PYRAMID SELLING — THE NEED FOR REGULATIONS

• Author: EDWIN LEE PENG KHOON
• Date: 01 December 1995
• Published date: 01 December 1995

Not all pyramids are in Egypt. This article discusses what is pyramid selling in the context of the Pyramid Selling and Multi-Level Marketing (Prohibition) Act (Cap 190) in Singapore, and the recent High Court decision of Tan Un Tian v PP. It concludes with a suggestion of a need for regulations in view of the very wide ambit of the Act.

I. INTRODUCTION

The case of Tan Un Tian v PP[1994] 3 SLR 33 was the first reported decision of its kind on a little known Act in Singapore, the Pyramid Selling and Multi-Level Marketing (Prohibition) Act (Cap 190) (hereafter “the Act”).

The case does not seem to have made much impact on the business community, but it should. The decision has highlighted the all-encompassing nature of the definition of pyramid selling. This article seeks to show that by Parliament’s failure to limit in any meaningful way the definition of pyramid selling, many innocuous business set-ups today are potentially liable for an offence under the Act.

II. WHAT IS PYRAMID SELLING

Section 2 of the Act provides a definition of Pyramid Selling. However it may first be useful to go beyond a mere literal interpretation of the Act and to investigate how pyramid selling schemes work and the objections that Parliament has to such schemes. This would provide a better framework of understanding when reading the Act.

A US author, Rodney K. Smith, provides a good summary of what is pyramid selling:1

“Historically, illegal pyramid activities were (and are) fashioned after the old chain-letter fraud. The chain-letter stratagem is based on the notion that the originator of the scheme writes to a number of individuals, all of whom are to pay him or her a fixed amount of money. After paying the perpetrator (or others higher up in the list), the individuals add their names to the bottom of the pyramid and send the letter on to another group of people. Theoretically, as the letter passes through many hands, those on the top of the list not only recoup their initial “investment” (the amount they paid others for the privilege of becoming part of the chain), but also reap a healthy profit, without rendering any service. Of course, at some point the chain breaks down. Thus while those at the top of the letter

may have made a profit, those at the lower levels generally suffer a loss.”

A similar account of pyramid structures was described by the Minister for Finance during the Second Reading of the Multi-Level Marketing and Pyramid Selling (Prohibition) Bill in 1973:

“In general terms, it may be described as a scheme or arrangement relating to the sale of goods or provision of services under which the participants pay for their rights under the scheme and receive a reward for recruiting new participants. Taken together, these two factors lead to expansion of such schemes on the chain-letter principle.”2

In order for everyone to profit from a pyramid scheme, there must exist a never-ending supply of new participants. Because such supply is limited, each new level of participants has a poorer chance of recruiting others and therefore less opportunity to profit. The legislation against pyramid schemes therefore becomes clear. It strives to protect potential recruits against such schemes.

III. TYPICAL EXAMPLE OF PYRAMID SCHEMES

An example of a pyramid set-up is described by the Minister thus:

“In a typical pyramid scheme for the sale of goods, a company sells and the participants buy a right to sell its goods. Legally the participants are usually regarded as independent contractors who buy for resale the goods from the company or from other participants at a discount on the price to the consumer. The participants are often described as franchise holders. The original franchise holders, as well as selling goods themselves to the public, will recruit further participants to whom they will sell the goods for resale to the public and, in some cases, to yet another level of participants. In this way, a hierarchy is built up, each receiving a discount from the consumer’s price on the goods he buys, the size of the discount depending on his position in the hierarchy.”3

In view of the commission structure, the ultimate price of the goods to consumers would be high, which makes the goods difficult to sell. The franchise holder therefore suffers as he is unable to rid himself of the inventory of goods he had committed himself to sell.

The Act, therefore, is aimed at protecting potential franchise holders from participating in such schemes. To a lesser extent, the Act would also protect the consumer by ensuring that the prices of goods are not artificially inflated.

IV. DEFINITION OF PYRAMID SELLING

Section 2(1) of the Act defines a “pyramid selling scheme or arrangement” and “multi-level marketing scheme or arrangement” as follows:

“any scheme or arrangement for the distribution of a commodity whereby a person may for valuable consideration in any manner acquire a commodity or a right or a...