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MLM: Perfect Side-Hustle or Illegal Pyramid Scheme?

Coins stacked in a pyramid.
By Kellie Pantekoek, Esq. on January 22, 2020 12:57 PM

Have you noticed that more and more of your social media friends seem to be selling stuff? Essential oils, hair products, nutritional shakes, makeup, press-on nails, candles, leggings ... the list goes on. And you've probably noticed that your friends don't just want to sell you their product, they also want you to join them in selling the product as part of their “team."

Welcome to the world of MLM.

What Does MLM Mean?

MLM refers to the multi-level marketing business structure, and in the era of the side-hustle, it is a trend that has taken social media by storm.

How Does MLM Work?

Essentially, MLM, or network marketing, involves a sales system with multiple levels (hence the name) where products are sold by individual salespeople or distributors, who get paid based on how much they sell. They also get a percentage of the sales completed by salespeople or distributors who they recruit to sell “under" them, known as “downlines."

In theory, an individual salesperson or distributor has both direct profit from their own sales as well as recruitment profit from the sales made by the salespeople under them. Now you may be thinking: Yeah, I get that, but is it legal?

The good news for your social media friends is that MLMs can be perfectly legal and legitimate, as long as they are not crossing over into illegal pyramid scheme territory, and they follow state and federal trade laws. The bad news is that most people don't make money on them (more on that later).

MLM vs. Pyramid Scheme

Pyramid schemes are nothing new – they have been around for hundreds of years. But few people understand what they actually are and how lawful MLMs are different from illegal pyramid schemes.

Indeed, the business and recruiting structures of MLMs and illegal pyramid schemes are very similar, and pyramid schemes technically are MLMs. The main difference is that illegal pyramid schemes focus on recruitment while legal MLMs focus on the sale of products. Other important differences include:

  • MLM products should be sold at a reasonable market price, while pyramid scheme products are usually sold at a much higher price.
  • MLMs should have no startup costs, while pyramid schemes typically require salespeople to make a significant investment in training and membership fees before joining.

Since most MLMs today focus on actually selling products and meeting the demand for those products, they are usually legal. But, like all businesses, MLMs cannot provide information that is false or misleading to consumers, including on their distributors' social media pages.

MLMs Can't Misrepresent Results or Deceive Consumers

Even if an MLM is not organized as an illegal pyramid scheme, there are other reasons these businesses can get into trouble with the Federal Trade Commission, such as by being misleading or untruthful when representing:

  • The business opportunity it offers
  • The amount of money salespeople or distributors can make by participating
  • The lifestyle that participants can achieve

There are also FTC rules regarding endorsements and testimonials, and even participants whose major success is real cannot make it seem as if their results are normal and expected.

Okay, but what about those posts saying you can "fire your boss" or "become a stay-at-home mom"? The FTC says that if those results are not common, then the statements would likely be considered false or misleading.

There's Still Reason to Be Skeptical

Unfortunately, few people end up bringing in enough income from MLMs to significantly change their lives. In fact, many participants don't make any money at all. According to a 2018 study by the AARP Foundation:

  • 44% of MLM participants surveyed dropped out after less than one year.
  • 25% of MLM participants surveyed made a profit, 27% broke even, and about half lost money.
  • About two-thirds of MLM participants surveyed said that they would not join the same MLM company after knowing what they know now.

Extensive research compiled in 2011 by the founder of the Consumer Awareness Institute and endorsed by the FTC found that, after subtracting expenses, only one in 545 MLM participants is likely to profit, and 997 out of 1,000 individuals involved with an MLM lose money.

Herbalife Paid the Price for Deceptive Marketing

Herbalife is an example of an MLM that was fined by the FTC for deceiving customers. After an investigation, the FTC reached a settlement with the weight-loss and skin care company, which agreed to pay $200 million for misleading distributors about how much money they could make. The FTC did not go so far as to shut down Herbalife for being an illegal pyramid scheme, though.

Should I Join an MLM?

If you are considering joining a MLM company, there are a couple of things you should ask yourself before sliding into a recruiter's DMs, including:

  • Is the company asking me to pay a membership fee or purchase goods to sell before I can start?
  • Do I have unrealistic hopes about how much money I can make and how little effort it will take?

If you answered "yes" to any of these questions, it is probably best to pass on the opportunity.

What Should I Do If I Think an MLM Is Violating the Law?

If you are concerned that an MLM you or someone you know is involved with is breaking the law, you can file a complaint with the FTC.

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