Pyramid schemes are a pernicious form of fraud that prey on consumers and honest salespeople alike. As a member of the Indiana Senate, I have an obligation to protect my constituents from illegitimate business scams. And as the spouse and father of direct sellers, I understand better than most the serious reputational harm pyramid schemes can inflict on legitimate small businesses.
My wife, Kim, has been a Mary Kay independent beauty consultant for more than three decades and our daughters Laura and Madeline have followed in their mom’s footsteps. They’re hard-working, honest entrepreneurs. The profits Kim’s small business generates has contributed significantly to our family’s income and quality of life, and the independence and flexibility direct selling afforded her has been a great benefit to us as we raised our four children.
Not everyone affiliates with a direct selling company to build a business or make large sums of money. Some become involved with direct selling to supplement their income by working part time or because they enjoy independence or the social engagement the business model encourages. Many others become involved simply because they enjoy a certain product and want to purchase it at a discount. All are honest activities that deserve respect and protection from fraud.
The differences between pyramid schemes and legitimate direct selling businesses are numerous, but the most important difference is how compensation is earned. Most pyramid schemes promise compensation for recruiting other victims to the scheme. Direct selling companies compensate for real sales by a salesperson or a network of salespeople of goods or services to a real user. A real user can be a direct seller’s customer or it can be the direct sellers themselves, who might have become involved in the business to buy a company’s products. There is nothing fraudulent about a direct seller personally consuming her company’s product any more than it is for salesclerk in a department store to buy at a discount the products he sells.
Pyramid schemes discredit the business my wife has built and the relationships of trust she has forged with her customers. They often masquerade as direct selling companies and sew public confusion and suspicion that harm legitimate businesses.
While all fifty states have anti-pyramid schemes on the books, Indiana’s anti-pyramid law was vague and not as effective as it should have been. I introduced Senate Bill 283 earlier this year to provide a sanctioned definition of pyramid schemes that is clear and distinguishes such fraud from legitimate direct selling businesses.
I based the legislation’s provisions on the 2004 Council of State Governments (CSG) Suggested State Legislation. I also worked with Indiana Attorney General Curtis Hill’s office to make certain the bill was focused on the right targets and violations of the law could be successfully prosecuted.
All members of the Indiana Senate and House recognized SB 283 offered effective consumer protection. It was adopted with no opposition, and Governor Holcomb signed it into law immediately upon it hitting his desk. Indiana is now one of twenty-one states that has an anti-pyramid statute based on the CSG’s suggested model legislation and extensive case law.
Regrettably, there is no such clear statute in the United States Code. The only guidance consumers have under federal statute to know whether a plan or operation is a pyramid scheme is “unfair and deceptive practices.” However, H.R. 3409, the Anti-Pyramid Scheme Promotional Act of 2017, introduced by Representatives Marsha Blackburn (R-TN) and Marc Veasey (D-TX) would remedy that deficiency.
Their bill would provide an effective sanctioned definition of pyramid schemes similar to Indiana’s new law. It, too, is based on the CSG’s recommendations and on judicial decisions. The legislation would give consumers clarity about what is a pyramid scheme attempting to defraud them and what is a legitimate direct selling company.
For far too long, direct sellers and their customers have been left exposed to swindlers who take advantage of the popularity of a unique retail channel and the trust earned through honest transactions. Most states have acted to protect consumers and direct sellers from pyramid fraud. It’s time for our national legislature to follow our example and pass the Blackburn-Veasey bill this year.
Mark B. Messmer is a Republican member of the Indiana State Senate, representing the 48th district.
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