The action taken against Fortune Hi-Tech Marketing provides a very valuable lesson for anyone involved in, or considering, network marketing. Fortune Hi-Tech Marketing was shutdown and assets frozen for being an illegal pyramid scheme. The reasons that FTHM was shutdown is a very important learning lesson for anyone in the industry.
The quick test for separating pyramid schemes from legitimate network marketing businesses is the presence of a product. If there is no product then it is either a pyramid or a a ponzi scheme. Both of which are illegal. Fortune Hi-Tech has been operating since 2001 with a product line yet still has been shutdown as an illegal pyramid scheme. As stated the presence of a product is a quick test, no product not legal, but it doesn’t stop there.
“To be a legal network marketing opportunity, income must be primarily derived from the sale of products no from recruiting new members”
This is the single most misunderstood and abused rule in the network marketing industry. Often times network markers will write “reviews” of competing companies and label them as a “recruitment driven” scheme due to the fact that the products are primarily sold to members. That is not what this rule means. For example companies like Sisel International, Visalus Body By Vi, Empower Network, Herbalife and even Amway are all legitimate network marketing companies whose products are generally bought by members. Many people have just a bit of knowledge about network marketing and incorrectly label any multi level marketing business as a pyramid scheme simply because the people purchasing the products are also members. Many people infer from this rule that if you recruit new members to purchase products so you earn money in a multi level compensation plan, that it is a pyramid scheme. That is a completely wrong interpretation of the rule. The correct way to interpret this rule is if a member is paid money it must come from the sale of a product and NOT money that was paid to be a member. Now don’t make the mistake of inferring that if a member has to purchase product to be in an earning position then that means they are paying for membership. If the money is paid for a product then that is a legitimate transaction.
Fortune Hi-Tech Marketing charged fees for initial membership and ongoing membership. FHTM products were basically affiliate deals. For example the Dish Network. If a member refers someone to a $50 a month Dish Network program they receive 50 cents. They have many programs like that but as you can see the income people were making with FHTM wasn’t from the sale of the products but the vast majority of the income was from the membership fees. Since members primary income came from funds that were not derived from the sale but instead from the fees associated with being in the program then FHTM was a pyramid scheme.
FHTM operated for more than a decade as an illegal pyramid scheme before being shutdown. What really gets a network marketing company shutdown is complaints being filed with Attorney Generals offices and the FTC. Now I’m not talking about the “wah wah I didn’t make any money” complaints, but really numerous legitimate complaints. In court documents filed in this case the legitimate complaints were the deceptive practice of false income claims.
False income claims are a huge no no with the FTC. With FHTM these claims came from both the company level and members in recruiting efforts. Potential members would be told by sponsors that they were earning huge sums from the product sales. After people paid to become members they found that not to be true. Numerous complaints being filed about deceptive recruiting is what spurred the FTC and AG offices to take action.
Don’t use deceptive practices in recruiting new members. Network Marketing is a very legitimate income vehicle but the reality is that it takes work just like any business. Your best bet is to be honest about the opportunity not only to protect your business but in order to build a much stronger business with people that are ready to put in the effort to earn a great income.
Learn how the money flows. Understanding how the money flows will keep you from getting involved in a pyramid or ponzi scheme. Money should only pass to members when product are paid for. This is something you have to look closely at to ensure that the rule is always met. For example many companies utilize a cycling matrix such as a 2 by 2 cycling matrix. This means you have two positions below you and each of those has 2 below them. The bottom row is the pay line. So when you enter you pay, just for example, $100 and receive a product. When the bottom line of your matrix fills with people paying the $100 and receiving a product you get paid. Generally the company gets a cut lets just say of the $400 on the pay line the company takes $100 and they pay you $100. You got paid and the money came from product purchase and all is good. Not they take the remaining $200, which is really your commission, and they use that to put you into another matrix. When that matrix fills you get paid more and part of that is used again to put you into a higher paying matrix. Most companies that are utilizing this style of matrix only provide a product on the initial matrix entry. In order to meat this regulation they would have to provide a product each and every time you enter a new matrix. It’s really simple when you look at the pay plan each time you get paid you need to be able to identify what product was paid for that earned you that money.