Saturday, January 11, 2014

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.


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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  1. It is really sad that you like many others trying to make a name for themselves twisting the truth and you can't even spell his name right!!! As you sit back there smug as you can be I am sure the Rice Twins that you made fun of are worth millions more then you, they have lead happy full filling lives, can you say that? You were born long after DBG & Koscot existed you except for hear say and your own dreams, you have no idea of what went on. Nixon's Committee to Re-Elect the President went after him for a $250,000 contribution!!! He refused to pay!!! He was number 4 on a hit list that was found at Watergate. The number 1 man was thrown out of a plane, the Paris Family of East Texas were bankrupted, Ross Perot's IBM stock was taken from $16,000,000,000 to $16,000,000 over night! The retribution to Glenn was to attack his companies all over the US and take him down!!!

    You have not asked for permission to use the video you have on this page, show some honesty and remove it immediately!!! If you went to his website you didn't read the article from the New York Times on him being 4th on the hit list.

    Had he had the same attorney Amway did instead of F. Lee Bailey, he would still be in business.

    For the record there have been a 1,000 millionaires that came out of Mr. Turners companies, including a few billionaires. Those that went through Dare To Be Great, we still hear from today. All of them thanking Mr. Turner for what they learned & how it helped them survive both the good and the bad times.

    He also spent 4 years and 8 months in prison in AZ., he was getting to many votes when running for office and they found out early they couldn't buy him off. So they went after him for 1 word in a contract, to get him out of the political arena. Sadly time and time again the corrupt government and their employees tried to get GWT to break the law and he refused!!! Yet they all saw in him what was in themselves, dishonesty, lying, cheating & fraud. Even F. Lee Bailey and a number of judges called him one of the most honest men they had ever met!!

    Just remember the government can make it's own rules and regulations and will do so at the expense of others. If they don't have enough cash they will create it. Mr. Turner would ask the judges, the attorney's what he needed to do so he wasn't breaking the law. Time and time again they told him nothing. Nothing until they ran for office and he was a big bull's eye for them to go after.

    Remember the laws were created to take a man down who wouldn't pay off a corrupt president!!!

    1. The video's public. If he doesn't want people to show it he should not have made it public, or uploaded it in the first place. You're barking up the wrong tree... in the wrong county.

      You're painting some sort of a "conspiracy" to put him in jail when the entire MLM industry accepted both Koscot AND "Dare to be Great" are illegal pyramid schemes. Wonder who else you sent this comment to? Did you send one to Grimes and Reese for their article on Koscot? How about Jeff Babener? And a few others? How about the FTC? SEC?

      An honest man can create a pyramid scheme, and remain honest otherwise. He picked the wrong business compensation structure. Maybe he didn't know better, maybe he did.

      I have no problem with GWT inspirational lessons. Never said I did. it's the way he sold them that's the problem. Don't confuse the two.

      If you're trying to explain that he was "made an example of", you sure picked a strange way to do it, by casting about various conspiracy theories and then claims that contained various narratives that cannot be corroborated. If you care to add such citings, feel free to do so.

  2. rich dad, poor dad
    guess chang's dad?

    1. Kiyosaki himself long ago directly compared Rich Dad to Harry Potter. There is no Rich Dad.