(MLMIA Legal Mentoring Series) About Affiliate Programs

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Gerald P. Nehra, Network Marketing Attorney

When does an affiliate program become MLM? Have you heard the following? “We are an affiliate program so we are not MLM”  or “Our affiliate program only pays one level (or two levels) so we are not an MLM.” The sole purpose of the bulletin is to encourage caution, and to encourage seeking out an expert advisor to make this determination.

The below 2 paragraphs are from the MLMIA legal Mentoring Bulletin One – with an ALL CAPS comment following, to address the affiliate question.

IF the independent contractor income opportunity is limited to the potential to RECEIVE income from the company, ONLY by purchases (for personal and family consumption and/or for resale) AND by the purchases of persons DIRECTLY INTRODUCED to the company (no matter what these purchasers are called) – the company has offered a single-level income opportunity to its independent contractors, and is NOT multilevel.

MOST BASIC – OR ONE LEVEL AFFILIATE PROGRAMS FIT INTO THE LEGAL DEFINITION ABOVE – AND ARE NOT MULTI-LEVEL – BUT – MAY STILL BE SUBJECT TO REFERRAL SELLING LAWS.

The income opportunity offered by the company becomes multilevel when the potential to receive income GOES BEYOND what is stated above. So, if the compensation plan gives an incentive and rewards a person for finding and introducing to the company more persons like themselves who generate business volume – we have a multilevel form of compensation. At this point the rewards available are for MORE THAN the business volume personally generated – and are additionally based on business volume being generated by persons introduced by the first person – thus – multilevel.

WHEN AN AFFILIATE PROGRAM IS STRUCTURED AS ABOVE – IT HAS CROSSED THE LINE INTO MULTI-LEVEL – AND – NO MATTER WHAT IT IS CALLED – THE MULTI-LEVEL LAWS AND POSSIBLY REFERRAL SELLING LAWS WILL APPLY TO IT.

This may be helpful in your analysis – it the first case – the company only needs the taxpayer ID number from one person to fulfill its IRS 1099 reporting requirements. In the second case – the company will need the taxpayer ID number from two persons – to fulfill its IRS 1099 reporting requirements – another evidence of the applicability of the multi-level laws to the business model.

            The author has discussed with the three additional law firms listed below what is written above. Readers are encouraged to seek the counsel of expert advisors if they want to ensure that their affiliate program is NOT subject to MLM direct selling laws and referral selling laws, or, if they want to COMPLY with both types of laws, because their affiliate program is subject to them.