Short answer: a legitimate direct selling plan pays mainly because real products are sold to real customers, and the company can show that. A pyramid scheme pays mainly because new people join and pay in. The test regulators and courts use is about where the money comes from, not about whether the company calls itself direct selling, network marketing or MLM. Software vendors must care because the code is the plan, and software that faithfully pays out an unlawful plan helps run it.
This article is a plain-language checklist for founders and for the software teams who work for them. It is not legal advice. Rules differ by country and change over time, so have a lawyer who knows your markets review your plan.
The core question: what are people being paid for
Ask of every bonus in the plan: what real-world event triggers this payment? In a sound plan the answer is a sale of a product or service to a customer, and in most cases a customer outside the sales force. In an unsound plan the answer is a person joining, a person paying an entry fee, or a person buying a large package of stock so they can qualify.
Direct selling is a lawful way to sell, and many established companies use it. In the United States, for example, the Federal Trade Commission has published guidance that separates lawful multi-level compensation from pyramid schemes, and other countries have their own laws. The names and details differ, but the same idea runs through them: pay should follow genuine sales, not recruiting.
Warning signs in the plan itself
- Large bonuses for sponsoring or enrolling people, with little or nothing tied to product sales.
- High joining fees, or a requirement to buy a big starter package to take part.
- Pressure on members to buy stock they cannot realistically sell, sometimes called inventory loading.
- Qualification that depends on members buying for themselves each month, with few outside customers.
- No refund or buyback policy for unsold products when someone leaves.
- Products that are overpriced or have no real use outside the scheme.
One of these signs does not settle the question, and a lawyer should judge the full plan. But several together are a reason to stop and review before anything is built.
Warning signs in the pitch
How a company talks about the plan matters as much as how it is written. Be careful with a pitch that promises income, that presents joining as an investment with a fixed or predictable return, that hides how few participants earn a meaningful amount, or that uses terms like gifting circle, board or donation round. Cash-gifting and board schemes and anything sold as an investment with fixed returns are outside what we build, and in many places they are unlawful.
A healthy company does the opposite. It publishes an income disclosure that shows what typical participants actually earn, it explains the product first, and it makes the refund and cancellation terms easy to find.
Why a software vendor cannot stay neutral
It is tempting to treat plan software as a neutral tool: the client brings the rules, we implement them. But the vendor writes the code that calculates every payment, and a vendor that builds an unlawful plan is part of how it operates. There is also a practical side. Disputes, regulator questions and chargebacks all end up asking the same thing: can you show how this payment was calculated and what sale it came from?
For that reason we ask questions before we quote. What do you sell and to whom? Which markets? Is there a written plan and an income disclosure? Has a lawyer seen them? If the answers show that pay depends mainly on recruiting, we decline the project. This is not a legal finding about your company, it is a limit on what we are willing to build.
How a sound build supports compliance
Software cannot make a plan lawful, but it can make a lawful plan easier to defend. Good practice includes:
- Implementing the written plan as separate named rules, each traceable to a clause in the plan document.
- Recording, for every commission, the order and the rule that produced it.
- Tracking customer sales separately from distributor purchases, so reports can show the share of volume that comes from outside buyers when your lawyer asks for it.
- Reversing commissions when orders are refunded or products are returned.
- Keeping an audit log of who changed a rule, a rank or a payout, and when.
- Producing the reports your reviewers and income disclosures need.
These features are described on our compliance page and in our work on automated commission and payout engines. They do not remove the need for legal review. They give the reviewer something concrete to review.
What to do before you commission any software
- Write the plan down completely, including ranks, caps, qualifications and payout dates.
- List every bonus and what sale triggers it.
- Have a lawyer who knows direct selling in your markets review the plan, the joining terms and the income disclosure.
- Decide your refund and buyback policy and write it into the terms.
- Only then ask a vendor to quote.
A vendor that does not ask any of these questions is not necessarily acting in bad faith, but you should ask yourself what it will do when a regulator asks the same ones. Ask for the vendor's answer to this in writing, and do the same for every other agency you speak to.
What we will and will not build
We build software for legitimate direct selling businesses: compensation plan engines, genealogy, replicated websites, wallets and payouts. We do not build or promote pyramid or Ponzi structures, schemes that pay mainly for recruiting, schemes presented as investments with fixed returns, or cash-gifting and board schemes. The client is responsible for the plan, its disclosures and the licences or registrations its markets require. You can see the platforms we build on the direct selling platforms page.
If you are planning a launch and want to check whether we are the right fit, chat with us on WhatsApp at +1 (929) 450-3261 and send the products, the markets and the written plan.