FTC: MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes

MLM distributors have long been claiming that they aren't involved in a pyramid scheme, but much of the time they are either unaware of the definition of a pyramid scheme or simply not willing to face an inconvenient truth.

Most often distributors erroneously make the claim that as long as they are buying the product and using it, it isn't a pyramid scheme. This is sometimes called "internal consumption." For years Amway distributors have said something like: "All we do is buy from ourselves and find others who do the same" with the implication that they don't need to make sales.

In 2004, the President of the Direct Selling Association (an organization that lobbies for MLM companies), Mr. Neil H. Offen wrote the FTC to get clarity on the legality of this internal consumption business model. The FTC's response couldn't have been what the DSA was hoping for. In particular, the letter included this quote:

"The Commission's recent cases, however, demonstrate that the sale of goods and service; alone does not necessarily render a multi-level system legitimate. Modern pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure."

I highlighted a few parts to make it clear. If an MLM requires that a distributor purchase product to earn commissions it is very likely a modern pyramid scheme. One way that an MLM can do this legally is if there are enough sales to people outside the scheme, so that commissions aren't funded primary from those within the scheme.

Using this as a guide is clear that companies such a MonaVie and One24 are pyramid schemes. At a minimum, such companies by being in the industry that they are in bare the burden of proving that profits don't come primarily from sales to internal distributors.

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MLMs vs. Pyramid Schemes

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3 Responses to “FTC: MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes”
  1. » How An MLM Can Show It Isn’t an Illegal Pyramid Scheme Says:

    […] previous articles we found out: MLMs with required minimum purchases to earn commissions are pyramid schemes. We also found that the FTC says MLMs must focus on sales to outside […]

  2. » One24 Sales Data from May 2011 and Feb 2012 Says:

    […] deeper the sales, it's worth noting that 75% came from AutoShip. That sounds good, but we know that MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes. These AutoShip numbers clearly show that One24 commissions are paid from these. We can also see […]

  3. » Secret One24 Commissions Show it is a Pyramid Scheme Says:

    […] MLMs with Required Minimum Purchases to Earn Commissions are Pyramid Schemes. Well, that's a little simplistic. Earnings can't be "primarily" from commissions that are the result of a required minimum purchases. The key way around this is… […]

 

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