Auditor’s office wants MLMs in Montana to follow law by registering

csimt 2021, Fraud, In The News, Securities

The state auditor’s office is giving multi-level marketing companies operating in Montana that haven’t registered until Dec. 15 to do so and pay a reduced fine under a so-called “amnesty program.”

The program will levy on multi-level marketing companies a fine of $1,000 instead of up to $5,000 per violation, as well as assistance in coming into compliance.

There are only 15 MLMs registered in the state, but the auditor’s office estimates there are hundreds operating here.

State law requires MLMs must file a notice of intent to operate with the auditor’s office, which is also called the Commissioner of Securities and Insurance Office. The company must also file detailed descriptions of how it compensates participants and its compensation structure.

That information is used to make sure the MLM is not a pyramid scheme, which is illegal to operate in Montana.

“For a multi-level marketing company, there’s in statute a requirement to register with this office and there’s some pretty significant reasons for that,” said Troy Downing, the commissioner of securities and insurance and state auditor, in an interview Tuesday. “The No. 1 reason is just how close an MLM can be to a pyramid scheme and the requirements an MLM has to follow to not be treated as a pyramid scheme.”

MLMs are defined in state law as companies that sell, distribute or supply goods or services through independent agents, contractors or distributors, at different levels of distribution. The companies have formulas for paying participants in whole or in part based on purchases of sales by or recruitment of other participants and permits participants to recruit other participants in the company. They may also provide commissions or bonuses based on the sale of goods or services or the recruitment of or the performance or actions of other participants.

A company generally crosses the line from an MLM to a pyramid scheme when a person’s compensation is based more on getting people into the program than it is from earning commissions on selling products, Downing said.

“We’re not against MLMs at all,” Downing said. “It’s completely legitimate, it’s right for some people.” He said the office’s focus is making sure the companies are in compliance and not taking advantage of consumers.

High-profile MLMs include LuLaRoe, a company known for its leggings that earlier this year paid $4.75 million to settle a lawsuit filed in Washington state claiming it was a pyramid scheme.

The auditor’s office has recently investigated six MLMs operating in Montana illegally. The companies sold cleaning supplies, magnetic jewelry, clothing and accessories, home decor, adult products and cryptocurrency. Several of the companies have settled with the office, paying more than $20,000 in fines and $10,000 in restitution, Downing said.

Of those companies, the auditor’s office alleged Magnabilities, LLC, Perfectly Posh, LLC, Pure Romance, LLC, and Norwex USA, LLC were not properly registered. The office investigated NUI Social for not being properly registered and selling unregistered securities.

The auditor’s office is also investigating Mintbuilder.com LLC for claims it is operating a pyramid promotional scheme.

According to the auditor’s office, one of the companies it investigated had nearly 3,500 participants in the state.

The main way the auditor’s office becomes aware of MLMs has been through complaints, Downing said. The office has received complaints about Montanans paying large initial costs to buy products that were unlikely to be able to be sold or people compelled to get others to join the company.

After the amnesty window expires, the auditor’s office plans to investigate any unregistered MLMs and hold them “accountable for violating the law, including the imposition of the full fine amount and restitution,” according to a press release from the auditor’s office.
The auditor’s office also plans to maintain a list of MLMs that are registered with the state on its website following the end of the amnesty period. It will also list those that are direct-selling associations, which are legal in the state.

“We hope to see some of these companies come out of the woodwork,” Downing said.

Egan said the state has been regulating MLMs in some form since 1999, following the large fraud case International Heritage Inc. pyramid scheme that led to the company’s executives going to prison.

The 15 MLMs registered in Montana include:

  • Magnabilities, LLC
  • Norwex USA, Inc.
  • Bat Club USA
  • GCOOP USA Corp.
  • DIG Direct
  • Youngevity International, Inc.
  • Bravenly Global, LLC
  • Color Street LLC
  • Xendurance LLC
  • Reliv International, Inc.
  • Amsoil, Inc.
  • Bing Han USA Ent., LTD
  • Multi-Pure International
  • Plexus Worldwide, LLC
  • 7K Metals, LLC