You learn of a new network marketing opportunity. You feel excited because you think it holds promise. You wish you had a way to know whether it is a legitimate network marketing company.
In Canada eight provinces require direct selling network marketing companies to be licensed. In some you, as a direct seller, would also have to acquire a license. When you apply, your application will reveal or be authorized by the network marketing company. If the company is not licensed, the local provincial regulator will notice when processing your license application. If your license application is held up, learn whether it is because the network marketing company does not have a license in the province. You could also simply call your provincial direct seller licensing office to learn whether the company is licensed for direct selling in the province. Most provinces have direct seller licensing definitions that include activities by most network marketing companies. Licensing by the province is not a guarantee of legitimacy however because when a network marketing company gets prosecuted it is usually for violation of federal law governing pyramid schemes rather than provincial consumer protection law.
Where the provincial license verification process is not available, you can consider several factors to assess a network marketing opportunity's legitimacy. Red flags should appear if you answer yes to the following questions:
Are you required to pay to purchase anything other than a sales facilitating package of products, materials, or services to participate in the network marketing company? This package is like a starter kit designed to help you sell the company's products or services to customers. It is not a package of products or services for you to consume personally.
Does your network marketing upline receive compensation from your payment for the sales facilitating package?
Must you purchase the sales facilitating starter kit for more than the seller's cost price plus shipping and handling?
Must you purchase any of the company's product for more than the company's cost price to participate in the network marketing company? The product in the sales facilitating starter kit must be sold at the company's cost price, so no upline may receive compensation from your required starter kit purchase. The plan can't require you to purchase the company's product, in a way that allows the upline to receive compensation, as a condition of participating fully in the plan.
Does your network marketing upline receive compensation from your required initial purchase?
If there is a free participation option, is it unrealistic in that it is not as convenient for those joining the network marketing company through the free participation option to sell the product and recruit new participants as it is for those purchasing something to participate?
Is the network marketing product priced higher than the market price for similar competing products which are not sold via network marketing? If so, the regulators may consider there to be a recruitment bonus hidden in the purchase price, particularly in the absence of significant sales to non-participant retail customers.
Is the purchase of product by plan participants promoted as a way of increasing the purchaser's compensation from the plan?
Is the purchase of product as an investment by plan participants promoted as a way to profit as other participants also purchase?
Does the network marketing company provide participants with product in amounts at which resale is commercially unreasonable?
Are you asked to purchase redundant quantities of product such as more than one personal web site so that your compensation may be higher on downline sales?
Are you asked to purchase large amounts of product prior to having orders for the products from customers not participating in the network marketing company?
Is the buy back policy and right to return product by those participating in the network marketing company: limited by conditions; too short to provide a sufficient period to assess how successful you will be with the network marketing opportunity or shorter than available for competing products?
Is the company's "network marketing opportunity" being more prominently promoted than the company's product?
Do the network marketing company's products seem relatively irrelevant compared to the company's "network marketing opportunity"?
Are the network marketing product's unused by the purchasers?
Do the network marketing company's materials and show a relative absence of concern for training participants to sell the products to non-participants who remain non-participants (ie. retail customers)?
Are the network marketing company's previously recruited participants left to go it alone after their initial recruitment and purchases?
Does the network marketing company fail to require you to keep evidence of sales to non-participants?
Does the network marketing company fail to retain a right to request that you provide the evidence of sales to non-participants or refrain from requesting the evidence from participants?
Does the network marketing company let you order product without certifying that you have sold or consumed most of what you have previously ordered?
Is the general impression left that the network marketing opportunity is largely about selling the network marketing opportunity to new participants with an emphasis on recruiting or acquiring new participants and selling them the product, rather than having as a primary purpose the sale of the product to non-participants who remain non-participants (ie. retail customers)?
Is the promoted path to network marketing success recruitment, duplication, and training others to do the same, rather than sales of the product to non-participants?
Regardless of what all the paperwork says, do the people operating the network marketing company encourage or tolerate the promotion of the network marketing opportunity with a emphasis on downline personal consumption purchases rather than with an emphasis on sales to non-participants?
Are most of the company's sold products consumed by plan participants rather than purchasing non-participant customers?
Does the network marketing company tolerate representations relating to compensation without disclosure of the earnings of typical participants?
If you answered yes to some of the above questions, the network marketing opportunity may still be legitimate. For example, most of the network marketing industry pays upline commission on downline personal consumption purchases, most of the industry requires a mandatory purchase of a starter kit at the seller's cost price for the purpose of facilitating sales, and much of the industry prohibits representations relating to compensation regardless of whether it is the compensation of the typical participants. Some of the questions above are automatic illegalities and others are simply evidence which may, when combined with other evidence, lead to the conclusion that the plan is illegal. One area of ambiguity often relates to the amount of product actually being sold to non-participants who remain non-participants (ie. retail customers). If much of the product never makes it beyond the plan participants (ex. if much of the product is consumed by the distributors rather than their retail non-distributor customers), then the regulators have concerns. Next time you are at a meeting, ask around to learn how many retail customers the plan members have. Only the regulators (speaking practically) and ultimately the courts (speaking legally) can make a final determination of a network marketing company's legitimacy. However, if you apply the above tests and the answers consistently raise red flags, you may want to consider alternative network marketing opportunities.