering big money but claiming "no selling required" is illegal.
Products or services provided by Direct Selling company must be legitimate one, that people would buy
at the retail price at the open market (without participating in the compensation plan).
If the direct selling company distributes health and wellness products, no miraculous claims (like our
products cures cancer) must be made without being approved by medical association.
Read more from Network Marketing vs Illegal Pyramids chapter in How to Build a Multi Level Money Machine
by Randy Gage.
You May not Like/Need a Product, Doesn't Mean It's Not Legitimate
I've heard many times from many people, that they don't think product of XYZ Direct Selling company is value
for money. Now similarly many people don't think iPhones deserve to be so costly or cold drinks should cost
12 INR. But still there are many people who are okay with that.
So you may decide not to join a Direct Selling company, if its product doesn't appeal to you. But that doesn't
make that company illegal, if others are finding it useful.
Who are the Culprits?
Why general public is skeptical about the concept? Why Govt. is running after direct selling companies? Who
are the culprits?
Like every industry, there are unethical companies and unethical distributors in ethical companies in our
industry. They are the culprits. Every single ethical person in our profession wants these unethical companies
and distributors to be punished.
But why judge our whole industry for the misdeeds of these few people? Why harass hard working direct
sellers and genuine companies who are making a difference to people's lives with their products and
Oh! Let me tell you, the underlying mentality of most people "how can I be rich overnight without doing
anything" is the ugliest culprit of all.
How Direct Selling Industry is Working Hard to Maintain High Ethical Standards
Legitimate direct selling companies are becoming stricter and bolder for maintaining highest ethical standards
in its distributors, terminating unethical distributors no matter what level they are in.
Also there are national trade associations like Direct Selling Association, and private associations, magazines
and communities like Association of Network Marketing Professionals, Network Marketing Pro, Direct Selling
Master Mind Event, Networking Times Magazine, First Class MLM Tools are relentlessly teaching Direct Selling
distributors to run their business with highest form of integrity.
Also direct selling leaders like us, irrespective of our companies, are also educating people about right way to
do this business, at individual level.
Humble Request to Legal Professionals, Regulators and Media Professionals
Legal professionals, regulators and media professionals - these 3 groups of people highly influence general
public's impression about our direct selling industry.
Though I respect people from these 3 professions very much, but I really don't understand why these people
draw conclusion about our industry always from those who are either negative about this industry or failed in
this industry. Why they never take time to talk to the successful people in our profession, why they never
publish stories about countless direct sellers who are grateful to this industry for changing their lives? Why
they never highlight the positive aspects and unique opportunities of this industry?
When the Sarada group got shut down sometimes back, I was shocked to read in a popular Bengali newspaper
that Sarada group was a MLM company. It wasn't! It was an investment scheme, not a business building
concept where any legitimate product/service was being sold. These type of companies recruit influential
people in different localities as their chief agents. They are given money and car in the beginning. Then they
are asked to form a team of agents and then collect money from common people. How can these companies
be Direct Selling / MLM companies? In MLM, no one is given any position. Everyone starts from zero and rise
by selling products/services and building a team.
Analyzing an Article from MadLaw
I was reading an article written by an associate of a leading corporate law firm in Mumbai: Multi-Level
Marketing and Indian Law – Amway cases in India and USA | Marketing and Advertising Law
Let me point our few portions:
Basically, it works on the principle of multiplication duplication, or geometrical increase of the retail or
sale activity, as the case may be. The survival of the system, thus, depends on the chain of recruiting at
lower functional levels, which sustains the levels above it.
Survival of Direct Selling doesn't depend on Recruiting
How can the survival of the system depends on the chain of recruiting at lower functional levels? The survival
of the system depends on the sales of products / services by distributors of different levels. Just like any
other companies. A traditional company recruits sales people to distribute their products/services. But
traditional sales people only get paid for their individual sales. That's why their earning is limited and when
they stop working, their earning stops. Only the company gets the benefit of leverage.
But the direct selling companies provide this benefit of leverage to all the distributors. Isn't that a great thing?
Any distributor will keep getting paid as long as they keep selling products/services, just like any other
businesses. Even if they can't or don't recruit, there isn't any reason for their earning to stop.
Another portion from the article:
While on the one hand it could arguably be a successful marketing strategy, which involves creating an
increasing market based on increasing outreach, it has underlying concerns of being an unfair trade
practice, long-term un-sustainability and the uneven distribution of the benefits and costs in the event
of the success or failure of the strategy.
At the heart of the criticism against the structure of the MLM is that it very closely resembles the
‘pyramid’ scheme, in which a higher level are supported by a geometrically larger lower functional
level. This structure is inherently flawed, because ultimately, it will necessarily fail when a level of
saturation is reached, and no further recruitment of additional participants can be made at lower
Which again is quite misleading.
Photo Courtesy: Brilliant Compensation by Tim Sales
What's wrong with the pyramid structure? Nothing! Ask any architect, he'll tell you that it is one of the most
stable geometrical structures. Our family trees look like pyramids. So why so much fuss about "Pyramid
scheme"? The problem is in people's perception with the shape:
The person on top makes all the money, but the people at the bottom don't make any.
This is a very common misconception regarding Direct Selling / Network Marketing business model. Before
investigating that, let me ask you, why aren't you accusing all corporate organizations for being Pyramid
scheme? Doesn't the person on the top (say CEO) make the most money and get benefit of leverage over all
people below? I am not judging this model by any way. Because I understand the justification you might want
to give. The CEO might have started the company, created the infrastructure and manages everything etc etc.
Doesn't he deserve to be paid most? Yes! I am fine with that!
Then what's your problem with someone at the top of a Network Marketing business, earning more than
people below them? That person on top, started from ground zero one day. Worked hard, trained people,
supported people and reached the top position. That person is still supporting their entire Network. So why
can't they get paid most?
If you still think Direct selling is Pyramid Scheme, this one is for you:
I Still Think It Is a Pyramid Scheme – YouTube Video
Unfair Trade Practice and Uneven Distribution of Benefits
Now I can't stay silent if you accuse Direct Selling for being unfair trade practice and uneven distribution of
Let me tell you a fact first:
You can find many successful corporate employees and traditional business owners who left their
profession and joined Direct Selling. But can you show me one successful direct seller who returned
to corporate business world?
And the reason behind this is: Direct selling provides most fair and even distribution of benefits.
Every single distributor in a direct selling company has the same opportunity to reach the top of the
compensation plan. Unlike traditional corporates where certain people can be promoted to certain
In direct selling the most productive distributor earns most, even from someone above them who
might not be that productive.
An average direct seller is happier due to different benefits like: being able to work from home, spend
time with family, absence of corporate politics, empowering life and business lessons etc.
How can you say that it's not fair trade practice and even distribution of benefits?
Celebrity Endorsement vs Word of Mouth Recommendation from Real People
Which do you think more fair trade practice? Paying millions to celebrities to endorse products/ services they
might never use themselves or rewarding happy customers who spontaneously recommend products/
services they personally love to use?
Long Term Sustainability
Sorry to say, this is another foolish accusation.
In today's disruptive economy, it's very difficult to be sure about long term sustainability of any company or
industry. Who would have thought that giants like Nokia and Kodak would vanish one day? (though mobile
and camera industries are booming) They were not direct selling companies, were they? But still you can
consider a business model viable if it's running successfully for 50+ years.
And if this Direct Selling business model is long term un-sustainable, then how can companies like Amway,
Mary Kay etc are running successfully for decades?
How could this industry generate $167 Billion in global sales in 2012? (Excluding those countless companies
who didn't participate in the survey).
And why would top Global brands below distribute some or all their products through Direct Selling , if this
was not a viable business model?
2. AT & T
10. Texas Instrument
11. General Motors
12. General Electric
15. Sun Microsystem
16. Hindustan Unilever (Yes! I bet you have atleast 1 product in your home with U sign behind it)
People who say that Direct Selling isn't a viable business model because someday it will saturate, are great in
math I must say.
How they figure this out? 1 person starts a Network Marketing business today. Then they recruit 2 people.
Each of they recruit 2 people. 1+ 1 x 2 + 2 x 2 + 3 x 2+ ---- = world population.
But what I don't understand is, how can they forget that this population isn't constant!
28th May 2014 Around 6:40 PM IST
May be visiting World Population Clock will wake them up!
When there are so many Direct Selling companies worldwide operating for more than 10+ years, then why
aren't everyone in Direct Selling or atleast know about it?
Now everyone got a mobile phone (most probably more than one), then how the mobile industry is still
Why can't McDonald franchisees get saturated one day? So that there are more burgers than the people to
Every year, so many Engineers are graduating, what will happen to them?
So you can safely ignore the saturation issue of Direct Selling industry. Let's talk about it the day it get
saturated. Today is not that day my friend.
The article also mentions:
Therefore, if one follows a technical and restricted approach, the requirements of ‘Money Circulation
Scheme’ are not met. However, on a closer scrutiny, it can be observed that in effect, it is identical.
This was recognized by the High Court, and it was held that the operation of Amway was illegal.
I don't have any idea how the author ended up in conclusion that direct selling is identical with 'money
However I appreciate that the author also wished for a better legal framework in India for regulating direct
I also found another article on the same MadLaw website, written by my friend legal expert friend Ramanuj:
How to run a legal MLM scheme in India and what is illegal Muti-Level Marketing? | Marketing and Advertising
Law . I must admit this one is by far the best and most unbiased article written on MLM by any Indian legal
expert, among the ones I've read.
Legal Verdict isn't Final
With this statement, I mean no disrespect to the law and constitution of any countries. What I want to say is,
court verdict isn't always the public opinion. Or with time better and more refined laws can be made.
So raising finger at Direct Selling companies/ industry pointing out legal cases, doesn't prove that the business
model is illegal in any way.
What Thought Leaders Are Saying About Direct Selling / Network Marketing
Whenever you want to learn about something, whom do you consult? People who are successful and/or
expert in that field? Isn't it? Then why would you take opinion about Direct Selling industry from those who
had failed or don't have any idea about it?
You might want to have some unbiased opinion about this industry, but then find out what respected thought
leaders are saying about it. Don't be influenced by just any Tom, Dick & Harry!
If Direct Selling business model wasn't legal and viable, then why would these reputed people have risked
their own reputation to appreciate and endorse it? Read Network Marketing Is… American Thought Leaders
on Network Marketing Profession. (Courtesy: NetworkingTimes.com )
Why would respected publications like Forbes publish articles on MLM?
I am waiting for some daring publication from India to step forward and take this responsibility to tell the truth
about this industry to common public.
Do Most People Fail in MLM / Direct Selling?
Now I can't conclude an article about MLM legality without addressing this issue. When all other logic against
Direct Sales industry fails, people resort to the final weapon
"Come on! Whatever you say, but the fact is most people fail in Direct Selling / MLM"
and they will keep counting all the names they can remember who failed in this industry.
But my common sense question for those people is: Name an industry/ field/ profession, where most people
How many people apply for Engineering/ Medical/Law Entrance Examination and how many get seats? I was
reading in newspaper sometimes back: for primary teachership recruitment examination, there are 55 lakh+
applicants appearing for 55K seats (approximate numbers). So even if 60K applicants are qualified for the job,
only 55K will get it.
But atleast in Direct Selling, there isn't any limit to how many people can reach to the top. It totally depends
on individuals, whether they'll give up in between or keep rising to the top.
I'll let Tim Sales explain you in better way. MLM : Do Most People Fail?
Why it is Important to Support Direct Selling
No matter whether you are associated with this industry or not, I'll request you to support this industry by
sharing this article.
Why? Because ...
There are very few industries like Direct Selling, where any common person can become rich and live
their dreams if they are willing to learn and work hard. ( Did you read my story? If not for this industry,
I could never dare to become the person I wanted to become - the person I am today)
Are there any other businesses, which have so low startup cost and so high returns?
This industry is bringing families together giving opportunity to work from home (or from anywhere).
This industry is helping people to grow as a human being.
This industry is teaching Entrepreneurial, Leadership, Management skills to people, who could have
never afforded to have a MBA degree.
By cutting the cost of celebrity advertisements and distribution channels, direct selling is proving
quality products at cheapest possible price to consumers.
Direct Selling is environment friendly : less work - home commuting, less fuel consumption, less offices,
less paper used, low (or no) use of advertisement banners. It's a green business.
This industry is making this world a better place one person at a time.
Extend your hand. Acknowledge the goodness of the industry. We promise you, that we will make it better.
Do you have any questions regarding this industry? Please leave your comment, I'd love to interact. If you
don't agree with something I wrote, please comment. I am open to discussion. Do you want to add any points
to the article, which I might have missed? I'd be delighted if you share it in the comment section. If you want
talk to me personally, book a session with me from the contact widget at the right side of my website.
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