[Article 1/8] – The nature of business activities in multi-level mode

Multi-level marketing or multi-level business (being known by a lot of different names, in Vietnam the legal term used is: multi-level business or multi-level selling) is a method of retailing goods that first appeared in the US, and was built and developed by Mr. Carl Rehnborg, a Nutrition Researcher, from the early decades of the 20th Century.

In this method, instead of goods sold at traditional retail channels such as markets, stores, supermarkets,and so on, multi-level sale enterprises will sell goods directly to consumers through a network of retailers also known as “distributors”. Multi-level sale participants will be paid commissions, bonuses, and other economic benefits by the company based on their sales and the sales network they build.

This business method has many characteristics including advantages and disadvantages

For businesses, the form of multi-level sales helps the enterprises to save the expenses: for advertising, promoting products and brands to consumers including the renting or buying premises cost for agents, stores. In addition, with multi-level sales participants, businesses do not have to pay salaries for distributors, but these distributors will get a commission from their own profits, therefore, the enterprises can reduce the personnel organization expenses.

Under the form of multi-level sale, the enterprises can grow the size of their sales network faster with the traditional sales method. By the experience of using products, participants introduce the products to other consumers as well as the opportunity to participate in multi-level selling activities. With this method, enterprises can quickly expand their distribution network and have a large market. Since then, enterprises can have large revenue, significantly contributing to economic development and the state budget.

For participants, multi-level sales help them to meet the job needs and create job opportunities for the society. The conditions are not strict for multi-level sale participants (no capital, professional knowledge, qualifications, working time required), the multi-level business model has been attracted by many stakeholders, participants, and solve employment problems for employees. In addition, participants also have income by selling products and the system.

For consumers, buying goods from enterprises by  the multi-level way helps consumers save their buying products expenses : because enterprises do not have to pay the transportation, distribution or advertising fee. Therefore, the cost of products when reaching consumers tends to be cheaper than the traditional sales method. Products of the multi-level marketing enterprise also have a certain research investment to produce certain products and have very high specificity (even exclusive to each manufacturer).

Besides, from operation, the multi-level sales model also has the following disadvantages:

The marketing and advertising of goods are performed directly through word of mouth and relies on human psychology, so it is difficult to control the information process from one to one and it is difficult to suit all consumers.

Multi-level business enterprises often have a very large number of participants and can take place over a wide geographical area of ​​a country, so the control and management of business activities and the behavior of people participating in multi-level marketing is very difficult.

In social aspects, derived from the very specifics of the business method, multi-level selling is also easily exploited by bad actors to mobilize finance, mobilize investment, fraudulently appropriate the property of customers, adversely affecting public opinion in general and enterprises and genuine participants in this business in particular.

Infact, historically, when this business method is introduced into any country, there are bad actors who distort the nature of this business to perform illegal acts and cause harm and huge consequences for society. The Albanian government collapsed in 1997 because of its involvement in the Ponzi scheme, or the scandal that shook the US financial markets was the case of the “$58 billion super scam” Bernard Madoff in 2008.

Vietnam’s legal concept of multi-level business reflects the true nature of this business form

Due to the reason that the multi-level model has been used by some objects to turn into a fraud tool, the terms “multi-level selling” and “multi-level business” have been used in the view of personal and user sentiments to refer to “island” or similar meanings are not correct in terms of the legal nature of “multi-level business”.

In Vietnam, the first legal term for multi-level business is the concept of “multi-level sale” as defined in Clause 11 Article 3 of the 2004 Competition Law.

At the present, the definition of “business by multi-level method” is specified in Clause 1, Article 3 of the Government’s Decree No. 40/2018/ND-CP dated March 12, 2018 on management of business activities by method. 40/2018/ND-CP), business under the multi-level method is: “business activities using a network of participants consisting of many levels and branches, in which participants enjoy commissions, bonuses and other economic benefits from their own business results and those of others in the network system”.

According to the provisions of Decree No. 40/2018/ND-CP: Business activities under the multi-level method must be registered according to regulations and can only be carried out with objects being goods. All business activities in multi-level mode with non-commodity subjects are prohibited (unless otherwise provided for by law, such as insurance business).

Multi-level business is a form of distribution, sales, as other forms of sales, multi-level sales seeks to bring goods from the producer to the consumer, not an investment method to get high returns and get rich quick.

For all enterprises that apply this business method have manifestations such as: not for the main purpose to sell goods (or goods are only symbolic, have no meaning of use), encouraging participants that this is a way to get rich from financial and good investment, all are businesses with nefarious activities that go against the nature of multi-level selling.

Source: Vietnam Competition Authority