Introduction.

'Invitation rewards', 'sharing commissions', 'promotion rewards'... Whether in traditional e-commerce, content platforms, or Web3 projects, more and more product designs are introducing user incentive mechanisms. However, the compliant boundaries of the commission mechanism remain a gray area: to promoters, it seems like reasonable profit sharing; but to regulators, it is sometimes viewed as 'pyramid scheme' suspicion.

Where does this misunderstanding come from? Does the platform's commission scheme genuinely cross the red line of 'organizing and leading pyramid schemes'? This article will clarify the boundaries between 'commissions' and 'pyramid selling' by combining real cases and judicial standards.

This article aims to explore the boundary between 'platform commissions' and 'pyramid scheme crimes' from a legal perspective, representing only the author's personal views. It does not constitute legal opinions or advice, nor does it serve as a judgment on whether any operating model constitutes a crime. The identification of pyramid scheme behaviors is highly case-specific and must be determined by judicial authorities based on all evidence.

Case summary.

A certain NFT platform categorizes NFTs into five different levels (level one being the lowest and level five the highest), with each level corresponding to different production capacities (computing power), and naturally, the prices differ; the commission (reward) for introducing NFT purchases also varies. This commission can only be given to those who register at a level higher than the purchaser and can only be awarded to one person.

For example:

Will the actual controller of this NFT platform be recognized as committing pyramid scheme crimes?

According to Articles 224-1 and 231 of the Criminal Law, entities can become the subjects of the crime of organizing and leading pyramid schemes. When convicting and punishing, criminal responsibility should be pursued against their directly responsible supervisory personnel and other directly responsible persons. So, who are the key targets of the law? Mainly including initiators, organizers, decision-makers, and core personnel responsible for planning, directing, and coordinating in pyramid scheme activities.

It is worth noting that such behavior can only be recognized as a pyramid scheme crime if it meets the criteria of 'defrauding property' and 'disrupting economic and social order'. Furthermore, the criminal law clearly states that 'paying fees to obtain membership qualifications' and 'forming levels in order' must be simultaneously satisfied to constitute pyramid selling in a legal sense. Meeting only one of these conditions usually does not constitute a criminal offense.

1. Sources of profit: Is it reliant on 'selling members'?

The main profit model of the platform is the income from selling NFTs, as well as fees from NFT circulation and capacity exchange. Profits come from real product sales and service fees, which fundamentally differs from the 'crime of organizing and leading pyramid schemes' that rely on the 'entry fees' of new joiners or continually recruiting new 'members' as the basis for capital accumulation.

2. Compensation basis: Is it 'based on the number of members'?

The platform profits from selling NFTs and transaction fees from secondary market circulation. The commissions (rewards) given to referrers come from the real profit-sharing of NFT sales. The platform expands sales scale through promotion, taking a portion of the incremental profits to reward referrers, which involves real transactions and sales of real products, differing from the 'crime of organizing and leading pyramid schemes' that relies on the number of recruited personnel or the aggregation of assets as the basis for compensation or rebates.

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3. Does it constitute a 'tiered structure'?

The platform adopts a 'single-line direct promotion' model, without a pyramid structure of three levels or more. Users are not hierarchically dependent on each other, and only commissions are given for single transactions, with a maximum reward to one person, lacking characteristics of 'continuous income' or 'multi-layer nesting'.

4. Is the value of the product real?

NFT transaction pricing must comply with market rules, and purchasers should have strong purchasing intentions based on their pursuit of product and its rights. The production capacity corresponding to the NFT should be able to circulate in the secondary market, maintaining high value for the long term. The platform's goal is not to develop downlines, and purchasing NFTs is not limited to recommendations from existing customers; any user can purchase directly from the platform.

How to avoid the commission mechanism being suspected of being a 'pyramid scheme'?

1. Do not set any form of mandatory 'entry fees', prohibit 'recruiting members'.

'Entry fees' and 'recruiting members' are the most core and clear characteristics of pyramid scheme crimes. Requiring users to pay membership fees, franchise fees, or purchase products to obtain promotional qualifications or enjoy higher earnings, as well as using the number of recruited downline personnel (rather than actual sales performance) as the main basis for compensation.

  • Do not establish any form of mandatory 'entry fees'.

Users can register as users or purchase products without paying any fees, enjoying promotional commission rights. Be wary of disguised 'entry fees', and avoid setting up 'premium membership benefits' or 'enjoying higher commission rates' which essentially constitute a paid threshold to obtain promotional qualifications or higher commission ratios. Fees paid should directly correspond to the tangible goods or services that can be enjoyed, and purchasing such goods/services should not be a prerequisite for obtaining promotional qualifications.

  • Compensation/rebate basis should be anchored in 'real sales performance'.

  • Clear source of commissions: Clearly state that commissions are derived from the profit-sharing of actual sales orders generated through promotion. Emphasize that the platform only allocates a portion of the profit as rewards for promoters after the goods/services have been sold and profits have been realized.

  • Strict distinction between 'promotion' and 'recruiting': The commissions for promoters should be based on indicators directly related to real transactions, such as effective user registrations, actual sales amounts, and completed orders. It is prohibited to use metrics such as the number of promoters developed directly or indirectly, team growth, or the number of downline levels as the main or decisive factors for calculating promoter compensation.

  • Data transparency: Clearly show promoters the source of each commission (specific orders, users, amounts) to prove its correlation with real sales.

A multi-level pyramid structure (usually referring to three levels or more) is a typical characteristic of pyramid organizations, which easily leads to uplines' earnings primarily depending on the 'performance' of downlines and their teams (essentially the accumulation of member fees or entry fees), rather than the real circulation value of goods. The more levels there are, the exponentially greater the risk. One of the key elements for identifying the crime of organizing and leading pyramid schemes is the formation of pyramid structures of three levels or more.

  • It is recommended to have 'linear' one-level commission.

Promoter A invites user B. Only when B makes a real purchase can A earn a commission. When B invites user C to consume, C's purchase is unrelated to A, and A will not earn any benefits from it. All commissions occur solely between the direct promoter (A) and the consumers they directly bring in (B). This structure is simple, transparent, focuses on direct sales results, has clear one-level relationships, and fundamentally eliminates the suspicion of 'team-based compensation' and 'recruiting members', posing minimal legal risks.

  • A maximum of two levels of rewards is allowed, with the design of multi-dimensional reward metrics.

If multi-level commissions are necessary to expand promotional efforts, increase promoter earnings, or enhance engagement, they must be cautiously and strictly limited. For instance, if incentivizing promoters to manage teams, a maximum of two levels of relationships is allowed: for example, A invites B to become a promoter, and B invites C to consume. When C makes a purchase, B receives a direct promotional commission, and A receives a reward for managing B's team, calculated based on the team's actual sales performance. However, A may be designed with different multi-metric reward weights to recognize their contributions to team building, training, management, etc., rather than rewarding the mere development of members or levels. There must never be infinite levels or unlimited profit transfer.

The essence of pyramid scheme crimes lies in 'defrauding property'. If the project itself is fraudulent, the goods are severely overpriced 'props', or the model itself lacks sustainability, leading to significant financial losses for many participants (especially at the bottom), then even if the first two points are formally avoided, it may still be substantively recognized as pyramid selling.

  • Provide real, valuable, and reasonably priced goods or services.

The foundation of the project must meet the real market demand for products or services. Consumer purchases should be based on recognition of the value of the product/service itself, rather than to obtain promotional qualifications or speculative profits. Moreover, the price of the product/service must generally align with its market value, firmly preventing ordinary goods from being packaged as exorbitantly priced 'props' to conceal the essence of a capital pool. Cost and profit structures should be relatively transparent or have reasonable bases.

  • Ensure the authenticity and legitimacy of transactions.

There must be real, verifiable records of product delivery, service provision, and evidence of actual consumer use/consumption. Prevent fraudulent orders and self-purchases to inflate performance. Establish a sound after-sales service mechanism to safeguard the legitimate rights and interests of ordinary consumers and reflect normal business logic. The payment of commissions and settlement of funds should be clear and compliant, conducted through formal channels, and taxes must be paid according to law.

  • The profit model must be sustainable and not rely on the funds of 'later joiners'.

The platform's overall profits should mainly come from the sales profits of goods/services, rather than fees (entry fees or disguised entry fees) paid by newly joined promoters or consumers. Ensure that commissions paid to promoters do not primarily rely on funds contributed by later joiners. The business model itself should be sustainable, so that even if new user growth slows, operations can be maintained through existing user repurchases and normal sales.

  • Promotional efforts should be pragmatic, eliminating fraud and misinformation.

Promotional materials must be true and accurate, without exaggerating benefits or promising 'easy profits' or 'get rich quick' schemes. It should clearly indicate that promotional earnings are related to personal effort and market conditions, which come with uncertainties. Ensure compliance in marketing and consumer guidance. The focus of promotion should be on the advantages and value of the product/service, rather than overly emphasizing profit opportunities from promotion.

Conclusion: Compliant commissions are marketing; illegal commissions are crimes.

The law will penetrate the 'marketing methods' packaging to determine if it is essentially 'pyramid selling'.

Even if multi-level and entry fees are formally avoided, if the core is to defraud property (such as severely overpriced goods or unsustainable models), it may still be characterized as such. For a project to succeed long-term, it must return to the creation of real value: winning with products and services, rather than relying on layers of rebates to create wealth myths. Maintaining boundaries is essential for stability.



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Author of this article: Lawyer Xu Qian.