Illegal Pyramid Scheme or Legitimate Company?

Some companies play in the grey area that separates illegal pyramid schemes from legitimate direct sales companies.

That grey area, however, is shrinking as the distinctions become clearer, making it easier to identify a company as an illegal pyramid or a legitimate company.

The Federal Trade Commission recently classified one well-known 26-year-old direct sales company as an illegal pyramid.

The movie franchise Fast & Furious has had a phenomenal run, with 9 movies since 2001, pulling in an estimated $5.9 BILLION at the box office. Playing Fast & Loose is a dangerous game that could cost a company everything!

In the direct sales industry, we often hear of companies that play Fast & Loose with their recruiting and sales volume requirements.

Some of these companies are straight up illegal pyramid schemes, where the primary focus of the company’s marketing materials and compensation strategies are based on recruiting people who “buy in”, often by purchasing large amounts of the company’s products. Some of these companies operate for years before attracting the government’s attention.

While the dream of wealth and luxury is sold to all distributors, only a handful of people ever end up making big bucks before the pyramid falls apart.

You may have heard that in May 2019 Advocare stopped operating as an MLM after talks with the Federal Trade Commission (FTC). Neither Advocare nor the FTC provided any explanation. In October 2019 the FTC denounced Advocare as an illegal pyramid scheme and fined the company $150 MILLION!

Just think about the impact on the company, the distributors and the customers. The FTC also banned the CEO and top distributors from participation in MLM — FOR LIFE.

On the surface, Advocare appeared to be a legitimate MLM company in business since 1993.

To be clear, most MLM companies are NOT illegal pyramid schemes. Legitimate companies:

  • sell real products and services to real people, with a focus on selling to retail customers
  • don’t require constant recruiting to qualify for payout
  • don’t make outrageous earning claims
  • make training materials available at a reasonable cost
  • don’t pay commissions on enrollment kits, training materials, and other distributor-only products and services

This list is far from exhaustive, but it includes the main points.

The unfortunate truth is that our industry has a stigma. You’ve probably experienced the reaction that some people have when they learn that you’re associated with “one of those companies.” Every time the media presents any negative information about a direct sales company, that stigma is reinforced, making life difficult for legitimate companies and their distributors.

A highly respected MLM attorney, Jeffrey Babner, who was my MLM attorney for my direct sales company, wrote a comprehensive article on October 28 that all direct sales company owners and executives should read. Here’s the link: Advocare-Teachable-Moment

An industry paradigm shift is underway, shifting companies’ focus to going into and staying in stealth mode, as far as the feds and attorney generals are concerned. How does a modern company stay under the radar? Quite simply, by avoiding the things that the FTC associates with pyramid schemes. Here’s a helpful guide from the FTC: MLM vs Pyramid

If you read only one thing today (aside from this email!), read Jeff’s article.

The direct sales industry is evolving quickly as both technology and laws change. Company executives must be diligent and keep up with the times to ensure that all company and distributor actions and messaging are compliant. In addition to business model and comp plan scrutiny, we can expect tighter control of sales tax and cybersecurity. Now, more than ever before, company owners, executives and other administrators must look to the future to anticipate and prepare for change.

If your time to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’.

Bob Dylan, 1964

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About the Author: David Doyle

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