State Statutes that Prohibit “Endless Chain”
Income Promises as a Means to Sell Products or
Services (click on state to see the statute)
Wisconsin
New York
Maine
California
Vermont
North Carolina
Puerto Rico
WISCONSIN STATUTE
(Regulations)
"ATCP 122.02 Definitions.
"(1) 'Chain distributor scheme' is a sales device whereby a person upon a condition that
the person make an investment (emphasis added) is granted a license or right to recruit for
profit one or more additional persons who also are granted such license or right upon
condition of making an investment (emphasis added) and may further perpetuate the chain
of persons who are granted such license or right upon such condition. (emphasis added).
A limitation as to the number of persons who may participate or the presence of additional
conditions affecting eligibility for the above license or right to recruit or the receipt of profits
therefrom does not change the identity of the scheme as a chain distributor scheme.
"(2) 'Investment' is any acquisition for a consideration other than personal services
(Emphasis added) of personal property tangible or intangible for profit or business
purposes and includes without limitation franchises business opportunities and services. It
does not include real estate securities registered under ch. 551 Stats. or sales
demonstration equipment and materials furnished at cost for use in making sales and not
for resale.
NEW YORK STATUTE
S 359-fff. Chain distributor schemes prohibited.
1. It shall be illegal and prohibited for any person, partnership, corporation, trust or
association, or any agent or employee thereof, to promote, offer or grant participation in a
chain distributor scheme.
2. As used herein a "chain distributor scheme" is a sales device whereby a person, upon
condition that he make an investment, is granted a license or right to solicit or recruit for
profit or economic gain one or more additional persons who are also granted such license
or right upon condition of making an investment and may further perpetuate the chain of
persons who are granted such license or right upon such condition. A limitation as to the
number of persons who may participate, or the presence of additional conditions affecting
eligibility for such license or right to recruit or solicit or the receipt of profits therefrom, does
not change the identity of the scheme as a chain distributor scheme. As used herein,
"investment" means any acquisition, for a consideration other than personal services, of
property, tangible or intangible, and includes without limitation, franchises, business
opportunities and services, and any other means, medium, form or channel for the
transferring of funds, whether or not related to the production or distribution of goods or
services. It does not include sales demonstration equipment and materials furnished at
cost for use in making sales and not for resale.
3. A chain distributor scheme shall constitute a security within the meaning of this article
and shall be subject to all of the provisions of this article.
MAINE STATUTE
§ 2305. Multi-level distributorships, pyramid clubs, etc. declared a lottery; prohibited;
penalties
The organization of any multi-level distributorship arrangement pyramid club or other group
organized or brought together under any plan or device whereby fees or dues or anything
of material value to be paid or given by members thereof are to be paid or given to any
other member thereof who has been required to pay or give anything of material value for
the right to receive such sums with the exception of payments based exclusively on sales
of goods or services to persons who are not participants in the plan and who are not
purchasing in order to participate in the plan which plan or device includes any provision
for the increase in such membership through a chain process of new members securing
other new members and thereby advancing themselves in the group to a position where
such members in turn receive fees dues or things of material value from other members
is declared to be a lottery and whoever shall organize or participate in any such lottery by
organizing or inducing membership in any such group or organization shall be guilty of a
misdemeanor and upon conviction thereof shall be punished by a fine of not more than
$5,000 or by imprisonment for not more than 11 months
or by both. [1971 c. 312 (new).]
CALIFORNIA STATUTE
327. Every person who contrives, prepares, sets up, proposes, or operates any endless
chain is guilty of a public offense, and is punishable by imprisonment in the county jail not
exceeding one year or in state prison for 16 months, two, or three years. As used in this
section, an "endless chain" means any scheme for the disposal or distribution of property
whereby a participant pays a valuable consideration for the chance to receive
compensation for introducing one or more additional persons into participation in the
scheme or for the chance to receive compensation when a person introduced by the
participant introduces a new participant.
Compensation, as used in this section, does not mean or include payment based upon
sales made to persons who are not participants in the scheme and who are not purchasing
in order to participate in the scheme.
VERMONT STATUTE
§ 2453. PRACTICES PROHIBITED
(a) Unfair methods of competition in commerce and unfair or deceptive acts or practices in
commerce are hereby declared unlawful.
(b) It is the intent of the legislature that in construing subsection (a) of this section the
courts of this state will be guided by the construction of similar terms contained in section 5
(a) (1) of the Federal Trade Commission act as from time to time amended by the Federal
Trade Commission and the courts of the United States.
(c) The attorney general shall make rules and regulations when necessary and proper to
carry out the purposes of this chapter relating to unfair methods of competition in
commerce and unfair or deceptive acts or practices in commerce. The rules and
regulations shall not be inconsistent with the rules, regulations and decisions of the
Federal Trade Commission and the federal courts interpreting the Federal Trade
Commission Act.
(d) Violation of a rule or regulation as made by the attorney general is prima facie proof of
the commission of an unfair or deceptive act in commerce.
(e) The provisions of subsections (a) (c) and (d) of this section shall also be applicable to
real estate transactions.
SUBJECT: CONSUMER FRAUD - CHAIN DISTRIBUTOR SCHEMES
ATTORNEY
GENERAL - CONSUMER FRAUD DIVISION
ADOPTED PURSUANT TO 9 V.S.A.
SECTION 2453(c)
RULE CF 101
CF 101.01 Unfair Trade Practice
CF 101.02 Definitions
CF 101.01 Unfair Trade Practice.
The promotion or offer of or the grant of participation in a chain distributor scheme in
connection with the solicitation of investments from members of the public constitutes an
unfair and deceptive trade act and practice in commerce under 9 V.S.A. Section 2453(a).
When so used the scheme serves as a lure to improvident and uneconomical investment.
Many individuals lack commercial expertise and anticipate unrealistic profits or economic
gain through use of the chance to further perpetuate a chain of distributors without regard
to actual market conditions affecting further distribution and sale of the property purchased
by them or its market acceptance by final users or consumers.
Substantial economic losses to participating distributors have occurred and will inevitably
occur by reason of their reliance on perpetuation of the chain distributor scheme as a
source of profit.
CF 101.02 Definitions.
(1) "Chain distributor scheme" is a sales device whereby a person, upon a condition that
he make an investment, is granted a license or right to solicit or recruit for profit or
economic gain one or more additional persons who also are granted such license or right
upon condition of making an investment and may further perpetuate the chain of persons
who are granted such license or right upon such condition. A limitation as to the number of
persons who may participate, or the presence of additional conditions affecting eligibility
for the above license or right to recruit or solicit or the receipt of profits therefrom, does not
change the identity of the scheme as a chain distributor scheme.
(2) "Investment" is any acquisition, for a consideration other than personal services, of
property, tangible or intangible, and includes, without limitation, franchises,
business opportunities and services. It does not include sales demonstration equipment
and materials furnished at cost for use in making sales and not for resale.
NORTH CAROLINA STATUTE
§ 14-291.2. Pyramid and chain schemes prohibited.
(a) Any person who shall establish, promote, operate or participate in any pyramid
distribution plan, program, device or scheme whereby a participant pays a valuable
consideration for the opportunity or chance to receive a fee or compensation upon the
introduction of other participants into the program, whether or not such opportunity or
chance is received in conjunction with the purchase of merchandise, shall be deemed to
have participated in a lottery and shall be guilty of a Class 2 misdemeanor.
(b) "Pyramid distribution plan" means any program utilizing a pyramid or chain process by
which a participant gives a valuable consideration for the opportunity to receive
compensation or things of value in return for inducing other persons to become
participants in the program;
"Compensation" does not mean payment based on sales of goods or services to persons
who are not participants in the scheme, and who are not purchasing in order to participate
in the scheme; and" Promotes" shall mean inducing one or more other persons to become
a participant.
(c) Any judge of the superior court shall have jurisdiction, upon petition by the Attorney
General of North Carolina or district attorney of the superior court, to enjoin, as an unfair or
deceptive trade practice, the continuation of the scheme described in subsection (a); in
such proceeding the court may assess civil penalties and attorneys' fees to the Attorney
General or the District Attorney pursuant to G.S. 75-15.2 and 75-16.1; and the court may
appoint a receiver to secure and distribute assets obtained by any defendant through
participation in any such scheme.
(d) Any contract hereafter created for which a part of the consideration consisted of the
opportunity or chance to participate in a program described in subsection (a) is hereby
declared to be contrary to public policy and therefore void and unenforceable.
PUERTO RICO STATUTE
TITLE 10 COMMERCE
CHAPTER 49B MULTI-LEVEL DISTRIBUTION COMPANIES
§ 997. Definitions.
The following words and phrases as used in this chapter shall have the meaning
hereinbelow expressed:
(a) Multi-level distribution company Means any natural or [juridical] person who grants in
exchange for an economic retribution, a franchise or concession for the distribution and/or
sale of properties or services, to dealers who serve as intermediaries to enlist other
dealers to the program and where other benefits or economic incentives are also offered
for the purpose of promoting said enlistment.
(b) Dealer Means any natural or [juridical] person to whom is granted a franchise or
concession for the distribution and/or sale of properties or services as dealer, agent or
participant for the purpose of developing a market therefor in Puerto Rico.
(c) Distribution contract Means the relationship established between a dealer and a multilevel distribution company whereby the dealer takes charge of the distribution and/or sale
of properties or services in Puerto Rico.
(d) Benefit Means any retribution, wage, incentive, commission, dividend, consideration,
bonus, agent's fee, reimbursement, deduction or any other type of profit with regard to a
distribution contract.
(June 5, 1973, No. 96, p. 409, § 1.)
§ 997a. Prohibited activities.
No multi-level distribution company may, by itself or through dealers, agents or
participants, carry out the following activities in the Commonwealth of Puerto Rico:
(a) Operate or directly or indirectly participate in the operation of any marketing program in
which the benefits of the participants depend primarily on the continuous and successive
enlistment of other participants and where the distribution and/or sale of properties or
services is not required as a prerequisite to obtain said benefits.
(b) Offer to pay, pay or authorize the payment of benefits to its dealers, agents or
participants in consideration only for the search and enlistment of new participants.
(c) Offer to pay, pay or authorize the payment of benefits to its dealers, agents or
participants unless said persons exercise actual control and effective supervision in the
distribution, sale, delivery or remittance of the merchandise or services to an ultimate
consumer.
(d) Offer to pay, pay or authorize the payment of benefits to its dealers, agents or
participants when such payment depends or is caused to depend on any aleatory or lucky
element that prevails over the ability or judgment of said persons; or when such ability or
judgment does not influence in any degree the obtainment of the benefits to be received by
said persons, or when the dealer, agent or participant does not have a sufficient degree of
control over the operations performed as to substantially affect the benefits to be received
by him.
(June 5, 1973, No. 96, p. 409, § 2.)
§ 997b. Contracts.
(1) Every distribution contract shall contain clauses permitting the dealer to cancel the
contract:
(a) At any time and for any reason within the term of ninety (90) days after the signature
thereof, and/or
(b) at any time upon showing noncompliance with any of the essential obligations of the
distribution contract on the part of the multi-level distribution company or any act or
omission by the latter affecting adversely the interests of the dealer in the development of
the market of the properties or services.
(2) The notice of cancellation shall be made in writing and shall be sent to the company by
registered mail.
(3) At the time of the cancellation of the contract, the multi-level distribution company shall
be bound to perform the following:
(a) Reacquire the total of the products acquired by the dealer which are in his possession
and in good condition at a price of not less than ninety percent (90%) of their original net
cost.
(b) Return to the dealer not less than ninety percent (90%) of the original net cost of any
services acquired by him.
(c) Return to the dealer not less than ninety percent (90%) of any sum paid by him for the
purpose of participating in the business.
(June 5, 1973, No. 96, p. 409, § 3.)
§ 997c. Reasonable stock of merchandise available.
No multi-level distribution company may, by itself or through its dealers, agents or
participants, require the acquisition of products or services or payment of any sum as an
indispensable condition to participate in the business, unless the company, its dealers or
agents have a reasonable stock of merchandise available, or are in a condition readily to
render services.
(June 5, 1973, No. 96, p. 409, § 4.)
§ 997d. Enlistment of new participants; information on gains or benefits obtainable.
No multi-level distribution company may, directly or indirectly through its dealers, agents or
participants, use as propaganda in the enlistment of new participants information on the
profits or benefits obtained in the past by its dealers, agents or participants, or assure to
prospective participants in this type of business a given amount of profits or benefits,
unless the profits or benefits mentioned are those obtained at present by a reasonable
number of participants in the Commonwealth or a similar geographical area and reflect the
average profits and benefits obtained by them through the distribution and/or sale of
properties or services. Likewise it is prohibited to make use of propaganda aimed at
showing the facility of enlisting and retaining new participants and their operational or
economic success.
(June 5, 1973, No. 96, p. 409, § 5.)
§ 997e. Injunction.
The Secretary of Justice of the Commonwealth of Puerto Rico shall have power to bring
injunction or any other kind of proceeding to prevent, avert, detain and punish violations of
this chapter or to obtain any other proper remedy.
(June 5, 1973, No. 96, p. 409, § 6.)
§ 997f. Noncompliance with orders; penalties.
Noncompliance of an order of the court to enforce the provisions of this chapter shall be
punishable as contempt of court and the person guilty of said violation shall be sentenced
to pay a fine not less than one thousand (1,000) nor more than ten thousand (10,000)
dollars for each day elapsed without complying with the court's order; Provided, That the
provision of this section shall not be construed as a limitation of the powers inherent in the
courts to enforce its orders.
(June 5, 1973, No. 96, p. 409, § 7.)
§ 997g. Provisions of public order; waiver prohibited.
The provisions of this chapter are of a public order and therefore may not be waived.
(June 5, 1973, No. 96, p. 409, § 8.)
§ 997h. Prescription of action.
Any action arisen from this chapter shall prescribe after three years reckoning from the
date of the definitive expiration of a distribution contract.
(June 5, 1973, No. 96, p. 409, § 9.)