Montana Orders ACN to Shut Down over "Pyramid Scheme" Allegations

It seems the state of Montana is having a field day with service MLM's this year. First it was FHTM (Fortune High Tech Marketing) in April, now it's ACN's turn.

The Montana Commissioner of Securities and Insurance ordered both companies to shut down it's operations in the state.

FHTM settled with the Government and was allowed to continue operating by refunding over $800,000 to its reps and drastically reducing it's enrollment fees. ACN may be forced to do something similar...

ACN has been around for a long time and is one of the most well known and recognised direct selling companies, so this news comes as blow to many of ACN's hard working reps and my sympathies goes out to them.

The commissioner's report states...

"Monica J. Lindeen, Montana’s Commissioner of Securities and Insurance, has issued a cease-and-desist order against ACN and a Notice of Proposed Agency Action. "Pyramid schemes are immensely profitable to a few individuals at the top and a complete loss for almost everyone else," Lindeen said. "The actions against ACN and its officers seek to shut down the company’s alleged unlawful operation before more people lose their hard-earned money."

"The Commissioner’s Office found an overwhelming portion of revenues earned by ACN representatives was derived from participants who must personally buy a telephone service that does not work in many parts of Montana to become managers or recruit new participants into the program.

"In 2008, ACN recruited 91 Montana participants who paid approximately $61,741.69 to be a part of the program. Only two of the participants made any money, with one participant making $696 and the other making $700.

"In 2009, ACN recruited over 300 Montana participants who paid approximately $234,813.02 to be a part of the program. ACN’s records indicate a mere $896.86 was paid out in compensation to these participants. ACN’s records indicate participants are located throughout Montana.

Read the full report here.

I know some of you maybe thinking "How can a company that sells a legitimate service that people pay for anyway, be classified as a pyramid scheme?"

Well, to be fair to ACN and every other network marketing program, it's unfortunate that some regulators make their judgments based on the average commissions that representatives earn. This has been a big factor in this case.

It's no secret that most network marketers earn little to no profits at all (...actually, maybe it is a secret :D...), but that's not necessarily a reason for an opportunity to be illegitimate.

Actually, it's bad logic to assume an MLM is illegal just because very few people make any money because the fact is, most people who go to the gym will quit before they achieve their health goals; most people sports men and women, actors, musicians will never reach stardom; most people who start a traditional business will not make it for the long haul.

But having said that, some compensation plans are structured in such a way that there is very little income potential, unless there is continuous recruiting involved.

Here are two very important questions that regulators ask to determine the legitimacy of business opportunities.

1. Would a logical thinking person pay this much money for the product or service if there was not a business opportunity involved?

2. Does the income stop when the recruiting stops?

The problem with service based MLM opportunities is there is very little margin to pay the distributors. Companies that sell consumer products can typically pay over 50% of the wholesale price (...the price distributors pay...) to the field, and in those companies, the average rep generates $100 in volume a month.

In service based companies, the average monthly volume is typically lower, and they can only pay out 10% - 20%. ACN's compensation plan, to be perfectly honest, is not very rewarding in terms of residual recurring income. Representatives are paid 1% on their own customers, and 1/4% on their first 3 levels. Acquire a customer on a $50/month phone bill and you're earning 50 cents!

This is why serviced based MLM's are so recruitment driven. They provide a lot more incentive for their reps to recruit new reps through sponsoring bonuses.

You can enroll in most product based MLM's for less than $50 without purchasing products, and your sponsor can't receive any commissions on your enrollment fee.

But in a low margin service based MLM, the entry fee typically ranges from $250 to $500. Most of the enrollment fee is paid out to the sponsor and their qualified uplines - this is what lands companies in legal hot water.

Twice before ACN has been in trouble with the authorities - in Canada and Australia, mainly due to its incentives for recruiting, rather than retailing. On both accounts, it was allowed to continue operating. It's highly likely that ACN will be able to continue operating in Montana, but it may be ordered to change its business model, like FHTM was.

If precedent is anything to go by, there will be further clamp downs on MLM companies with similar pay plans where there is large upfront commissions and very little back end residual income.

To read more about the Montana Securities Commissioner's attack on ACN and other related stories, check out the following links...

1. Rod Cook's opinion of the Montana ACN crackdown at MLM Watchdog.

2. Len Clement's version of the ACN attack at MarketWave Inc.

3. Lou Abbott on the FHTM settlement at MLM-the Whole Truth.

To Your MLM Success,

Wayne Wu

Looking for success in network marketing? I struggled for 2 years before stumbling upon the right answers. Let me freely share them with you.

Original article: Montana Orders ACN to Shut Down over "Pyramid Scheme" Allegations posted at The Profitable Networker.