THOMPSON
BURTON PLLC
R
e d e
f i n
i n g t h
e A r
t o f L a w
On
e F r a n k l i n P a r k
*Kevin Thompson Direct Dial: (615) 465-6001
December 15, 2015
Ilgamos
Viktor Havasy
Re: Legal Review of Ilgamos Business Model
Please allow this letter to serve as the legal
review of the Ilgamos business model (“Ilgamos”). In short, it’s my
opinion that Ilgamos has some serious challenges to achieve legal compliance.
In and of itself, an MLM business is high risk. Given the leveraged nature of a
business’ compensation plan and the number of new participants that quickly
join the ranks of a new enterprise, it’s difficult to monitor and regulate
field behaviors. On top of this ever-present complexity, Ilgamos has added two
additional layers with the ILcoin and Gold. In June of 2014, the SEC warned
against Ponzi schemes as they relate to virtual currencies (as I will discuss
in greater detail below).
In the
matter of EmGoldex Team USA
- ILGAMOS COPY THIS PONZI MODEL FOR GOLD
In 2014, the Massachusetts Secretary of State
filed civil fraud charges against EmGoldex, alleging
the fraudulent offer and sale of unregistered
securities in a pyramid scheme.
EmGoldex was an internet-based store specializing in the buying
and selling of “investment gold
|
bars.” In order to participate in the purchase of gold, one had
to register with the Company, place
|
an order for a set of gold bars, and make a down payment.
|
Upon submitting a prepayment,
|
participants received a coupon with an activation code. Upon
entering the activation code, the
|
participant was thereby placed into the EmGoldex genealogy. In
order to advance in rank, a
|
participant was tasked with recruiting two new participants.
The Massachusetts Secretary of State
|
alleged that participants received payouts with minimal effort
and no required sale of an actual
|
product. “Any sale
of investment gold bars is ancillary to the EmGoldex program.” The Secretary
|
went on to allege that the coupons and memberships of participants
were nothing more than an
|
investment contract acting as an unregistered security.
|
Bottom Line
Sales
to customers are critical for the vitality of any company seeking to thrive in
the network marketing industry. In order to prove that the products
are truly marketable, it’s vital for companies
to demonstrate some type of market demand from nonparticipants. Without
external sales, the product will be viewed as a mere token item designed to
conceal an illegal money transfer. This fear of a “money transfer” is a
legitimate concern. The best analogy to explain a regulator’s concern with a
token product is to analyze a hypothetical business that sells $1,000 ounces of
lemonade. Sure, people will buy the lemonade under the influence of a
compensation plan, fully expecting to make their money
back eventually if they recruit
enough people. Regardless if there’s a return policy, this program will obviously be seen as a money transfer game because the product
lacks legitimate market value. In order for a transaction to be commissionable,
the item needs to have relevancy for customers as well as distributors. This is
the proof regulators want to see.
Furthermore, a network marketing company with
gold as its product is a bad idea. Traditional network marketing
companies (Amway, Avon,
NuSkin)
offer unique and proprietary
products
with creative stories and robust margins to support
a sales force. Gold is a commodity; thus, it’s not
entirely
unique
and
it’s
certainly
not
proprietary.
This
is
why
the
majority
of
network
marketing companies that have focused on gold
as their core product have failed (EmGoldex, Gold
Unlimited, etc.).
Ilgamos
Business Model
The Ilgamos
business model intermixes an opportunity to buy and sell gold with a digital
currency
trading
platform based upon Ilgamos’ very own ILCoin.
Beginning
with the access to gold, Ilgamos’ services are free and only require a package
purchase within the first fourteen days of registration. Beyond the
package purchase requirement within
fourteen days, a participant has to purchase a
15 € Partner Pack every 28 days in
order to remain
In
regards to the cryptocurrency aspect of the business, the gas that runs the
ILCoin engine is Optional Purchas Rights (or “OPRs”). OPRs are redeemed
in exchange for mining resources to unearth ILCoins. The more OPRs a person
has, the more ILCoins he or she can mine. OPRs are offered
in
varying
amounts
to
all
partners
who
purchase
Basic,
Medium,
Business,
or
Smart
Packs. Additionally, OPRs are derived from
30% of all bonuses and commissions a participant earns. However, there are a
few limitations with the use of OPRs: OPRs received from pack
purchases
are escrowed
(locked) for sixty (60) days; OPRs acquired as part of the 30% of commissions
and
bonuses are
locked for thirty (30) days.
Legal Analysis
Unfortunately, I wish I had better news: As I
will explain in greater detail below, the Ilgamos
business as it
operates today appears to unequivocally act as a Pyramid scheme.
Furthermore, I
have
legitimate concerns surrounding
the ILCoin/OPR aspect
of the business. Those elements trigger
a real
possibility
that the business could be considered a Ponzi scheme.
I. Legal
Challenges with the MLM Model
PROBLEM 1: NO RETAIL OPPORTUNITY/NATURE OF THE PRODUCT
On paper, the
Ilgamos services appear to represent a simple transfer of money between
participants (money transfer scheme). In
purchasing a pack, a participant makes a down payment on future gold
purchases.
There’s a good chance a
regulator would view the resulting
commissions from the down payment as an
inappropriate reward unrelated to a product sale.
The down
payment, by itself, will unlikely be viewed as a product sale. It’s a promise to
purchase
products at a future date.
The network
marketing model is designed for introducing unique products and services into
the
marketplace.
Because they’re unique, the products commonly carry significant margins
to cover
a generous pay plan to a sales force. As stated
earlier, in order to avoid pyramid allegations, companies in the
industry need to demonstrate some modicum of retail sales.
Without an
opportunity for external / retail sales,
leaders must focus exclusively on recruiting. Regulators have concluded
that models contingent on constant recruitment must fail.
While this point is
debatable, it remains the rule. As I already stated, gold is a
commodity. If there are margins, the
margins are small.
PROBLEM
2: COMBINING ADMIN FEE WITH PRODUCT SALE
In
the network marketing industry, it’s imperative that the purchase of inventory
always remain optional. There can be no requirement for the new distributor to
buy inventory as a condition to their participation. As evidenced by
Burnlounge, it’s important to pay commissions on product volume and not from
the sale of business centers.
As further proof of regulators disdain for mandatory product
purchases, in the FTC’s case against
Jewelway in 1997, the court’s order said:
Jewelway is prohibited from requiring a person to make a product purchase
in order to become a
participant in the program or to receive a particular level of compensation in
the plan. In addition, statements suggesting that it would be
beneficial to make a purchase in order to participate in the program are prohibited;
With
Ilgamos, a one-time €15 administration fee applies the first time a pack is
purchased. Essentially, people obtain and activate
a position in the genealogy
at the same time they’re
buying the service. When this happens, there is no clear distinction
between participants and non- participants. As stated above, it’s important to
create a distinction between customers (people outside your program) and
participants (those looking to derive income by selling your service).
As
discussed below, the product can be ACCESS to the Ilgamos gold accumulation
service. If users derive value from paying a fee (annual or monthly) in
exchange for favorable prices, the fee
(access to the service) can be viewed as a legitimate product IF there’s
legitimate interest from non-participants.
PROBLEM
3: DIFFERENT INCOME OPPORTUNITIES
There’s no law on the books
with respect to the legality
of offering additional compensation based on a point of entry or a monthly
order. With Ilgamos,
members are eligible
for larger commissions simply by nature of their
choice at enrollment.
Here, the key question
is “motive.” Due to the fear of loss, it can be argued that people are buying
the larger bundles solely because
of the financial incentives. As referenced above,
the main metric regulators use when assessing
value is customer revenue. If people detached from the income opportunity are
paying for the product, it’s indicative of value. If the only people buying are
the reps, it’s a problem. In SEC vs. Glenn
Turner, the closest case on point, Glenn Turner was shut down for selling
unregistered securities (investment contracts, discussed in more detail in the
Security section below). In his business, individuals had 4 packages to choose
from (A through D). People that purchased package “A” could only earn
commissions when they sold an “A” package. People that purchased B could earn
income from the sale of “A” and “B” packages. Etc. There was a financial
incentive to spend the extra money to purchase the “D” package. The Court said, “It is apparent from the
record that what is sold is not of the usual type of products. Rather, the purchaser
is really buying the possibility of deriving money from the sale of the plans by [Glenn Turner’s distributors].” Again, it
all boils down to “motive.”
With
the current structure, it can be easily argued that people choose to buy more
because they want to qualify for higher commissions or larger bonuses,
i.e., the purchase of a smart pack nets
a
participant
a
10%
infinity
bonus
whereas
the
purchase
of
a
medium
pack
only
results
in
a
5%
bonus. The ability to buy more in order to qualify
for higher commission was also present in
the
BurnLounge
model and led to significant trouble.
PROBLEM 4:
SECURITIES (THE BIG ONE)
As the Shavers case made clear, the SEC
will consider crypto-currencies packaged in an investment vehicle to act as a
security and thereby induce securities regulations. Understand, a
crypto-currency on its own is not security; however, it becomes one if its
presented to the marketplace in a certain way. Remember, an investment contract
is any scheme involving (1) an investment of money, (2) in a common enterprise,
(3) with the expectation that profits will be derived from the efforts of the
promoter or a third party.
And finally,
the third and final element:
the expectation that profits will be derived
from the efforts of a promoter or third
party. Within the Ilgamos marketing materials, ILCoins are presented with an
“outstanding
profit
outlook.”
Additionally,
market
timing
is
heavily
emphasized
so
as
to
suggest
that participants should get in on the ground floor in order to earn the
greatest return. Finally, Ilgamos uses phrases like “price increase” and
“growth potential.” All of these statements act as advertisements and create an
expectation of profits solely through the efforts of a third party (in this
instance, Ilgamos and its effective price management). With “mining and
distribution under exclusive
Ilgamos
control,”
Ilgamos
acts
as
a
third
party
promoter
and
thereby
fulfills
all
the
elements of a security
or “investment contract” analysis by allowing
its participants to utilize OPRs
as a ticket
into Ilgamos’ digital mining platform.
II. Legal Challenges Surrounding Ponzi Concerns
Upon inspection, your company appears
to be a well constructed Ponzi scheme. Please understand, I’m not passing
judgment as I do not believe it was your intent to engage in any sort of fraud or
deceit.
After our phone conversation, I truly believe your passion surrounding
cryptocurrency comes from a good place. However, regulators don’t care about
intentions as much as they do alleviating illegal market practices. Once again invoking
some of the signs of a Ponzi scheme mentioned by the SEC, Ilgamos and its
ILCoin appear to fit the bill in a variety of ways:
Overly
Consistent Returns: It was implied
in our conversation and throughout your marketing material that as the
network grows, the value of the ILCoins and OPRs will increase. The reality is
that
without
natural
market
forces,
there
is
no
way
to
predict
or
determine
the
true
value
of
your
ILCoins.
Right now, it’s a closed market in which the company is dictating the value
based on the
inflow of
cash and participants.
Normally, alt-coins
values fluctuate wildly
based on psychology and market forces
between buyers
and sellers.
With Ilgamos, you essentially control
everything and even advertise as much with your
expression of
“Effective Price Management.”
Promises
of High Returns: In our
conversation, you expressed your desire to reinforce to potential
participants
the
current
speculative
value
and
nature
behind
the
ILCoin.
While
informing people
of
the
speculative
nature
is
obviously
better
than
promising
a
very
specific
rate
of
return,
it
nonetheless does nothing to prevent people
from joining because of mistaken beliefs on
passive
returns.
As I’ve
mentioned previously within this review, you need to be careful with mentioning
market timing. Endorsing any sort of “Get in Early” narrative
in which people are encouraged to get in on
the ground floor sends the wrong message. You are essentially professing as
fact that Ilgamos partners who mine ILCoins will benefit from price increases. While you may believe this is simply your way of expressing belief in
the ILCoin and the success of the Ilgamos business, regulators would perceive
this as promising a higher return on one’s investment.
Difficulty
in Receiving Payments: The SEC
matter-of-factly states, “Be suspicious if you . . . have difficulty
cashing out your investment.” Ilgamos employs a few different measures that
appear to be two-fold in function: first, by making perfunctory withdrawals
difficult; and second, ensuring
there
isn’t
a
run
on
the
bank
and
cash
stays
within
the
system.
There’s
the
fact
that
OPRs
are held in escrow for thirty and sixty days, depending on if they originate
from commission or pack purchases; the idea that while 100% of new OPRS are
convertible only 50% are tradable, thereby
preventing
a
person
from
cashing
out
all
at
one
time;
the
30%
of
all
commission
and
bonuses being
credited as OPRs to a partner’s account suggests a re-investment tool that
keeps
cash within
the system.
deteriorate
rapidly. Thus, the explanation for the need to have auto-investment policies
and limited
withdrawal options in place. Zeek Rewards,
Cyber Kids, Zhunrize and TelexFree all had auto-
invest policies and were eventually shut down
as Ponzi schemes.
Secretive
Strategies: The SEC says, “Avoid
investments you don’t understand for which you can’t get complete
information.” With Ilgamos, it remains unclear how valuation will be determined
or when it will be determined. In our phone conversation, you made a series of
conditional statements when talking about the potential of OPRs and ILCoins: “.
. . if business is coming in and we are growing, if we have merchants
supporting the backing of the coin value, etc.” that make the ILCoin
opportunity too speculative and unknown. I’m in the practice of
trying to advise and protect clients
against the possibility of any regulatory scrutiny, whether impending or far
off into the future after the achievement of great growth and success. There’s
just too many unknowns and too much control by Ilgamos over its digital
currency mining platform. The
SEC
has
and will continue
to target cryptocurrency models
as an area
of needed oversight and
regulation.
PROPOSALS:
Moving
forward, the Ilgamos business model has to emphasize and be built upon the
following foundation: access to discounted gold. As it stands now, the
access to gold is ancillary to to the crypto-currency
aspect
of
the
business.
You
told
me
on
the
phone
that
you
believe
OPRs
will
serve as the marketing tool, when in
actuality the inverse is true: the gold will merely serve to attract people
interested in alt-coins. I can guarantee you that as your business grows in
size, data will reflect
that
participants
buy
the
gold
accumulation
programs
(or
“packs”)
for
the
right
to
participate in the mining of ILCoins as
opposed to the right to purchase discounted gold. Regulators will
see
how your business operates in practice and argue no
intrinsic value exists behind the current Ilgamos
product.
In
the
future,
the
access
to
gold
must
reflect
intrinsic
value
that
is
driven
by
retail
sales.
However,
if you remain steadfast in the decision to carry on this aspect of the
business, it would be prudent of you to make the following modifications:
·
Eliminate the auto-investing and withdrawal
options. Allow participants to withdraw 100% of their commissions at any time.
· Open the market. The sooner this is done, the better.
The longer the market remains closed and in the exclusive
control of Ilgamos, the greater the skepticism will be (rightfully so)
surrounding the scheme’s legality. There needs to be opportunities for people
to mine for ILCoin that are unaffiliated with Ilgamos.
Income Disclosures
If your business can successful adapt to the above
proposed suggestions, I will need to prepare some income disclosures for you in
the future. Whenever you make an earnings claim, whether express or implied, an
income disclosure needs to be present. An earnings claim occurs when you talk about the financial potential
i.e. earn $10,000 if you do XYZ, be able to by a car if you build this business
right, etc. If Ilgamos is aggressive with income disclosure forms, it’ll make
for a great insurance policy. Also, we need to create disclosures where
participants/ customers acknowledge that the Ilgamos alt-coin
might lose all of its value. It needs to be clear that there are
zero guarantees when making these purchases.
Conclusion
With gold as the lynchpin, I’m not sure Ilgamos has a shot at viability
and legitimacy. In its current
form, the model is illegal
and could possibly
lead to criminal exposure. I’m available for discussion
about this memo at a time of your convenience.
Sincerely,
Kevin P. Thompson Thompson Burton
