For aspiring multi-level marketing (“MLM”) or direct selling (“DS”) companies, a positive written opinion by Canada’s Competition Bureau is an important first step in the operational success of their business. However, early decisions in the pricing of “starter kits” or “training kits” can jeopardize that opinion and derail their business before it ever gets to market.
In order to protect Canadian consumers from unscrupulous businesses, the Competition Bureau enumerates a number of requirements that proposed MLM companies must comply with in order to receive a positive written opinion. These requirements ensure that MLM companies are engaging in legitimate business practices and are not operating a scheme of pyramid selling.
Schemes of pyramid selling focus primarily on generating earnings through recruitment of new participants and not the sale of products. Schemes of pyramid selling are illegal under the Competition Act and the Criminal Code.
To determine whether a business is engaged in a scheme of pyramid selling, the Competition Bureau will look at whether the MLM company is generating earnings through upfront pricing charged to new participants in the form of enrollment, membership, investment or training kit fees. An MLM company may not require a participant to pay an enrollment, membership or investment fee to join their plan; however, they may require a participant to purchase a training kit provided that the company does not profit from the sale.
In selling training kits to participants, an MLM company may only charge for their direct costs in acquiring the products. This includes the direct costs of labour, materials, handling and shipping. The MLM company must not charge the new participant in the plan for indirect (overhead) costs, nor may the MLM company make a profit (mark-up) from the sale.
The Siskinds Franchise, Distribution and Licensing Group works with start-ups and multi-national firms in navigating Canadian trade-mark, marketing and franchise law. If you have questions about the regulatory process for your MLM business, please contact Andrew Johnson.