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It is
highly probable that every person you meet in the street
has a relative, a friend, a neighbor or an acquaintance
that has fallen victim to a pyramid or Ponzi scheme.
Government web sites, like that of the Securities and
Exchange Commission (SEC) and the Bangko Sentral ng
Pilipinas (BSP), now contain warnings against these
fraudulent multilevel-marketing schemes, but
unfortunately, these warnings have not kept the list of
victims from increasing, mainly because of extreme
financial need for some, while for others
“get-rich-quick” ventures are just too difficult to
resist.
What is
to be emphasized is that the business of multilevel
marketing is not illegal per se and hence, being
involved in such a venture or investing therein should
not really pose a problem. However, the problems arise
when a pyramid or Ponzi scheme is made to appear as a
supposedly legitimate multilevel-marketing scheme. It
thus becomes important for an ordinary person to be able
to differentiate between a legitimate multilevel-
marketing business and a pyramid scheme before deciding
to invest in the business venture.
The SEC,
in an opinion rendered as far back as in 1984, defined
the concept of “multilevel marketing” as “a popular and
legally sanctioned method of retailing whereby consumer
products are sold by independent distributors in
customers’ homes.”
The
distributors in a multilevel-marketing business act as
independent businessmen in directly selling consumer
products and services to individuals. They are
encouraged to build and manage their own sales force by
recruiting, motivating and training others to sell the
product or service and set their own hours. A percentage
of the sales of the distributor’s sales force would be
his compensation in addition to his personal sales.
Most of
the materials that discuss multilevel marketing always
mention it together with the concept of
“chain-distribution plans” or “pyramid-sales schemes.”
These terms are defined in the Consumer Act of the
Philippines as “sales devices whereby a person, upon
condition that he makes an investment, is granted by the
manufacturer or his representative a right to recruit
for profit one or more additional persons who will also
be granted such right to recruit upon condition of
making similar investments: Provided, that the profits
of the person employing such a plan are derived
primarily from the recruitment of other persons into the
plan rather than from the sale of consumer products,
services and credit: Provided, further, that the
limitation on the number of participants does not change
the nature of the plan.”
“Chain-distribution plans” or “pyramid-sales schemes”
are expressly prohibited by the Consumer Act in the sale
of consumer products.
A
legitimate multilevel-marketing system has been
differentiated by the SEC from a pyramid scheme in this
manner.
First,
in legitimate multilevel marketing, the SEC noted that
the start-up cost is minimal and intended merely to
recover actual costs, unlike in a pyramid scheme where
the start-up cost is substantial or expensive as it
makes virtually all of its profits on the signing up of
new recruits.
Second,
in legitimate multilevel marketing, the company will
guarantee to buy back the products, unlike in pyramid
schemes which do not buy back unsold inventory.
Third,
the distributor will receive a commission from the
multilevel-marketing company upon actual sale of the
products to consumers, while pyramid schemes are not at
all concerned with repeat sales to users of the
products.
The
profits of those involved in pyramid schemes are made on
volume sales to new recruits, who buy the products not
because they are useful but because they must buy them
to participate in the schemes.
The
Department of Justice in an opinion aptly summed up what
is at the core of a “pyramid scheme,” which is an
“illegitimate program which lure participants with the
promise of easy money by compensating them from the
investments of additional participants rather than from
legitimate product sales.”
Hence,
for as long as the sales method of a business aims to
compensate a person depending on the volume of product
sales, and not primarily on the recruitment of other
persons in order to participate in the scheme, then
there is basis to claim that the business employs
legitimate multilevel marketing, rather than a pyramid
scheme.
Nowadays, people who perpetrate “pyramid-scheme type”
frauds make use of new ways of “attracting” would-be
victims. Different species of scams, not just those
pretending to be multi-level-marketing businesses, are
being propagated through the Internet, e-mail and text
messaging.
Some of
the features of an Internet-based Ponzi scheme noted by
the SEC are the business has no SEC registration;
investments are sought in foreign currency (especially
US dollars); offers a huge profit in a very short
period; uses a binary network (i.e. upline and downline)
to earn commissions; no paper trail (e.g., contracts or
receipts); promises little or no financial risk;
provision for lock-up when an investor cannot touch the
investment; uses high pressure of methods to convince
investors to reinvest their earnings; unknown principal
office address, founders, directors or officers; and
orientation seminars are conducted informally. These
features will probably also be present in other forms of
scams.
Besides
scrutinizing the nature of the business, and the
products and services for sale, if any, and ruling out
the more known and obvious indicators of a pyramid
scheme, it may also prove crucial to conduct some
background check on the people behind said business
before letting go of one’s hard-earned funds and
finalizing any investment.
For
corporations, public records may be secured from the SEC
or other government agencies that will give some
background information on said corporation’s
stockholders, directors and officers, and whether or not
said corporation has been specifically permitted to
solicit investments.
A
legitimate multilevel-marketing business, for instance,
that intends to conduct “home-solicitation sale” or
“consumer sales or leases which are personally solicited
by any person or organization by telephone,
person-to-person contact or by written or printed
communication other than general advertising or
consummated at the buyer’s residence or a place of
business, at the seller’s transient quarters, or away
from a seller’s regular place of business” must secure a
permit from the Department of Trade and Industry.
The
probability of compliance with government regulations is
higher if a business is legitimate rather than one that
will only seek to defraud the investing public.
Performing the above tests and checks will not
completely rule out the possibility that one’s
investment may go bad. Even legitimate investments carry
with them a certain amount of risk. However, what one
may seek to avoid is being swindled without knowing it.
The SEC
and the BSP have, time and again, advised would-be
investors to be careful. When in doubt, there is no harm
in seeking the help of our regulators in confirming the
legitimacy of an investment scheme or even immediately
reporting those that show signs of a would-be scam.
****
Atty. Rosa Michele C. Bagtas is a partner at the
Villaraza Cruz Marcelo & Angangco Law Offices (web site:
www.cvclaw.com),
where she is a member of the Corporate and Commercial
Law Department. Her areas of practice include mergers
and acquisitions, real estate and property development,
securities, corporate governance, and taxation.
Disclaimer
This
article has been prepared for informational purposes
only and should not be treated as legal advice. |
