Web3 project pump new promotion rebate, how to prevent it from becoming a pyramid scheme?

Author of this article: Lawyer Xu Qian

Introduction

"Invite Rewards", "Share Commissions", "Promotion Bonuses"... Whether in traditional e-commerce, content platforms, or Web3 projects, more and more products are incorporating user incentive mechanisms. However, the compliance boundaries of commission mechanisms remain a gray area: To promoters, this is reasonable profit-sharing; but to regulators, it is sometimes viewed as a suspicion of "pyramid schemes."

Where does this misunderstanding come from? Does the platform's commission really cross the red line of "organizing and leading pyramid selling activities"? This article will clarify the boundary between "rebate" and "pyramid selling" by combining real cases and judicial identification standards.

This article aims to explore the boundary between "platform commission" and "pyramid scheme crime" from a legal perspective, representing only the author's personal views, and does not constitute legal opinions or advice, nor does it constitute a judgment on whether any operating model constitutes a crime. The determination of pyramid scheme behavior is highly case-specific and requires judicial authorities to make a ruling based on all evidence in accordance with the law.

Case Introduction

An NFT platform categorizes NFTs into five different levels (Level 1 being the lowest and Level 5 the highest), with each level corresponding to different production capacities (hash rates), and naturally, the prices vary. The commission (reward) for introducing the purchase of NFTs also varies according to the level. This commission can only be given to individuals whose NFT level is higher than that of the purchaser, and the commission can only be awarded to one person.

For example:

Will the actual controller of this NFT platform be identified as committing a pyramid scheme crime?

Legal Analysis | Does platform commission constitute pyramid selling?

According to Article 224-1 and Article 231 of the Criminal Law, an organization can become the subject of criminal liability for organizing and leading pyramid selling activities. When convicting and punishing, the directly responsible supervisors and other directly responsible personnel should be held criminally liable. So, who are the main targets of legal prosecution? They mainly include: initiators, organizers, decision-makers who play a key role in pyramid selling activities, as well as core personnel responsible for planning, directing, and coordinating.

It is worth noting that: only under the premise of "fraudulent acquisition of property" and "disturbing the economic and social order" can such behavior be identified as pyramid scheme crimes. In addition, the criminal law clearly states that "paying fees to obtain membership" and "forming hierarchies in sequence" must be satisfied simultaneously in order to constitute a legally recognized pyramid scheme. Having only one of these conditions typically does not constitute a criminal offense.

1. Source of profit: Is it relying on "selling heads"?

The main profit model of the platform is the revenue from the sale of NFTs, as well as transaction fees from NFT circulation and capacity exchange. The profit comes from the sale of real goods and service fees, which is fundamentally different from the "crime of organizing and leading pyramid selling activities" where the "entrance fee" paid by new members or the continuous recruitment of "head fees" serves as a fund deposit.

2. Compensation basis: Is it "based on headcount"?

The platform's profits come from the sale of NFTs and the transaction fees from the secondary market. The commissions (rewards) given to referrers come from the actual profit sharing of NFT sales. The platform expands its sales scale through promotion and rewards a portion of the incremental profits to the referrers. This involves real transactions and the sale of real goods, which differs from the crime of "organizing and leading pyramid schemes" that relies on the number of recruited personnel and the accumulation of assets as the basis for compensation or rebates.

3. Does it constitute a "hierarchical structure"?

The platform adopts a "single line direct push" model, with no pyramid structure beyond three levels. Users are not hierarchically linked, and commissions are given only for single transactions, with a maximum reward for one person, lacking characteristics of "continuous income" and "multi-layer nesting."

Is the value of the product real?

NFT trading pricing aligns with market rules. Buyers have a strong willingness to purchase based on their pursuit of the products and their rights, and the production capacity corresponding to the NFT can circulate in the secondary market, holding high value and sustainability in the long term. The platform does not aim to develop downlines, nor is it the case that NFTs can only be purchased through recommendations from existing customers; instead, any user can directly purchase from the platform.

How to avoid the suspicion of the commission mechanism being a "pyramid scheme"?

1. No "entry fees" and prohibition of "referring others"

The "entry fee" and "referral bonuses" are the most core and clear characteristics of pyramid schemes. Users are required to pay membership fees, franchise fees, or purchase products in order to gain promotional qualifications or enjoy higher profits, and the number of recruited downline members (rather than actual sales performance) is used as the main basis for compensation.

• No mandatory "entry fee" of any kind will be established

Users can register as users or purchase goods without paying any fees and enjoy promotional commission rights. Be wary of disguised "entrance fees" that prevent the establishment of "premium member benefits" or "enjoying higher commissions", which essentially create a paid threshold to obtain promotional qualifications or higher commission rates. The fees paid should be directly linked to tangible goods or services that can be enjoyed and of equivalent value, and purchasing the goods/services should not be a prerequisite for obtaining promotional qualifications.

• Compensation/Rebate criteria should be anchored on "actual sales performance" Clarify the source of the commission: Clearly state that the commission comes from the profit share of the actual filled orders resulting from the promotion. It is emphasized that the platform only rewards promoters with part of the profits after the goods/services are sold and the profits are obtained.
• Strictly distinguish between "promotion" and "referring people": The commission for promoters should be based on indicators directly related to real transactions, such as effective user registrations, actual sales, and completed orders. It is prohibited to use "the number of promoters directly or indirectly developed," "team size growth," "the number of downline levels," and other "headcount" indicators as the main or decisive factors for calculating promoters' rewards.
• Data Transparency: Clearly show promoters the source of each commission (specific orders, users, amounts), proving its correlation with real sales.

2. It is recommended to have a "linear" first-level reward instead of a "pyramid" type three-level or above reward.

A multi-level pyramid structure (usually referring to three levels or more) is a typical feature of pyramid schemes, which easily leads to the situation where the earnings of those at the top primarily depend on the "performance" of their subordinates and their teams (which is actually the accumulation of head fees or entry fees), rather than the genuine circulation value of goods. The more levels there are, the risks grow geometrically. One of the key elements recognized by the Criminal Law for the crime of organizing and leading pyramid scheme activities is the formation of a pyramid structure with more than three levels.

• Suggest "Linear" Tier 1 Rebate

Promoter A invites user B. Only if B makes a real purchase can A earn a commission. If B then invites user C to make a purchase, C's consumption is unrelated to A, and A will not receive any earnings from it. All commissions occur only between the direct promoter (A) and the consumers (B) they directly brought in. This structure is simple and transparent, focusing on direct sales results, with a clear hierarchical relationship limited to one level, effectively eliminating the suspicion of "team compensation" and "recruiting headcount," minimizing legal risks.

• A maximum of two layers of rewards is allowed, and multi-dimensional reward indicators are designed

When it is necessary to adopt a multi-level commission to expand promotional efforts, increase promoters' earnings, or enhance interest, it is essential to proceed with caution and strictly limit the levels. For instance, if we consider incentivizing promoters to manage teams, a maximum of two levels of relationships should be allowed, such as: A invites B to become a promoter, and B invites C to make a purchase. When C makes a purchase, B receives direct promotional commission, and A receives a reward for managing B's team. The basis for this reward calculation is the total actual sales performance of the team, but A can be designed with rewards based on multiple indicators with different weights to recognize contributions to team building, training, management, etc., rather than rewarding the development of headcounts or levels themselves. There must be no situation of unlimited levels or unlimited transmission of benefits.

3. Ensure that transactions are real, legal, and sustainable

The essence of pyramid scheme crimes lies in "defrauding property." If the project itself is fraudulent, the products are severely overpriced "props," or the model itself lacks sustainability, ultimately leading to substantial financial losses for a large number of participants (especially those at the bottom), even if the first two points are formally circumvented, it may still be recognized as a pyramid scheme in substance.

• Provide genuine, valuable, and reasonably priced goods or services

The project's foundation must be products or services that meet the real needs of the market. Consumers' purchases should be based on the recognition of the value of the product/service itself, rather than to gain promotional qualifications or for speculative profits. At the same time, the price of the product/service must be basically consistent with its market value, firmly eliminating the practice of packaging ordinary products as exorbitantly priced "props" to conceal the essence of a funding scheme. The cost and profit composition should be relatively transparent or have a reasonable basis.

• Ensure the authenticity and legitimacy of the transaction

There should be real and verifiable records of product delivery, service provision, and evidence of actual use/consumption by consumers. Prevent false orders and self-buying to boost performance. Establish a sound after-sales service mechanism to protect the legitimate rights and interests of ordinary consumers and reflect normal business logic. Commission payments, fund settlements, and other cash flows should be clear and compliant, conducted through legitimate channels, and taxes should be paid in accordance with the law.

• The profit model is sustainable and does not rely on funds from "latecomers"

The overall profitability of the platform should primarily come from the sales profits of goods/services, rather than fees paid by new promoters or consumers (entry fees or disguised entry fees). Ensure that the commissions paid to promoters are not primarily reliant on the funds invested by later joiners. The business model itself should be sustainable, so that even if the growth of new users slows down, it can rely on the repurchases of existing users and normal sales to maintain operations.

• Promote in a practical and factual manner, eliminating fraud and misleading information

Promotional materials must be truthful and accurate, and must not exaggerate returns or promise "easy money" or "get rich quickly." They should clearly indicate that promotional earnings are related to personal effort and market conditions, and that there are uncertainties involved. Compliance in advertising and consumer guidance should be prioritized. The focus of the promotion should be on the advantages and value of the product/service, rather than overly emphasizing profit-making opportunities.

Conclusion: Compliant rebates are marketing; illegal rebates are a crime.

The law will penetrate the packaging of "marketing methods" to determine whether it is essentially "pyramid selling."

Even if multi-level and entry fees are formally avoided, if the core is to defraud property (such as significantly inflated goods or unsustainable models), it may still be characterized as such. For a project to go far, 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 a more stable path.