Why Are Mlm Companies Legal

Why Are Mlm Companies Legal

Have you ever heard anyone suggest that MLM or network marketing is an illegal Ponzi scheme? MLM companies operate in all 50 U.S. states. Businesses may use terms such as “affiliate marketing” or “home-based business franchise.” Many Ponzi schemes attempt to present themselves as legitimate MLM companies. [7] Some sources say that all MLMs are essentially Ponzi schemes, even if they are legal. [4] [19] [20] Take the FTC`s Business Opportunity Rule, which requires companies working from home and other independent sales representatives to provide detailed information about the risks of the purchase. When first proposed in 2006, this rule applied to network marketing companies, but the industry has significantly increased its lobbying funds for members of Congress; Many of them have written letters to the FTC asking them to exempt MLMs. This is a big problem for what the Federal Trade Commission is looking at. If you use hypothetical income, or if you use your own example, if you give someone an idea of how much money they can make as a representative, always show a real average income statement. Also, don`t make product claims. It will come from a different direction. It`s the Food and Drug Administration and not the Federal Trade Commission, but you can still be an illegal company because the distributor does it. Multi-level marketing is legal as long as it complies with disclosure laws and, as mentioned above, offers customers a real product for their money.

But people trying to make money easily or break into the world of sales or commercial real estate should be careful. The Better Business Bureau warns against any opportunity that promises high revenue with little time or effort, requires you to purchase a large amount of inventory to begin with, and offers no guarantee that unsold products can be repurchased, and requires payment in cash, wire transfer or money order for the initial investment. According to the Federal Trade Commission, MLMs are not illegal. Most multi-tier marketing companies, such as LuLaRoe, ensure they stay in a legal position by offering revenue to distributors who make retail sales. If the only way for merchants to make money is to recruit new sellers, this is a Ponzi scheme. It is these Ponzi schemes that are illegal. The Ponzi scheme is just the recruitment part, and if that was all it was (getting paid to recruit people), then it would be an illegal Ponzi scheme. But if you attach a product to sell (à la Amway, Herbalife, etc.

etc.), it may masquerade as a “legitimate” business. The company`s goal is to sell the product, but you also get money to recruit new people. Because it`s just a collection of legal things. Franchise business model? Ok. Recruitment payments? Ok. Are you courting your friends? Ok. Sell things to your employees? Ok. It`s Avon in a nutshell. How exactly is this legal? A combination of opaque laws, lack of resources and a lot of lobbying power.

MLM companies sell their products or services through in-person sales. This means you`re selling directly to others, perhaps at home, at a customer`s home, or online. And the more distributor successes reach audiences, the more likely companies are to recruit new sellers. The Direct Selling Association (DSA), an advocacy group for the MLM industry, reported that in 1990, only 25% of DSA members were using the MLM business model. By 1999, this share had risen to 77.3 per cent. [26] In 2009, 94.2% of DSA members used MLM, representing 99.6% of sellers and 97.1% of revenues. [27] Companies such as Avon, Electrolux, Tupperware and Kirby were originally all single-tier marketing companies that used this traditional and unchallenged direct selling business model (as opposed to MLM) to sell their products. Later, however, they introduced tiered compensation plans and became MLMs. [23] The DSA has approximately 200 members,[28] while it is estimated that there are more than 1,000 companies engaged in multi-level marketing in the United States alone. [29] Fast forward to 2018, when the FTC issued “Business Guidance for Multi-level Marketing,” detailing what is legal and what is not or a Ponzi scheme. The Federal Trade Commission warns: “Not all multi-level marketing plans are legitimate. Some are Ponzi schemes.

It`s best not to commit to plans where the money you make is primarily based on the number of distributors you recruit and your sales to them, rather than your sales to people outside the plan who intend to use the products. [21] The Federal Trade Commission issued a decision, In re Amway Corp., in 1979, declaring that multi-level marketing was not per se illegal in the United States. However, Amway was found guilty of price fixing (effectively soliciting “independent” traders to sell at the same fixed price) and filing excessive tax returns. [46] [47] The FTC recommends that multi-level marketing organizations that increase recruitment incentives be viewed with skepticism as product sales. The FTC also warns that the practice of receiving commissions to recruit new members is prohibited in most states as “pyramiding.” [48] Most people who join legitimate MLMs earn little or no money. Some of them lose money. In some cases, people believe they have joined a legitimate MLM, but it turns out that it is an illegal Ponzi scheme that steals everything they invest and puts them deeply in debt. Because of the encouragement of recruits to continue recruiting their competitors, some people have even gone so far as to say that modern MLMs are at best nothing more than legalized Ponzi schemes.[4][19][20] with a statement “Multi-level marketing companies have become an accepted and legally sanctioned form of Ponzi scheme in the United States”[19]. while another states: “Multi-level marketing, a form of Ponzi scheme, is not necessarily fraudulent. [20] In October 2010, it was reported that multi-level marketing companies were being investigated by a number of attorneys general, claiming that salespeople were paid primarily for recruitment and that new hires could not come close to what first entrants do.

[58] Industry critic Robert L. FitzPatrick has called multi-level marketing a “main street bubble” that will eventually burst. [59] Unfortunately, distributors do not have much influence when it comes to legal actions – MLM companies often include a “mandatory arbitration clause” in their distribution agreements, meaning that disputes must be dealt with outside the court system. Even if an MLM agrees to settle with a disgruntled distributor and pay for the damages suffered, its misconduct will not be made public, Lidow says. Brooks pointed to a court decision, the FTC`s Koscot decision, as a widely accepted precedent for determining what an illegal MLM looks like. In that 1975 case, a judge ruled that MLM companies should base distributors` compensation on actual retail sales to customers, not on the number of new employees they hire or the amount of inventory they wholesale to those recruits. Well, that`s the most important thing. This is where the tip of the spear is today, as opposed to 30 years ago. The Federal Trade Commission investigates a person`s intent when ordering products. If that intention is to consume the product, it`s probably legal. When it comes to selling the product to a customer, it`s probably legal. When it comes to earning commissions, then it`s probably illegal.

If the intent is motivated by the compensation plan, meaning sales reps only buy products to earn a commission, it`s probably illegal. What do we mean by Comp-Plan-Drive? In some compensation plans, they motivate a person to buy the inventory to earn commissions that will cross a line because your intention in buying that inventory is not to consume or sell it, but to earn more commissions, and that`s where it gets dubious. The Federal Trade Commission doesn`t like that. MLMs are designed to generate profits for the owners/shareholders of the company and some individual participants at the higher levels of the participants` MLM pyramid. According to the U.S. Federal Trade Commission (FTC), some MLM companies already constitute illegal Ponzi schemes, even through existing narrower legislation that exploits members of the organization. [21] I hope this has clarified a little bit what makes a business legal or illegal.