When is a multi-level-marketing scheme a pyramid scheme ?

This is definitely a source of confusion for many people, and Multi-Level-Marketing (MLM) schemes tend to be all tainted with the same brush.

Even to otherwise highly educated professionals, exactly when an MLM scheme becomes a pyramid scheme is not trivially obvious.

After looking around and considering the matter at length, I think the best definition comes from an advisory from the Federal Trade Commission (FTC) itself.

To quote,

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.

It goes on,

A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants, and therefore, does not guarantee financial failure for the majority of participants. In contrast, a multi-level compensation system funded primarily by payments made for the right to participate in the venture is an illegal pyramid scheme.

 

To repeat, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.

For a more in-depth discussion on the differences between a pyramid scheme and legitimate marketing, see this discussion by Debra Valentine.

 

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