To date the crowdfunding MLM niche has been nothing more than a front for cash gifting.
Affiliates sign up, gift participation fees to their upline (the affiliate who recruited them), which in turn qualifies them to receive participation fees (gifting payments) from subsequent participants.
This is usually wrapped around “donating to a cause” or some such, when in reality the funds “donated” are paid to earlier participants, in true cash gifting fashion.
In an attempt to curb the lack of regulatory clarification such schemes operate in, the SEC earlier today announced the introduction of specific rules pertaining to crowdfunding investment.
The SEC’s new
proposed rules
will address the issue of unregistered securities and crowdfunding, which in the context of MLM is affiliates investing funds to an upline on the expectation of receiving funds from subsequent participants.
The good news is that this is still very much cash gifting with elements of a Ponzi scheme, which is very much illegal in the US.
Where things get murky though is when MLM companies start to profess immunity from unregistered securities and/or cash gifting laws, citing the JOBS Act.
Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects.
Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method can be used to offer and sell securities.
Through deceptive marketing, an exemption from US securities law is sometimes claimed based on the above.
The problem however is that MLM crowdfunding schemes and the purpose of businesses the SEC seek to regulate are vastly different:
“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” said SEC Chair Mary Jo White.
“With these rules, the Commission has completed all of the major rulemaking mandated under the JOBS Act.”
The final rules, Regulation Crowdfunding, permit individuals to invest in securities-based crowdfunding transactions subject to certain investment limits.
The rules also limit the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offering, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.
If you’re a small company looking to raise capital for legitimate business operations, then you’re good to go.
If you’re an MLM opportunity charging a participation fee which qualifies participants to receive participation fees from subsequently recruited participants, you’re still engaged in cash gifting.
In addition to where invested funds go, the primary difference between shonky MLM crowdfunding schemes and legitimate
🤖 Quick Answer
What is the relationship between crowdfunding, MLM schemes, and cash gifting?Crowdfunding MLM schemes typically operate as cash gifting fronts where affiliates pay participation fees to their recruiters (upline), qualifying them to receive payments from new participants. These schemes are often disguised as donations to causes, but funds flow to earlier participants, creating unsustainable structures that regulators increasingly scrutinize.
How is the SEC addressing crowdfunding MLM concerns?
The SEC introduced proposed rules specifically targeting unregistered securities within crowdfunding and MLM contexts. These regulations aim to clarify the legal framework and prevent schemes from operating in regulatory gray areas, protecting investors from fraudulent investment structures disguised as legitimate business opportunities.
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