When Is MLM Legal?

How can a consumer determine whether a multi-level marketing (MLM) company is legitimate or a "devastating con game" as 60 Minutes correspondent Mike Wallace recently exposed one fast growing MLM?

The lines of legality for MLM were drawn 20 years ago when the Federal Trade Commission charged that the Amway Corporation was operating as an illegal pyramid scheme. The ruling of an Administrative Law Judge cleared Amway of the charge at that time and laid down guidelines for legitimacy.

This booklet makes the case that current marketing practices of Amway and much of the MLM industry have so widely deviated from those guidelines that a new inquiry is called for by the Federal Trade Commission.

Confidence schemes, like the Confidence Man in Herman Melville's novel, appear in disguises. The illegal pyramid can disguise itself as high interest investment plan, hot new penny stock, sales referral program or internet chain letter. Its most common masquerade is multi-level marketing.

In whichever costume, the schemes amass fortunes for the organizers while cheating nearly all of the investors of the income they are promised.

In the MLM disguise, the pyramid scheme gains access to millions of hopeful entrepreneurs entering "self-employment" for the first time. It is also exported as "free enterprise" to emerging market economies where recruits are uninformed and unprotected.

In the poor countries, the pyramid's freedom to defraud is virtually unrestrained. In the US, the birthplace and headquarters of the MLM sales model, some states have no pyramid scheme laws at all. No single federal statute applies to MLM.

MLM is the legacy of door-to-door sales. Today, the "direct" sales person is recast as MLM "distributor." But few knock on doors or even solicit sales of products. More commonly, the approach is made to friends, relatives, neighbors and associates to enroll in a "unique new business." Profit is primarily based upon enrolling other distributors who in turn enroll others who in turn do the same.

Is this sales model a pyramid scheme? How many distributors actually earn a profit? When does the number of "distributors" exceed the available "customers" to cause market saturation. If everyone is enrolling, who is buying the products? These and other questions are addressed in this booklet.