66 Business Practices Committee 6. Conclusion

 

 

Although Omega offers discounts to members and proposes to operate the PAID system in the future, the core business of Omega is the on-selling of membership by members. The marketing scheme operated by Omega does not differ from those run by Rainbow and Newport, the only material difference being the amounts paid to the junior and senior partners and the "management".

 

The Minister prohibited Rainbow and Newport and certain individuals involved from continuing running their schemes (6).It was stated in the previous paragraph that the marketing scheme run by Omega does not differ from those ran by Rainbow and Newport. This being the case the Committee has no alternative but to recommend to the Minister that he prohibit Omega to continue with its business in its present form.

 

The arguments for the Minister's prohibition of Rainbow and Newport and set out in detail in the respective reports. These arguments also apply to Omega are not repeated here in detail. Interested readers could refer to the Rainbow and Newport reports.

 

 

The major benefit to a person who became a member of Omega was to be found in the active recruitment and introduction of new members. A considerable part of the new members' payments served to fund the recruitment costs and the management of the scheme. The incentive to new members to recoup their initial cash payment lies in the introduction of further new members on which this scheme is dependent. The greater the number of new members introduced, the sooner the recoupment of the original cash payment.

 

The explanation of the scheme shows that a new member needs to recruit at least four other members directly to recoup his or her payment of R6 400 and make a slight profit. The canvasser's net income would be 2 x R1 000 plus 2 x R2 500 less R6 400 = R600. Under other circumstances members would need to canvass at least five persons directly or indirectly to recoup their outlays. This would apply should the third person, the senior partner, canvass two members (2 x R1 500). The member's net income will then be 2 x R1 000 + 1 x R2 500 + 2 x R1 500 = R7 500 less R6 400 = R1 100. The effect of income tax was ignored in the examples above.

 

In Report 55: Rainbow Business Club and Others and Report 56: Newport Business Club and Others the Committee found that in a scheme whereby an existing member needs to recruit at least four new members to recoup his/her outlay, the percentage of members that would not recover their payments would never be smaller than 75 per cent. This would apply to the total number of members, irrespective of at what stage they joined the scheme. Applying the same calculations in those cases where a member is required to canvass at least five new members directly or indirectly, the percentage of members that would not recover their payments would never be smaller than 80 per cent. It would seem that the empirical results of Omega as set out in the table in section 4.5 clearly supports the theoretical figures.

 

Omega's success is dependent on the money received from its members and new members on a continuous basis. The potential benefit to a consumer who becomes a member lies in the right to recruit and introduce new members. The incentive to new members to recoup their initial cash contribution lies in the introduction of further new members on which this scheme is dependent. The greater the number of new members introduced, the sooner the recoupment of the original cash contribution.

 

 

The extent of a new member's possible earnings is clearly limited by the extent of the market. And the market is limited. There are, at any time, a finite number of people with the buying power to part with R6 400 to become members of a club. The population growth rate does not match the exponential rate required to make the scheme viable for all participants over a relatively short period. Most of the people that part with their R6 400 probably joined Omega with the expectation to make a handsome profit, as shown in slide (k) "R46 500 could be made or earned by canvassing one member per month for nine months" in a few months.

 

The scheme can never reach a stage where everybody has recovered their payments. Those that have not canvassed any new members at all the levels of each separate pyramid structure will lose their R6 400. The "independent" contractors, management and those at the top of every successful individual pyramid with many layers stand to earn substantial amounts. Those that have not canvassed their four members directly or five members directly or indirectly will be severely and unreasonably prejudiced. Again this will apply to all members, irrespective of when they became members of Omega.

 

It would then become increasingly difficult for any member to find further potential members the longer the scheme operates. Only a growth in the target market would provide potential members. The growth in the target market would also have to be equal or higher than the exponential rate required for everyone to recoup their payments within a reasonable period of time.

 

The major factor that really attracts members is the possibility to make R46 500 within months. When people do not "make" the envisaged profits, interest in the scheme declines. It would seem that this decline in interest is an exogenous "switch off" of schemes such as Omega. A "switch off" of the scheme would lead to the collapse thereof.

 

The Committee is of the opinion that Omega members would be unreasonably prejudiced. The following is the reasons for this standpoint:

 

At any time at least 75 per cent to 80 per cent of the Omega members are at risk. The relations between those consumers who have nor recouped their payments and the business, Omega, will be harmed. In terms of the Act this by itself would constitute a harmful business practice. The argument that saturation will never be reached relies on the proposition that growth in the target market will exceed the growth in the scheme.

 

 

Following the investigation into inter alia Rainbow and Newport, the Committee, with the approval of Cabinet, undertook a section 8(1)(b) investigation in terms of the Act into money revolving or pyramid schemes. The Committee's Report 63: "Investigation into money revolving or pyramid schemes" was published under Notice 2723 in Government Gazette No 19455 dated 13 November 1998.

 

After having considered Report 63 the Minister, in terms of section 12(6)(a)(iii) of the Act, gave notice that he intended to publish a notice in the Government Gazette declaring a number of business practices as being unlawful. One of these business practices is where any person, directly or indirectly, participates in a pyramid promotional scheme. A pyramid promotional scheme is defined in the notice as:

 

"....any plan or operation by which a participant gives consideration for the opportunity to receive compensation which is derived primarily from the person's introduction of other persons into a plan at operation rather than from the sale of products by the participant or other persons introduced into the plan or operation".

 

It is clear from an analyses of the scheme tan by Omega that it could be regarded as a pyramid promotional scheme.

 

The Committee is of the opinion, because of the reasons advanced, that the activities of Omega constitute harmful business practices as defined in the Act.

 

See Notices No 1959 and 1350, both of 1997, in Government Gazette No.'s 18531 dated 12 December 1997 and 18292 dated 17 September 1997 respectively.