FTC Releases MLM Business Guidance

Key Document Helps Legitimate MLM Programs Distinguish Themselves From Illegal Pyramid Schemes

Multi-level marketers sell a wide variety of products and services and they structure their companies in different ways.

But there’s a lodestar that all industry members can use to navigate through issues that may arise – and here it is: Core consumer protection principles apply to all MLMs.

FTC staff have released business guidance to help MLMs apply those core principles to their business practices.

The document addresses questions like:

• How does the FTC distinguish between MLMs with lawful and unlawful compensation structures?
• How does the FTC treat personal (or internal) consumption by participants in determining if an MLM’s compensation structure is unfair or deceptive?
• How should an MLM approach representations to current and prospective participants?

 
Those are just some of the topics covered in the guidance document.

While the publication isn’t legally binding, it offers FTC staff’s perspectives about issues they know are on the minds of industry members.

For someone facing a recruitment request to join an MLM, whether by a friend, colleague or family member, there are key questions regarding compensation will usually help tell the difference between a legitimate MLM and a pyramid scheme.

• What are your annual sales of the product?
• How much product did you sell to distributors?
• What percentage of your sales were made to distributors?
• What were your expenses last year, including money you spent on training and buying products?
• How much money did you make last year — that is, your income and bonuses, less your expenses?
• How much time did you spend last year on the business?
• How long have you been in the business?
• How many people have you recruited?
• What percentage of the money you’ve made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?

 
It’s important to get a complete picture of how the plan works: not just how much money distributors make, but also how much time and money they spend on the plan, how long it takes before they’re earning money, and how big a downline is needed to make money.

If most income comes from recruitment and not from direct sales, chances are high that the program is a thinly disguised pyramid.