Is it a Pyramid Scheme,
or is Multi Level Marketing Legal?

Is Multi Level Marketing legal?


The answer is: Yes, but there are some issues.

The general concept and business model of MLM is absolutely, positively legal and ethical. In fact, hundreds of legitimate MLM businesses operate in all 50 states and more than 100 foreign countries. However, there are numerous (even hundreds) of specific companies and entities that are in reality scams or pyramid schemes. MLM companies, like every other corporation in the world, do use pyramid structures, however, there is a difference between a pyramid scheme and a pyramid structure. Think about it, every corporation in the world has the CEO at the top, vice presidents, then mid-level managers, then the lower echelon sales people at the bottom. Every one in the organization generates an income from the efforts of those lower in the structure.

Pyramid Scheme

A pyramid scheme, also generally referred to as a Ponzi scheme, is illegal and here’s how it works.

A company promises consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from the real sale of goods to the public. When “recruiting” is the only goal, the people at the top of the pyramid make money from the people on the bottom. Debra A. Valentine (of the Federal Trade Commission) has a great and detailed (though lengthy) review of pyramid schemes while answering the queston "is multi level marketing legal"?
(http://www.ftc.gov/speeches/other/dvimf16.htm)

Pyramid Structure

A pyramid structure is simply a tiered compensation system that almost every large sales organization in the world uses. Salespeople get a commission. Then sales managers get overrides or bonuses on top of those commissions, and sales directors on top of that, and Vice Presidents on top of that, and so on. In answering the question - is multi level marketing legal - the compensation structure is perfectly legal and ethical. An MLM distributor gets a personal commission every time they sell a product or service. They also earn a commission on the sales of every person underneath them in the tiered structure.

The fact that one has to pay to participate in the compensation system does not qualify as a pyramid scheme, either, because that is a standard franchising model.

Pyramid Scheme vs. Legitimate MLM Opportunity

Under current legal statutes, multi level marketing companies must be retail organizations which market bona fide products to ultimate consumers outside the pyramid structure of the company. Outside sales are the sell of products to consumers who are not distributors or associates with the company. Inventory loading and "headhunting," or remuneration for the mere act of recruiting others, are prohibited.

The biggest issue right now in answering is multi level marketing legal is the percentage of retail sales outside the organization that a company must have to be considered a legitimate business. The Federal Trade Commission’s current stand is that 50% of the revenues for a company must be generated from retail sales outside the organization.

The landmark court decision that settled is multi level marketing legal was the 1979 case of FTC vs. Amway. Based on the ruling of this case, current legal statutes, and common sense, it is not a difficult task to differentiate a legitimate MLM opportunity from a pyramid scheme. The following are indicators of a pyramid scheme or scam:

1. Products which have "no real world" marketplace, i.e. the marketing program is a facade for a scam.
2. Products which are sold at inflated prices.
3. Plans which result in inventory loading or "buy-in" qualification by distributors.
4. Substantial cash investment requirements.
5. Mandatory purchases of peripheral or accessory products or services.
6. Plans in which distributors are left with substantial unsold inventory upon cancellation of participation.
7. Plans in which emphasis is on recruitment rather than sale of product.
8. Earnings misrepresentations or inflated earnings representations.

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For more Research into the question Is Multi Level Marketing Legal? we recommend these websites:

IRS Publication 911 (Direct Sellers). Explains the issue from the IRS point of view (http://www.irs.gov).

MLM Legal.com is a great website on the subject with major court decisions, legal explanations, and discussion.

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