It is illegal to persuade customers to buy a product by making promises about rebates, commissions or other benefits they will get once they introduce other buyers to the product. This is called referral selling.
However, it is legal if the customer voluntarily enters into these arrangements after the sale.
Examples of referral selling include:
- selling a mattress that you claim promotes good health, while convincing customers to become part of a club where they receive commissions if they get other people to join the club or buy mattresses
- selling expensive metal alloy roofing for homes, while telling potential customers they can get a rebate by sending interested neighbours to the business.
Pyramid schemes make money by recruiting people rather than by selling a product or service. In a typical pyramid scheme, members pay to join. The only way they can recover any money is to convince other people to join as well.
It is illegal to promote or participate in pyramid schemes. These schemes differ from legitimate multi-level marketing where people make money by selling genuine products or services, rather than from recruiting others.
Last reviewed 28/11/2011