The article drafted by Jelena Pejovic, Associate & Mirjana Mladenovic Paripovic, Senior Associate for Lexology on 31 July 2026
The development of the digital economy and new models of product and service distribution has further blurred the line between permissible forms of direct selling and prohibited pyramid schemes. A particular challenge lies in distinguishing legitimate multi-level marketing (MLM) models from systems whose economic sustainability is primarily based on the continuous recruitment of new participants. Although both models rely on a multi-level organisation of participants, their legal and economic foundations are fundamentally different. This phenomenon has become even more complex due to the fact that, alongside traditional physical trade in goods, these models increasingly appear in the digital sphere through the sale of intangible products.
A significant milestone in the legal distinction between MLM models and prohibited pyramid schemes was the decision of the United States Federal Trade Commission (FTC) in In re Amway Corp., decided in 1979. In that proceeding, criteria relevant for distinguishing legitimate multi-level selling models from unlawful pyramid structures were systematically examined.
Although the Amway decision has no direct application in the Republic of Serbia, the criteria considered in that proceeding continue to represent one of the relevant reference points for distinguishing legitimate MLM models from pyramid schemes in numerous legal systems.
Multi-Level Marketing as a Business Model, Not a Legal Form
From the perspective of corporate law, it is important to clarify the nature of the concept of multi-level marketing. MLM, in itself, does not constitute a separate legal form or a distinct category of business entity; rather, it represents a business model that may be implemented by business entities operating under different legal forms.
The manner in which distributors are engaged and their tax status depend on the specific business model and the legal nature of their relationship with the company.
Accordingly, any entity seeking to implement this business model on the Serbian market must be registered in accordance with the Companies Act of the Republic of Serbia and other regulations governing the performance of business activities, have an appropriate registered activity, comply with its tax obligations and operate within the applicable regulatory framework.
Regulatory Framework
Where the sale of goods within a particular MLM model is carried out through direct contact with consumers outside business premises, such relationships may fall within the scope of the provisions governing direct selling under Article 15 of the Trade Law of the Republic of Serbia. This form of trade involves selling outside business premises, with the simultaneous physical presence of the trader and the consumer, together with the consumer’s prior consent to receive an offer. It may be conducted at promotional sales events or at the consumer’s residence or workplace.
In practice, relationships between a company and its distributors may be regulated through various types of contractual arrangements, depending on the actual substance of their relationship, including a commercial agency agreement where the statutory requirements for such an arrangement are fulfilled. However, the contractual structure itself is not decisive for assessing the legality of an MLM model; rather, the relevant consideration is its actual economic function and the manner in which revenue is generated.
Where a system operates in such a way that income is generated exclusively or predominantly from the actual sale of products to end consumers, this represents a lawful form of direct selling.
When Does Multi-Level Marketing Become a Prohibited Pyramid Scheme?
The absence of specific regulation governing MLM leaves room for abuse and the emergence of unlawful pyramid schemes disguised as MLM business models. A particular challenge arises from the fact that modern pyramid structures are rarely presented as traditional profit-making schemes. In practice, contemporary digital models are often presented as “educational platforms”, “digital memberships”, “affiliate programmes” or “investment communities”, meaning that the formal label attached to a business model is far less significant than its actual economic structure.
Article 43 of the Trade Law expressly prohibits organising, conducting, advertising and encouraging pyramid selling schemes. Paragraph 2 of this Article provides that pyramid selling constitutes a form of trade whereby customers are enabled to purchase goods or services exclusively from persons included in a chain or network of resale of goods or services (members of the network), where the seller conditions the purchase upon an obligation to pay membership fees or other compensation to the organiser of the network or another network member; an obligation to purchase the same or other goods in quantities or values which the seller knows or must know are unreasonably high; or an obligation to find other persons who will engage in the resale of goods offered by the seller, where the right to receive remuneration for finding such persons is conditional upon prior payment or the provision of a special fee to the seller. In addition to prohibiting pyramid selling schemes, the Trade Law also establishes misdemeanour liability for violations of this prohibition. Pursuant to Article 68 of the Trade Law, a legal entity that organises, conducts, advertises or encourages pyramid selling may be subject to a fine ranging from RSD 500,000 to RSD 2,000,000.
In addition to the prohibition of pyramid selling under the Trade Law, certain models displaying characteristics of pyramid schemes may also constitute misleading commercial practices under the Consumer Protection Act of the Republic of Serbia. These include the creation, operation or advertising by a trader of a product sales system in which a consumer pays a fee for the opportunity to obtain income which does not depend on the success of selling a particular product, but rather on the participation of other consumers in that sales system (pyramid scheme). Pursuant to Article 187 of the Consumer Protection Act, a legal entity may be subject to a fine ranging from RSD 300,000 to RSD 2,000,000 if it misleads consumers in the manner prescribed by Articles 18-20 of the Consumer Protection Act. Given that the Act expressly recognises pyramid schemes as a form of misleading commercial practice, such models may also give rise to misdemeanour liability under consumer protection legislation.
The above provisions demonstrate that the legislature does not prohibit multi-level distribution as such, but rather business models in which recruitment of new participants represents the dominant source of income.
The Economic Source of Income Criterion
From both a legal and economic perspective, the essential distinction lies in the source of profit generation. In a legitimate MLM model, the product or service has independent market value and genuine demand, regardless of the recruitment of new members. Even if the recruitment of new members were to cease, such a business model could continue to operate based on the continued sale of products or services to end consumers.
By contrast, in pyramid structures, the product or service often plays a secondary role and primarily serves as a formal basis for charging entry fees or maintaining the recruitment system. Initial participation fees are often high and may be disguised as “mandatory starter packages”, “vouchers” or “educational levels”. Where the economic survival of a system is not based on genuine market demand, but rather on purchases made by participants within the system and the recruitment of new participants, such a model exhibits characteristics of a pyramid structure and carries a significant risk of economic unsustainability. For this reason, when assessing the legal classification of a particular model, the decisive issue is not whether a company formally sells a particular product or service, but whether the business model could operate sustainably without a constant influx of new members.
Civil Law Consequences
From the perspective of civil law, contracts for participation in systems displaying characteristics of pyramid selling may be deemed void under the general principles of contract law if they are contrary to mandatory statutory provisions, public policy or good morals. However, the assessment of invalidity always depends on the specific circumstances of the case and the content of the contractual relationship, as assessed by the court.
You can read the full article on Lexology: Multi-Level Marketing (MLM) and Pyramid Schemes in the Republic of Serbia: Where Is the Line Between a Lawful Business Model and Prohibited Practice? – Lexology