Referral selling and pyramid schemes

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Referral selling

Referral selling is when a consumer is persuaded to buy goods or services by promises of a rebate, commission or other benefit for supplying information that helps the trader sell to other consumers, and the consumer does not get the promised benefit unless some other event happens after the agreement is made.

Promising future commissions or rebates that depend on other events, such as subsequent sales is illegal in certain circumstances.

It is not ‘referral selling’ for a supplier to promise a benefit for simply providing the names of consumers or helping the trader supply goods.

Pyramid schemes

Pyramid schemes make money by recruiting businesses or people rather than by selling real and legitimate products or services – even if a product or service is involved.

These schemes inevitably collapse and new members can lose a lot of money. It is illegal for any business or person to participate in, or persuade others to participate in a pyramid scheme.   

The two payments often associated with a pyramid scheme are:

  • a participation payment to join; and
  • a recruitment payment, promised when a member recruits others investors or participants.

These recruitment payments often help define a pyramid scheme – it may be the only or main reason for new member to join. The recruitment ‘payment’ involved could be a financial or a nonfinancial benefit, given either to the new participant or to someone else.

A court can consider several factors when identifying a pyramid scheme. The ACL does not limit the matters a court can consider however the following characteristics can be used to help identify a pyramid scheme:

  • unrealistic claims in regard to future profits;
  • the sales and/or promotional material push recruitment very hard; and
  • recruitment payments are a substantial reason to join.

For more information on Pyramid schemes see WA Scamnet 

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