MLM Dictionary: Koscot Test

Koscot Test was a 4 part test that determines whether the business or a scheme is a pyramid scheme. It was established in 1975 in the court case "FTC vs. Koscot Interplanetary" i.e. 86 F.T.C. 1106, 1181 (1975) "Koscot".

Koscot Interplanetary is a part of "Glen Turner Enterprises", ran by Glen W. Turner (who's still around!). Despite the fancy name, Koscot sells "Kosmetics (sic) for the communities of tomorrow!"

Original charges from the FTC was filed in 1972, and the trial started two years later. During the trial, the court created what's known as the Koscot Pyramid Test, often shortened to Koscot Test. It has four parts:

(1) Payment of money to the company;
(2) The participant receives the right to sell a product (or service);
(3) The participant receives compensation for recruiting others into the program;
(4) The compensation is unrelated to the sale of products (or services) to the ultimate user.

Koscot case has been referred to in every suspect pyramid scheme case since.


Koscot Interplanetary is basically a cosmetics pyramid scheme, sometimes called pyramid selling, where majority of the participants paid thousands of dollars ($2000 for supervisor, $5400 for director) and make money by recruiting other people who also buy in. The three ranks available are beauty advisor, supervisor, and director.

Beauty advisor: Pay $10 to join, can buy cosmetics from "supervisor" (sponsor/upline) at "40% discount", and can get a 'refund bonus' based on volume of their own purchases.

Supervisor: can be created by a) Pay $2000 to Koscot  b) order $5400 worth of products from sponsor/upline, or c) sell some stuff to retail, buy the rest of $5400 worth of products from sponsor/upline. Supervisor can order things from company at 55% discount, and gets 25% bonus commission on each new supervisor's order (of $2000) that was placed by his downline.

Director can be created by a) Pay $5000 to Koscot, b) become supervisor, then order $3000 of products from supervisor / sponsor / upline. Director is entitled to order from company at 65% discount, gets 10% commission from ANY downline supervisor's "order", plus $500 for every supervisor, and $1350 for every director.

FTC alleged and proved in court that little if any actual retail sales happened and most money are moved from supervisor to director, and most products are simply left in a garage somewhere unused, in a situation known as "inventory loading", where the upline simply made their downline order way too much stuff to be retailed, so upline can qualify for the commission for "sales".

Thus, based on the 4-item "Koscot Pyramid Test" aka "Koscot Test", Koscot Interplanetary is a pyramid scheme.

Glen W. Turner eventually went to jail in 1984 for little under 5 years, and after completing the sentence, went back to Florida, still marketing himself, albeit a lot more low-key nowadays, claiming to be the ORIGINAL America's motivationals speaker.

Commentary

When you see/read someone starts to explain what a pyramid scheme is... If they do not mention the Koscot test, they have NO IDEA what they are talking about, as this is the ONLY definition that counts. If they claim some other definition, they are using the "strawman" defense.

If you are looking for what is the difference between MLM and Pyramid Scheme, that's the next item: "Amway Safeguard Rules".


Historical Note

SEC tried to prosecute Koscot in 1973 but was successful on appeal in 1974 that a "business opportunity offer" can be judged a "security" if personal investment of assets is required (and other items in the "Howey Test" are satisfied.)

This is Glen W. Turner (GWT), in an old video (uploaded by himself?) daring Americans to be great (and join one of his schemes?). He named himself "Mr. Enthusiasm" and travelled from coast to coast in various seminars / stage shows where he allegedly appeared with two midgets wearing neon colored suits, rhinestone pins, and allegedly boots made from unborn calfskin. (huh?)

GWT, an eighth-grade dropout (according to People) had been in trouble with the law before 1975, as SEC tried to prosecute GWT for Koscot Interplanetary as a security by applying the Howey Test (to be covered later) on whether it is an investment. SEC lost, but won on appeal, but not a decisive victory. It fell to FTC to prosecute Koscot, which started in 1972, and ended with final judgment in 1975.

(GWT was profiled by Florida newspaper in 2004, and he's still selling stuff then)

Incidentally, GWT also ran "Dare to be Great", allegedly, the first popular American self-help seminar tour. Dare to be Great itself was prosecuted as a pyramid scheme as it promised a lot of money for people who sold the seminars (and LPs and lesson plans and so on) and bring in even more salespeople.

Please also see

How an Aussie Tries to create his own definition of Pyramid Scheme
What is a Product-Based Pyramid Scheme? And how is it similar to MLM? 
Will DSA recognize the danger of Product-Based Pyramid Schemes and save MLM as we know it?
Common myths about Pyramid Scheme busted

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