MLM or Pyramid Scheme?

Direct sales companies include many strategies for the marketing and successful selling of their products. One example of such strategies is multilevel marketing (MLM). MLM involves the recruitment of new distributors by existing ones, who are then paid a percentage of their recruits’ sales. Essentially, MLM is a distribution model whereby representatives sell a company’s products to end-consumers, and instead of utilising regular stores or e-commerce, they use sales representatives. Therefore, individuals act as independent agents of a company and sell products on its behalf.

It is important to note that MLM can often be mistaken for so called ‘pyramid schemes,’ otherwise known as “ponzi schemes.” Although MLM is legal, it remains unregulated by Cyprus law. On the other hand, unfair commercial practices, such as pyramid schemes, are regulated by Section 2 the Consumer Protection Law 112(I)/2021 (the “Law”). Specifically, Annex 1 of the Law provides for certain commercial practices which are deemed to be unfair under any circumstance.

The Law expressly prohibits practices that involve “creating, operating or promoting a pyramid sales system, where the consumer considers that he has the opportunity to benefit more by introducing other consumers to the system than by selling or consuming products.” Any agreement, therefore, between the person who promotes the pyramid scheme and others, is void. According to the Criminal Code, promoting pyramid schemes constitutes a criminal offence and it can lead to imprisonment of up to maximum five years, a fine of €200,000 or both sentences.

To determine the legitimacy of a multi-level strategy, several factors are taken into consideration. One must examine whether the focus falls upon the selling of products to consumers, rather than to distributors who aim to recruit new individuals. The former likely indicates a legitimate multilevel market strategy, while the latter an illegal pyramid scheme. The difference between the two lies in the fact that pyramid schemes do not involve any real products. Instead, participants make money only by recruiting others, with the promise that they will earn high sums of money in a short period of time. 

For security, and as a precautionary measure before having an involvement in an apparent MLM sales scheme, one should perform proper due diligence by conducting research into the company.  For example, one should consider ensuring that the company has a registration number that it abides by legal and/or regulatory obligations, and also review any relevant paperwork, such as a business plan, sales literature, disclosure documents or any other agreements.

In the absence of clear guidelines or regulations for MLM, familiarising oneself with Cyprus law on unfair commercial practices of companies, and performing due diligence, are both highly advisable.  Therefore, if you are considering becoming involved in MLM, you should exercise caution by carrying out proper diligence and/or consulting your lawyer in order to ensure that the opportunity is legitimate, and that you do not become a victim of a pyramid scheme.

For more information, please speak with Demetris Gregoriou or your usual contact at Elias Neocleous & Co LLC.

SHARE

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on telegram
Share on email