The Kentucky Pyramid Sales Act was enacted in 1986. It defines “pyramid distribution plan” as “any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program.” This is fairly typical, but the definition of “compensation” excludes “payment based on sales of goods or services by the person or by other participants in the plan to anyone, including a participant in the plan, who is purchasing the goods or services for actual use or consumption.” This means that the law could permit a scheme where all of the “customers” are also participants. This reverses the holding in In re Koscot Interplanetary, 86 F.T.C. 1106 (1975), which clearly requires compensation to be paid only on purchases by non-participants in the scheme.
Kentucky Pyramid Sales Act
367.830. Definitions.
Unless the context otherwise requires:
(1) “Participant” shall include, but is not limited to, those who give consideration in order to participate in the pyramid distribution plan;
(2) “Person” means natural persons, corporations, trusts, partnerships, incorporated or unincorporated associations, or any other legal entity;
(3) “Promotes” means inducing one (1) or more other persons to become a participant;
(4) “Pyramid distribution plan” means any plan, program, device, scheme, or other process by which a participant gives consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program;
(5) “Compensation” means payment of any money, thing of value, or financial benefit conferred in return for inducing others to become participants in the pyramid distribution plan. Compensation does not include payment based on sales of goods or services by the person or by other participants in the plan to anyone, including a participant in the plan, who is purchasing the goods or services for actual use or consumption; and
(6) “Consideration” means the payment of cash or the purchase of goods, services, or intangible property but does not include the purchase of goods or services furnished at cost to be used in making sales and not for resale, nor does it include time and effort spent in pursuit of sales or recruiting activities.
367.832. Pyramid distribution plan prohibited.
(1) It is hereby declared unlawful for any person to establish, promote, operate, or participate in any pyramid distribution plan.
(2) A limitation as to the number of persons who may participate or the presence of additional conditions affecting eligibility for the opportunity to receive compensation under the plan does not change the identity of the plan as a pyramid distribution plan nor is it a defense under this section that a participant, on giving consideration, obtains goods, services or intangible property in addition to the right to receive compensation.
367.834. Powers of Attorney General — Powers of Commonwealth or its agencies not limited.
(1) All of the remedies and powers granted to the Attorney General by KRS 367.190 to 367.300 and 367.990 for enforcement of KRS 367.170 shall be granted to the Attorney General with equal force and effect for enforcement of KRS 367.832.
(2) Nothing in this chapter limits the power of any agency of the Commonwealth of Kentucky to enforce criminal or civil provisions of any other chapter of the Kentucky Revised Statutes or the right of any person to bring civil actions granted by any other chapter of the Kentucky Revised Statutes and based upon conduct prohibited herein and nothing in this chapter limits the power of the Commonwealth of Kentucky to punish any person for any conduct which constitutes a crime by statute or at common law.
367.836. Short title.
KRS 367.830 to 367.834 may be cited as the “Pyramid Sales Act.”