Skip to main content

Disclaimer: Educational purposes only. Not legal advice. Consult a qualified NZ legal practitioner for your specific circumstances.

SimplifiedLaw.co.nz
consumer

Pyramid selling vs. Multi-level marketing in NZ

Key Takeaway

Pyramid selling schemes are illegal in New Zealand due to their focus on recruitment payments over product sales. Multi-level marketing (MLM) is lawful if income is primarily from product sales, but all schemes must comply with the Fair Trading Act 1986 regarding truthful conduct and the Consumer Guarantees Act 1993 for product and service quality.

Pyramid Selling vs. Multi-Level Marketing in New Zealand

New Zealand law differentiates between illegal pyramid selling schemes and legitimate multi-level marketing (MLM) structures. Understanding these distinctions, and the consumer protection laws that apply, is crucial for both participants and consumers.

Understanding Pyramid Selling Schemes

A pyramid selling scheme is a scheme that involves two main characteristics: payments are required from participants for the right to recruit other participants, and the participants receive payments that are primarily derived from the introduction of other participants into the scheme, rather than from the supply of goods or services by those participants or by other participants [Source: Fair Trading Act 1986, s 21(2)].

Pyramid selling schemes are illegal in New Zealand. No person may promote, operate, or participate in a pyramid selling scheme [Source: Fair Trading Act 1986, s 21(1)]. The Fair Trading Act 1986 prohibits these schemes due to their inherent unsustainability and their tendency to cause financial harm to most participants, as their income relies on a continuously expanding base of new recruits, which is mathematically impossible to sustain long-term.

Penalties for involvement in pyramid selling schemes can include fines of up to $200,000 for individuals and up to $600,000 for body corporates [Source: Fair Trading Act 1986, s 40(1)].

Understanding Multi-Level Marketing (MLM)

Multi-level marketing (MLM) is a business model where individuals sell products or services, and may also recruit other distributors to do the same. Income in a legitimate MLM structure is primarily derived from the sale of goods or services to end consumers, and distributors may earn commissions not only on their own sales but also on the sales made by their recruited team members (their 'downline').

Legitimate MLMs are not illegal in New Zealand, provided they genuinely focus on product or service sales and comply with all applicable consumer protection laws. The key differentiator from an illegal pyramid scheme is the primary source of income for participants: genuine MLMs reward participants primarily for selling goods or services, whereas pyramid schemes reward participants primarily for recruiting others.

Distinguishing Between Pyramid Selling and Legitimate MLM

The Commerce Commission, New Zealand's competition and consumer protection regulator, considers several factors when assessing whether a scheme is a pyramid selling scheme or a legitimate MLM. These factors align with the definition provided in the Fair Trading Act 1986:

  • Primary focus: Is the emphasis on recruiting new members (pyramid) or on selling a genuine product or service to end consumers (MLM)?
  • Source of income: Are participants' payments primarily derived from recruitment fees paid by new participants (pyramid) or from sales of goods or services (MLM)?
  • Required upfront payments: Are significant payments required from new participants for the right to join or recruit, with little or no genuine product value in return (more indicative of a pyramid scheme)?
  • Value of goods/services: Do the goods or services offered have intrinsic value and are they sold at competitive prices to actual end users, or are they overpriced, low-quality, or largely irrelevant to the scheme's operation, primarily serving to mask the recruitment focus?

Consumer Protection under the Fair Trading Act 1986

Even legitimate MLM operations must comply with the Fair Trading Act 1986, which prohibits misleading and deceptive conduct in trade. The Act applies to all businesses, including those operating under an MLM model. Key provisions include:

  • Misleading and deceptive conduct: No person, in trade, may engage in conduct that is misleading or deceptive, or is likely to mislead or deceive [Source: Fair Trading Act 1986, s 9]. This applies to any representations made about the products, services, or potential earnings from participating in the scheme.
  • False or misleading representations: Prohibitions exist against making false or misleading representations concerning, among other things, the characteristics, benefits, or uses of goods or services, and the price or existence of any benefit or advantage [Source: Fair Trading Act 1986, s 13]. This means that claims about product effectiveness or potential earnings must be accurate and truthful.
  • Unsubstantiated representations: A person must not, in trade, make an unsubstantiated representation. An unsubstantiated representation is a representation made without reasonable grounds for making it [Source: Fair Trading Act 1986, s 12A]. For example, claims about significant income potential must be based on verifiable data and achievable by a reasonable proportion of participants, not just a few top earners.

Breaches of these provisions can also lead to significant penalties [Source: Fair Trading Act 1986, s 40(1)].

Consumer Rights under the Consumer Guarantees Act 1993

The Consumer Guarantees Act 1993 (CGA) provides a range of guarantees for consumers when they acquire goods or services from a supplier in trade. A consumer is a person who acquires goods or services of a kind ordinarily acquired for personal, domestic, or household use or consumption, and does not acquire them for the purpose of resupplying them in trade or consuming them in the course of a manufacturing or production process [Source: Consumer Guarantees Act 1993, s 2]. A supplier is a person who is in the business of supplying goods or services [Source: Consumer Guarantees Act 1993, s 2].

If goods or services are purchased from an MLM participant (acting as a supplier in trade) by an end-consumer for personal use, the CGA generally applies. This means:

  • Goods must be of acceptable quality: Goods must be fit for all the purposes for which goods of that type are commonly supplied, acceptable in appearance and finish, free from minor defects, safe, and durable [Source: Consumer Guarantees Act 1993, s 6].
  • Goods must be fit for a particular purpose: If the consumer makes known a particular purpose for which the goods are required, and the supplier represents they are fit for that purpose, the goods must be reasonably fit for that purpose [Source: Consumer Guarantees Act 1993, s 7].
  • Services must be carried out with reasonable care and skill: Services must be provided with reasonable care and skill, fit for any particular purpose that the consumer makes known, and completed within a reasonable time and at a reasonable price (if not agreed upon) [Source: Consumer Guarantees Act 1993, s 28, s 29, s 30].

It is important to note that the CGA generally does not apply if an MLM participant purchases goods for the purpose of reselling them in trade [Source: Consumer Guarantees Act 1993, s 2, definition of 'goods' and 'consumer']. However, the Act may still apply to services acquired by a participant if those services are not acquired for the purpose of resupplying them in trade [Source: Consumer Guarantees Act 1993, s 2, definition of 'services' and 'consumer'].

When to Seek Independent Legal Advice

For specific information regarding participation in or disputes arising from multi-level marketing schemes, or concerns about a potential pyramid selling scheme, it is recommended that individuals seek independent legal information. Enquiries can be directed to the Commerce Commission for consumer protection issues, or individuals can consult with a lawyer or a Community Law Centre for free legal information and assistance [https://communitylaw.org.nz/].

Key Resources