Your MLM may be profitable, but is it legal?

A controversial business tactic, multi-level marketing (MLM) schemes have often been likened to pyramid schemes. Pyramid schemes are expressly illegal in the United States and many other countries for their predatory behavior and shady tactics. Multi-level marketing is not the same thing as a pyramid scheme. However, many MLM companies operate in a legally and ethically grey area of business.

Because the punishment for operating or contributing to a pyramid scheme involves serious consequences, it is essential to watch for the signs of bad practices when starting or joining an MLM team. Many people who rush into an MLM without educating themselves first end up needing a criminal defense lawyer for federal crimes.

Multi-Level Marketing

Some people see multi-level marketing as a simple rebranding of the pyramid schemes of old. However, there are some distinct differences that make most multi-level marketing schemes legal in most regards. For one, MLMs offer actual profits, while many pyramid scams turned out to be based on a lie. MLM products strive to set themselves apart in the marketplace, though this is not always the case.

MLMs are a way for companies to avoid their own marketing and sales costs since the company works through direct sales. While different MLM companies call their distributors different titles, as a consultant or contractor, they all use individuals to build the business. Distributors purchase products from the MLM company through their distributors. Each MLM has a somewhat unique structure and payment plans, but most involve selling these products and recruiting new distributors.

Succeeding in an MLM scheme is complex, and the Federal Trade Commission has condemned them for having such a low rate of success. While around 39% of real small businesses eventually turn a profit, only 1% of people that join an MLM see success.

Pyramid Schemes

Pyramid schemes are illegal because they have stolen money from millions of Americans through fraud or bad business practices. Like MLMs, pyramid schemes dangle the monetary rewards of success in front of their distributors in order to expand the business and achieve recruitment. Pyramid schemes rarely had real or legitimate products or services, but now some offer these as well.

If a product or service is not publicly available in a retail or online setting, then it might just be a mask for a pyramid scheme to operate through. This allows all sales between the many levels of distributors to be counted as sales, inflating data and hiding a weak core business idea.

Another sign that a multi-level marketing scheme is operating as a pyramid scheme is inventory loading. Inventory loading is when distributors are required or coerced into buying lots of a product, more than they have a chance to reasonably sell. This is shady and profits the top of the pyramid, while distributors towards the bottom are left holding a hard-to-sell product.

Another name for the type of structure that has no actual product is a Ponzi scheme or a Peter-Paul scheme. These, like pyramid schemes, are destined to fail because they rely on indefinite recruitment for their distributors to profit.

Anti-Pyramid Scheme Laws

The nature of the beast that is a pyramid scheme or MLM means they are destined to collapse eventually. No matter where someone thinks of themself in the grand scheme of the distributor structure, simple mathematics tells us that the vast majority will find themselves closer to the bottom.

Many US organizations are tasked with protecting people from the predatory tactics and ruination of an MLM or pyramid scheme. The Federal Trade Commission openly combats them, and the SEC, FBI, and DOJ all take a similar stance.

Commonly, people in MLM and pyramid schemes are found guilty of mail fraud, securities fraud, tax fraud, or money laundering, especially people at the top. If a company is found to be a pyramid scheme under the FTC laws that combat unfair or deceptive practices, even distributors can be liable. You may have to pay out double the amount of any recruitment bonuses or serve time in prison.

With a BA in communications and paralegal experience, Irma C. Dengler decided to combine her skills. In the past, when she was involved in proceedings of her own, she witnessed firsthand the weight of legal language. A convoluted terminology can easily disarm the average American. Therefore, she set off to empower her readers by making the law more accessible to them. Although she has covered all areas of civil and criminal law, insurance-related issues, and her area of specialty are personal injury cases.