Anyone with eyes can see that Multi-Level Marketers (MLMs) are predatory business models that prey on vulnerable folks looking to make a meaningful income. People who have escaped these companies all have similar stories of crippling debt and shady manipulation. The products they sell are either overpriced, poor quality, useless, or, in some cases, harmful.
With all we know about how these companies operate, how is it that MLMs are legal? To fully appreciate the answer, you have to know what a pyramid scheme is.
MLM vs. Pyramid Scheme
Pyramid schemes are a business model in which members are recruited based on the promise of payments of services for enrolling others into the scheme. As more and more members fill the ranks of the pyramid, recruiting becomes impossible and the scheme falls apart.
The only major difference between MLMs and pyramid schemes is the existence of a product. Pyramid schemes have no product. MLMs do. That product can be anything from make-up to online courses. As long as you have a real product to sell, you are not a “pyramid scheme.”
You’re now a product-based pyramid scheme.
What makes an MLM suspiciously like a pyramid scheme is when most of the income is generated by recruiting more members instead of product sales. You will hear MLM advocates do mental gymnastics to dismiss criticism. “All businesses are shaped like a pyramid if you think about it.”
If it walks like a duck…
What is the Legal Language?
The most cited description of an illegal MLM scheme is found in the FTC’s Koscot decision.
In that decision, the FTC observes that these companies are “characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.” In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975).”
In layman’s terms, an unlawful MLM is one in which you pay the company for “the right” to sell their product and have an opportunity for incentives (like a bonus) to recruit more salespeople.
As long as the MLM gives you a product to sell, it can skirt this line very carefully in order to maintain its predatory practices for as long as they’ll last.
Products Are Legal Loopholes
MLM products are something else. Often overpriced, these potentially harmful products are marketed as “premium” when they are usually poor quality. Monat’s hair products cause hair loss. Herbalife can harm your liver. BOO (now defunct) was literally dirt.
The reason MLM products are so often overpriced and poor quality are that it’s not about the product. MLMs make their money off recruiting new salespeople. The product is just a legal loophole to maintain their pyramid scheme’s “legitimacy.”
Sorry, You’re Not A Business Owner
Let’s put aside the annoying, invasive messages from MLMers (or “huns” as they’re facetiously referred to), the creepy cult similarities, and the manipulative tactics. Instead, let’s focus on the pure economic realities of working for/in an MLM. If you sell products from an MLM, you are not a business owner. You are a sales associate, at best. This isn’t a judgment as much as it is a “snap out of it!”
Unless you take the very difficult, expensive, and energy-draining process that comes with starting your own business, you are not a business owner. MLMs promise a lot for a little. There’s no such thing as easy money. But, for those who are financially vulnerable and desperate for income, an MLM can look very appealing.
Can We Do Anything?
Legally speaking there are a couple of avenues to blow the whistle on an MLM. These companies, however, are often ready and eager for a fight and are prepared with adequate resources.
If you think an MLM is engaging in shady activities, you can report them. Otherwise, the best thing you can do is to call these companies out for what they are: predatory business models that prey on vulnerable folks trying to earn a meaningful income. There are plenty of support groups and Facebook groups available that do an excellent job of spreading anti-MLM awareness.
Technically, MLMs are legal. Ethically, MLMs are repugnant. Until the laws catch up to these predatory business practices, we need to shout from the rooftops to protect as many people as we can from getting sucked into these shady, scummy businesses.